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40 Years at Prudhoe Bay: Lease sales opened doors to prosperity Making North Slope acreage available to industry for oil and gas leasing ushers in exciting new era of challenges, opportunities Rose Ragsdale For Petroleum News
In 1960, the federal government established the Arctic National Wildlife Range (now the Arctic National Wildlife Refuge), covering the entire eastern end of the Arctic Slope and Brooks Range from the Canning River to the Alaska-Yukon border.
The State of Alaska, as part of its land entitlement under the Statehood Act, selected more than 1.8 million acres of the Arctic coastal plain bordering the Beaufort Sea between NPR-A and the wildlife range. This swampy lake-covered area contained no surface rock exposures but was recommended for selection by the state’s only geologist, Tom Marshall, who recognized some general geological similarities of the Arctic Slope to petroleum-bearing areas in the Rocky Mountains.
Selection of the coastal plain area had an additional advantage because it eliminated potential future disputes between the state and federal governments over the definition of navigable streams in upland areas. If the surrounding lands were state lands, it became unnecessary to define the limit of navigability of streams flowing into the Arctic Ocean.
The lands thus selected included Prudhoe Bay, an obscure geographic feature named more than 130 years earlier by Arctic explorer Sir John Franklin for his friend, Capt. Algernon Percy, Baron of Prudhoe and later Fourth Duke of Northumberland in the first penetration by white men along the Arctic coast west of the Mackenzie River in Canada.
Alaska offers first North Slope acreage In late 1964, the state received tentative approval for its land selections from the federal government, and in December held its first competitive oil and gas lease sale, Sale 13, offering state-owned lands on the North Slope, near the mouth of the Colville River east of NPR-4. The sale also included some tracts in Cook Inlet and offshore Kodiak Island. Of the total $5.5 million in bonuses that the state received from the sale, some $4.3 million was from tracts on the North Slope. The highest amount per acre received by the state of Alaska was $31.96 per acre on tracts U-3-5-42 and U-3-5-43 submitted by British Petroleum and Sinclair Oil and Gas Corp. (This sale did not include tracts above the Prudhoe Bay structure.)
In July 1965, Alaska held Sale 14 and took in a relatively modest amount in total bonuses. In this sale, tracts C14-123 and C14-124 both brought $93.78 per acre, a record high. It was on these relatively expensive tracts that three years later, ARCO and Humble would drill Prudhoe Bay State Well No. 1 and make their historic discovery.
Richfield Oil and Humble Oil as partners acquired more than 71,500 acres of land in Sale 14, covering the crest of a subsurface geological structure adjacent to Prudhoe Bay. At that time, the only information available was seismic data combined with geological predictions on the nature of the subsurface rock types projected from the outcrops in the Brooks Range, 80 to 130 miles to the south and east. The nearest exploratory well was in NPR-4, 75 miles west of Prudhoe Bay. British Petroleum, with lower bids, acquired nearly 82,000 acres located lower down the flank of the structure.
The bonuses paid by the oil industry for North Slope leases in these two sales held by the State of Alaska were said to have pleased then-Gov. William “Bill” Egan, who had taken the risk and allowed the industry to come in.
ARCO acquires critical offshore tracts On Jan. 24, 1967, Alaska held Sale 18 in which 15 tracts mostly offshore in Prudhoe Bay were offered to industry along with acreage in the Katalla area near Prince William Sound.
A memo from Pedro Benton to Charles Herbert through Roscoe E. Bell on Dec. 16, 1966 held the following paragraph:
“The Arctic Slope area is the same area we recommended originally, which was approved by Mr. (Phil) Holdsworth. Almost all of the area is offshore, however, according to the protraction diagrams, which check very closely with recent (Bureau of Land Management) surveys in the area, several of the tracts include small projections of uplands or small islands. I suggest we include these uplands parcels to maintain a solid and logical lease pattern.”
Bids of only $1 per acre by T. Miklautsch on C-18-1 and C18-2 were the only bids for these tracts and thus the high bids. Within a year, those two tracts would bring a tidy return on investment.
The only other bidders in the sale were British Petroleum and a partnership between Atlantic Richfield Co. and Humble Oil Co.
On tracts C18-10 and C18-11, which adjoin two tracts that ARCO acquired in Sale 14, the company bid a total of $885,293. The next highest bid in the sale was a modest $5,029, and BP did not even bid on C18-10 and C18-11.
