Although it does not say much about its oil-related operations externally, some crude oil profit-taking is ongoing within the expanding San Diego-based Sempra Energy holdings, known mostly for having the largest retail utility customer base in the nation. In reports to internal audiences in recent months, Sempra has talked up its oil/gas mineral rights covering 5.2 million acres across 31 states, and most recently a 21-year record oil trading volume (Jan. 7) that its trading unit helped the International Petroleum Exchange (IPE) achieve.

As documented by the Financial Times last month, IPE, Europe’s largest energy futures/options exchange, had a 60 million-barrel exchange of futures for physical transactions — the largest such transaction in its history, and Sempra Energy Trading helped make it happen, Sempra officials reported to their employees last week.

Sempra Trading reportedly “built up” its futures contracts for a number of weeks prior to the Jan. 7 record, and that put Sempra “in a strong bargaining position,” according to a Financial Times report, which credited Sempra and British Petroleum with each putting through 30,000-lot (about 30 million barrels) transactions.

Domestically, another part of Sempra — a holdover from the Pacific Enterprise side of the 1998 merger that created Sempra Energy — Sempra Energy Production Co. (Sepco) was gushing profits last fall, according to another report to employees, rising 350% over the 1999-2000 two-year start-up period. At the end of 2000, Sepco estimated the market value of its holdings at $25 million with the prospect of growing that to about $60 million by 2005, according to company estimates.

“We’re on track to earn a net profit of about $4 million this year (2001),” said Mike Walker, a Sempra Energy Resources vice president in charge of Sepco. (That’s a small part of the overall $518 million in unaudited profits for 2001 that Sempra Energy reported last month.)

Sempra’s little-known subsidiary owns or controls non-expiring oil and natural gas mineral rights throughout the U.S. “We own more mineral rights than most independent oil companies,” Walker told employees in the company internal report.

While royalties are a fraction of a percent of production, most of the time (1/4 of 1% to 3/16 of 1%), “when you earn royalties on 400 oil and gas wells, like Sepco now does, that adds up to net profits of between $500,000 and $1 million a year.”

In addition to the payoff from mineral rights, Sepco leverages some into interests in wells that are eventually drilled, and it now has working interests in 60 wells, about 90% of which are natural gas wells, Walker said. “Our smallest investment to date is about $2,000 in a single well, and our largest, $1.5 million.” He told employees that Sepco’s success ratio is above the industry standard of 40-50%, hovering at 70% as of last fall.

The pre-merger parent of Southern California Gas Co., and now one of two Sempra Energy utility subsidiaries, Pacific Enterprises of Los Angeles bought Texas-based Sabine Corp., a company that began buying mineral rights back in the 1930s, and Terra Corp., an E&P company. The two were combined into Pacific Enterprises Oil Co. and the working oil-gas well part of the business eventually was sold in the early 1990s, but the mineral rights on land that was not producing at the time were retained.

When Pacific Enterprises and San Diego-based Enova merged to form Sempra Energy, the new company leaders considered selling the mineral rights, but Walker proposed keeping them and leveraging them into more profits. The company has told employees that the strategy has paid off.

“If a drilling operator proposes a well, we have the right to take part in the project by sharing in the capital costs,” Walker was quoted in the employee report. “Using the intellectual capital of our (five-professional, Dallas-based) staff, we ‘cherry pick’ the best opportunities. We only participate in 20 of every 100 proposals that come across our desks.”

Sempra claims that when a Sepco-supported well yields natural gas or oil, “the immediate revenue payoff is four to five times the amount the company would get from royalties alone.” They view it as another way of increasing the holding company’s overall long-term value.

©Copyright 2002 Intelligence Press Inc. Allrights reserved. The preceding news report may not be republishedor redistributed, in whole or in part, in any form, without priorwritten consent of Intelligence Press, Inc.