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Naval Petroleum Reserve

Since the early 1900s, the Naval Petroleum Reserves program has controlled oil bearing lands owned by the U.S. Government. Originally established in a series of Executive Orders, the lands were intended to provide U.S. naval vessels with an assured source of fuel. The Naval Petroleum Reserves operated three major oil fields located in California and Wyoming. The Government also held oil shale lands in Utah and Colorado that were opened to development during the 1980s as an alternate source of fossil fuels. Much has changed since 1996 when Congress authorized the divestment of several Naval Petroleum and Oil Shale Reserves properties. Today the Naval Petroleum Reserves manages associated closeout activities for the giant Elk Hills Naval Petroleum Reserve No. 1, located in California, and coordinates public/private initiatives relating to possible oil shale demonstration and development programs from its headquarters office in Washington, DC.

By 1910, the U.S. Navy was rapidly converting from coal to oil-burning ships. Concern arose for an assured supply of oil in the event of war or a national emergency. The General Withdrawal or Pickett Act of 25 June 1910 (36 Stat. 847) authorized the federal government to classify the public lands according to what it considered to be their best uses, whether recreation, mining, grazing, forestry, or farming. After classification, the government could either sell lands; allow miners to buy or lease them to remove minerals; or retain and manage them as national forests, parks, or monuments. The Pickett Act provided authority for the President to withdraw large areas of potential oil-bearing lands in California and Wyoming as sources of fuel for the Navy. On July 2, 1910, President Taft set aside federal lands believed to contain oil as an emergency reserve.

Within the next fifteen years, the properties that make up the Naval Petroleum and Oil Shale Reserves (NPOSR) were brought under the NPOSR umbrella. This included the Naval Petroleum Reserves 1, 2, and 3 plus the Naval Oil Shale Reserves 1, 2, and 3. The Naval Petroleum Reserve Number 4, on the north slope of Alaska, was added in 1923. The Reserves were initially under the control of the Department of the Interior (DOI), but in 1920 the U.S. Navy's Fuel Oil Office assumed responsibility for the Reserves.

There were great debates over the establishment of these reserves and whether private interests would be allowed to lease and partially exploit them. These debates were part of a public policy battle at the time between those championing development and others advocating conservation.

Warren Harding was a small-town newspaper editor from Ohio who wanted to be America's best-loved President. And in fact, Harding's sudden death in August 1923 caused a genuine outpouring of popular emotion. Only later did his countrymen learn the sordid details of Teapot Dome and other scandals that would destroy Harding's historical reputation. According to the good-natured Harding, he had no trouble dealing with his enemies. "It's my damn friends that keep me awake at night."

Harding won the presidency in 1920 on a platform that celebrated a harmonious relationship between conservation and development. However, his belief in development was revealed when he chose Senator Albert Fall from New Mexico as Secretary of the Interior. Fall was a successful and politically powerful rancher, lawyer and miner. Fall was able to wrestle control of the petroleum reserves away from the Naval Department. In 1922 he leased Teapot Dome to Harry Sinclair with "sweet-heart" terms that assured a guaranteed market with the U.S. Government. He also leased a larger reserve in California, Elk Hill, to Edward Doheny. Both Doheny and Sinclair were well-known American oilmen. The rumors of a shady deal soon began swirling.

Sinclair had built up much of his fortune by investing heavily in the Glenn Pool in Oklahoma. The Oklahoma fields were awash in oil from flush production and were not yet hooked up to pipelines. Sinclair bought all the oil he could get for ten cents a barrel and constructed storage tanks to contain it. When the pipelines were completed, he sold for $1.20 a barrel. By WWI Sinclair was the largest oil company in the midcontinent. He raised $50 million and in 1916 assembled one of the ten largest integrated oil companies in the nation.

On April 14, 1922, the Wall Street Journal reported an unprecedented secret arrangement in which the secretary of the Interior, without competitive bidding, had leased the Teapot Dome Naval Petroleum Reserve #3 in Wyoming to a private oil company. Soon after the Teapot and Elk Hill leases were signed in 1922, Senator La Follette of Wisconsin began to investigate. He discovered that officers that had opposed the transfer of the petroleum reserves from the Navy to the Department of the Interior were transferred to distant and inaccessible stations. His suspicions were thoroughly aroused when Fall resigned in 1923. Harding suddenly died later that same year and was succeeded by Calvin Coolidge. Wisconsin Republican Senator Robert La Follette arranged for the Senate Committee on Public Lands to investigate the matter. His suspicions deepened after someone ransacked his quarters in the Senate Office Building. Expecting this to be a tedious and probably futile inquiry, the committee's Republican leadership allowed the panel's most junior minority member, Montana Democrat Thomas Walsh, to chair the panel. Preeminent among the many difficult questions facing him was, "How did Interior Secretary Albert Fall get so rich so quickly?" The Senate Public Lands Committee took up the matter when it was learned that Fall had begun extensive and expensive renovations on his New Mexico ranch at about the time the leases were signed. Fall also purchased with cash an adjacent ranch. In subsequent hearings, Sinclair's secretary testified that Sinclair had told him he should give Fall twenty-five or thirty thousand dollars if he ever asked for it. Fall did ask.

