Oily Deals: Pattern Emerging in Questionable Arkoma Gas Transactions

by Wythe Walker Jr. and David F. Kern  on Monday, Mar. 31, 2014 12:00 am  

A version of this article originally appeared in Arkansas Business on April 9, 1990. It is being republished as part of Arkansas Business' 30th anniversary issue. You can access the digital edition for free here.

Jerry Jones has always pleaded innocent in the controversial 1982 Arkla-Arkoma gas deal, a deal worth at least $174.8 million when the final numbers were tallied last fall.

This January, a ratepayers’ class-action suit declared the deal an insider’s rip-off for Arkansas gas consumers who got stuck with an $80 million overcharge bill that went straight into Jones’ bulging bank account.

Depending on whom you believe, the Jones’ Arkoma deal is either the “best deal” Arkla Gas ever made (ex-Arkla Chairman Sheffield Nelson) or a brazen ploy for Nelson to “stuff his pockets so full of money his pants fell down” (U.S. Rep. Tommy Robinson).

Arkansas has never seen anything quite like this gas deal with its bitter feuding that pits the state’s most powerful political family, the Stephenses, and their new protégé, Robinson, against their one-time protégé but now bitter enemy Nelson and Robinson’s old friend Jones.

Most readers faced with deciphering the bewildering arcane gas-field lingo of “farm-out,” “farm-in,” “MCF” and “take-or-pay contracts” spewed out in newspaper articles over the past six months have given up trying to understand who’s lying and who isn’t in this Texas-sized battle of oil tycoons.

But beneath the reams of newsprint a disturbing and surprisingly simple pattern emerges:

Jerry Jones has gotten in tight with major utilities’ gas purchasing officers — the men who buy the gas from suppliers like Jones’ Arkoma Production Co. — and those relationships are under investigation in Arkansas and California and are now being questioned in Canada. To Jones’ accusers, his relationships with gas purchasing agents give him an inside track on sweet deals and big bucks, going well beyond friendship into potential kickbacks and payoffs.

• In Arkansas, Jones had numerous business ties to Arkla’s Nelson and to B.E. “Billy” Harrell, chief gas purchasing officer for the utility when the Arkla-Arkoma deal was signed. Between the two of them, Nelson and Harrell carried enormous influence over what gas Arkla would buy and at what price.

• In California, Jones’ name was linked last fall to Eugene E. Satrap, a gas purchasing agent for Pacific Gas & Electric of San Francisco, who had visited Jones in Little Rock many times. Satrap also shares a Texas oil and gas partnership with Jones’ right-hand man, Mike McCoy, in violation of PG&E rules. An investigation is underway.

• Now add Canada to the list with recent allegations by George R. Walsh, who says he was fired last September from his $139,000 job as a gas purchasing agent for Alberta & Southern Gas Co. because he refused to go along with his boss’ plan to play favorites with Jones.

In February, Jones defended his business relationships with gas purchasing officers to The Dallas Morning News in this way: “Do I have a problem with having personal relationships with the people I do business with? No.”

So far, those “personal relationships” have resulted in three public service commission investigations — two by the Arkansas PSC and one underway in California.

The Arkoma deal single-handedly has yielded three lawsuits against Arkla: two filed in 1983 that were consolidated and settled for $750,000 in attorney’s fees and this January’s $80 million class-action ratepayers’ lawsuit filed by Springdale attorney Thomas A. Mars.

Mars’ lawsuit claims Arkla violated its mandate to purchase gas at the lowest available price in structuring the Arkla-Arkoma deal with Jones. Arkla thinks enough of Mars’ reasoning to have already made preliminary attempts to settle without success. (For how much? Mars won’t say.)

Although the December 1982 Arkla-Arkoma agreement has received most of the publicity, insiders say Jones first received favoritism from Arkla in late 1981 in Haskell County, Okla., during a redrill for Federal King Well -2. Mars’ suit says the Federal King redrill set the pattern that Jones would repeat over and over again.

In essence, Jones would use his inside track with Nelson and Harrell to sell gas to Arkla for fat profits, while other oil sellers were locked into low prices that only Arkla could raise. (Asked about these charges over the past six months, Jones and Nelson have both repeatedly denied allegations of favoritism.)

“You’re dealing in nothing but Arkansas politics,” Jones says. “It’s being made news to demean Mr. Nelson.”

