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Oily deals: pattern emerging in questionable gas deals in Arkansas, California and Canada.

Oily Deals Pattern Emerging In Questionable Gas Deals In Arkansas, California and Canada

Thousands of miles from Dallas, George R. Walsh, a Canadian gas purchasing officer was fired from his $139,000 job last September. Walsh believes oilman Jerry Jones is the reason.

"Why did they come to Canada?" Walsh asks about Jones' Arkoma Production Co. of Canada Inc. operation which incorporated in 1988. "They were told to come to Canada by PG&E and that Alberta & Southern would give them a good deal."

Walsh, a former Alberta & Southern Gas Co. Ltd. vice president, says his boss at the time, Don McMorland (now chief operating officer/senior vice president) was prepared to play favorites with Jones, but he wouldn't go along. To get Walsh out of the way, they gave him the axe.

Walsh has filed a lawsuit in the Court of Queen's Bench of Alberta claiming he was fired without cause Sept. 6, 1989.

His former company has made settlement overtures, but he wants to continue with his lawsuit to clear his name. "I'm the victim in this whole thing," he says.

Jones denies he had anything to do with Walsh's firing and says it's just sour grapes. "That's ridiculous," Jones says of the allegation. "Mr. Walsh is obviously a fired-employee that has an axe to grind someplace."

Alberta & Southern is a subsidiary of Pacific Gas & Electric based at San Francisco and the man who introduced Jones to Alberta & Southern was Eugene E. Satrap, Walsh says.

Satrap is a gas purchasing officer for PG&E who was fired, reinstated and demoted last fall and has been associated with an ongoing PG&E investigation into gas purchasing contracts. Satrap owned a $99,000 gas lease participation with Jones' partner, Mike McCoy, in violation of PG&E rules. McMorland, Satrap, Jones and McCoy were friends and socialized, Walsh says.

Again, Jones flatly denies Walsh's statements. "I've never met with him (McMorland) except at PG&E offices," Jones says. "That's not true."

Walsh's story is just the latest in a mounting string of allegations against Jones that he has engaged in dirty deals in building his fortune in the oil and gas business all across the country and, now, into Canada.

The Big Feud

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 ripoff 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 Stephens and their new protege Robinson, against their one-time protege - 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, California and 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 Satrap, a man 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 under way.

* Now add the recent allegations by Walsh against McMorland in Canada to the list.

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

But so far, the above "personal relationships" have resulted in three public service commission investigations; two by the Arkansas Public Service Commission (one in 1983, one ongoing) 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 attorneys' 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 Akla-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). Last week, Herbert Rule III of the Rose Law Firm who represents Arkansas Gas Consumers, an industrial gas users organization, acknowledged he is considering joining Mars' lawsuit and increasing the forces against Arkla.

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, Oklahoma during a redrill for Federal King Well -2. Mars' suit concurs and says the Federal King Well -2 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 priveleges? What motivation would 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.

Among the highlights:

* Jones and Nelson owned property together at Lake Hamilton, were joint venturers in oil and gas wells, partners in the "Rolling Pines" real estate development; partners in KARK TV in Little Rock; partners in a boxing partnership; investors in a thoroughbred horse syndication; investors in Petit Jean Poultry Inc.; owners in Seneca Oil stock, a publicly traded oil and gas exploration company.

* Jones was a principal stockholder and officer or director of Seneca Oil Co.; Ricks Exploration Co.; Century Refining Company Inc.; and Mutual Petroleum Marketing Co. Inc. and its subsidiaries. All of which conducted substantial business with Arkla and its subsidiaries.

* Harrell had bought 5,000 shares of Seneca stock from Jones. Harrell's son-in-law, Edward T. "Buddy" Braddock was the president and majority stockholder of Louisiana Bayou Oil Co., a company Jones owned 25 percent of. Harrell's responsibilities included negotiating gas prices for Arkla from Arkoma, Seneca and Ricks Exploration.

* Harrell would leave Arkla in 1984 and start his own company in Louisiana, Mid-Continent Oil, which bought and resold gas. Jones would begin supplying gas to Harrell on April 20, 1985.

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 -1, was only producing 50 thousand 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 only pay 20 cents per thousand cubic feet 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 Company 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 farmed out (sold their 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

On Dec. 30, 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 oil-rich 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 a computer analysis showed that the company hit gas 95 percent of the time. A fantastic success rate in an industry were 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 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 (See accompanying story).

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 -2 redrill. This time it would involve Stephens' holdings in the gas-rich Cecil and Aetna fields.

Locked into long term agreements with Arkla, Stephens was only getting 16 cents per thousand cubic feet on the Aetna field and 55 cents per thousand cubic feet 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 thousand cubic feet. Arkla ratepayers would pay the difference as the cost of gas purchasing would be passed on in higher monthly bills.

In early 1983, the United States Securities and 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 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.

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

Go West, Oil Man

Pacific Gas & Electric began conducting an investigation into four gas suppliers last fall - that includes 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 Jones.

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

Recall that Satrap, PG&E gas purchasing agent, was suspended in September and then reinstated at a new post three months later.

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 1985, 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 (No relation to the Stephens family.) to finance the deal. Stephens Bank President Richard Smith is the subject of a Federal Bureau of Investigation investigation, and the bank had earlier lent up to $50,000 to Tommy Robinson, then a close friend of Jones.

PG&E officials have not formally named Satrap in the investigation, but do 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 accepting gifts other than nominal ones.

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. Walsh questioned the methods that Jones used to enter that pool.

First, he says Jones had no gas to sell. Walsh says Jones and McMorland's friendship favored 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. Unlike American gas pricing, Walsh viewed this as highly improper.

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

Walsh's speculation is that in exchange for offering the low price, 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."

PHOTO : QUESTIONABLE DEALS: Oilman Jerry Jones' relationships with gas purchasing officers in Arkansas, California and now Canada are being questioned.
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Title Annotation:Arkla Inc. and Arkoma Production Company involved in lawsuit
Author:Walker, Wythe, Jr.; Kern, David F.
Publication:Arkansas Business
Date:Apr 9, 1990
Previous Article:Nightmare at Third and Louisiana.
Next Article:The $1 billion deal.

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