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U.S. oil reserve comes up short on major supply disruption Strategic Petroleum Reserve would handle short-term crisis at 700 million barrel capacity; some 600 million barrels stored now; legislation expected to expand it to 1 million barrels Petroleum News Alaska
The U.S. Strategic Petroleum Reserve, at least for a few months, appears adequate to handle almost any national energy crisis, even if all oil imports abruptly stopped from the politically hot Middle East. But output from the petroleum reserve likely would deteriorate rapidly over time.
So, federal legislation likely will be introduced within a few weeks to expand the petroleum reserve to around 1 billion barrels from its current 700-million barrel capacity, an official with the U.S. Minerals Management Service confirmed March 20. President Bush has proposed a similar plan.
Meanwhile, the MMS official said, oil dedicated to the petroleum reserve would be increased to 130,000 barrels a day from a current 100,000 barrels a day starting April 1, the average peak rate established under President Bush's three-year initiative to fill the reserve to 700 million barrels sometime in 2005.
"We are in a fill mode," he said.
The petroleum reserve currently holds about 600 million barrels of oil, stored in giant salt caverns at four locations in Texas and Louisiana. Currently, all deliveries into the petroleum reserve are made up of federal royalty in-kind oil produced by industry in the U.S. Gulf of Mexico.
The reserve, established in 1975 under the Energy Policy and Conservation Act, has never faced a sustained drawn down. Only 17 million barrels were withdrawn from the petroleum reserve during the brief 1991 Persian Gulf war. The largest withdrawal was a 30-million barrel crude oil exchange in late 2000.
A million barrels a day possible The reserve could release 1 million barrels a day of oil into the market for roughly a year and a half and, in the event of a major supply disruption, would provide considerable support for the roughly 275 million barrels in U.S. commercial oil inventories.
Nevertheless, a 1 million barrel a day withdrawal from the petroleum reserve over the course of more than a year would not appear to be nearly enough to replace oil from the Middle East in the event of a total supply disruption.
In fact, a maximum draw of 4.4 million barrels a day from the petroleum reserve under the current program barely would cover the 4.1 million barrels a day of imported OPEC crude for 90 days. Thereafter, it would seem diminishing total withdrawal capacity would require increased imports from other sources outside OPEC or reduced consumption. In total, the U.S. imports about 9 million barrels a day.
"After the 90-day period, the withdrawal rate declines dramatically due to mechanisms of the salt cavern withdrawal process," Investment bank Simmons & Company noted in a report. About 15 days to award contracts DOE projects that in the event President Bush orders an emergency sale of petroleum reserve oil, it would take about 15 days to select bid offers and award contracts to deliver the oil into the marketplace. In a full scale draw down, DOE estimates, at least 1.9 million barrels a day would stay on the Gulf Coast. Up to 2.5 million barrels a day could be shipped to ports on the East and West coasts and into the Louisiana Offshore Oil Port, which is linked via pipeline to Gulf Coast and Inland refineries.
Meanwhile, industry has vigorously opposed releasing petroleum reserve oil for the purpose of stabilizing energy prices. ExxonMobil and ConocoPhillips made that clear at last month’s Cambridge Energy conference in Houston.
ExxonMobil CEO Lee Raymond told the CERA Week audience that the only appropriate use of petroleum reserve crude would be “as a shield against serious harm in the potential event of a severe and sustained supply disruption.” ConocoPhillips Chairman Archie Dunham said he would “encourage them not to do this unless it is a dire energy emergency.” Filling will take quite a while So, how much additional royalty oil from the Gulf of Mexico would remain to fill the petroleum reserve to over 1 billion barrels?
Of the government's 225,000 barrels a day of royalty in-kind oil from the Gulf of Mexico, 130,000 barrels a day is currently dedicated to the petroleum reserve and at least another 65,000 barrels a day to small refineries and other federal programs.
That would leave less than 35,000 barrels a day available for the petroleum reserve, a U.S. Department of Energy official said. At that rate, given occasional industry delivery deferrals granted by DOE, it would take "quite a while" to fill the reserve to over 1 billion barrels, an MMS official conceded.
And first it would have to be determined whether extracting the government's remaining share of royalty oil from Gulf of Mexico fields would be economic for producers, he said.
In the first phase of the Bush plan to fill the petroleum reserve to 700 million barrels, it took just 21 producing properties to raise the government’s royalty share of production to 60,800 barrels a day. However, the number of properties required to produce 130,000 barrels a day jumped to 112 during the second phase and to 235 during the third and final phase, MMS said.
“Would it be worth the expense?” the MMS spokesman said, adding that Congress also would have the option to funnel its oil from the small refinery program into the petroleum reserve, or to buy oil from other sources.
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