Interview with Richard J. Stegemeier - PART 4 is just below. This is followed by PART 3 - a sound recording. PART 1 and PART 2 are text, so please scroll down (as they were published earlier).

 

Interview with Richard J. Stegemeier - PART 4 

Thursday, April 28, 2011

RJS = Mr. Stegemeier 
PJD = Paul Durning 
MEU = Mike Utt

MEU:  Where and when did Union Oil first go overseas?  You were one of the early people in International.

RJS: Yes, in 1964. I was one of the first but a few others preceded me.    

RJS: Well, let’s get the beginning of my international history out of the way first. My first overseas assignment was in Tokyo in 1964 to negotiate an LNG contract for 100 Million MCF per day with Tokyo Gas Company. That project was to liquefy natural gas and then transfer LNG from Kenai, Alaska to Tokyo

But before that, let’s look at Union Oil Company of California back into the early 50’s.  Ray Burke and I were contemporaries but he was elected to the board of directors as a very young man. He went to the University of Texas, studied geology and was without a doubt was the best geologist in the company, no question about it.  He caught the eye of Reese Taylor, CEO at the time, and was promoted to Vice President.  He was the pioneering guy who took Union Oil Company of California, basically a west coast company, into oil and gas exploration in the Gulf Coast.  He was the leader who had the uncanny ability to smell out oil and gas reservoirs, using seismic and his geological experience.  He was just incredible, first of all to acquire properties, and then to drill those properties and successfully find oil and gas in the Gulf Coast and the whole of Texas and Louisiana.  So he basically took us from a small west coast company to a national oil and gas company, but not yet International. 

The company had exploration in Louisiana and Texas.  We set up offices down there and were very, very successful. Later, after Fred Hartley became CEO, we began exploration in Canada, Fred’s birthplace.  And Ray led that venture as well, mostly in Alberta.  So, Canada was probably our first real international adventure.  In the late 1930’s we had dabbled in Mexico and Argentina without any significant success.

But then in the late 50’s and early 60’s we began to branch out internationally and began exploring in the Middle East. In a joint venture in the Persian Gulf we had an oil field discovery called Sassan. It was in Iranian waters.  We also drilled in Abu Dhabi and a few other places over there in the Middle East but I think Iran was the only real success.  We also drilled some stuff in Dahomey, West Africa. 

MEU:  I remember Pete Gallus talking about drilling offshore Dahomey.

RJS:  That’s the west coast of Africa.  Yes, we drilled offshore Dahomey.  [Note: Dahomey has become the Republic of Benin.]

PJD: Would have been early 60’s. 

RJS: Yeah.  Dahomey.  I think we had also drilled places in South America especially Argentina.  We had moved in a small way into other places around the world without any great success except in Iran. (Sassan was a pretty good oil field). As I now recall, a long time ago, we also had some oil properties in Mexico but they were expropriated in the late 30’s.

Bill Greenwalt was the first real Unocal resident abroad, both in Thailand and in Iran. In Iran he helped negotiate exploration rights in the Persian Gulf. Arco and Murphy Oil were our partners. All of those efforts were before the Shah was deposed. Certainly in the early 60’s we were reaching out and discovered the Sassan oil field. I believe Arco was the operator.

In 1970 the Shah of Iran was deposed and was replaced by Iranian rebels who expropriated our Sassan Field without compensation. This is off the subject but during one of the many Persian Gulf disputes in the 1990’s, Iran placed missiles on the Sassan platform that fired on oil tankers. That was a big mistake. The Sassan platform now lies in deep water, destroyed by American missiles. Sounds fair to me.

RJS: Back to my career for a second.  I started at Union Oil Company of California (now Unocal) straight out of Texas A&M, as a research engineer. I was probably the first actual new employee at the brand new Research Center in Brea, California. My starting salary was $350.00 per month, holidays were without pay and my first two-week vacation had to wait until the end my first year.  Lee Vogel and I were contemporaries.  He had come to the company, two or three months before I had in 1951, but his first job was at the Research Center down at the Wilmington refinery.  

 So I began my job on Halloween day of 1951 as an engineer working for Clay Carpenter and Jim Covington.   I trained as a petroleum engineer, first at the Missouri School of Mines and Metallurgy, Rolla, Missouri, and then at Texas A&M.  But as a teenager during World War II I worked as a farm boy and later as a construction worker. During summers I worked as a common laborer in a refinery and a roustabout in the oilfields of Oklahoma, where I met and later married Marge. After I received had my bachelor’s degree I worked as a junior engineer in south Texas for Magnolia Petroleum Company, a Subsidiary of Mobil Oil.

 After ten years as a research engineer I was transferred temporarily to the Gas Department in Head Office where I worked in the natural gas plants.  There was one at Stearns, outside Brea, another at Santa Maria and one at Santa Paula.

Then, sometime in the late 50’s or early 60’s we made the Kenai gas field discovery up in Alaska.

MEU: Wow, was it that early? 

RJS:  Had to be, because by 1964 I was already up to my neck in LNG.  After Unocal made that Kenai gas field discovery there was no market for gas. Kenai was a town of about 500 people. Anchorage was bigger than that, but Anchorage had long term coal commitments for all their power generation. The Alaskan National Railway depended on coal for a big part of its revenue, and brought coal in from, I don’t know, Fairbanks or someplace out that way to feed the power plants and general heating load for Anchorage. Alaskan politicians didn’t want that railroad to shut down so they resisted bringing gas into the city of Anchorage.  They finally had to relent and let us do that, but…

MEU: Well, I remember when I first became aware of that business at all; the price of natural gas had started moving up and was, you know, getting somewhat better…

RJS: it was well under a dollar. 

MEU: … in the ‘70’s, and we had these long term contracts with the City of Anchorage at $0.25/MCF.

RJS:  Well under a dollar. 

MEU:  Yeah. 

RJS: But, but anyway we had to sell the gas at a very low price.  The Kenai gas field was several trillion cubic feet, and we could have supplied Anchorage and Kenai for three hundred years with that amount of gas.  Outside Anchorage was Elmendorf Air Force Base and Fort Richardson Army base that also got into the picture and they were potential consumers, but, but the gas market was just not there. 

PJD: The market was pretty small.

RJS:  So, in 1960 or 61, I was finally just transferred into the gas department and I left research.  Then I was involved not only in the gas plants, but it became obvious that if we wanted to move a lot of gas out of Kenai, we had to transport it someplace. Liquefied gas (LNG) became my principal job and Larry Bradford was my boss.

We looked all up and down the west coast, for cities and islands including Kodiak and Sitka

And other small islands in the Alaskan waters. Maybe they could take the LNG because they couldn’t get a pipeline in there.  But none of those plans ever jelled because the market was too small. But we decided that Japan would be a big market for LNG, especially Tokyo Gas Company, because they were all using manufactured gas at that time, made from coal. They didn’t like manufactured gas.  It was poisonous and all those bad things; low BTU and so on.  I didn’t do the initial negotiation, others did including Charlie Smith and Johnny Frasier. Our partner in Kenai at the time was Ohio Oil Company, later Marathon.  We were 50-50 in the Kenai field. Tokyo Gas showed a lot of interest in LNG, because they were trying to expand their gas usage.  Tokyo was a natural place to go, and then later maybe, Tokyo Electric.  This would be before nuclear was even started, but Tokyo Electric might also be a future customer.  So, it was a good potential market.  

After we tweaked Tokyo Gas’s attention, Ohio Oil sent Bart Emery to Tokyo to be our joint resident manager there, to just be the engineer, liaison, sales, marketer, whatever it took dealing with Tokyo Gas Company. I was charged with going up to Bechtel’s office in San Francisco off and on for about two years (I would leave on a Monday morning, come back on a Friday afternoon.) Bechtel was contracted to do the engineering and design of the LNG facilities and tankers. So, I was heavily involved in that whole engineering design of the LNG plant, plus the transportation, because in those days nobody knew how to transport this stuff.  LNG is a super cooled liquid at -260°F and stainless steel is as brittle as glass.  

So we had to find a better metal to use throughout the system.  We used 9% nickel steel, but aluminum also would work at those temperatures.  But insulation was also a problem. We talked about balsa wood and others.  So I got involved in the tanker designs as well as the LNG plant designs. How do you liquefy natural gas and re-gasify it on the other end?  How do you store it on both ends?  I mean, this new technology was very complicated. I spent two years in direct liaison with Bechtel planning all this stuff.  

Well, after two years of negotiations, Tokyo Gas Company was still unconvinced that we guys knew   how to make LNG…

[laughter]

RJS: … or transport it.  But by then it was pretty much established that there was at least one other LNG shipping system, that came out of, I want to say, Algeria, but I’m not sure of that.  Eventually Tokyo Gas became serious about LNG, yeah, but now they wanted to talk about price.

 Well, after two years Ohio and Unocal decided to swap the lone representative in Tokyo. We’ll put a Unocal guy in Tokyo now, and let the Marathon guy come back and follow through on the engineering design. I wasn’t too surprised when Ray Burke called me in his office and implied that my next paycheck would be sent to Tokyo.  So, I moved to Tokyo with Marge and the four kids in 1964.