Eventually, the investigation uncovered Secretary Fall's shady dealings and Senator Walsh became a national hero. The bombshell came on January 24, 1924 when Doheny told the Senate Committee that he had given one hundred thousand dollars in cash to Fall. Doheny insisted it was not a bribe but rather a loan to an old friend with whom he had prospected for gold decades earlier. There was even a hand written note with the signature torn off to substantiate his claim! Doheny claimed that his wife held the signature portion so as not to embarrass Fall with an "inconvenient" claim should Doheny happen to die.

Despite the ongoing scandal, Coolidge managed to get re-elected as President in 1924 based on assurances and testimony that he had no knowledge of the Teapot Dome deal. The scandal dragged on for the rest of the decade. In 1928 it was learned that Sinclair had funneled several hundred thousand more dollars to Fall through the bogus Continental Trading Company, bringing Fall's total gain to over $400,000 from his old friends. In 1931 Fall finally went to jail as the first Cabinet officer ever convicted of a felony while in office. Sinclair was sentenced to six and a half months for contempt and Doheny was judged innocent.

Repercussions of the scandal continued when it was later learned that the Continental Trading Company was a mechanism for a group of prominent oil men to receive kickbacks in the form of government Liberty Bonds for purchases of oil made by their own companies. Sinclair had even used some of his as part of his payments to Fall. One of the greatest shocks came when it was revealed that the great and distinguished Colonel Robert Stewart, Chairman of Standard of Indiana (Amoco), had also received kickback bonds. These were the highlights of the Teapot Dome scandal, whose tentacles touched many oilmen and politicians at the time.

While President Warren Harding had placed the Reserves back under the DOI in 1921, the Teapot Dome Scandal forced control back to the Navy. In 1927, the first Office of the Naval Petroleum and Oil Shale Reserves was officially created in the U.S. Navy and the Reserves had an official name. The US Navy maintained ownership of the Reserves until the transfer by the Department of Energy Organization Act of 1977 to the U.S. Department of Energy.

Set aside as a reserve and not for production, the Reserves sat idle (not producing oil for the government) for many years. NPR-2 and NPR-3 each had leases allowing commercial oil companies to drill for and produce oil and gas. NPR-1 did not have any leases, although Standard Oil Company did own and operate drilling and production operations on its lands, which due to the checkerboard nature of Elk Hills, were among the sections owned by the government.

At the onset of World War II, the United States foresaw a critical need for oil production for war time needs; therefore, production began at NPR-1. On October 15, 1942, President Roosevelt signed an Executive Order enlarging the limits of the Reserve. As a result, a Unit Plan Contract with Standard Oil was signed allowing the entire field to be run in an equitable manner, with both the government and Standard sharing the profits and costs. Final settlement of the UPC is still going on today.

NPR-3, on the other hand, was shut-in during the war years as a result of the Teapot Dome Scandal and would not open up again until 1958. Production at Elk Hills (NPR-1) was shut-in at the conclusion of the Second World War, but production from the Shallow Oil Zone continued in order to satisfy debts and obligations owed to Standard.

On April 5, 1976, President Ford signed into law, the Naval Petroleum Reserves Production Act as a result of the oil shortages created by the Arab Oil embargo of 1973-74. Referred to as the "Open Up" legislation, this law enabled the Naval Petroleum Reserves to operate in a production mode rather than a conservation mode. The NPRs would never be shut in again.

Just a little over a year later, on August 4, 1977, President Jimmy Carter signed the Department of Energy Organization Act which transferred the NPOSR to the U.S. Department of Energy. Even though the U.S. Navy no longer controlled the Reserves, a Navy Captain from the Civil Engineering Corps (the SeaBees) would direct the program for the next twenty years. Navy Lieutenants from the SeaBees would be on the engineering staffs at both the California and Wyoming sites.