Why would Arkla grant Jones special privileges? What motivation could Nelson and Harrell have?

Mars’ PSC complaint details numerous business links between Jones and Arkla. From 1979 to 1984, Jones, Nelson, Harrell and Arkla were connected in a series of interlocking business arrangements. In 1983, Jones would even go so far as to join the Arkla board of directors.

The Pattern

Jones and Michael V. McCoy first formed Arkoma Production on April 29, 1981, to conduct oil drilling, exploration and production. Five months later, Arkoma wrote Sun Gas Co. in Oklahoma City asking for the rights to redrill an existing Sun well it operated in Haskell County. That well, Federal King Well -2, was producing only 50,000 cubic feet of gas per day. Nearby wells drawing on the same reservoir were churning out 60 times as much.

As main operator of the well, Sun wanted greater production, but all production was dedicated to the Arkla pipeline, and Arkla would pay only 20 cents per thousand cubic feet (MCF) to Sun. Sun had already asked for a higher gas price from Arkla to justify the redrilling costs but had been turned down.

In contrast, Arkoma’s letters to Sun assure Sun that Arkoma can get Arkla to pay the highest gas price available under the Natural Gas Policy Act, so a new well can be drilled. All Sun has to do is allow Arkoma to get in on a share of the new well’s profits. (It’s not known what Arkoma paid Sun for its participation.)

This news angered Stephens’ Spence A. Leamons, and he sent a letter Nov. 10, 1981, to the other minority owner in the well, Exxon Co. USA.

“Sun asked Ark-La [sic] for an improvement in the gas price so this unit could be redrilled, and Ark-La rejected their proposal. Sun then [sold its interest] to Arkoma who was able to get Ark-La to make some upgrading in the gas price. I suspect that Stephens and Exxon would be rejected if they asked for an improvement in the gas price.”

The letter goes on to say, “Frankly, we think this whole business stinks. ...”

By Jan. 5, 1982, the deal was completed, and Arkoma owned 75 percent of the new well. Insiders say this pattern was repeated by Jones and Arkoma throughout the Arkoma basin.

The Billion-Dollar Bonanza

In December 1982, Jones would strike it rich with the Arkla-Arkoma gas deal.

For $15 million, Jones bought half of Arkla’s interest in 28,500 acres in the Aetna and Cecil gas fields. The transaction also gave Jones sweeping powers over Arkla because of its requirement that Arkla buy 75 percent of all the gas Jones could find to sell it in a five-state area. By 1986, the lucrative deal was estimated by Arkla executives to be worth potentially $1 billion.

For good measure when the deal was struck, Jones promised to kick in $30 million over the following four years in drilling and exploring costs. Nelson told the board that Jones was taking exploration risks that Arkla couldn’t afford and that no one could know how successful the new wells would be.

Nelson missed the mark horribly. On the wells Arkoma would drill in the Arkoma Basin, The Dallas Morning News reported that a computer analysis showed that the company hit gas 95 percent of the time — a fantastic success rate in an industry where the average is 15 percent for new exploration.

Last week, Arkla’s chief geologist at the time, Leonard E. Jordan, testified under oath in a deposition to attorney Tom Mars that he strongly disapproved of the deal and only signed off on it because Harrell, his superior, pressured him to. (Nelson has always maintained that Arkla’s entire geologic team favored the deal.)

In another twist, Jordan and another Arkla officer told Mars the deal was signed on Dec. 30, 1982, before the board’s vote the following day. Nelson has repeatedly said he sought the Arkla board’s approval on the Arkoma deal before it was finalized Dec. 31.

The Persistent Pattern

With the 1982 Arkla-Arkoma deal firmly in hand, Jones and Stephens Production would strike an agreement in the spring of 1983 similar to the Federal King Well redrill. This time it would involve Stephens’ holdings in the Cecil and Aetna fields.

Locked into long-term agreements with Arkla, Stephens was getting only 16 cents per MCF on the Aetna field and 55 cents per MCF on the Cecil field. After negotiating with Jones, the old contracts were broken on April 28, 1983, and Arkoma and Stephens began sharing in gas now being sold to Arkla under new Jones-negotiated agreements.

The Jones-controlled gas would sell for the dramatically higher price of $3 per MCF. Arkla ratepayers would pay the difference as the cost of gas purchasing would be passed on in higher monthly bills.

