Title: Try and Try Again: Dinnehotso-Northeast Arizona Prospect
Author: Don Stone
Publication: The Outcrop, July 2012, p. 6-11
Editors Note: The following is just one chapter selected from an ongoing book project intended to illustrate the activities and challenges encountered by an independent petroleum geologist/entrepreneur in his efforts to make a living in the oil patch.
On December 28, 1973, I had just signed a letter agreement for the sale of my Halleck Prospect, a structural play on the Pass Creek Platform in the southern Hanna Basin of Wyoming.
My youngest brother, Bill, working for Davis Oil Company at the time, afforded me a communication avenue to Davis, the most active independent oil company in the Rocky Mountain region. In one of our conversations, Bill asked me if I would be interested in a large block of Navajo Tribal leases constituting the Dinnehotso Prospect that Davis had acquired in northeastern Arizona. The original lease purchases were based on a geologic idea that Bill had brought from his time at Mobil Oil Corporation, before he accepted an
offer from Davis Oil Company to go to work in the Davis Denver office in 1968. The prospect concept was both stratigraphic and structural but not well defined. Davis had access to Mobil’s single-fold seismic coverage, acquired in the early 1960s, and there was the hope that reprocessing the data with more modern methods could lead to a better understanding of the structural element and perhaps also reveal some possible stratigraphic features critical to the primary objective, Pennsylvanian reef trend.
I reviewed the geologic data base and fundamental prospect concept of the play and told Bill that I would be interested in pursuing some kind of arrangement with Davis Oil. On January 4, 1973, Bill called and said Marvin Davis was willing to let me try to sell the Dinnehotso acreage block, and he would expect $5 per acre or $73,450 for the 14,690 acre leasehold. The Davis Oil Company offices were on the 12th floor of the Denver Club Building in downtown Denver, 6 floors above Sherwood Exploration Company’s office. This made it convenient for me to hop upstairs and pick up all the supporting geologic data that Bill had gathered on the Dinnehotso prospect. With this data package I began a review of the prospect geology and potential.
The Dinnehotso Prospect was located within the Navajo Indian Reservation 20 miles south of the Utah state line and 40 miles west of the New Mexico state line. The reservoir objective was the Pennsylvanian Lower Hermosa (“Barker Creek”) biostromal reef carbonates, which are equivalent to the “Tocito” zone of the Tocito Dome oil field in northwestern New Mexico. This field has produced more than 10 million barrels of 45° API oil and 2 billion cubic feet of natural gas from Ivanovia algal platelets and Chaetetes coral porosity in Lower Hermosa biostromal buildups. This particular buried reef trend was thought to be identifiable in an irregular east-west band extending across northwestern New Mexico and into northeastern Arizona. The reef band represents the oldest cycle of off-lapping reef buildups in the southern Paradox Basin, and culminates at the giant Aneth oil-field complex in southern Utah (producing from the “Desert Creek” cycle).
Localization of the Dinnehotso Prospect area was based on evidence for well-developed, oil-stained reef porosity encountered in the inconclusive wildcat test American Mining Navajo # 1 well, located in the SE/4 NW/4 Section 28, T38N, R24W, Apache County, Arizona, together with a seismically defined, northwest-trending structural closure and interpreted Pennsylvanian-Permian structural growth. This last factor was considered critical to the oil accumulation at Aneth and at Tocito Dome.
I wasted no time in preparing geologic displays and lining up meetings with clients to present the Dinnehotso Prospect. I made presentations to some 16 interested oil company’s receiving a positive response from most of them. But it was taking some time for these companies to evaluate the prospect risk and economic potential.
It was during this period (January to early March) that (Sherwood Exploration Company) had rented out the small outer room in my Denver Club office to Jack Parker. Jack was a long-time friend and iconic Rocky Mountain petroleum geologist. He had just returned to Denver after several years working as exploration manager for Kirby Petroleum in Texas and needed a base for the job interviews he had lined up with Denver oil companies. He soon found a position as Exploration manager for Northwest Pipeline Company in Denver.
