Office of Strategic Petroleum Reserve; Opportunity for Public Comment

DEPARTMENT OF ENERGY

Office of Strategic Petroleum Reserve; Opportunity for Public

Comment

AGENCY: Department of Energy, Fossil Energy, Office of Strategic

Petroleum Reserve.

ACTION: Opportunity for Public Comment on Strategic Petroleum Reserve

Policy.

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SUMMARY: In preparation for the issuance of an Administration Statement

of Policy concerning the capacity, size, use, and financing, among

other issues, of the Strategic Petroleum Reserve, the Department of

Energy, Office of Strategic Petroleum Reserve, extends this opportunity

for interested persons to submit written comments. All submissions in

response to this notice will be made available to the public.

DATES: Interested persons are invited to submit written comments at the

address below by June 16, 1997.

ADDRESSES: Mr. Richard D. Furiga, Deputy Assistant Secretary, Strategic

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Petroleum Reserve, FE-40, Room 3G-024 1000 Independence Ave. S.W.,

Washington, D.C. 20585.

Comments may also be submitted by use of the Internet by linking to

the DOE Fossil Energy web site at: http://www.fe.doe.gov/spr.html

Requests for further information may be addressed to: Mr. John D.

Shages, Strategic Petroleum Reserve, FE-432, Room 3G-052 1000

Independence Ave. S.W., Washington, D.C. 20585, Phone: (202) 586-1533,

Fax: (202) 586-0835, Internet: [email protected]

Opportunity for Public Comment

As a result of changes in the overall energy environment that have

occurred since initial authorization of the Strategic Petroleum Reserve

(the Reserve) in 1975 and creation of the International Energy Agency

(IEA) in 1974, and agreement by the Department's witness before the

Senate Energy and Natural Resources Committee on May 15, 1996, that a

Statement of Administration Policy on the Reserve would be prepared,

the Department intends to prepare, on behalf of the Administration, a

statement of policy addressing fundamental issues affecting the future

of the Reserve. As an initial step in the development of the Reserve

Policy Statement, the Department solicits the views of all interested

persons on the issues listed below. After compilation of the public

comments, the Administration will conduct an Interagency review of the

issues, and develop positions on the major issues of the capacity and

inventory of the Reserve, which will be a touchstone for decisions

regarding the Reserve, including proposals to use the Reserve's

inventory for purposes other than energy supply shortages,

interruptions, and international obligations.

Background on U.S. Oil Emergency Response Policy

Creation of the International Energy Agency and the Strategic Petroleum

Reserve

Following the 1973 Arab oil embargo, the United States determined

that its vital foreign policy, national security, and economic

interests were threatened by our dependence on imported oil and the

possibility of recurring severe supply disruptions. As a result, in

1975 the Energy Policy and Conservation Act, Public Law 94-163 (the

Act), was enacted, authorizing both American participation in the IEA

and creation of the Reserve.

It was intended at the time that the Reserve would serve several

functions. It would protect the national economy by providing the

capability to supplement oil supplies in the event of disruptions due

to political, military, or natural causes. It also would sustain U.S.

foreign policy objectives, especially in the Middle East, by providing

the President the freedom to take action free of concern for essential

oil supplies. The Reserve would provide U.S. military forces with a

secure source of oil supplies in a crisis. It would also be a deterrent

to countries or parties that might seek political gain by intentionally

disrupting world oil exports.

The Reserve also was intended to fulfill a U.S. international

obligation. Under U.S. leadership, and drawn together by a common

interest in maintaining secure oil supplies, 12 industrialized nations

met in Washington in February 1974 to begin a process that would lead

to the signing of an Agreement on an International Energy Program. This

was the charter of the IEA, which today has 23 members. The member

nations of the IEA agree to take common effective measures to develop

emergency self-sufficiency in oil supplies and to cooperate in a

crisis. Each member of the IEA commits to maintaining the equivalent of

90 days of net oil imports as an emergency reserve. Throughout its 22

year history, the United States has been the IEA's foremost advocate of

building and maintaining strategic oil stocks. In establishing the

Reserve, it was a U.S. goal to lead by example, setting a high standard

for others to follow.