 At that time, we had two sons, aged 9 and10, a daughter almost 2 years old and a baby daughter only 4 months old. I ask those daughters today how they would like to have made that move with their children before there were any disposable diapers, baby formulas or central heating in a Japanese house. That was the trauma that I imposed on their poor mother.

 [laughter]

 So we spent two years there, negotiating with Tokyo Gas Company through a translator.   Putting up with their…

MEU: Marathon had already been talking to them for two years, and you were there two more years…

RJS:  Yeah, but now we’re down to the nitty gritty.  Now we’re talking about price.  I mean, Bart was there trying to convince them of feasibility, which they doubted.  I had experience in the feasibility and now I’m there trying to negotiate the price.  So…I’m an engineer, not a salesman, and it was a new experience. My engineering curriculum at Texas A&M didn’t include marketing in Japan who was our mortal enemy only 20 years earlier. I had an office of one, and a Japanese secretary who spoke a little English. I also had a driver. It’s suicidal for a foreigner to drive on the left side of the road in downtown Tokyo. So I spent days and days and days negotiating with Tokyo Gas Company. But most of the time, it was sheer boredom because they didn’t want to talk to me. The Japanese are very hierarchical and I was just a flunky who took pricing orders from Los Angeles. 

Some of the people were very arrogant at times. We worked five and half days a week, normally.  One Saturday morning, Mr. Murikami (President Anzai’s enforcer) called my office and demanded that I come over to talk to him…right now! It was a rainy day, and Tokyo traffic is always a zoo, especially on a rainy day.  My driver drove me over there, and I got there about 15 minutes late.  Mr. Murikami was sitting at his desk with his feet up on his desk, reading the newspaper. I walked up and his secretary said, “Mr. Murikami is very busy right now.”  So, she put me a waiting room and brought me a cup of tea. After 15 minutes, the exact time I was late, his secretary escorted me into his office. 

[laughter] 

RJS: When he finally allowed me to talk to him he chewed me out because our LNG price was too high.   and we were trying to rip them off. (There’s another Japanese word for it but you get the meaning.) I mean he was a very obnoxious character.  But, that was the kind of stuff you had to put up with day after day, after day, after day.

There were other instances of Murakami’s chicanery. Our competitor for the LNG contract was Phillips Petroleum. One time in the heat of negotiations he declared that Phillips’ proposal was cheaper than ours and he handed me a copy of their proposal. That was clearly unethical and I refused to accept it. That didn’t go too well with Murakami-san. 

Well, we started off asking, in round numbers, $1.25 per MCF of LNG landed FOB into their storage tanks in Tokyo Harbor which we would help design and build.  Well, that was at the start of these negotiations in 1964. 

About every three months, a delegation of one or two Unocal executives and one or two from Ohio Oil (later becoming Marathon), would come over and meet with them to discuss the price and delivery and conditions.  Some of our senior executives led the delegation. They included Kenny Vaughan, Charlie Parker and sometimes Fred Hartley. They were always pleasant to our senior management but demanded a lower price. Unocal always stood by the price we had agreed to back home. 

But there was a problem. Dealing in Japan at that time meant going through a trading company. We had to deal through Mitsubishi Shoji Kaisha (MSK.)  They were the intermediary between us and Tokyo Gas. It was the “good cop” “bad cop” system. So they were always there for these meetings too. Mitsubishi would take just the Marathon people out to geisha parties and have a good time, then without us there, they would tell the Marathon people, “If we can get the price down about two or three cents, I think we can put this deal together.”  So, Marathon would agree to two cents and then everybody would get in their airplane and go home.  I’m sitting there the next day being told that the new price will be is only $1.23/MCF, take it or leave it. 

This went on, and on, and on until finally, they negotiated the price down to $1.08/MCF.  Well, I had done a lot of rate-of-return calculations before I was sent to Tokyo, when I was still in the Gas Department.  I refreshed that study and sent a memo back to Charlie Smith, who was head of the Gas department. I said, “Charlie, I know I’m talking myself out of a job, but we can’t make any money at $1.08/MCF.  There are all kinds of uncertainties in this project and this is a loser for us.  I’m recommending you either pull out of the deal, fire me or transfer me back to the states.”  

Well, I didn’t get fired but a contingent of our executives came over to Tokyo after meeting with Marathon. I’m sure somebody did their own calculations back in LA to confirm what I had said.  I believe it was Kenny Vaughan or maybe Fred Hartley who came over and announced to the Japanese that Unocal was going to drop out of this project.  We were going to build a fertilizer plant at Kenai with our share of the gas, and Marathon can take their share of the gas and do whatever they want to, but we’re not in this project anymore.  The Japanese came unglued because they thought they had a deal on the table at $1.08/MCF.  Tokyo Gas was now faced with only half the amount of gas that they thought they were going to get. But we were intransigent.  We said, “No way.  We’re just going to pull out. Period!  Full-stop.”  And we did eventually build a fertilizer plant at Kenai.  

Well, Marathon then went out to Phillips, who were also competing with us at that time for LNG. Phillips had discovered gas in the Cook Inlet with no home for it. We were strong competitors.  In fact, I was going head-to-head with the Phillips guy, who was there; his name was Bob Wallace.  He was a good friend of mine. We were competitors for the same market but never talked shop.  He’s still a good friend of mine.  He’s now retired from Phillips.  But, Phillips then joined with Marathon, so they provided the other half of the gas and they went ahead with all of the designs that I had helped make. 

 They built the LNG plant, using our design and they had, I think, two tankers that carried this stuff to Tokyo Gas Company and became very successful.  I think Tokyo Gas Company later allowed the price to escalate along with inflation, so they were honorable in that sense.  And, we were honorable in our sense with the fertilizer plant.  Now, who made the most money?  I don’t know.  Who had the best deal?  I don’t know, but we went our separate ways and that was the beginning of the LNG industry.

 So, at the end of that, in early 1966 the company transferred me back to the United States. I was made Production Superintendent of our San Joaquin Valley district operations starting at Coalinga and north into the Sacramento gas fields.  There were two other districts there, one in Santa Paula and another in Taft.

 Once again, it was not an easy move for Marge and the kids. From Tokyo with a population of over 10 million people to the Coalinga Nose Oil field was a culture shock. As we drove up the hill to our little oilfield house, Marge asked “Is this what we are going to call home?” It was one of only six little frame houses with only two bedrooms and one bath smack dab in the middle of oil field operations.  Our basic water supply was foul smelling brackish water from the oil field. Our drinking water came from 100 pounds of ice delivered twice a week from Coalinga. Melted ice is not quite the same as Arrowhead Springs bottled water. Our house was only about 100 yards from 12 huge gas compressors that chugged away 24 hours a day. The nearest town was Coalinga, eight miles away. It was not very exhilarating for any of us, especially Marge and the four kids. Although both of us had grown up on farms, it was a little disconcerting when, on the second day, one of the roustabouts showed up in his pickup truck with a six-foot diamondback rattlesnake that he had just killed at the tank farm. Some other funny stories but I’ll get to that later.

 RJS:  By 1967 we had been in Coalinga about a year and half or a year or so.  And then, ah, Ray Burke called me to his office and said, “We’d like for you to move with your family to Toowoomba, in Queensland, Australia. You will be Manager of Operations.”  Chuck Schwartz was the Manager of all of Australia and my boss. John Zender was Manager of Exploration.

 I knew that in 1961 Union Oil Development Company had made the first commercial oil discovery in Australia. The Moonie field was followed by the Alton field. Together they produced about 10,000 barrels per day. We had built a 200-mile pipeline from that outback location to Brisbane on the east coast. I thought but didn’t say to Ray, “Let’s see. I’m production superintendent in Coalinga with dozens of oil and gas wells producing over 25,000 barrels per day.  Now I’m promoted to Manager of Operations, 10,000 miles away to an operation that has only two oil fields producing only 10,000 barrels per day. I can hardly wait.” But I didn’t say it…. Marge did. One of the best decisions of my career. 

PJD: Okay.  So Moonie is on the eastern side? 

RJS: Yes. Queensland is on the east coast. Marge, the kids and I initially moved to Toowoomba, Queensland which was 100 miles west of Brisbane. The great Australian outback began there. If you travelled west, the next town was Kalgoorlie, 2,300 miles away. We moved in to a motel waiting for our stuff to come from the United States which took about six weeks. 

Moonie was not easy to get to. You could drive 100 miles on a dirt road but we often flew by dead reckoning in a small twin engine plane, probably a Cessna. They had a dirt strip there. Every time we landed on that dirt strip, our bush pilot would look back, wipe his brow and say, “Well, we cheated death again.”

[General laughter] 

Oil production was routine; the pipeline had numerous leaks and we subsequently drilled over 50 more dry holes. We were in Toowoomba for only a short time before we moved to Sydney. 

In 1966, when global oil prices began to rise, the Australian government put a price cap on all domestic oil production, and refused our request to export where prices were higher. The labor government made it unprofitable to remain in Australia and we eventually sold our properties to the Australian Oil Company. 

