Providing coverage of Alaska and northern Canada's oil and gas industry
July 2018

Vol. 23, No.27 Week of July 08, 2018

GAO reviews Strategic Petroleum Reserve

Changing scenarios for usage and aging crude oil storage infrastructure give rise to challenges over long-term plans for facility

Alan Bailey

Petroleum News

The U.S. Government Accountability Office has reported the results of its investigation into the operation of the U.S. Strategic Petroleum Reserve and has recommended some ways of better ensuring that the reserve can continue to fulfill its role. The reserve, by storing large volumes of crude oil, provides the United States with an oil supply buffer capable of mitigating oil supply disruptions. The reserve also enables the country to meet its commitment to maintain emergency oil reserves under the terms of the International Energy Agency’s International Energy Program. The U.S. Department of Energy manages the reserve.

Congress authorized the creation of the Strategic Petroleum Reserve in 1975 in response to the Arab oil embargo of 1973 to 1974. The bulk of the reserve, currently amounting to about 665 million barrels, is stored in underground salt caverns at four major sites on the Gulf Coast. In addition, as part of the SPR, the Northeast Gasoline Supply Reserve holds 1 million barrels of gasoline. The Northeast Home Heating Oil Reserve also holds 1 million barrels of ultra-low sulfur distillate, although this is not part of the strategic reserve.

Changing priorities

The original concept behind the strategic reserve was to protect the United States from disruption to oil imports. And, under the IEA’s rules for its International Energy Program, each oil importing country that is an EIA member must hold a reserve representing at least 90 days of net oil imports. Those reserves can be in the form of crude oil or petroleum products such as gasoline or diesel fuel. And the reserves can be held by the government or by private industry or by some combination of the two.

Although the U.S. has been able to use its strategic reserve to meet its international obligations for the holding of reserves, the U.S. has tended to use the reserve to guard against fuel supply disruption within the country as a consequence of catastrophic events such as earthquakes and hurricanes, the GAO report says. And changes in the global oil market have impacted the reserve requirements. In particular, the recent upsurge of U.S. oil production has reduced U.S. oil imports, a factor that has resulted in the volume of oil stored in the reserve climbing well above that 90-day minimum limit.

The increased importance of the strategic reserve as a contingency against internal U.S. oil supply disruption has raised some issues. In particular, the location of the reserves storage site on the Gulf Coast may make it difficult to support a supply disruption in some other part of the country. Moreover, since the supply disruption may impact the availability of refined products, the availability of crude oil from the strategic reserve may be of limited usefulness, the GAO report says.

Aging infrastructure

Also, much of the infrastructure at the storage sites on the Gulf Coast is now of an age beyond its serviceable life. There are growing concerns about the system’s ability to continue to operate as intended, and there have been equipment failures, including a pipeline leak.

Any addition or reduction of the volume of oil held in the strategic reserve requires Congressional approval. But, although DOE has examined the economic benefits of a range of reserve sizes, the agency has not determined an optimum size for the reserve, the GAO report says. In addition, DOE has not determined whether additional regional reserves of petroleum products should be added to the strategic reserve, to support internal U.S. supply disruptions, the report says.

Modernization program

The DOE has a modernization program to address the age of the strategic reserve facilities, but the scope of the modernization program has undergone several changes in response to changing conditions and requirements. To help fund the modernization, in fiscal year 2017 the agency raised about $323 million from the sale of oil in the reserve. And Congress has approved the draw down and sale of up to $350 million worth of oil in fiscal year 2018. DOE has been moving forward with the modernization program, and the first major construction is scheduled for fiscal year 2019.

DOE now assumes that the strategic reserve will in future store some 405 million barrels of oil, a figure well below the facility’s design capacity of about 713 million barrels. In response, DOE may close one of the strategic reserve sites, the GAO report says. DOE could also consider leasing excess storage capacity to other countries, the report says.

But long-term uncertainty regarding the required scale and configuration of the strategic reserve hampers mid- to long-range planning efforts for the modernization project, the report says. And DOE does not have the authority to pursue options for the use of excess capacity in the strategic reserve facilities, the GAO report says.

Four recommendations

In response to the issues that the strategic reserve faces, the GAO has made four recommendations.

First, the DOE should supplement its current strategic view of the reserve, taking into account the response of the private sector, oil market projections and the costs and benefits of a range of strategic reserve sizes. Second, the agency needs to periodically review and provide to Congress its analysis of potential reserve sizes. Third, the agency should analyze the benefits of holding regional reserves of petroleum products. And fourth, as part of its analysis of oil sales mandated by Congress, the agency should consider a full range of options for handing the resulting excess storage assets.

DOE has partly agreed with the first recommendation, saying that it would supplement its current long-term strategy but commenting that a full cost-benefit of the strategic reserve may not be meaningful, since most of the costs of the system have already been incurred. However, the agency did concur with the recommendation for regular reporting to Congress.

The agency disagreed with the third recommendation, citing a number of concerns including a view that the operation of government owned and/or operated regional reserves of petroleum products would be inefficient and expensive. With the U.S. having the world’s most robust oil refining system, it would be preferable to provide reserve supplies of crude oil to refineries in the event of disruption to the supply of refined products, DOE said.

DOE told the GAO that it concurs with GAO’s fourth recommendation, saying that the agency has already begun a study into the disposition of excess or underused petroleum reserve assets.

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