U.S. to use royalty crude for SPR refill

The U.S. Department of Energy will take 28 million bbl of federal royalty oil from the central Gulf of Mexico and store it in the Strategic Petroleum Reserve.

Energy Sec. Bill Richardson said the SPR replenishment, which will begin about Apr. 10, was neither intended nor expected to raise the price of oil in the U.S.

But Gil Thurm, Independent Petroleum Association of America president, said, "We hope the market will recognize the fact that there will be more oil off the market."

Richardson announced other initiatives to help small oil producers hurt by low crude prices (see related story, this page).

SPR fill

The 28 million bbl equals what the government sold to help reduce its budget deficit in fiscal 1996 and 1997, at an average price of $19.50/bbl.

DOE said matching its authority to store crude with the Interior Department's power to take oil in value (rather than in cash) will enable the administration to refill the SPR without a congressional appropriation or offsetting revenues.

But, at $12/bbl, the transfer will reduce the federal government's expected surplus by about $336 million.

DOE said about 100,000 b/d of 30° gravity crude (both sweet and sour) would be stored at the Big Hill, Tex., SPR site. DOE will trade royalty oil not meeting SPR specifications for other crude that does.

DOE would pay the $1/bbl cost of moving the royalty oil to the SPR, if it is not exchanged.

Congress has not appropriated funds to buy oil for the SPR since 1990.

The four SPR sites in Louisiana and Texas have capacity for 680 million bbl and hold 561 million bbl, acquired for an average $27/bbl.

The SPR also is holding until next September another 1 million bbl of oil belonging to Mexican state oil company Petroleos Mexicanos as part of a program to exchange Mayan crude for two types of higher-quality Mexican crude (OGJ, Sept. 7, 1998, p. 30).

Richardson notified congressional oversight committees about the administrative transfer of crude.

Minerals Management Service said it would soon notify offshore producers which leases will be involved in the SPR fill program. The program will not involve the "8g" federal leases, within 3 miles of state waters, because the government shares its royalties on those tracts with states.

Reasons

Richardson said replacing the SPR crude when prices are at a historical low "is smart policy and good economics.

"This is not meant to affect prices-the market will do that. We are taking advantage of today's low oil prices to rebuild our strategic oil reserves. By putting oil in the reserve today, we will get a high rate of return tomorrow-more national energy security, more strategic assets, and a great deal for the American taxpayer."

He said rising imports have increased U.S. vulnerability to energy disruptions. "Net imports now account for 49% of our consumption-a record high-and could reach 65% or even 70% by the year 2020, if low prices persist.

"Because we continue to rely so heavily on imported oil, we risk incurring serious economic damage from disruptions of our oil supply, disruptions that have contributed to three severe recessions in the past 25 years. Our SPR is our first line of defense against a disruption of our oil lifeline."

Industry views

IPAA's Thurm said "much more remains to be done" to help independents survive low oil prices.

"We are hopeful DOE's action will lead to direct action by President Clinton to call a White House conference on the impact of low oil prices on America's critical domestic production.

"We've requested a meeting and are confident that, with President Clinton's help, we can speed up enactment of a number of excellent relief bills that have been introduced in the House and Senate. Even more important, we must forge a new energy partnership that will put the U.S. on the path to long-term economic and national security."

Red Cavaney, American Petroleum Institute president, said API applauds the oil transfer.

"It makes a great deal of sense to replenish the reserve now, when crude oil can be obtained at historically low prices, substantially saving money for American taxpayers. It also makes sense to use the royalty in-kind method as an efficient way of both replenishing the SPR and meeting royalty obligations."

Kansas Gov. Bill Graves, chairman of the Interstate Oil and Gas Compact Commission, said Richardson's announcement "signals that Washington is beginning to recognize that this is a time of crisis for a vital American industry.

"States across the nation are taking action to assist oil producers, but federal efforts are critical.

"While the replenishment of the SPR is not intended to raise the price of oil, it does give beleaguered domestic producers an option for their oil produced on federal leases, rather than continuing to give it away at bargain basement prices."