RJS: After this, home office they decided, “Look, there are opportunities in Southeast Asia that are potentially much bigger than Moonie.  We want you to move to Sydney and start getting involved in this Indonesian thing.

Meanwhile, back in Los Angeles, our International Division began to see opportunities for major oil discoveries in Indonesia if we could get invited. After we had been a motel in Toowoomba for about three weeks and had started the boys in school, we were still waiting for our personal belongings to arrive by freighter from the States.  Chuck Swartz came up from Sydney to see me and look at our operations. He eventually got to the real reason for his trip. He said, “Dick, the company wants to do some exploration in Indonesia.  We think there’s a lot of opportunity up there.” 

So, a few days later, I flew down to Sydney and left Marge and the kids alone in a dingy motel in a new country; I couldn’t get a flight to Asia out of Brisbane.  From there Chuck and I flew up to Jakarta, and uh, he said, “Look, you’ve lived in Asia before.  You know something about Asian dealings, and, and uh, I want you to take over and do the negotiations.  I’ll be with you, but you seem to know more about contracts than I do.” 

 Chuck was a good boss, and a good guy.  So we flew the 3500 miles north to Jakarta.  There were only about three planes a week that flew from Sydney to Jakarta at that time. If you made a reservation to fly back to Sydney, you may or may not get on it.  They would “bump” you and all kinds of reasons.

 MEU:  Yes, if the General’s wife wants to go…. uh, you know…

 RJS: Yeah.  After about 10 days in Jakarta, in the only hotel that had air conditioning, I knew that Marge was wondering what happened. I tried several times to place to make a Trans Pacific call to Toowoomba, without success. (This was well before cell phones.)  Frustrated, I finally talked to the hotel manager who explained that the subsea cable from Indonesia to Australia had been broken for over two years. At a lull in the negotiations, Chuck and I flew 600 miles to Singapore where we called our wives and assured them that our heads had not been lopped off by headhunters. 

During the next three years I commuted from Sydney to Jakarta at least once a month. On one occasion I went to the airport in Indonesia to board the flight to Darwin in Northern Territory of Australia and from there to Sydney.  When the Indonesian health officer checked my health card, he showed me that my cholera inoculation had expired, during the week I was there. (Cholera was endemic in Indonesia at that time.) He said, “You can’t fly to Australia.  They won’t let you land without having a certificate of cholera inoculation.”

 I told him, “That’s alright. I’ll take the shot when I get to Sydney.”  He replied, “No, they won’t let you in if you don’t have a shot.”  I guess I was pretty stupid. I should have said, “Here’s twenty bucks. Just stamp my card and let me go.”

 Well, he opened a drawer with about 10 needles rolling around in his drawer…he pulled one out. He had a bottle of milky fluid, sucked some of it in the hypodermic syringe and poked it in my arm. So I could have had hepatitis or malaria or who knows what, because this needle had probably been used a hundred times, but that was Indonesia in the late ‘60’s.

 MEU: You know, even during all the time Unocal had an office in Jakarta, the usual advice to expatriates there had been, “If you’re seriously ill, go directly to the airport…”

 RJS:  Yeah, oh yeah.

 PJD: “and go to Singapore.” 

RJS: Well, modern health care was almost non-existent in Indonesia at that time. Dr. Call, who was Unocal’s medical director was a very good friend of mine. He came out to Indonesia, after we were starting operations. We were living in Porta-camps and so-on at the time; we collected rain water because the local water was not potable.  A little later Dr. Call sent a letter back to Chuck Schwartz, who was our manager in Singapore at the time.  Basically he implied, “Don’t eat the food, don’t drink the water…try not to breathe too much.”  That was his analysis of the health situation in Indonesia.  It was really pretty bad. 

[General laughter]

 Indonesia was really primitive after their civil war and especially away from the big cities in 1967. At our operations in East Borneo there were no phones, no radio except short wave broadcasts from “The Voice of America”, no TV, no VCR’s and no medical facilities at all. In Balikpapan, there was a little perforated steel mat airstrip left over from the Japanese occupation during WWII. It was used as an airfield for Japanese Zeros.

Once on a takeoff in our little four seat Piper Aztec, we slashed a tire on the rusted steel mat. The nearest modern runway was in Bali, 500 miles away. We had to land on a flat tire with fire engines all around, skidded off the runway and stopped just short of a big ditch. It was pretty scary.

 If I wanted to make a phone call to Los Angeles, I had to board our Aztec twin engine plane and fly to Singapore, 1000 miles across Borneo and the South China Sea.

 If I may, a little refresher on Indonesia might help understand what that third world country was like in the middle 1960’s.

Indonesia, as you know was formerly known as the Dutch East Indies. The day after Pearl Harbor, Japan dispatched its armies to Indonesia to occupy the oil fields and refineries in Sumatra and Borneo. Shell’s refinery and oil fields north of Balikpapan became one of Japan’s principal sources of oil products for the entire war. 

After World War II the Dutch reoccupied its former colony but almost immediately, the Indonesian people had an uprising, defeated the Dutch occupiers and declared independence. Its first president was Major General Sukarno who aligned himself and his new country with communist China. During the next 20 years Indonesia began a gradual decline in its economic output. Formerly a major exporter of rice, oil, tin and rubber, Indonesia could barely feed itself by 1965. 

A big part of the problem was Sukarno’s expropriation of all the international oil companies.  Shell, Mobil, Exxon, Amoco and Pan American all had oil production there for many years.  But all of them were just tossed out without compensation. In the early 1960’s Sukarno denounced America at the United Nations with the taunting words, “America, go to hell!” By 1965 the country was in such disarray that the Indonesian army, under General Suharto staged a coup and overthrew the Sukarno government. It was said that over 600,000 people died, mostly those of Chinese origin. 

In early 1967 Suharto was named acting president and that’s when Chuck Schwartz and I first went to Jakarta. Remnants of the civil war were everywhere. Bullet holes, burned out cars and buildings. Some buildings had the word “TJina” scrawled across the front designating that the owners were killed because of their Chinese ancestry. 

Despite the risks, the company had urged us to go to Jakarta and see if there were any offshore oil exploration opportunities there. Acting President Suharto had indicated that he might invite small foreign oil companies with offshore capabilities to do exploration in his country. He recognized that his two domestic oil companies, Pertamin and Permina, had no offshore capabilities whatsoever. So when Chuck asked me to go to Jakarta with him, I said, “Fine.” Marge was a little less than happy. 

(General laughter.)

Wisely, the new president recognized that the fastest way to improve their economy was to increase oil production as quickly as possible. He surrounded himself with five Indonesians who had been educated in the United States. They were scoffingly named, “The Berkley Mafia.” Together, they constituted the “Oil Committee.” Their duty was to negotiate an agreement with the foreign oil companies.  The committee included a lawyer, an economist, a financial expert, an engineer and an army colonel. 

Back in Los Angeles, our International Division geologists recommended offshore Northwest Sumatra and the east coast of Borneo for our first efforts. 

Borneo and Sumatra were truly oil rich. Royal Dutch Shell had begun its global success with oil discoveries in and Borneo in the early 1900’s. The small village of Balikpapan in East Borneo was its center. They had built a small refinery there to process the light sweet crude that they were producing. Some of its best fields were in the Mahakam River Delta no more than 25 miles west of what became our billion-barrel oil field called Attaka. There is no proof but some say “Attaka” means “Eureka.”

On our first trip we were introduced to the Oil Committee. I believe we were either the first or second foreign company to do so. These negotiations dragged out for two years with monthly trips to Jakarta. The result was, I believe, the first “Production Sharing Contract” in the world. It was only about 25 pages long but has been the model for contracts of this type all over the world. That was before the lawyers got into the act and increased the page count into the hundreds. We never had a serious disagreement over our little document. 

So anyway, in our negotiations with the Oil Committee, Trisulo was the lead man. Although he too was an engineer and was not the senior guy on the committee, he was the only guy who knew the oil industry and had any ability to work with contracts.  

There is an interesting side to this story that I can’t verify. One of our Indonesian employees who helped with government formalities in Jakarta was a guy named Lolo Sotoro. He was the step-father of Barack Obama who lived in Jakarta at the time. I have also heard that Lolo was the brother of Trisulo, my adversary in the negotiations. Except for the Trisulo part, this was reported in The New York Times. 

From the beginning, President Suharto recognized that Sukarno did the wrong thing when he tossed all the oil companies out because Indonesian companies were not able to keep the oil production up, and that was a major source of revenue. One thing for sure, they didn’t want to negotiate anything like their old concession contracts, pre Sukarno. Oil companies in those days simply returned some of their profits to Indonesia.

We recommended something different. It was called a Production Sharing Contract (PSC). The first sentence in the contract said, “It is agreed, that all of the oil and gas resources in Indonesia belong to the people, not to the oil companies.”  