In early 1983, the U.S. Securities & Exchange Commission conducted an informal inquiry into the Arkoma transaction that resulted in no action. That summer, after The New York Times did a lengthy piece in July, the Arkansas PSC would launch its first investigation into the transaction, eventually concluding that although many individuals alleged the deal was tainted, the PSC couldn’t find any clear wrongdoing.

Last fall, the PSC launched its second investigation after learning that Arkla paid Arkoma $174.8 million to release it from the December 1982 contract that Nelson had described as the best deal the company ever made.

Go West, Oil Man

Pacific Gas & Electric last fall began conducting an investigation into four gas suppliers, including Jones, amid allegations of kickbacks and favors. The California Public Utilities Commission, the state regulatory agency, also launched a parallel investigation into a series of major gas transactions involving Jerry Jones.

The Arkansas Democrat estimated Jones’ contracts with the California utility are worth $41 million a year to Arkoma.

A gas purchasing officer for PG&E, Eugene E. Satrap, was fired and then reinstated to a new job last fall and has been associated with an ongoing PG&E investigation into gas purchasing contracts. The Dallas Morning News reported that Satrap has visited Jones’ private duck-hunting lodge in Arkansas and stayed regularly as a guest of Jones in Little Rock. In his capacity as gas purchasing officer, Satrap negotiated a number of contracts with Jones and his companies.

Most significantly, in 1984 Satrap and McCoy bought interests together in a series of mineral leases in Franklin County, Texas. Satrap borrowed $99,000 from Stephens Security Bank in Arkansas (which is not associated with the Stephens family) to finance the deal.

PG&E officials have not formally named Satrap in the investigation but confirm that it focuses on gas purchasing practices, and Satrap’s attorney called his new job “a demotion.” PG&E policy prohibits gas supply managers from joining any of the utility’s gas suppliers in investments and from accepting gifts that are more than nominal.

The Canada Connections

In Alberta, where pricing practices are different, Jones’ strategy changed.

Contrasting to American marketing practices, Canadian producers seeking to sell to Alberta & Southern must belong to an exclusive 200-company pool. George R. Walsh questioned the methods that Jones used to enter that pool.

First, he says, Jones had no gas to sell. Walsh says a friendship between his former boss Don McMorland (now chief operating officer/senior vice president) and Jones caused Alberta & Southern to favor Arkoma over the other producers. Jones denies this.

Jones says he never met with McMorland outside his office and just used persistence in seeking Arkoma’s gas contracts.

Walsh also questioned Jones’ attempts to low-ball prices in Canada’s controlled gas system. Walsh viewed this as highly improper.

Again, Jones denies Walsh’ accusations and says he is just an embittered former employee.

Walsh’s speculation is that in exchange for offering the low prices, which would help Alberta & Southern get better prices from other suppliers, Arkoma would get a sure market for its gas. Arkoma could negotiate price increases later on, he speculates.

Jones wouldn’t estimate the size of his contract with Alberta & Southern, but a newspaper reporter in Canada estimates it at 2 million cubic feet per day — about 25 percent of Arkoma Canada’s production.

“We convinced them with persistence and a lot of hard work,” Jones says of the Alberta & Southern contract.

Offering lower prices may have helped open some doors but Jones says the company’s goal is to make profits.

“We want to get as high a price for our gas at all times.”

Since Then ...

2014: In 1990, when Arkansas Business produced a version of this story as part of a package of articles on the state’s oil and gas industry, the Arkoma rights transactions — from Arkla Gas Co. to Jerry Jones and back again — were the subject of litigation that would drag on for six more years.

Although the story didn’t mention it, Nelson was a candidate for the Republican nomination for governor in the spring of 1990, and he would win the primary over the strenuous opposition of the executives at Stephens Inc. He would lose that general election to Bill Clinton. Nominated again in 1994, he would lose to Democrat Jim Guy Tucker.

Nelson is now 72 and still occasionally gets involved in politics, especially issues involving the natural gas severance tax.

Also not specifically mentioned was the fact that Jerry Jones had bought the Dallas Cowboys a year before this article appeared. In 2014, his net worth is estaimated at $3 billion, tying him with 28 other people on Forbes magazine’s most recent list of the world’s billionaires.

In 1996, the U.S. Supreme Court declined to hear an appeal of an Arkoma settlement, so Jones and his associate Mike McCoy were ordered to compensate affected mineral rights owners.

 

 

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