When I showed Jack the Dinnehotso Prospect he took an immediate interest. On February 25, 1974, he called from his new digs at Northwest Pipeline and said he would commit to the purchase of the Dinnehotso leasehold at $7.50 per acre if I would pay the rentals due shortly (@ $1.25/acre). An agreement was signed between Northwest Pipeline and Sherwood Exploration Company and between Tesoro – who had a 75% interest in a small part of the Davis leasehold — and Sherwood in March, 1974. In these agreements, Sherwood received a 1% overriding royalty “of all oil, gas and casinghead gas produced” on the Dinnehotso leasehold. Other overrides were held by Davis Oil Company employees (Paul Messinger, Marlis Smith, Bill Stone).
Considering the casual way in which Marvin Davis said he would take $5 per acre for his Dinnehotso lease block, and knowing that Marvin was uncomfortable with exploration prospects outside of the Powder River Basin in Wyoming where all of his successes had so far occurred, it seemed only prudent to attempt to negotiate with Marvin for a per-acre price lower than the loosely stated five-dollar figure. So I called Davis Oil Company and asked to speak to Marvin Davis. He would probably not have accepted my called except that Davis Oil was seriously considering committing to Sherwood’s Halleck Prospect in the southern Hanna Basin in central Wyoming, and he may have assumed that I had something important to say about the Halleck Prospect agreement. When he came on the line I got right to point and asked “would you take three dollars an acre for the Dinnehotso leasehold?” Without hesitation he said yes and hung up. With that simple one-minute call I just made Sherwood an extra $21,247 and, as it turned out, another $8,133 for Sherwood when Tesoro agreed to go along with the Davis $3 price on their smaller interest in the Dinnehotso leasehold.
The pesky paper work of filling out assignment forms for the 24 individual Tribal leases was generously completed by Ruth Aivaliotis, secretary to Paul Messinger, chief landman and deal-maker at Davis oil. These assignments were delivered to Sherwood Exploration together with an invoice for the May rentals already paid by Davis. Then shortly after this, Sherwood also received assignments and a rental invoice from Tesoro. Total rental reimbursements paid by Sherwood were $11,569. From the total check of $110,175 from Northwest Pipeline, and after lease rental payments and $44,069 to Davis and Tesoro for the Dinnehotso lease block, Sherwood’s net was $54,336 (before salaries and other miscellaneous office expenses), which equates to $229,930 in 2012 dollars.
The next step was the delivery in June by Davis Oil of the Mobil seismic tapes to northwest Pipeline for reprocessing and interpretation. This was performed by John Vreeland, geophysicist for Northwest Pipeline. The results apparently were not compelling as Northwest Pipeline decided not to pursue development of the Dinnehotso Prospect and offered Sherwood reassignment of the Dinnehotso leases in February 1975. I accepted.
After Jack Parker informed me of Northwest Pipeline’s decision to relinquish the Dinnehotso leasehold, but before the paper work had been done, I mentioned the Dinnehotso Prospect to Bill Leroy, Vice President of Reserve Oil and Gas in Denver, and followed up with a presentation on February 11, 1975, to Rex Nelson, geologist at Reserve. Along with the Dinnehotso leases, Sherwood promoted a “Northeast Arizona” lease purchase opportunity” in which client was required to nominate and bid on an additional 50,000 acres of Navajo Tribal leases in a future competitive, sealed-bid sale. Sherwood’s proposal called for a twenty-five cent per acre commission for Sherwood on any leases won in the lease sale, with the total commission not to exceed $75,000. The proposed agreement included an overriding royalty of 1% for Sherwood Exploration on the Dinnehotso leasehold and 3% on any new leases acquired in the Northeast Arizona area. Also, purchaser(s) must drill a Mississippian test within a 5-year period or reassign all leases to Sherwood free and clear of any burdens other than basic 16 2/3rds Tribal royalty and Sherwood’s existing royalties.