At its origin, the IEA adopted an emergency system based on

allocation of available supplies among the oil importing countries.

Since then the United States has gained experience with the

difficulties and negative consequences of price and allocation

regulations, and the Reserve has moved from being merely a plan, to

becoming a viable petroleum stockpile. With time, the U.S. position has

evolved to aggressively advocate use of free markets even in a

disruption. The existence of the Reserve lends credibility to urging by

the U.S. to the other member countries that the most efficient response

to an emergency would be to allow markets to balance supply and demand.

In order to formalize this position, the United States enunciated a

policy, in the event of an emergency or shortage, to rely on market

forces to allocate supply, and to ordinarily supplement supply by the

early drawdown of the Reserve in large volumes and in coordination with

our allies and trading partners. This policy recognizes that the best

way to dampen the price increase associated with an emergency, and

mitigate the economic impact resulting from a significant disruption,

is to inject additional supplies into the market in a timely manner. It

is the U.S. position that the member countries of the IEA, acting in

concert, can leverage the impact of their collective actions well

beyond the mitigating impacts of independent action by each state

acting alone.

The Strategic Petroleum Reserve Structure

The Act authorized a Reserve up to one billion barrels and provided

for a range of policy options such as storage of refined products in

regional reserves. The Act also required that the Executive Branch

prepare a comprehensive plan for the Reserve that required approval of

the Congress, and that substantial changes to the plan be formalized as

amendments. The plan was submitted, approved, and implemented. The

Reserve, as planned, consists of crude oil stored in salt caverns

located on the Gulf Coast. That configuration allows the lowest

construction, maintenance, and operations costs; the greatest

logistical flexibility; and the lowest cost for procuring and storing

petroleum.

Today the Reserve is composed of five oil storage sites with

surface facilities consisting of pipes, pumps, motors, meters, and

other equipment typical of oil storage facilities. Two of the sites are

in Texas and three in Louisiana, with a Project Management Office

located in New Orleans. The oil is stored below ground in caverns

created within salt domes. The total capacity of the caverns is 750

million barrels, but is being reduced to 680 million barrels by the

decommissioning of the Weeks Island, Louisiana, storage site due to

structural instability. The peak oil inventory in the Reserve was 592

million barrels during the period July 1994-March 1996. Approximately

18 million barrels of oil were sold in fiscal year 1996, leaving the

inventory of the Reserve at 574 million barrels of which one-third is

low sulfur (sweet) and two-thirds high sulfur (sour). During fiscal

year 1997, the Reserve sold another 10 million barrels of mostly sour

oil, to raise $220 million in satisfaction of appropriation law

requirements. The resulting current inventory is approximately 564

million barrels of oil.

Strategic Petroleum Reserve Drawdown

The Act provides the President wide latitude to anticipate and

react to events that are of an emergency nature, cause petroleum prices

to rise, adversely impact the national economy and safety,

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or trigger United States international obligations. The authority of

the President to drawdown the Reserve may not be delegated. Once the

President makes a finding of an interruption, shortage, or determines

that drawdown is necessary to meet United States obligations under the

International Energy Program, the Secretary of Energy has discretion as

to the volume and type of oil to draw down, and the administration of

sales is preplanned, including periodic exercises. The Secretary also

has discretion to draw down and sell up to 5 million barrels of oil to

test the distribution systems for oil sales. In fiscal year 1986

Congress directed the Secretary to use the test sale authority to

conduct a sale of one million barrels. The Secretary also used the test

sale authority in 1990 after the invasion of Kuwait by Iraq. There has

been only one Presidentially directed drawdown, in January 1991. The

United States, simultaneously with commencement of the air war against

Iraq, and following activation by the IEA of its coordinated emergency

response contingency plan for the Desert Storm war, offered for sale 33

million barrels of oil, and after consideration of the bids, actually

sold and delivered 17 million barrels of crude. Whenever Reserve oil is

offered for sale, the volume, type, and location of the oil is

announced in a Notice of Sale. Awards are made to qualified bidders

solely on the basis of price and the availability of drawdown and

distribution facilities.

