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New legislation for US SPR

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Hydrocarbon Engineering,

Two recently enacted laws have authorised significant sales of crude oil from the Strategic Petroleum Reserve (SPR) over the next decade. The Bipartisan Budget Act authorises the sale of 58 million bbls of SPR oil between fiscal year (FY) 2018 - 25 for deficit reduction purposes and an estimated 40 - 50 million bbls of oil in FY 2017 - 20 for SPR modernisation. As part of the Bipartisan Budget Act, the US Department of Energy (DOE) is required to complete a long term strategic review of the SPR to ensure it meets current and future energy and economic security goals and objectives. The Fixing America's Surface Transportation Act authorises the sale of
66 million bbls of oil in FY 2023 - 25 to help support the Highway Trust Fund.

As the largest stockpile of government owned emergency crude oil in the world, the SPR is designed to help alleviate significant disruptions in oil supplies from events such as severe weather, major geopolitical events and unplanned production, transport, and delivery outages. Located in four storage sites along the Gulf of Mexico, the SPR currently holds more than 
695 million bbls of crude oil, or about 96% of its 727 million bbl design capacity. Although the SPR does not store petroleum products, one million bbls of ultra-low sulfur distillate are held in the Northeast Home Heating Oil Reserve, and one million bbls of gasoline are held in the Northeast Gasoline Supply Reserve.

As a member of the International Energy Agency (IEA), the US is obligated to maintain stocks of crude oil and petroleum products, both public and private, to provide at least 90 days of import protection and to collectively participate in the release or sale of oil supplies to help balance a shortage among IEA members in the event of a severe energy supply disruption. Based on September levels of net crude oil and petroleum product imports, the SPR alone holds crude oil stocks equivalent to 156 days of import protection, including average levels of commercial stocks over the past five years, total days of import coverage provided by strategic and commercial stocks is currently 450 days. The IEA obligation is only one consideration for policymakers in determining the size and composition of SPR holdings.

On three occasions, the US has participated with other IEA members to release strategic petroleum stocks as part of an IEA collective action. The first occasion arose in 1991 with the commencement of operation ‘Desert Storm’, which resulted in a release of 17.2 million bbls of oil from the SPR. The second release came after hurricane Katrina in 2005, with 11 million bbls of SPR oil sold. The third release occurred in June 2011 in response to oil supply disruptions driven by hostilities in Libya, which resulted in a release of 30.6 million bbls of oil from the SPR.

To ensure the SPR is ready to respond to emergencies, DOE occasionally conducts test sales. The first test sale of approximately one million bbls of oil occurred in 1985, and the second sale of
3.9 million bbls of oil occurred in the period between Iraq's invasion of Kuwait in August 1990 and the beginning of operation ‘Desert Storm’ in January 1991. The third test sale of 5 million bbls of oil, the statutory maximum, took place in May 2014. Some of the funds from the third test sale were used to help establish the Northeast Gasoline Supply Reserve. DOE is required by law to buy back petroleum products from test sales within one year of completion of the sale.

In addition to emergency sales and test sales, SPR oil has been released through a mechanism known as an exchange, where an entity, usually an oil refiner, borrows SPR oil and later replaces it in full along with a premium of an additional quantity of oil. This concept is similar to financial interest. According to DOE, SPR oil has been released through exchange arrangements 11 times, with all but one of the requests originating from a private company to address emergency supply disruptions. These exchanges occurred during severe weather events such as hurricanes Lilli (2002), Ivan (2004), Katrina (2005), Gustav and Ike (2008), and Isaac (2012). Other exchanges occurred in response to temporary disruptions such as pipeline blockages and ship channel closures, as well as the creation of the Northeast Home Heating Oil Reserve in 2000.

SPR oil has also been sold to meet SPR specific and general government fiscal purposes. To help defray the cost of decommissioning the Weeks Island SPR storage site, 5.1 million bbls of oil from the storage site were sold in January 1996. Another 12.8 million bbls of Weeks Island oil were sold between May and August 1996, yielding US$227 million to reduce the FY 1996 federal budget deficit. An additional 10.2 million bbls of SPR oil were sold in FY 1997 for deficit reduction purposes, yielding US$220 million to the federal treasury.

Adapted from press release by Francesca Brindle

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