The Naval Petroleum Reserves Production Act of 1976 required that the reserves be fully developed and operated at their maximum efficient rate of production. The act generally required that production be sold at public sale to the highest bidder and the revenues deposited in the Treasury. From 1976 to 1993, the reserves generated about $15.7 billion in revenues at a cost of $2.9 billion.' According to the Department of Energy, the remaining oil and gas could sustain commercial-level production for another 40 years.

Naval Petroleum Reserve No. 1 (Elk Hills in Kern County, California) ranked among the 11 largest domestic producing oil fields in the lower 48 States by the mid-1990s. It is also one of the nation's 10 largest natural gas fields. Since 1912, the Federal Government has managed the Elk Hills Naval Petroleum Reserve (NPR) in Kern County, California. Under federal ownership since the early 1900s when it was first set aside to provide crude oil for the US Navy, the field no longer serves its original national defense purpose. It has been operated by the government for the past 20 years strictly as a commercial enterprise.

At its peak in July 1981, NPR-1 produced 181,000 barrels of oil per day. Thousands of employees, both federal and mostly contractors, have worked at the sites. If NPR-1 had been a commercial oil field and not a government reserve, it would rank as one of the top ten largest oil fields in the lower 48 States in the production of oil and gas. Elk Hills consists of about 67 sections of land, approximately 78 percent of which is owned by the Federal government and 22 percent by Chevron U.S.A. These lands have been developed and operated as a unit pursuant to a Unit Plan Contract (UPC) entered into in 1944. Under the UPC, the Federal government has the exclusive control, subject to the UPC, over the exploration, development, and operation of NPR-1.

In the Defense Authorization Act of 1996, the U.S. Department of Energy was directed to sell the assets of NPR-1. On February 5, 1998, the Department of Energy and Occidental Petroleum Corporation concluded the largest divestiture of federal property in the history of the U.S. government. The sale agreement completed a privatization process that began in 1995 when the Clinton Administration proposed selling Elk Hills. The divestment removed the federal government out of the business of producing oil and gas at Elk Hills. In May 1995 the Clinton Administration proposed placing the federally-owned Elk Hills Naval Petroleum Reserve on the market as part of its efforts to reduce the size of government and return inherently non-federal functions to the private sector. In February 1996, the Congress passed and the President signed the Defense Authorization Act for Fiscal Year 1996 containing authorization to proceed with the sale.

Naval Petroleum Reserve No. 2 (Buena Vista Hills Naval Reserve) established in 1912 about 30 miles southwest of Bakersfield as a potential source of fuel for the nation's naval vessels. The Buena Vista Hills Naval Petroleum Reserve #2 in California - a "checkerboard" pattern of government and privately owned tracts adjacent to the Elk Hills field. Of the 50 tracts owned by the government, nearly 90% are leased by private oil companies. Royalty payments are deposited in the U.S. Treasury. The NPR-2 drill sites were kept vacant to allow for petroleum extraction, but they were never developed or otherwise used by the United States. Each drill site is a vacant, undeveloped two-acre parcel. Residences were constructed adjacent to the parcels in the 1920s and 1930s prior to and shortly after the establishment of Ford City in 1923. Properties in the vicinity of the drill sites are mainly single-family residences, apartment buildings, churches and small grocery stores.

Teapot Dome Naval Petroleum Reserve #3 in Wyoming is in the Teapot Sandstone, first mapped around Salt Creek oilfield by C.H. Wegemann in 1911 and named Little Pine Ridge sandstone. It was renamed by V.H. Barnett in 1913 as Teapot Sandstone from the "Teapot Rock," which is a well known topographic feature carved from this sandstone about half a mile east of the Casper-Salt Creek road [Teapot Rock, the namesake of one of the Naval Petroleum Reserves, lost its "spout" in the 1960s]. Sinclair Oil Company discovered Teapot Dome in 1922. Teapot Dome was one of three field (the others are in California) that were set aside for unexpected emergencies.

The vast Naval Petroleum Reserve-A (later Naval Petroleum Reserve No. 4 and now the National Petroleum Reserve-Alaska) in northern Alaska contained oil, but how much and where was unknown. Environmental restrictions have put areas such as the Naval Petroleum Reserve in Alaska off limits to exploration.

Secretary of Energy Bill Richardson transferred deed of Naval Oil Shale Reserve No. 2 in Utah to the Ute Indian Tribe on December 4, 2000. This was the last and largest of the three Oil Shale Reserves administered by the Naval Petroleum and Oil Shale Reserves.

NOSRs-1 and 3 have been transferred to the U.S. Department of the Interior.



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Page last modified: 05-07-2011 02:54:30 ZULU