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Austral Oil, Co., Inc. - Lehman Brothers Collection

Austral Oil, Co., Inc.

List of Deals

Austral Oil Company Incorporated was organized by Burden-Fox, Wells & Rogers interests in 1951 and incorporated in Delaware on November 3, 1950.

R. McLean Stewart, the son of a Scottish aristocrat, was president and chief executive officer of the company for the first ten years. Mr. Stewart described himself as having been a "poor boy" from Canada, born in Aylmer, Quebec in 1895. Stewart had both military (World War I) and business careers, his business career leading him to positions at the National City Bank of New York, Brown Harriman & Co., Inc., (Harriman Ripley & Co., Inc.), and A. M. Burden. Austral was an enterprise of A. M. Burden & Co. and of Fox, Wells & Rogers, both of which were private venture capital partnerships. The two concerns guided the financial arrangements of Austral and provided it with funds.

Austral provided wealthy individuals, partnerships, or families direct ownership of property interests in oil and gas prospects and leases, and in the exploration and development of such properties by engaging in the drilling of wells. Austral Oil and Gas Exploration Corporation (Australexco), a subsidiary of Austral, conducted the exploration programs that were offered.

Over the course of the first eight years, with a budget of $3 million to $4 million a year, the company undertook in each year exploration programs principally in the areas of Texas, Louisiana, Arkansas, and New Mexico. Each year's program was large enough to carry out two basic policies. The first was to spread risk over at least ten drilling prospects and the second was to select properties for drilling blocks that were of sufficient area to bring in substantial reserves through development after production was discovered. Between 1952 and 1959, 150 clients of Austral invested a little over $58 million in its exploration, development, and operating programs. The properties acquired returned to those who participated in each of the eight years a gross income of $18,035,356. The budget for exploration, lease costs, and development drilling in 1960 was expected to exceed $10 million, a record since the company's organization, and properties under the Austral management were producing income at the rate of $6 million a year.

One of the main reasons wealthy individuals in high tax brackets sought out the type of investment outlets offered by Austral is the federal income tax law. Under the law at the time, intangible drilling and development costs and various other costs were allowed in the year paid or incurred as federal income tax deductions.

The company elected C. Wardell Leisk, formerly an executive vice president, as president and chief administrative officer in 1961. He succeeded Stewart, who was named chairman and continued as chief executive officer.

In 1967 the natural gas industry was riveting its attention to a big gamble, according to industry experts at the time: a project called Rulison. The main attraction of Rulison was that it was to be the first attempt at commercial exploitation of nuclear energy explosions to tap large gas reservoirs, and was an operation designed to recover underground gas reserves by nuclear blasts. Rulison was a cooperative effort of Austral Oil Company in Houston, the primary funder, and CER Geonuclear, which was a joint venture of EG&G and Continental Oil. Rulison was a gas-simulation Plowshare Program. Plowshare was a program that promoted using the energy from nuclear explosions for peaceful uses and applications. The basin was estimated to have potential at 100 trillion cubic feet, and Austral had rights to more than 60,000 acres. The industry was hoping to fashion from nuclear explosions a key to unlock the potential in such basins. The fracturing caused by two fifty-kiloton explosions (equal to a total of 100,000 tons of TNT) could stimulate a well to produce fifteen times the output of a conventional well over a twenty-year period. The forty-kiloton test was detonated six miles west of Grand Valley, Colorado, on September 10, 1969. Its purpose was to release natural gas reserves locked in the sandstone and shale Mesa Verde formation. The estimated cost for Rulison was $6.5 million. By 1970 gas from the project could be successfully produced at initial rates of at least ten million cubic feet a day. Nuclear stimulation constituted a significant breakthrough in the development and production of natural gas. Commencement of commercial production of Rulison was going to require substantial time and capital and would depend on actions by the federal government to fund the development of nuclear technology to establish standards for marketing the gas.

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