Naval Petroleum Reserve

The Naval Petroleum Reserve in Elk Hills, California, is jointly owned by the United States government and Chevron U.S.A., Inc. It is now operated by Bechtel Petroleum Operations, Inc., under a contract that expires in July 1995. Chevron believes that it can run the reserve more profitably than the government can, and in May 1995 it proposed taking over reserve operations. Later, the Energy Department (DOE) suspended negotiations with Chevron on this proposal and recently began to solicit interest from other parties to operate the reserve. Like Chevron, DOE wants to lower the costs of operating the reserve. This report explores actions that DOE and Congress can now take to improve the reserve's profitability.

GAO found that: (1) there are three standard industry practices that could enhance the profitability of NPR-1; (2) the Department of Energy (DOE) could be allowed to set the rate of production in a way that maximizes profits rather than following a legislatively required rate; (3) more profitable gas resources are sacrificed to maximize oil recovery; (4) finalizing how ownership shares in NPR-1 are distributed between DOE and the commercial co-owner could increase NPR-1 profitability by allowing the owners to focus on investments that enhance the venture as a whole; (5) the open-ended NPR-1 contract undermines trust and cooperation between the owners, who spend a significant amount of resources assessing the likely impact of proposed investments on their equity shares before committing to new projects; and (6) modifying the NPR-1 contract to include a nonconsent clause to promote risk-sharing between the two owners would help encourage investments and enhance profits.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

Director: Team: Phone: