Providing coverage of Alaska and northern Canada's oil and gas industry
March 2020

Vol. 25, No.12 Week of March 22, 2020

DOE orders purchase of US crude for Strategic Petroleum Reserve

Alan Bailey

for Petroleum News

On March 13 President Donald Trump announced that he was instructing the Department of Energy to fill the U.S. Strategic Petroleum Reserve with crude oil purchased in the United States. The objective is to ensure a maximum reserve of oil and thus sustain U.S. energy independence by taking the opportunity to purchase oil at a time when the oil price is low, the president said.

And, as originally reported by the Financial Times, on the same day Energy Secretary Dan Brouillette directed the purchase of U.S. crude oil for the petroleum reserve.

“In response to the president’s announcement today declaring a national emergency concerning COVID-19, and in accordance with all relevant authorities, I am hereby directing you to immediately initiate the process of purchasing American-made crude oil for storage in the U.S. Strategic Petroleum Reserve as expeditiously as possible,” Brouillette wrote in a memo to Steven Winberg, assistant secretary for fossil energy.

U.S. Sen. Dan Sullivan, R-Alaska, in a March 16 press release, said that he had urged the Department of Energy to help stabilize American oil markets and the Alaska economy by using only U.S. produced oil, including oil from Alaska, to fill the reserve. Filling of the reserve will require the purchase of more than 77 million barrels of crude, Sullivan said.

Sullivan said that, while his first priority is the health and well being of Alaskans in the face of the coronavirus pandemic, he is also focusing on the Alaska economy, with its critical dependence on the energy sector.

Oil industry challenge

The U.S. oil industry is facing a major challenge, as the price of oil plummets under the dual impacts of the virus pandemic and the oil price war recently initiated by Saudi Arabia. Some people have questioned Saudi Arabia’s ability to sustain a low oil price situation, given the county’s dependence on oil revenues to fund its economy and social programs. However, according to media reports, during a 2019 results earnings call on March 16, Amin Nasser, CEO of Saudi Arabian oil company Saudi Aramco, said that his company was comfortable with $30 per barrel oil as the company continues to produce oil at elevated levels.

Sullivan, U.S. Sen. Lisa Murkowski, R-Alaska, and 12 of their colleagues have written to Saudi Crown Prince Mohammad bin Salman bin Abdulaziz Al Saud, urging Saudi Arabia to halt its policy of boosting oil production and lowering oil prices at a time when the United States and the rest of the world are struggling with the economic impacts of the coronavirus, Sullivan said.

The U.S. shale oil industry is particularly susceptible to a production downturn if oil prices remain low. In fact, the industry benefits from its ability to respond quickly to oil price signals by slowing or speeding development and production. But shale oil production is relatively expensive, given the need to continuously drill wells and conduct hydraulic fracturing, to maintain production rates. Smaller oil companies are being particularly challenged, because of the difficulty of financing their operations and servicing debt when the oil price drops below profitable levels.

Storage options

Presumably the purchase of oil for the Strategic Petroleum Reserve could bolster U.S. oil production for a time during the oil demand downturn, while also providing an increased U.S. reserve to stave off the need for imports, should U.S. production drop. The Energy Information Administration has been anticipating U.S. oil production at around 13 million barrels per day this year.

However, if U.S. production drops, the impact on the overall oil market, and on any need for U.S. oil imports, appears somewhat uncertain, given that the viral pandemic is reducing oil demand. And there is the potential to store surplus oil at locations other than the strategic reserve.

In another twist in the saga of surging oil supplies from Saudi Arabia, the rates for shipping crude oil have skyrocketed in the face of high transportation demand, thus undermining the economics of oil produced for international trade, including the export of U.S. oil. According to a Reuters report, one issue that has arisen is a shortage of very large crude carriers, a factor that is causing the use of smaller and less economic vessels.

In a March 17 release, financial institution Mizuho Securities commented on the high shipping costs and the potential for storing surplus oil. Mizuho said that, overall, U.S. crude oil storage is at around 50% capacity, a level that would suggest that it might take about 10 weeks to fill all available storage using realistic fill rates, should oil be stored rather than exported. Once storage capacity has been exhausted, the huge oversupply of oil coupled with high shipping costs could push the oil price into negative territory, the release suggests.


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