Production Sharing goes like this. The oil company is given an offshore area to conduct exploration for a period of time not to exceed five years if no commercial oil or gas is discovered. All costs are paid by the oil company. If commercial production is found, then the oil itself, not its monetary value, is divided among the parties by a formula. The first 40% of oil or gas production each year is taken by the oil companies to recover their past and present costs. The remaining 60% of the oil is divided 65% to Indonesia and 35% to the company. Contract life is extended another 30years and then re-negotiated after that. 

This was an incredible windfall for Indonesia that transformed itself from a third world country almost overnight. When we signed the first contract in 1969 the oil price was $1.80/barrel and total Indonesian production was 500,000 barrels/day. Six years later, after the 1973 Arab oil embargo, production rose to 1,500,000 barrels/day and the oil price was $12.00/barrel, a 20-fold increase in revenue for Indonesia. Obviously, it was very good for us too.

But back to the beginning. Our first PSC was in Northwest Sumatra in the waters near Nias Island. We found a little gas but it was non-commercial. 

Our second contract was off the east coast of Borneo. It was an area of about 100 square miles with the equator as its southern boundary, the beach as its western limit and then easterly out to water depth of 600 feet. The adjacent waters south of the equator were owned by Japex, a new company out of Japan. 

Independent geophysical data indicated a large geologic structure that was exactly bisected by the equator. I met their president, Mr. Takamizawa at a conference in Jakarta and we discussed and agreed on a joint well directly on the equator. We insisted that Unocal be the operator.

PJD: And the first well was the discovery? 

RJS: First well was the discovery. Right, it was drilled right on the equator. 

PJD: Right 

RJS…as well as we could without GPS in those days. (Chuckles) 

Bill Lewright and his team in Los Angeles contracted with the Fluor Corporation’s Wodeco VI to spud our first well Attaka 1.

 A year before that I began to grow a beard. Well, Fred and Ray came out to visit our operations in 1970. Fred was always vocally disgusted with Hippies and their life style. He took one look at me and said, “What the hell is that all about?” 

(General laughter) 

Why are you raising that beard? I had to think quickly so I said “Well Fred, I decided to raise a beard until we make an oil discovery in Indonesia.” Fred’s reply was “OK G-- Dammit, don’t shave it off until you do. So I had a beard, cooties and all, for over a year.

Our first well, Attaka 1, had a minor shallow depth gas blowout only a few days after we spudded it. But that is another story. Anyway we skidded the rig over a few hundred yards and made Attaka 1A our first major discovery. It tested 13,500 barrels/day of 38 gravity sweet crude at a depth of 7,600 feet.

In 1970, international communications from Indonesia were non-existent. We only had a single sideband radio of WWII vintage. We had arranged to have a simple code to transmit messages between the rig and Singapore. So I sent a coded message to Chuck Schwartz that we had tested 13,500 barrels/day of light sweet crude. Anyone could have cracked that code but we did it anyway to avoid any possibility of insider trading. 

Well, the next day I got an un-coded message from Fred over the sideband radio. It said, “Congratulations, you may now shave off your beard.” Half an hour later my face was as smooth as a baby’s bottom…with a few razor nicks, of course.

Everyone was elated of course but then the real work had to begin. Original estimates were reserves of 280 million barrels if it was a gas drive and 350 million barrels if we had a water drive. Our original budget was $110 million and first production in two and a half years. 

That’s another story for another time.

 

PART 3 IS RECORDED SOUND FILE - CLICK THIS LINK

Link to RJ Stegemeier's Farewell Letter to Unocal Personnel

Interview with Richard J. Stegemeier - PART 1

Thursday, April 28, 2011

RJS = Mr. Stegemeier
PJD = Paul Durning
MEU = Mike Utt

[We asked Mr. Stegemeier if he was still working on writing a book.]

RJS: Yes but I’ve sort of changed the focus. Originally I was talking more about the environment, greenhouse gases, global warming, that kind of stuff. If the climate does change significantly, it will be beyond the life span of most of us. Even we global warming agnostics admit that the world has warmed and cooled during the last century. But it is an incredible leap of faith to attribute that solely to greenhouse gases. That will be part of the book of course, but I think a greater issue and immediate problem for the country is energy sufficiency.

Back during the Vietnam War there was a bumper sticker, I recall, that said “What if they declared a war, and nobody showed up?” To paraphrase that, “What if they declared global warming, but there’s not enough recoverable fossil fuel to cause it?” That’s where I’m coming from right now. If you look at it, the world has consumed about a trillion barrels of oil since 1859 when Colonel Drake made his discovery at Titusville, Pennsylvania. So the unanswered question is, “Is there enough recoverable fossil fuel left to cause the global cataclysm called global warming?” The complex answer that combines geology, technology, economics and politics is almost certainly… no.

Let’s look at all of the estimates of conventional oil left to be produced and consumed in the world – excluding American oil shale, Canadian tar sands and Venezuelan heavy oil. I’ll get to them later. Everybody who understands geology and oil resources –the International Energy Agency, ExxonMobil, Shell, BP, the Department of Energy – all of these agencies, have pretty much agreed that there are about 1.2 trillion barrels of conventional oil left and yet to be found and produced using today’s technology and prices. Only the United Nations and its surrogate the IPCC believe that oil resources are nearly inexhaustible. In fact, for greenhouse gases to double by the end of this century, the IPCC “Business as Usual” scenario forecasts that oil reserves and production rates will be 3 to 5 times greater than any experts believe are possible. To add further nonsense to these predictions, the IPCC forecasts that oil production and oil discovery rates will still be increasing at the end of the century. As far as I can tell, not a single petroleum geologist or reservoir engineer has ever been consulted in the IPCC reports.

So, during the last 150 years modern civilization has produced and consumed nearly half of the original recoverable oil in the world, about one trillion barrels that I mentioned a few moments ago.

Over 50 years ago, M. King Hubbert, a Shell Oil geoscientist described something he called Peak Oil Theory. He analyzed thousands of oil fields all over the world and observed that they all begin an inexorable decline averaging more than 5% per year after they have produced about half of their ultimate production. Most of the world’s largest oil fields have already reached the midpoint in their production life and are in serious production decline. Furthermore, our global replacement rate of new oil discoveries hasn’t even come close to replacing annual production for many years.

Right now the world is consuming about 30 billion barrels a year and that may rise to 35 billion in the next ten years or so. Those rates, if continued, would deplete the remaining oil reserves in less than 35 years. But peak oil experience proves that these rates cannot be sustained and production declines will take over.

That’s just the oil supply problem. What about the oil demand problem? Sometime before 2025 world production capacity will be incapable of meeting increasing demand as China, India and the developing world begin to improve their life styles. That requires enormous supplies of energy and poses yet another serious problem. Anytime demand exceeds supply, commodity prices rise with serious global economic consequences. The poorest countries will be unable to purchase fuel for their basic agricultural food production. Global unrest is sure to follow.

Here are the facts. There are about 7 billion people on the earth right now, but by the year 2050, there will be another 2 billion or so, no matter what we do. Think about another 2 billion people to house, feed, clothe and transport. That’s a staggering number almost 7 times the population of the United States…and we have to cope with it in less than 40 years. That’s even if they live as poorly as the world’s population does today. There are 1.5 billion people today without electricity. If each one of the billions of poor people in the world had had only one more 100 watt light bulb and nothing else, the new global demand for electricity would require at least 1000 new nuclear power plants.

Even if you took the 1.2 trillion barrels that’s left to be produced, and we continue producing at the same rate of 30 billion barrels a year, that’s only a 40 year supply. All our conventional oil would be gone by 2050. But, as you guys know, oil production isn’t like your gas tank, where you can drive at 60 miles an hour until the tank is empty. Oil fields don’t work that way. Gradually they begin to dribble into a stripper mode that lasts for decades at very low rates. But, the public doesn’t seem to understand that.

Now, there’s also a lot of natural gas, but even the big numbers that people talk about for shale gas, are such that there will be a supply problem in the next 20 or 25 years anyway, where demand is higher than supply. That’s especially true if we consider that almost all of our food production demands chemical fertilizers made from…guess what…natural gas. Demand for natural gas is bound to increase dramatically if nuclear power plants are decommissioned, hydroelectric dams are demolished and new coal fired plants are not built. That is going on in America today.

There are also a lot of coal resources that are talked about but resources are not the same as recoverable reserves. We “oilys” certainly know the difference between them. A “resource” says that there’s coal down at 8,000 feet even it’s in seams only one foot thick. Well, that’s indeed a resource, but we don’t know how to get it. That’s the problem with a lot of the resource and reserve figures, people confuse these two things.

PJD: They do that with oil and gas, also.

RJS: Exactly. You know, someone makes a discovery somewhere, and they say “It’s a billion-barrel oil field.” Well, they’re only going to get 30% of that out of the ground especially if it’s in deep water. You can’t afford to produce stripper wells on offshore platforms. That’s where the country is so misinformed. We are technologically illiterate in this country, and we let the illiterates set the policy – that’s kind of a bad deal.