C18-10 brought $121 per acre, while C18-11 drew $233 per acre from ARCO.
The highest bid from BP in the entire sale was $53.77 per acre.
The lease sale that made Alaska rich Some say that Sept.10, 1969, was the day Alaska got rich. It was the day Alaska held its most famous and lucrative oil and gas lease sale, netting more than $900 million in bonus bids for state coffers. (This was the first sale of North Slope lands after the Prudhoe Bay discovery.)
In the days leading up to the sale, oil industry scientists and executives from around the globe converged on Anchorage, crowding hotel lobbies and motels to overflowing.
Former ARCO Alaska President Harold Heinze recalled how he spent the days leading up to the sale helping to generate the information that would form the basis of the company’s bids.
“I got a transfer to Alaska in February 1969. I was the youngest of the young. Very shortly I found myself in Dallas where I worked in a closet for most of the summer with one other engineer. We did the evaluation for ARCO of the 1969 sale. I had a chance to see things from the perspective of the lowest of the low. Because of the secrecy, we had to do everything ourselves, read all the charts and do all the interpretation ourselves. I coded all the stuff. ARCO already had a tremendous acreage position.”
Heinze said amazing stories about the behavior of various sale participants surfaced.
“We heard that Hamilton Brothers got a train in Western Canada and they rode up and down the track and everybody involved in their bidding group had to stay on the train whenever it stopped,” he said. “Several wells were drilled on the Slope that summer and people went to great lengths to find out about them.”
Episodes of industry espionage became rampant. Company scouts would land and creep about the tundra with binoculars, Heinze said.
“There times when things got really bad, when there were three helicopters circling in a tight pattern around the drilling rigs. FAA traffic control was out of Fairbanks at that time, so it wasn’t a good scene,” Heinze recalled.
It was then that many of the company “scouts decided that it wasn’t worth killing someone over the information” and settled down to” pretty civilized” behavior, he added.
The world comes to Anchorage In the days leading up to the sale, witnesses said big raw-boned Texans rubbed shoulders with nattily suited businessmen from Japan and smooth-talking executives from New York and London, all seeking a piece of the action in what had become the hottest oil play in the world.
Groups of company men — directors, accountants and geologists — huddled together in corners to plan their strategy, those already operating on the North Slope jealously guarding the geological information they had obtained, while others had to guess at what were the best locations and what they might have to bid to get them. Rumor and counter-rumor ran riot as industrial spies tried to break through the tight cordon of security around the North Slope drilling operations.
On offer were 451,000 acres of previously unleased land around Prudhoe Bay and the Colville River. It was the fourth time that the state had put up North Slope land for lease since selecting 2 million acres in 1964 of former federal land on the North Slope.
Though 37 wells had been drilled by 23 active rigs within the area and thousands of square miles of the region had been mapped by 24 different seismic crews, no company knew what the others might bid for leases offered, nor what it would have to bid to prevail in getting the acreage it particularly wanted. The only thing for certain was bidding would be high.
For the State of Alaska, the stakes also were high. Of the bonuses collected from all 22 lease sales held during Alaska’s 10-year history, including the three previous sales on the North Slope, the state had netted a total of $97.6 million.
Speculation leading up to the sale suggested that Alaska could attract as much as $1 billion in bonuses and trounce the previous U.S. record of $603 million paid in 1968 for 363,000 acres off the California coast in the Santa Barbara Channel. But some Alaska officials played down the sale’s prospects, talking in terms of an expected $100 million in bonuses. Even that amount would have been welcome, considering that the state’s total annual budget that year was $150 million.
Drama, humor and huge bonuses On the morning of Sept. 10, representatives of oil companies, state officials, investors and journalists filed into the 350-seat Sydney Laurence Auditorium. In the presence of armed guards and state troopers, bidders handed over sealed envelopes, each envelope marked with the number of the tract it concerned.
In an almost festive atmosphere, the sale began promptly at 8 a.m. The very first bid opened brought gasps of astonishment, then wild cheering from the audience. This set the pattern for the rest of the day’s excitement, witnesses said.