Public versus Private Reserves:

The obligation of the United States to the IEA is to store the

equivalent of 90 days of net imports by a combination of Government

owned reserves and private reserves. While the Government's Strategic

Petroleum Reserve at one time equated to 118 days of net imports,

increasing imports, a hiatus in oil acquisition, and the non-emergency

sales conducted during FY 1996 and 1997 reduced the days of net import

equivalency to 67 by December 1996. Although the United States has

urged other members to build government-owned stocks and to move away

from the regulation of industry, the United States currently satisfies

its obligation by virtue of private inventories even though those

stocks are not controlled by the Government for strategic purposes.

Primary Issues

1. Should the United States Continue to Maintain the Strategic

Petroleum Reserve?

The International Energy Agency (IEA) and the Reserve were created

in response to the market power of the Arab Organization of Petroleum

Exporting Countries, as demonstrated by the international embargo and

price increase of 1973-74. Since then, the geographical location of the

world's oil reserves, production, and exports have become more diverse.

Regardless of their causes, recent price increases appear to be self

correcting by attracting increased supply.

In addition, the existence of Government owned strategic reserves

may dampen or eliminate incentives for private industry to carry

inventories in excess of immediate operational needs. Within the

context of this question the Department solicits views on private

sector inventory behavior and the private sector's likely inventory

response to decommissioning the Reserve.

The cost of the Reserve is approximately $200 million per year for

operations, maintenance, construction, and management, exclusive of any

costs of acquiring oil. The Reserve is currently in the fourth year of

a seven year Life Extension Program to extend the useful operating life

of all critical Reserve systems to the year 2025. After completion of

the Life Extension (construction) projects, the annual budget for

operations, maintenance, and management of the Reserve will be

approximately $150 million per year. The United States is unique among

oil stockpiling countries in assigning all of the cost of the Reserve

to the general taxpayer. Most other stockpiling countries partially

shift the cost burden to the oil industry by requiring that their oil

companies maintain inventories in excess of working needs. The Energy

Policy and Conservation Act (the Act) provides authority to the

Secretary of Energy to require private companies to create an

Industrial Petroleum Reserve. If it is desirable to maintain a Reserve,

the Department solicits views on whether the Government should

privatize the management and cost of strategic stockpiling.

Alternatively, if the Government continues to manage the nation's oil

stockpiles, the Department solicits views on whether the cost should be

borne by oil importers, refiners, or consumers rather than the general

public.

2. What Should be the Size and Composition of the Reserve Facilities

and Oil Inventory?

The United States' international obligation (under the Agreement on

an International Energy Program) is, as a Nation, to maintain petroleum

stocks equal to 90 days of net imports. Based on calculations by the

International Energy Agency in the Spring of 1996, the United States

has 157 days of imports, approximately 74 of which are provided by the

Reserve. The remainder are private inventories that are calculated by

the International Energy Agency to be stocks available during an

emergency. However, the Federal Government has no control over these

private stocks.

As of November 1, 1996, the Reserve had an effective capacity of

680 million barrels, and an inventory of 571 million barrels of crude

oil. After completion of the sales directed by the FY 1997

appropriations act, the Reserve will have an inventory of approximately

564 million barrels of oil. The Act authorizes a Reserve of up to 1

billion barrels, and had an initial target of 90 days of net imports.

The Strategic Petroleum Reserve Plan, which contains the

configuration of the Reserve, provides only for crude oil storage.

Although regional, refined product storage was authorized in the Act,

the Strategic Petroleum Reserve Plan concluded that centralized crude

oil storage was preferrable both in the interests of cost reduction and

in the belief that crude oil is the most flexible form of petroleum for

responding to emergencies. In addition to questions regarding size and

inventory, the Department solicits views on (1) whether the philosophy

of private inventory managers of refined products regarding stock

maintenance has changed permanently within the last few years, (2)

whether other circumstances that bear on the analysis of regional and

refined product storage have changed with time, and (3) the option of

storing refined products either centrally or regionally.