Let me leave conventional oil production and reserves for now and move on to unconventional oil. There’s a lot of it but most of it is out of reach. There are three main resources. They are the Athabasca oil sands; U.S. Western States oil shales; and Venezuelan heavy oil. But remember, here I’m talking about resources in-place…not recoverable oil reserves by today’s technology and at today’s price of say $100 per barrel.

The first is the Athabasca oil sands that are said to be about a trillion or a trillion and a half barrels in place. The Canadian government has wisely downgraded the reserves to only about 170 billion barrels that are recoverable. That’s a lot of oil and its worth a lot of money but the world consumes that much oil every 6 years. The rest of the resource is too deep and not mineable. In-situ processes for deep oil sand deposits are well known but recovery rates are very low and very require large amounts of natural gas.

The present mining method in Canada produces about 1.5 million barrels of syncrude per day but that’s less than 2% of world demand. Most people in the industry predict that a maximum rate of 3 million barrels per day is the practical limit. The extraction process poses huge environmental problems. It takes 2 to 3 barrels of hot water per barrel of oil recovered. The waste water is a toxic fluid that contains sodium hydroxide and the tailings pits already cover over 50 square miles. The water drawn from the Athabasca River would meet the requirements of a city of 3 million people and the Canadian government is unlikely to allow much more withdrawal in the future. Environmentalists point out that the syncrude process produces 5 times as much greenhouse gas as conventional oil production, partly because it takes about 1.5 MCF of gas per barrel including upgrading.

The second unconventional oil resource is oil shale in Colorado, Utah and Wyoming. These shales also contain about one and a half trillion barrels of resource in place but only a fraction is recoverable by mining and retorting. Unocal is the only company that has ever operated a commercial shale oil plant in America. That plant operated for several years at rates up to 8,000 BPD. Some say that it was a marginal technical success but an economic failure. Shale oil also requires a large amount of water, taking about 3 barrels per barrel of oil produced. Where does that water come from? Well, the only large source of water in the arid west is the Colorado River which is heavily oversubscribed right now. There’s no way on earth that the oil industry, or the energy industry is ever going to be able to pull water out of the Colorado River to produce shale oil. The contiguous states of Colorado, Utah, Arizona, Nevada, California, even Mexico, all have legal rights for that water and some are contested. But there are no remaining commercial rights to take water out of the Colorado River, so that’s a dead deal. I don’t think oil shale will ever produce oil on a large scale in our lifetime. They may be able to produce small quantities for specialty purposes, like petrochemicals or something like that, but to try to use it for a huge energy source to replace the nearly 7 billion barrels of oil a year that we consume in this country, it just isn’t gonna happen.

Shell Oil and others have experimented with an in-situ process using 1000 foot long electrical heaters on a close well spacing of about 100 wells per acre. The electrical demands would be enormous and would require many nuclear or coal fired plants. Using fossil fuels for electricity defeats the purpose. This process is unlikely to ever develop on a large scale.

The Orinoco extra heavy oil belt in Eastern Venezuela is the third unconventional oil resource with nearly a trillion barrels in place. But recovery of no more than 200 billion barrels is likely. That again is only a 7 year supply for the world at the present consumption rate. This heavy oil requires a lot of heat and a large volume of natural gas for sulfur removal and upgrading to traditional transportation fuels. It too is the target of environmental concerns.

I’ve spent a lot of time talking about oil but let’s look at global energy in its totality. About 85% of global and American energy comes from fossil fuel…oil, gas and coal… about 40% of which is oil. Most of the 15% of non fossil energy comes from nuclear energy and hydro. Only a tiny amount comes from the so-called renewables that are defined in California as geothermal, solar, wind, biomass and small hydro. I’ll discuss each of them the next time we meet.

So, I’m not at all sanguine about global energy supplies for the world, much less for the United States. Then by inference, that says you can’t produce enough oil past the middle of this century to cause global warming. Without fossil fuels, greenhouse gases aren’t produced and according to global warming theory warming won’t happen. Back to the bumper sticker: nobody showed up. My book is trying to move more into that direction. Not to debunk Anthropogenic Global Warming, which to me is easily debunked, it’s just that you can’t get to global warming doomsday without fossil fuels, if you believe the theory.

PJD: We know that the climate is changing – the climate has always changed.

RJS: It always has. I went to a lecture – it was an all-day seminar at the University of California, Irvine earlier this year. Its title was “Energy, the Economy, the Environment,” but it was mostly entrepreneurs trying to do little start-up companies of environmentally this and that. At lunch, I told one of the guys who used to be with EPA that this is like lighting a candle in a dark room and saying “Now I’ve got heat and light.” Well, yes, you do – but it doesn’t really solve the energy problem on the grand scale that faces the world.

PJD: Unfortunately, most of the “green” solutions are in that category. That bothers me. You never really see the real supply issue, and how it will be solved.

RJS: You’re absolutely right, Paul. It will take decades got Green solutions to replace fossil fuels but time is our enemy and we trifle with it at our very great peril. Those of us who are in the energy industry are engineers and geologists who have dealt with the practical aspects of energy supply. We’ve gone out there and kicked the tires and made things happen. We know how difficult it is to do that. Dreaming and hoping are not an acceptable plan of action.

PJD: So you were in Indonesia in the very early days.

RJS: Chuck Schwartz and I were the first Unocal guys to go there in 1967 after the coup that overthrew President Sukarno, and put General Suharto in place. Suharto was the Chairman of the Joint Chiefs of Staff of the military and led the coup because Sukarno was trying to turn Indonesia into a communist country. He had close associations with Red China and, had sort of sold out Indonesia to the Red Chinese. He had nationalized all the oil companies and during a speech at the United Nations said “America go to hell.” Indonesia had gone from being the “rice bowl” of Southeast Asia, under the Dutch, before and after the World War II, to the point where they couldn’t even feed themselves in 1966. The people rebelled with the help of the military. There were many different stories but during the coup as many as 800,000 people lost their lives. It was just a dreadful thing and not a pleasant place to be in the late 1960’s.

In 1967, Marge and I and the four kids were transferred from Sydney, Australia to Toowoomba in Queensland, Australia. Later we moved to Sydney. I was Manager of Operations for the Moonie and Alton fields plus drilling operations in Australia. Our international geologists believed that there was a lot of oil potential offshore Indonesia and that the new government under Suharto looked on a resurgent oil industry to bootstrap Indonesia’s economy. Pertamina, the Indonesian oil company had neither the capital nor the expertise to conduct offshore operations. There were no offshore wells in Indonesia in 1967 but the Indonesian archipelago was good oil country. Royal Dutch Shell got its start in the early 1900’s in East Borneo (now called Kalimantan) that was then part of the Dutch East Indies. Samarinda and other oilfields producing light sweet crudes were all around there. The petroleum geology indicated that oil potential would extend north to the Mahakam River Delta, just like the other river deltas we look at all over the world.

 I was involved in – this is bragging right now -- but I negotiated and signed most of the production-sharing contracts in Indonesia, for our offshore and onshore drilling in northwest Sumatra and East Kalimantan. Chuck Schwartz was our General Manager in Southeast Asia and John Zehnder was Manager Exploration. I was Manager of Operations involved in contract negotiations and the drilling and development effort.

But to develop what turned out to be nearly a billion-barrel oil field (after the fact) was a difficult undertaking. It was a super giant oil field. When fully developed, the Attaka oil field produced about 110,000 barrels per day and 100 million cubic feet of gas. It was an enormous activity, but 110,000 barrels per day is chicken feed, in the world. It takes a lot of that stuff just to stay even, because of the intrinsic oil decline rates. Oil fields just keep falling off day after day, year after year. They don’t produce constantly like your gas tank and then drop off to zero. That’s not the case, but you can’t seem get that message across - to anybody.

As a matter of fact and back to global oil supply, it would take about 800 Attaka type fields to meet the world oil demand today. And we would have to discover another 45 such fields every year just to offset the world’s nominal 5% decline rate. To sustain that activity would require four times as much oil as is known to be recoverable or as yet to be discovered.

But, back to Indonesia. We had a lot of good reasons to acquire exploration lands off the Mahakam River, on the East Coast of Borneo. The equator goes through the Mahakam Delta. When we met with the Minister of Mines we found that JAPEX, our eventual partner, had already leased a block of offshore land south of the Equator and easterly out to a water depth of 600 feet. We then applied for everything from the equator north along the coast out to a water depth of 600 feet. The parcel reached several degrees north latitude that included Sangkulirang Bay.

We acquired the East Kalimantan Block under a pioneering concept that was new in Indonesia and in the world. Unocal was the leader in this new kind of agreement. It was called a Production Sharing Contract or PSC. Gone were the concession agreements of the past that were always a bone of contention between national oil companies and multinational oil companies. The PSC with Pertamina, the Indonesian National oil Company, agreed in the first paragraph that the oil and gas resources belong to the people of Indonesia. Unocal agreed to make all the investments through the 30 year life of the contract. If we were successful we would recover all our past and present investments out of the first 40% of the oil and gas production every year. We could take this share in physical custody of the oil therefore obviating any problems with currency convertibility. Of the remaining 60% of oil and gas production, Unocal received (again in oil) 35% and Indonesia kept 65%. Our share carried a document from Indonesia stipulating that our 35% share was after all Indonesian Income taxes had been paid.