What immediately became apparent was that many companies formed new alliances to improve their chances of success in the sale. Gulf Oil joined BP, while Shell teamed with Texaco. Mobil, Phillips and Standard Oil of California also mostly bid together. Many smaller companies also banded together to improve their odds - Amerada-Hess and Getty Oil; Hamilton Brothers, Union and Pan American; Continental Oil, Sun Oil and Cities Service.
BP-Gulf bid $15.5 million for one of six lots on the Colville River delta, 100 miles northwest of Prudhoe Bay, or more than $6,000 per acre.
Excitement mounted when BP-Gulf won the second lot out of 21 separate bids, for an average of about $8,000 per acre. The third parcel went even higher, selling for $12,000 an acre. By the time the BP-Gulf partnership had swept the board, taking all six of the lots offered in the Colville River delta, the companies has offered a total of $97.7 million in bonuses.
When the bidding moved to the leases that were available around Prudhoe Bay, prices went so high that even the BP-Gulf coup paled to relative insignificance. The most spectacular moment of the sale came when bids were opened for Tract 57, the closest parcel to the oil discoveries at Prudhoe Bay. Atlantic-Richfield Co. bid $26 million. BP-Gulf bid $47.2 million, which remained the high bid as offers of $36.8 million and $36.6 million were announced from the Hamilton group and Continental-Sun-Cities Service. The next bid, however, drew a roar of shouting and cheering from the crowd that shook the auditorium. The Mobil-Phillips-Standard group bid $72.1 million. A moment later, the state announced a bid of $72.3 million, or $28,233 an acre, from Amerada-Getty.
The audience stunned with sheer disbelief lapsed into a moment of total silence before erupting in pandemonium. Not only was it the highest bid ever offered in a U.S. lease sale, it also was incredibly close to the previous bid. Had there been a leak? Why had the Amerada group bid alone this time when most of the day, they had bid with Louisiana and Land Exploration, Marathon Oil and H.L. Hunt interests?
There had never been any doubt that Tract 57 contained oil. One estimate put its recoverable reserves at 200 million barrels.
Standard Oil had purchased seismic results from the area from BP and thus, had a good idea of the parcel’s potential. Standard had been involved with Amerada Hess in joint bidding for Louisiana leases some months earlier, so each group was familiar with the other’s way of thinking.
Observers theorized that they had placed a similar value on the oil, related it to their joint experience in the Louisiana sale and added a bit for luck. The resulting closeness of the bids likely was a coincidence.
“Some of the bids in the 1969 sale were squeaker close,” Heinze said. “That’s when you start checking your security.”
In the end, the sale netted just over $900 million, or an average of $2,180 an acre. A plane had been chartered to transport the checks to the Bank of America in San Francisco, while bankers were on hand to cancel the checks from unsuccessful bidders.
Not all of the bids were record-breaking. One block, tract 36, was close to BP’s discovery well and thought to have been really hot. Mobil-Phillips-Standard picked it up for $18 million, double the only other significant bid from Humble.
The sale also had its moments of humor. Almost all of the tracts drew joke bids of a few cents an acre. On one whole parcel, in fact, the sole bid was $1, entered by locals who were very upset when the offer was rejected.
The entry into the auditorium of a mysterious figure dressed as an Arab, complete with flowing robes, head-dress and dark glasses, caused a buzz of speculation that a rich Middle Eastern sheikh might be entering the fray — until it turned out that a local humorist had donned the disguise.
Natives protest state leases
Not everyone was delighted with the results of the sale. Some economists at the University of Alaska argued that the state had shortchanged itself by selling so much North Slope acreage so quickly.
Edgar Paul Boyko, former Alaska Attorney General during the Hickel administration, also voiced doubts about the state’s early policies toward the oil industry.
“I’m not anti-oil company,” Boyko said. “They are in business to get the most they can, and we need them here. But we must not let them develop our country on their terms.”
After the big lease sale, Boyko tried to file an injunction against the state issuing some of the leases, but the effort failed.
Most Alaskans were delighted with the way the sale had gone and with the sudden windfall. However, a group of Alaska Natives and their supporters held a protest during the sale and occasionally interrupted the proceedings in the auditorium. While seemingly insignificant, the protest proved to be a symptom of deeper discontent among Alaska Natives, and portend of challenges yet to be faced and overcome in the future of North Slope oil development. What looked so promising in the fall of 1969, a year later was beset with problems and uncertainties.
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