It was during this time that I interviewed and offered a job to Brad Morrison who was working as a geologist for Shell Oil Company in the Gulf Coast area. He accepted my offer, moved to Denver and started with Sherwood Exploration in May, 1975. I put Brad to work on the Dinnehotso Prospect and he produced a geologic report that I used in a new set of “show and tell” meetings with potential purchasers and contributed to the eventual sale of the Dinnehotso and Northeast Arizona deals.
The Society of Exploration Geophysicists held their annual meeting in Denver in the early part of March and I attended some of the presentations and also one of the all-day seminars. And then, on the 16th, my wife Charity and I flew down to San Salvador Island in the Bahamas where I was part of the class in underwater photography put on by Skin Diver magazine. This was a very enjoyable break in my hectic daily routine in Denver and resulted in considerable improvement in my knowledge and skill as an underwater photographer. The only negative consequence was Charity’s broken toe, stubbing it against a wayward scuba tank onboard the dive boat.
On March 19, 1975, Reserve committed to the Navajo Tribal prospects, bringing in Clinton Oil Company as a 50% partner. Reserve had also planned a 30-mile, 2D seismic acquisition program. I arranged for the Dinnehotso leasehold assignments to be made directly from Northwest Pipeline to Reserve and Clinton. I arranged for the Dinnehotso lease assignments to be made directly from Northwest Pipeline into Reserve and Clinton. Contracts with these purchasers were executed in late 1974, and the $20,000 “finder’s fee” paid to Sherwood in early 1975. Sherwood picked up these lease assignments from Northwest Pipeline and delivered them to Reserve and Clinton in April. The 1% Sherwood overriding royalty on the Dinnehotso leases was carried forward.
But the Reserve-Clinton Partnership never performed and Sherwood again took reassignment of the Dinnehotso leases. A new round of presentations was short-lived as Exxel Energy Corporation, Jim Peterson (President) stepped up and signed an agreement with Sherwood in March, 1978. By this agreement, Exxel took assignment of 80% net revenue interest Dinnehotso leases directly from Reserve and Clinton and paid the April and May lease rentals. In the Sherwood-Exxel agreement Exxel made it clear that they were planning to “farmout the leases to one or more parties who will pay the cost of drilling a Pennsylvanian test on one of the leases and reimburse Exxel for all its costs incurred pertaining to this prospect”. Exxel agreed “to pay Sherwood $5 per net mineral acre as additional consideration for the leases within 10 days following the commencement of the test well on the leases, whichever first occurs”. And if a well is not commenced on or before February 16, 1979, Exxel must either pay Sherwood $5 per acre or reassign the leases to Sherwood. As it turned out, Exxel did succeed in farming out the prospect to partners Cabot Corporation and Crystal Oil Company, but since the well had not yet started drilling, Sherwood received Exxel’s check for $73, 415 (equivalent to $230,219 in 2012) on February 15, 1979.
A test well on the Dinnehotso Prospect under the operating name Exxel Energy Corporation Navajo Tribal 29-1, was finally spud on March 27, 1979, in the NW/4 SW/4 of Section 29, T38N, R24E, Apache County, Arizona. The well drilled the entire Paleozoic section and into the Precambrian crystalline basement to a total depth of 6020 feet. After all the time, effort, and money spent on the development, promotion, and negotiation on the Dinnehotso-Northeast Arizona prospect package, it was surely disappointing that the well was abandoned as a dry hole. No Pennsylvanian Ivanovia reef development and no encouraging oil shows were encountered, even though the nearby American Minerals well had reported the presence of both these encouragements. This result is another confirmation of the manifest high risk inherent to oil and gas exploration, and anyone engaged in this activity should be prepared for such negative outcomes. The rare successful exploration venture, however can and often does, make up for the numerous unsuccessful projects that keeps the independent explorationist engaged and optimistic. And with entrepreneurial determination, one can always make a profit and enjoy the ride, as in the Dinnehotso adventure.