Inviting foreign oil companies under the new PSC contributed to the economic recovery of Indonesia after the coup. In just 8 years, Indonesian oil production tripled from 500,000 BPD to 1.5 million BPD. At the same time, following the rise of OPEC and Arab oil embargo in 1973, oil prices climbed from $1.80 per barrel to over $30 per barrel. But in the mid-1970’s the World Bank advised Indonesia that the terms were too good for foreign oil companies and Indonesia subsequently revised the terms to 85/15 in favor of the government.

Other than native villages, the city nearest to our operations was Balikpapan, 100 miles south. That was where Pertamina had its local office and where we eventually built our own base on Pasir Ridge. It was also where Royal Dutch Shell had its base and a refinery before the war. Our first base camp was a bunch of Porta-Camp trailers located beside an old perforated steel mat airfield built by the Japanese in World War II for their Zero fighter planes. We gathered rain water for drinking and domestic use and there was no radio except short wave where you could sometimes pick up the Voice of America. There was no television, of course and we had to fly 1000 miles in a small Piper Aztec to make a phone call to Los Angeles or to go to the dentist. Later on we got an old DC-3 and five helicopters.

Our Medical Director Dick Call first visited our base camp in 1970 to evaluate the health conditions there. Freely paraphrased his letter implied that we should not eat the food, not drink the water and try not to breathe too much. And be sure you get your cholera, tetanus and typhoid shots as well as malaria pills without fail. Originally, everybody in base camp or on the drilling rigs was on bachelor status, two or more weeks on…one week back to Singapore, whenever it was convenient. Our lifeline depended on reliable logistics. Every scrap of food, equipment and supplies had to come 1300 miles by sea from Singapore across the South China Sea, the Java Sea and the Makassar Strait.

Our first well at Attaka 1 was from a floating drill ship, the WODECO VI and it took a long a time to get drilled. We had a lot of problems with that well. We drilled it to about 13,000 feet or so, and it tested at 13,800 BPD from multiple zones. The Attaka Field produced light sweet crude with a gravity of 38 degrees API. The geologists and reservoir engineers predicted that the field would probably produce about 280 Million barrels if it was a solution gas drive (we didn’t know at the time), but might produce as much as 350 million barrels if it was a water drive. Well, it has produced nearly a billion barrels, so it has a strong water drive, and multiple reservoirs. The Attaka field was probably the largest oil field ever discovered by Unocal. In 1970, OPEC was gaining strength and there was a worldwide push by multi-national oil companies to bring on new production as soon as possible. After a second well confirmed the extent of the discovery well, Unocal management gave us a budget of $110 million to bring the field on production and a timetable of 30 months, a difficult task even in America. But we were able to convince some of the best managers, engineers, geologists and geophysicists in the company to join us in Southeast Asia for this great adventure. It was a great success. We started production in 1973, two and a half months ahead of schedule and $3 million under budget. Many members of that team moved on to positions in upper management. They were the best.

Development of the field was a textbook for good field management for maximum recovery. I think there were probably at least 20 reservoirs all with good permeability. Very wisely (not my doing, our reservoir engineers and geologists did this), we perforated the sands to produce from the deepest reservoirs up. We had dual completions on a lot of these wells, with 2 production strings, and we could produce out of two reservoirs at the same time. When we completed the wells, we limited the number of perforations per foot of sand, and then we limited the production out of each perforation. We could then produce each sand to minimize water influx from the bottom and gas expansion from the top. It performed like this [gesture of hands moving up and down to meet] until finally they matched at the end. That prevented both gas and water breakthrough. The reservoir engineers and development geologists did a beautiful job of doing that. That’s the reason the recovery was so high. It was a good water drive and we didn’t try to over-produce it too fast like TOTAL did.

PJD: Was that the onshore production that Total has?

RJS: Yes. Our neighbors were the French company TOTAL who discovered a big oil field onshore in the river delta. They were also in a partnership with JAPEX but they produced the field flat-out and didn’t get the recovery rates that we did. RJS: Let me get back to Attaka. We had the block north of the equator, and Japex had the block south of the equator. Before we began operations there Japex had drilled 2 or 3 dry holes on their block. They were a new start-up company in Japan but were quickly running out of money. At a party in Jakarta, I met Mr. Takamizawa, who was the President of Japex at the time. I got to talking to him, he was a really, really nice guy. We were talking about our operations, adjoining each other – we had people there, and they had people there in Balikpapan at that time. I said that we needed to see if we can agree to some kind of a unit operation, because we both knew that there was a geological structure on our two blocks that was bisected by the equator. We called it the Attaka prospect. They knew the same thing, because their geophysics had proven that.

So I suggested to Takamizawa, why don’t we join forces with a unit operation? With a puzzled look on his face he asked, “What’s a unit operation?” Oil industry terms were unknown to him at the time. So I explained to him what that was all about, I told him that we should drill one well right on the equator itself that would test the structure on both sides of the line, and save some money for both of us. Otherwise, he’d have to drill a well and we’d have to drill a well. He thought that was a great idea. After a long discussion, we agreed to share all cost and production, if any, on a 50/50 basis. When I returned to the U.S. in 1977, that 50/50 deal proved to be about correct insofar as cumulative production was concerned.

I said, “If you agree with that, then Unocal must be the operator, because we have a lot of offshore experience, and you guys really have only drilled 2 or 3 wells in your whole company’s existence.” He was very happy to do that. I said that we will split the costs right down the middle. We would add only a small overhead administrative cost for our operations back in the States, because there has to be accountants, expediters, purchasing agents and such. I told him his guys could sit there with us all the time, and have observers and consultants. We’ll talk with them about everything, and we’ll share the costs fifty-fifty. But we’ll drill it, because we know what we are doing.

Well, after only a few days, as we were preparing to run surface pipe, Attaka1 blew out at 500 feet. It was just a small gas pocket… but I had egg on my tie…big time! [laughter]

MEU: It wasn’t the last Kalimantan well that did that, either.

RJS: That was in 1970, and it was only later than that we really learned how to detect shallow bright spots of gas from enhanced seismic data. Most people in those days were blasé about running surface pipe. You just didn’t worry about it, but we should have. It was just get through the ground water and move on. Forget about a little shallow gas pocket. As my granddaughter used to say, “Not OK, Grandpa.”

MEU: That’s the kind of drilling that later was so successful with surface-stack operations, because you drilled that section without a riser, and if it blew out you watched the bubbles go away and got on with the work.

RJS: That’s what happened. We did have a riser on the well that was in about 200 feet of water. The pocket of gas was just slightly over-pressured and when we disconnected the riser, the sea water head was not high enough to contain it and it blew it out on us. We were drilling from the floating drillship, Wodeco VI, so we winched the ship off the location, It’s kind of a funny story… Permit me to wander a bit today, OK?

I happened to be in Tokyo meeting with Japex at the time of the blowout. Fred Hartley and Ray Burke were both there too. We were supposed to meet for breakfast that morning.

Don Landis, our Drilling Superintendent called me from the rig in the middle of the night on a single sideband radio patched into my hotel phone. In those days it was one of these “over and out” contraptions and the reception faded in and out.

PJD: Oh, yes, communication was difficult.

RJS: Very. Single sideband was what we had. Sheepishly, Don said “Dick, we’ve got a blowout at Attaka 1.” I knew that we had just spudded it a couple of days before. Well, I asked, “Have you accounted for all the crew and is anybody hurt?”

Don replied, “No, we had to fish a few people out of the water but we’ve accounted for everybody and they’re all OK. We’ve winched the rig off site, and it’s still blowing, as far as we know.”

“Well,” I asked, “Is it oil or gas?”

“Well, we think it’s just gas. It’s still nighttime, but we think it’s just gas. We haven’t seen any oil, and there’s no fire. I’ll call you back in the morning after we find out more about it, but everybody’s safe.”

I couldn’t sleep so I got up and went down to breakfast early, and was sitting at the table having a cup of coffee. Ray Burke came in, and I told him about it. His face kind of drained – this was only 3 years after the Santa Barbara blowout in ’67. So, everybody was pretty sensitive about that. Ray asked the same questions: anybody hurt, oil or gas, et cetera. He said, “Well, Fred will be here in a few minutes, and you know more about it than I do. Why don’t you tell him about it? [laughter]

MEU: Oh, what a wonderful opportunity!

RJS: So, Fred walked in and said, “How’s it going, guys?” I said, “Not too well, Fred. We just had a blowout in Indonesia.” His face just turned pale, and he asked the same questions: anybody hurt, oil or gas, et cetera?

Finally, he asked, “What are you going to do about it?” (Pointedly, the pronoun was “you” not “we” or “they.”

