Gas Gusher or Hot Air? Driller Urges Patience
By BROOKS BARNES
Staff Reporter of THE WALL STREET JOURNAL
June 20, 1998
BAKERSFIELD -- F. Lynn Blystone unfurls a map marking California's oil and gas fields onto a conference table in his cramped office here and begins jabbing at a splotchy area near Tracy with his right index finger.
"It's right here," says the 62-year-old president and chief executive officer of Tri-Valley Corp., eyeballing the spot as if the natural-gas reservoir he has been seeking for nearly a decade will magically appear if he stares at it long enough. "I know it."
His bravado notwithstanding, these are extraordinarily stressful days for Mr. Blystone. Last February, he announced that his tiny company was on the brink of hitting a pool containing up to 300 billion cubic feet of natural gas -- an amount that would stand as the largest such discovery in California in 30 years.
But now, having drilled a $2 million exploratory well that failed to deliver a significant payoff, Mr. Blystone finds himself struggling to appease antsy investors and answer to an industry that views his claims of a "company-making" discovery with one eyebrow arched.
"Three hundred is just a whopping number," says Roland Bain, a consulting geologist in Sacramento who has long tracked drilling activity in Northern California. "It's easy to talk these numbers before the fact, but they often change quickly when you see what's there."
Keith Petersen, who tracks the natural-gas industry for Salomon Brothers Inc. in New York, agrees. Claiming a discovery of 300 billion cubic feet -- worth more than $600 million at today's prices -- "raises a red flag," he says. "It seems very high."
Mr. Blystone dismisses the skeptics, and insists it's only a matter of time before Tri-Valley -- currently the ninth-largest producer of dry natural gas in the state -- has its big breakthrough.
"There is a secret down there that we haven't figured out yet, but we will," he says. "The question is: Can you stay in long enough for it to happen?"
So far, Mr. Blystone has made a career of hanging in there. Following a stint as a financier, land developer and manager at a pipeline company, he joined Tri-Valley as its vice president in July 1981 and became president shortly thereafter. But it was an earlier job he had, as director of the Bakersfield YMCA, that Mr. Blystone credits with really preparing him for his current post.
The experience, he says, taught him "not to be afraid of extremely limited cash resources."
It's a good thing. Tri-Valley was forced to file for bankruptcy protection in 1996, emerging from Chapter 11 proceedings later that year. In 1997, the company posted a loss of $3.3 million on revenue of less than $1 million. And it had a $273,836 deficit for the first quarter of 1998. Twice since the late 1980s, Mr. Blystone himself has gone without taking a salary for more than two years at a stretch.
Were it ever to come through, however, the find near the Sacramento Valley town of Tracy could mark a reversal of fortune for Tri-Valley -- and help give a lift to the entire petroleum sector in California.
Still Called 'Wildcatting'
Much has changed since the state's gas-producing peak in the early 1970s. By the mid-1980s, the largest players in the industry -- including Chevron Corp., Shell Oil Co. and Mobil Corp. -- had all but quit because they felt there were no large discoveries still to be
made in California.
That left the field to about 2,025 mostly small independent companies. Today, fewer than 500 such operators remain due to heavy consolidation, soaring costs and volatile natural-gas prices.
Of late, however, prospects have brightened a bit, thanks to high-tech seismic equipment and deeper wells that allow previously unreached areas to be tapped. In fact, nearly 60% of the wells drilled in California were successful last year, compared with fewer than 25% in 1974, according to Mr. Bain.
Nonetheless, the business remains fraught with uncertainty -- a point that Tri-Valley's experience in Tracy underscores.
"Yes, all these glitzy, groovy, whiz-bang, million-dollar technologies have boosted the success rate, but there are still major, major risks," says Tri-Valley's geophysicist, Peter Jeschke. "That's why it's still called 'wildcatting.'"
Tri-Valley's hunt for a gargantuan gas pool near Tracy stretches back to 1988, when it entered a joint venture with Phillips Petroleum Co. The Bartlesville, Okla., company was halting its California exploration activities and offered to give Tri-Valley reams of seismic
data for a piece of anything found.
"It was a chance for us to go home that night a nobody and come back a
500-pound gorilla," Mr. Blystone says. "That's what we needed, and the only reason we had a shot was because the majors were leaving. I had to take it."