In 1990, the Reserve capacity reached 750 million barrels. However,

due to geologic instability the Department is decommissioning the Weeks

Island, Louisiana site and its 70 million barrels of capacity. In 1992,

the Act was amended to require the Administration to prepare an

amendment to the Strategic Petroleum Reserve Plan for an expansion of

the Reserve to one billion barrels. The Administration has postponed

submitting this amendment to reflect the reality that the inventory of

the Reserve is not increasing, and in

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1994 and 1995 proposed an amendment to the Act that would require the

preparation of its expansion plan only when it becomes likely that

funding sufficient to fill the existing Reserve facilities becomes

available.

The Act also requires that inventory be added to the Reserve at the

rate of 75,000 barrels of oil per day. This requirement has been waived

for many years in annual appropriations acts, and the volume of crude

oil acquired has been determined by the spending limits contained in

that legislation.

If desired, additional crude oil storage capacity could be added to

the existing Big Hill and Bayou Choctaw sites. By using the existing

infrastructure, approximately 100 million barrels could be added at

those sites at an incremental site development cost of approximately

$2.00 per barrel. If expansion were desired above 750 million barrels,

a new site(s) would be required and the cost would be approximately

$5.00 per barrel. Creation of a new salt dome storage site, requiring a

National Environmental Policy Act review process for site selection,

land acquisition, construction, and leaching would require

approximately nine years.

3. How Should Reserve Oil be Distributed?

The Department maintains the Reserve in a state of readiness that

allows for delivering oil within 15 days of notice to the field office

to proceed. The primary means of distributing oil is by competitive

sale, i.e., oil is sold to the highest responsible bidders. The bids

are made in response to an offer of specific types and volumes of oil

available at each Reserve location. The basic terms and conditions of a

competitive sale are available in a document titled, ``Standard Sales

Provisions.'' The bidders must accept all terms and conditions of the

offer, and bid only on price, volume, location, delivery mode, and

delivery date. The current Reserve Drawdown and Distribution Plan

provides the Secretary of Energy with the option to direct sales of up

to 10 percent of the oil to be sold by means other than competitive

bid, although the Strategic Petroleum Reserve Office has no plans to

implement the allocation authority.

4. What Should be the Drawdown and Distribution Capability for the

Reserve?

In the initial 1976 Strategic Petroleum Reserve Plan for a 500

million barrel Reserve, drawdown and distribution capability was

designed to equal 60 percent of daily imports, implying a drawdown rate

of 3.3 million barrels per day and complete drawdown of the Reserve in

150 days. When the planned size of the Reserve increased to 750 million

barrels, the initial drawdown and distribution rate was increased to

4.5 million barrels per day, which in 1990 was equal to 63 percent of

imports. If the Reserve were expanded to one billion barrels with a

drawdown and distribution capability of 6.0 million barrels per day,

that capability would be the equivalent of 60 percent of projected

imports in the year 2000. Due to decommissioning the Weeks Island site,

drawdown and distribution capability will be reduced to 3.9 million

barrels per day, although the rate eventually will be restored to 4.5

million as part of the Reserve's Life Extension Program. The drawdown

and distribution rate of 4.5 million barrels per day will decline as a

percentage of net imports as imports rise. In the years 2000, 2005, and

2010, the percentage will be 45%, 39%, and 38% respectively, based upon

projections by the Energy Information Administration.

5. What Is an Appropriate Policy for Revenue Raising Sales From the

Reserve?