I said, “I’ve only got this one report from Don Landis. I know it’s a shallow blowout – we haven’t even run surface pipe yet. But, I think it will probably bridge itself. It’s very shallow and the hole will probably collapse. We’ve moved the rig to a new location nearby and we’ll just watch the blow-out for awhile. As far as we know, there is no danger, no pollution and it’s just a big annoyance. If it’s only gas there should be no problem.”

Fred said, “Well, suppose it doesn’t bridge.”

I said, “Then we’ll have to jump a diver. We’ll have to try to inject some mud and cement and try to kill it that way.”

He said, “Well, is it going to work?”

I said, “Yeah, I think…”

“Damn it,” he said, “I don’t care what you think, is it going to work?” My job didn’t seem very secure at that moment. [laughter]

Well, it finally did bridge itself, and we winched off to Attaka 1a, and that’s where we made our big discovery. I had a lot of egg on my tie by telling the Japanese (and Fred and Ray for that matter) that we knew what we were doing. But, that was a great adventure. I can tell long, long “war stories” about the development, the murder that took place at Santan and things like that. It was not in my pay grade to put up with some of that stuff…..But I loved every minute of it!

Interview with Richard J. Stegemeier - PART 2

MEU: One subject that has stirred some interest on the website is the whole Pickens takeover thing in the mid-80’s. There are some strong personalities involved in that story.

RJS: OK, let’s take that. It all began on Valentine’s Day of 1985.That was the day Boone Pickens announced his hostile takeover bid for the Company. The ordeal lasted, I think into the month of May. That was kind of the time frame.

The early 1980’s was a time when there were all kinds of hostile takeover opportunities. There was Carl Icahn, Boone Pickens and others who saw opportunities to take over companies like Unocal who were, let’s say, “underleveraged.” In other words, our debt-to-equity ratio was very, very low. We had the ability to borrow a lot of money at fairly low interest rates. That presented an opportunity for someone to buy us with borrowed money using the company’s strength as collateral. The company’s intrinsic strength would allow them to pay off the debt and all of a sudden, we were toast.

We had a mindset at that time, and I think we all agreed with it---I was on the board at the time---that we didn’t like to have a lot of debt. We were an old fashioned company that limited its spending to the financial resources that we had earned. If we couldn’t afford something we didn’t borrow money to buy it.

PJD: So, you were on the board in ’85?

RJS: Yes, I was elected to the board as Senior Vice President of Corporate Development in 1980. Let me sidetrack for a bit because it’s part of the story. I came back to the States in 1977 after 13 years overseas. I had the lofty title of Vice President of Operations for Southeast Asia at the time. When I came back they made me Associate Director of Exploration and Production Research at the Brea facility. That was kind of a strange title because there wasn’t a Director, so what was an Associate Director?

(laughter)

RJS: I never quite understood that. Hal Huffman was head of Research at that time---I don’t remember what his title was. But he retired about a year after I returned to research. Clearly they brought me back with the intention of replacing Hal. This was to the chagrin of all the other senior executives in Brea. They were Bill Baral, Dick Crog, Arnold Kelly, Cloyd Reeg and Joe Walker and they were all in competition for Hal’s job. They all accepted me because I started my career with Union Oil in Brea as a research engineer in 1951 but they were nonetheless apprehensive. Dick Crog retired when they promoted me into his position. Looking back, it’s pretty obvious that Fred Hartley believed that an assignment at the Research Center was a good training ground for me to begin to move up in the Company.

MEU: That’s the direction that Mr. Hartley had taken.

RJS: While we are on the subject, let me say a few more words on the succession plan that put me on the Board of Directors in the first place. If there was a stepping stone that put me in contention firstly to Chief Operating Officer and then to Chairman and CEO, it was our Indonesian operation. All of my fellow Senior Vice Presidents were eminently well qualified for those promotions but I was slightly younger and that gave me a slight edge.

In 1967, during my family’s first month in Australia, my boss Chuck Schwartz and I were asked to travel to Jakarta, Indonesia. That was less than a year after the coup that overthrew President Sukarno. We immediately began negotiations with the Indonesian government for offshore leases in Northwest Sumatra and East Kalimantan (formerly East Borneo.)  Chuck basically turned the task over to me because I had lived in Asia before and understood some of the culture. What ensued a year later was one of the first Production Sharing Contracts (if not the first) in the world.  

John Zendher was Manager of Exploration at the time and we began geological and geophysical operations almost immediately. I was Manager of Operations and led the activities that culminated in drilling the discovery well at Attaka. The ensuing development plan in that remote location was a logistical nightmare. 

The nearest city was Balikpapan, 100 miles south of the field. We were totally isolated from our Singapore headquarters and of course from home office in Los Angeles. I was kind of running my own company but with Unocal’s money of course. In those days we had only a single sideband radio that seldom worked. If I wanted to make a phone call to the States I had to board a small Piper Aztec airplane and fly 1000 miles to Singapore without navigation aids. So I had no direct supervision at all and almost daily exceeded my budget authority. Ray Burke was my boss’s boss’s boss who supported me all the way with Fred Hartley and the Board. Without his support, the job would have taken a lot longer. It was a great thrill when I personally opened up the first well and then saw the first tanker take on a load of Attaka oil and sail off into the open sea. That field has since produced almost a billion barrels of oil.

After making the Attaka discovery we worked with Bill Lewright and others to prepare an AFE for $110 million with a completion target of 30 months. This was at the time that OPEC was flexing its muscle and we were anxious to get on production as soon as possible. Well, 30 months in that extremely remote location was a very short time and a $110 million budget was pretty stingy. We knew that there were no supply stores anywhere within 1000 miles. Every drill bit, o-ring or pipe wrench had to be brought in by lift van and work boat or helicopter from someplace far away. It would have been an awesome task even in the Gulf Coast; seemingly impossible in East Borneo.

At home office, Bill Lewright and Bill Owens helped us scour the company for the best people we could get who were willing to move their families to Balikpapan. They were an incredible team! We brought Attaka on-stream ahead of schedule and under budget; specifically, 27 and a half months and $107 million. 

I know I sound like a braggart but it was my wonderful team that really deserves the credit. The Attaka success story was not lost on Fred Hartley, Ray Burke and the Board. They gave me credit for leading a successful operating team with very little consultation and supervision from home office half way around the world. That team worked tirelessly 12, 14 and even 16 hour days, seven days a week. Occasionally they would return to their families in Singapore and then back to Borneo. It was a grueling operation but only one person asked to be sent back to the States during the development stage.

Initially, I reported to Chuck Schwartz but when he returned to the States in 1975 I took his place in Singapore and began to expand our activities into Burma and Bangladesh. At that time I reported to Hal Lian who was very supportive of all our activities in Southeast Asia.

In 1977 we were transferred back to the States and the assignment I spoke about at the Research Center. In 1978, we renamed the Research Center the Science and Technology Division and I was its first President. 

In 1980 I was promoted to Senior Vice President of Corporate Development. This was a new division that included “other peripheral operations” namely Real Estate, Human Resources, S&T Research, Engineering and Construction, Mining, Oil Shale, Geothermal and Alternative Energy. They were essential to the company’s broad operations but for the most part these were cost centers, not profit centers.

Finally, I return to your question about Boone Pickens and my role on the Board of Directors at that time. As a Senior Vice President, I was shocked along with all executive management when Boone Pickens made his Valentine’s Day announcement. It was not unexpected because Boone had already tried and failed to take over Phillips and Carl Icahn had made a run at TWA. There was merger frenzy in America so we kind of expected it…but it was very unsettling anyway. 

But the way Boone Pickens went about it is an interesting story. By the time he made his Valentine’s Day announcement, he had possibly engaged in illegal activity. In those days an investor became an insider when he owned 10% of a company’s stock. He was prohibited from any further stock purchases or sales without first making a full disclosure to the public. We know now that Boone had acquired 9.9% of the stock legally but surreptitiously, a little piece here, a little piece there. But then he possibly breached the full disclosure rules by purchasing another 5% of Unocal stock through an intermediary named Boyd Jeffries. As an after-market broker Boyd Jeffries did not have the financial ability to buy that much stock on his own. It would have cost at least a half a billion dollars. But he was well known as an after- market broker who arranged direct private sales between seller and buyer that were not disclosed to the public. By funding Jeffries with borrowed money to complete these transactions, Boone violated the SEC disclosure rules regarding insider trading. By using this intermediary, Boone did not alert the public that a hostile takeover was pending and avoided the certain run-up of stock price. In other words he bought 5% of Unocal stock at bargain prices, a clear case of insider trading and a clear violation of SEC rules. Later on there was a shareholder lawsuit citing this fact. Pickens settled the case for a large sum of money rather than go to trial.

Another interesting anecdote of this chicanery was the way Boone borrowed his money in the first place. One of Unocal’s principal bankers for many years was Security Pacific Bank. We felt we were seriously betrayed when Security Pacific provided a very large loan to Pickens for the sole purpose of a hostile takeover of Unocal, one of the Bank’s largest customers. This was disclosed to us after it was too late to stop. 