Tri-Valley hired a geologist to make suggestions on where to drill based on Phillips's data. And in 1990, the geologist pinpointed an area that he thought had the potential to yield a huge amount of gas. It was right next door to Tracy's famed Lathrop Gas Field -- the same
highly productive location that had helped propel Occidental Petroleum Corp. from a shoestring operation in 1961 to an industry giant.
All Alone
But in 1992, Tri-Valley suffered a setback. Phillips, which had an option to help finance the drilling of the site, decided not to back the project after all. A Phillips spokeswoman says the company simply made a decision at that stage to get out of California altogether.
This left it up to cash-strapped Tri-Valley to come up with $2 million on its own for initial exploration work. Mr. Blystone spent the next three years scrambling to secure investors, a time he refers to as his "sadomasochistic period."
"With Phillips on board it was a lot easier to get people to write a check," he says. "I made 60 presentations on this thing, but no one was willing to take the risk. Along about the 59th presentation I was thinking I should start selling cellular phones. At least people wanted them."
While flailing for investors to buoy the Tracy project, Mr. Blystone kept the company afloat by developing Tri-Valley's other assets, including a gold-mining operation in Alaska. And in mid-1995 he secured a $620,000 loan from a Texan for other gas developments.
By January 1996, however, Tri-Valley couldn't afford to make its loan
payments, and it filed for bankruptcy.
Still, Mr. Blystone trudged forward. He eventually rounded up a group of investors, who infused between $7 million and $8 million into Tri-Valley. That helped the company pay off its debts and come out of bankruptcy proceedings in November 1996. By last December, it finally had enough capital to begin exploring the Tracy property.
Heavy rains delayed things for a while, so Mr. Blystone decided to take a long-overdue vacation. He was in the midst of a three-week South American cruise when his drilling team reached him by phone with some astounding news: Tests on the first well, named Holly Sugar No. 1, signaled they had hit the jackpot -- a gas find of as much as 300 billion cubic feet.
"I was ecstatic," he says. "I was on my first vacation in 10 years, and I was thinking I could stay on vacation. I could even buy the ship."
Yet it wasn't long before Mr. Blystone was, as he puts it, "lower than a gopher in Death Valley." Subsequent tests revealed there was indeed a significant amount of gas beneath Holly Sugar, but there was no way to get most of it from the spot where the current well is dug. It turns out the gas there is too pressurized to extract in large quantities. Technically speaking, it's just a "dry hole."
The bottom line for Tri-Valley: Until it can drill a well that allows it to successfully draw from the gas formation below Tracy, it will be impossible to prove that the field contains the 300 billion cubic feet it has advertised.
"I think the field has great potential, but everyone is getting anxious about all of the problems," says Edgar Moss, a Bakersfield resident and Tri-Valley investor.
The Next Step
Despite his continuing confidence that the Tracy field will be "the one," Mr. Blystone concedes that the test results have left him "quite humbled" for now. Others say the impact on the CEO has been even more severe.
"Lynn goes up and down so much emotionally along the way that it's not
healthy," says Mr. Jeschke, who has worked at Tri-Valley for four years. "If I took every unsuccessful location" as seriously as Mr. Blystone does, he adds, "I'd be calling myself Snow White by now."
The next step for Tri-Valley is to figure out how it wants to proceed at Tracy. It can try to salvage the 12,000-foot Holly Sugar well -- one of the deepest in California history -- or it can seek to raise another $2 million for a brand new one.
Either way, after more disappointing tests came back in March, Mr. Blystone had to start calling investors to tell them they had just lost thousands of dollars. Then he had to ask them for more money. "That's beyond the comfort zone in every way," he says.
At least for now, though, most investors seem inclined to stay put, resigned to the inherent risks in gas drilling and encouraged by the initial discovery. Tri-Valley's problems are "very frustrating," says Behrooz Sarafraz, a San Francisco businessman who has sunk about $400,000 into Tri-Valley. "But the potential production value makes it hard to walk away."
Mr. Blystone "has been at the helm through thick and thin," adds Dennis Vaughan, a retired insurance executive and Tri-Valley's biggest investor with some 950,000 shares, or more than a 6% stake. "And I'm sticking with him."
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