Under the Act, the oil in the Strategic Petroleum Reserve may only

be drawn down in the event of a Presidential finding of a shortage,

interruption, or international obligation, with the exception of

limited test sales. Aside from test sales (after which the Reserve is

required by the Act to replace the oil sold), the Department has

advocated a non-emergency sale only once, in FY 1996, to fund the cost

of decommissioning the Weeks Island site. However, beginning in 1992,

Congress has applied outlay caps to the funds available for oil

acquisition, thereby severely limiting oil purchases and making those

funds subject to transfer for other purposes. In addition, the

Administration agreed with Congress on a deficit reduction sale of $227

million worth of oil in FY 1996, and an additional sale of $220 million

worth of oil in FY 1997. These proposals, which lower the level of oil

inventory in the Reserve, are in conflict with the provisions of the

Act, discussed above, which require plans for oil fill and facility

expansion. The Department of Energy has also advised against any

further sales of oil for revenue generation purposes.

6. Should the Reserve's Facilities Be Available for Alternative Uses?

Initially the Reserve facilities are exclusively dedicated to the

storage and distribution of Government-owned oil. However, the surface

pipelines and docking facilities which were built by the Government in

conjunction with the storage sites could be used by the private sector.

The Act provides authority for the Department to ``use, lease,

maintain, sell or otherwise dispose of storage and related

facilities.'' Beginning in 1994, the Department proposed a

``commercialization'' program to lease or sell its underutilized or

idle distribution pipelines and marine terminaling facilities for

commercial crude oil operations, while retaining priority use of these

facilities to distribute Reserve crude oil in the event of a national

emergency. In October 1996, the Reserve leased the St. James terminal

and the Bayou Choctaw pipeline, and sold the Weeks Island pipeline. The

Department expects the commercialization program to reduce the

maintenance costs of the Reserve by transferring those costs to the

lessees, generate revenue from unutilized facilities, and assist

industry.

The Department's current policy regarding commercialization is to

lease or sell the off-site facilities provided that their capabilities

are maintained and available to the Reserve in the event of a drawdown.

The Department would also be willing to lease certain on-site

facilities that may, in the future, be attractive as lease candidates.

The Reserve also has almost 100 million barrels of underutilized

storage capacity. Other member countries of the International Energy

Agency and non-member countries need capacity to store their oil, and

the United States could lease the underutilized space to those

countries. In 1995, the Administration proposed a lease program to the

other member countries of the International Energy Agency. The

Administration's policy is to explore the possibility of leasing

storage capacity to foreign countries in order to generate revenues,

preserve Reserve capacity for future use, and to promote stockpiling by

other nations.

7. Should the Reserve Attempt To Raise Funds Through Alternative

Financing, Innovative Financial Instruments, or Buying and Selling

Inventory?

Part C of the Act authorizes the acquisition of oil for the Reserve

that would remain the property of another person provided the

Government controls the drawdown of the oil. This authority was added

to the Act in 1990, in hopes of reducing carrying costs of the oil in

inventory. Since passage of the legislation the Department has not had

any success at ``leasing'' or otherwise acquiring alternatively

financed oil, and in recent years has abandoned the initiative due the

overall budget

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situation. Nevertheless, the Department is willing to store non-

Government oil for long-term storage in the Reserve if oil acquisition

is resumed. The Department solicits views on the use of alternative

financing for oil acquisition.

The Department also solicits views on the use of financial options,

futures and other financial instruments. The Department would have to

become active in the oil markets if it wished to sell options for the

purchase and sale of Reserve oil. The intent of this activity would be

to generate funds for the Government and provide an automatic mechanism

for the release of oil. Additionally, the oil industry could be

provided a hedging instrument backed by oil. The Administration has not

taken a position on whether Reserve oil should be offered for trade on

public markets.

In addition, the Department seeks views on whether it should sell

and repurchase Reserve inventories on a continuous basis to take

financial advantage of market anomalies, such as high current prices

and low future prices.

The operating, maintenance and management expenses of the Reserve

are approximately $200 million per year currently, and are expected to

decline to approximately $150 million per year over time. The

Department seeks views on other alternatives for funding these expenses

other than appropriations from general revenues.

Issued in Washington, D.C. on April 24, 1997.

Robert S. Kripowicz,

Principal Deputy Assistant Secretary, Fossil Energy.

[FR Doc. 97-11146 Filed 4-29-97; 8:45 am]

BILLING CODE 6450-01-P