When he finally announced that he owned 15% of the company and was making a hostile takeover bid, we had only 20 working days before we had to call for a special election according to SEC rules. (That was later extended on a technicality.) By that time Pickens had already lined up a lot of money managers, investment managers and pension firms who promised to vote his way. He was offering a premium price of $54 per share, about $6.00 more than the market price on February 14. But this offer applied only to the first 35% of shares tendered. That would have been enough to give him 50% of the company. For the remaining 50% of the stock he offered junk bonds “of equivalent value.”

We decided that his offer was grossly unfair to the shareholders because the company was worth much more than that. If the company was to be sold, the shareholders deserved the benefits, not Boone Pickens. So we hired two investment bankers, Goldman Sachs and Dillon Read. They were asked to determine, independently, the true value of the company without any prompting from management.  They went through every aspect of the company including our balance sheet, oil and gas, chemicals, refining and marketing. They determined what the intrinsic value of the company was if broken up and sold piece by piece. Well, these two investment bankers came up with an almost identical evaluation of about $72 a share. They did not collude in this study but talked to people in every division of the company. They did not seek any advice from me or, presumably any other Senior Vice President.

Armed with this information, the Board believed that we were on firm legal ground to fight the merger falling back on diligence and the business judgment rule. To insure that this could not be construed as “entrenched management” we let the outside board meet in private with their own lawyers and investment counselors. The outside board voted unanimously to fight and not capitulate to this grossly unfair offer. They opined that they didn’t care whether management lost its job or not. Pickens’s offer was just not fair to the shareholders. There were eight outside board members, a comfortable majority. The Delaware Supreme Court cited this in their final decision in favor of Unocal in what is now known as “The Unocal Decision.”

At that time there were six insider members of the Board. They were Fred Hartley, Claude Brinegar, Ray Burke, Bill McConnor, Craig Henderson and I. The decision to fight affected all of us. Fred, Claude and Sam Snyder, our general counsel, dedicated their work to the legal and financial battle. The rest of us were challenged to continue running the company. We were involved from time to time of course to make trips to visit some of the large shareholders.

The twenty day clock was running to avoid or defeat the hostile bid. It was a formidable task. At this time, 60% to 70% of our stock was owned by large firms with huge voting power. Many of the shareholders were arbitrageurs who had bought the stock for $48 a share a few weeks before and were ready to sell at a profit of $6.00 a share a few months later. They had no interest in Unocal or the business it was in. 

My territory was New England, Chicago and parts of New York. It was a very unpleasant task. Many of the money managers were openly hostile to our management. I had my secretary, Jean Brady, call ahead for a meeting with one of the large investment firms in Boston. They ran some large retirement funds. The appointment for me was at 1:00 pm. I forgot who was with me at the time. I always had a person from our finance department with me. So we showed up at their offices and they met us at the elevator. They started by saying, “We’ve given you an hour because somebody asked us to do it. We’ve already decided to vote for Boone Pickens. Come on in if you want to and say your thing but you’re wasting your time and ours.” They added, “You guys are just trying to save your jobs.” And “You don’t care about shareholders.” And, “We’ve got a $54 offer from Pickens and we bought your stock for only $48 just a short time ago.” And, “Why should we vote for you? You run a lousy company.” I gave them my spiel but it was no use. They were in it for a quick profit and didn’t care about the future. I presume all my associates can tell similar stories.

After that, things really got hot and heavy. It was pretty obvious that if this went to a vote, there were so many of these arbitrageurs and money managers that we were probably going to lose the Company. Sam Snyder was one of the most brilliant lawyers I’ve ever known.  He was born and raised in West Virginia, got his law degree at SMU – had the appearance of a frumpy good old country boy lawyer, sort of a Clarence Darrow-type lawyer.  He had a funny twang in his voice. A wonderful, wonderful man, just a delightful person to be around at all times. He had an intellect like a steel trap, he was really, really smart. 

So he came up with a brilliant idea. He reckoned that, OK, Boone Pickens, you’re probably going to win this election anyway. But we know now from independent analyses that the company is worth a lot more than that. You’re trying to steal the company and then break it up and sell its component parts. We can’t stop people from accepting $54 for about a third of their shares. But, your junk bond for the remaining two thirds of their shares is a mighty gamble. So we are making a counter offer that’s called a reverse tender. We’re turning the tables on you. Any shareholder is free to sell a third of his shares to you and get $54 for each share plus junk bonds for the rest. But we’ll make a better offer for the left over shares. We will pay, then, $72 for all the shares that are left over – the other 50% of outstanding stock-- because we know that’s far better than junk bonds.  

Well, who in his right mind was going to tender any shares for $54 and a bunch of junk bonds, if he could hold all his shares and sell them for $72? The answer was, nobody. But on the chance that many people defied logic, and Pickens bought the company, he would be stuck with a binding commitment to pay a price of $72 for all the outstanding shares. All of the intrinsic value of the company would have been lost. If he bought the Company he owned the liabilities as well as its assets. To liquidate those liabilities he would have had to borrow a huge sum of money to meet the obligation. So obviously, this turned the tables on him. Unocal had changed the rules of the game.

In the minds of the astute shareholders, and that included the arbitrageurs, if Boone Pickens was going to have this vote, what should they do? They probably mused, “I’m not going to tender to Boone, I’m going to let the dummies tender to Boone and I’ll wait and see. Then I will get $72 for all my shares and Boone Pickens will be stuck with the bill.” It was obvious that nobody was going to tender to Boone.

Boone Pickens, seeing that he was stuck in a no-win situation came back and said, “I will just tender all of my shares and accept your $72 offer for my 15% of the company.” 

We said, “No, our offer is sequential. It applies only to the junk bond portion of unsold shares and our offer applies only after you win the vote.

Boone Pickens contended that this was unfair, that it treated him unequally to all the other shareholders. So he went to the Delaware Chancery Court. Delaware is the state that has more registered corporations than any other state in the nation. The Chancery Court was composed of three judges, who rule on corporate matters. At that time, one of those judges, Carolyn Berger, had once been a lawyer for Boone Pickens. She should have recused herself, because she had a conflict of interest, but she didn’t. The Chancery court ruled two to one in favor of Boone Pickens that he should be allowed to tender into our $72. Ms. Berger was one of the two who voted yes.

Within 24 hours, Sam was on the steps of the Delaware Supreme Court appealing this judgment by the Chancery Court. He pleaded that the Chancery Court was wrong. Our offer applied only after the sale, not before. The Supreme Court, within 24 hours – pretty unprecedented – came back with an instruction to the Chancery Court: here are 10 reasons why you should reverse your decision. They didn’t tell them to reverse it, but “Here are 10 good reasons why you should reverse your decision.”  Well, very arrogantly, they reaffirmed their original decision, by the same two to one vote. 

 Again, Sam Snyder was on the steps of the Supreme Court within 24 hours, appealing it one more time. Within a few hours they came down with a ruling that overruled the Chancery Court. They said in effect that Boone Pickens could not tender his stock. The $72 offer applies only after the merger, not before. Well, that same day was scheduled for the takeover vote. When Pickens heard the Supreme Court’s ruling he sued for peace, and the actual shareholders’ vote never took place. 

But we still had some unfinished business to take care of. Although we had no legal obligation to do so, we felt we had a moral obligation to reward the shareholders somehow. As a token of our goodwill we agree to buy about 60 million of the outstanding shares for $72 a share. That added $4.5 billion to our debt. Even the arbitrageurs were happy because if they had a $48 base price that gave them a healthy profit and the Company’s reputation was preserved. 

The consequence of that was – and this is where Claude Brinegar came in – we had to come up with a lot of money. At that time, our debt was $1.6 Billion. To pay for this stock purchase, we had to increase our debt up to $6.1 Billion. So, we had to borrow $4.5 Billion. The debt instruments were in different tranches, but the interest rates were in the range of 15% to 17% - really high interest rates. As a consequence of that, we had fought off Boone Pickens, but instead of him shooting us in the head, we had to shoot ourselves in the foot, just to preserve the company. It would have been sold at a fire sale price to Boone Pickens.  But, we felt that we were obligated ethically and morally to give something to the shareholders.     

PJD: So, all of the shareholders received the $72?

RJS: Yes, but not for all their shares, just for about 25% of them. The market value of the company in those days was about $12 Billion. So, it was a fairly large amount of money we had to borrow, about $4.5 Billion. When we made the purchase that reduced the number of outstanding shares by about 25%. 

Boone Pickens got some of that money, too – we couldn’t cut him out of this, because he was a shareholder. He probably didn’t make all that much – he had spent a lot of money in his failed takeover attempt. 

This all happened in the early spring of 1985.  In December of ’85, the Board had a vote and named me Chief Operating Officer. I was delighted, of course. But a year later the thought that crossed my mind was this. I wanted to say, “Thanks a lot – what have I done to deserve this honor? Our debt has tripled, oil prices have dropped from $30 a barrel to $12 a barrel, we have a hiring freeze, a salary freeze, we’re laying off workers, encouraging early retirements and I have recommended to the Board that there should be no bonuses for senior management. Was this promotion to COO intended to be punishment?”

 

[laughter]

 

[to be continued]