Oil and gas lease auction draws energy risk-takers

Not all that long ago, the quarterly auction of oil and gas leases at the Bureau of Land Management office in Reno would start at 8 a.m.

and wrap up about 90 minutes later.

No more.

By the end of this year, BLM expects that bidding on leases of the 48 million acres it oversees in Nevada will be so active that the once-sleepy auction will last all day.

Another sign that times have changed: At least one company, already preparing for the December auction, expects to send an executive with $20 million in his pocket to be spent on the spot.

The unfolding story in a state that's never been much of an oil producer a mere 37 permits for new wells were issued from 2001 through 2004 is a tale of oil companies willing to stomach big risks in search of potentially huge payoffs.

How huge is the potential? Wolverine Oil & Gas, a tiny company from Grand Rapids, Mich., reported this year that a new oil discovery in western Utah may amount to 1 billion yes, billion barrels of oil.

It's touted as the biggest onshore oil discovery in three decades.

And the companies that are sharply bidding up lease rates on potential oil properties believe that the geology in eastern Nevada may be similar to the Utah area of discovery.

But it's a long shot.

"Our geology is more chopped up.

It's more complex," says Alan Coyner, a geologist who heads the Nevada Division of Minerals.

Unlike states such as Texas where geologists see underground strata that resembles layers of cake,Nevada's underground geology is a jumble of formations forced over one another, shifted hundreds of miles and sometimes covered with volcanic rock or the sediment of long-ago oceans.

It's maddening to exploration teams.

The Grant Canyon No.

3 well in Railroad Valley, for example, is probably the most prolific single well in the Lower 48 states it pumped 2,000 barrels a day for years after it came on line in 1984.

But not more than 500 yards away, exploration drilling has come up dry.

The oil companies moving into Nevada think that deep drilling will get them through the jumbled geology, and they're proposing holes that are 10,000 feet deep twice the depth of much of the past exploration drilling in Nevada.

"It's getting very expensive," says Coyner.

A 10,000-foot exploration program, he says, might cost $5 million to $10 million per hole.

Oilmen are lining up for the chance to spend that kind of money.

The BLM's record-setting oil-and-gas lease auction on June 14 drew close to $3.1 million in bonus bids on 163 of the 344 parcels it offered.

Oil companies bid as much as $95 an acre of promising tracts, and the highest bid for a single parcel was $219,260.

In fact, the bids at the June auction alone were more than five times greater than the BLM's Nevada office raised at oil auctions during its entire 2004 fiscal year.

(At a BLM auction, the minimum bid is $2 an acre, and prices go upwards from there.

In addition, oil companies pay annual rent of $2 an acre.) Del Fortner, the BLM's deputy state director for minerals management, says the agency expects activity will slow a little at the September auction maybe to a total of 200 parcels.

But the December sale, he says,will be gangbusters as landmen are parked all day long in the BLM's Reno office, scouting opportunities.

And that's putting pressure on the BLM's staff to deal with a dramatic increase in work.

"We're staffed for Nevada," Fortner says.

"All of a sudden, we have interest that's more like Colorado or Utah or Wyoming."

There's no guarantee, in the mean time, that a company will be able to raise money for an exploration program even if it's successful in bidding for a BLM lease.

Take a look at Empire Petroleum Corp., a little outfit based in Tulsa that's getting ready to explore a 44,000-acre area near Gabbs in central Nevada.

President Albert Whitehead notes that the nearest producing oil well is at least 80 miles away "This is a rank wildcat, to say the least," he says and he's been working for a year to convince investors to get on board.

"Nevada," he says,"is a pretty tough sell."