U.S. hopes to flex energy muscle with oil reserve makeover

*One of four US Stategic Petroleum Reserve, Bryan Mound, Texas.

*One of four US Stategic Petroleum Reserve, Bryan Mound, Texas.

09 June 2016, Freeport, Texas — The United States boasts the world’s largest stash of emergency oil supplies, yet the country’s ability to influence global crude markets with releases from that reserve has waned.

The Obama administration hopes to fix that problem with an overhaul of the Strategic Petroleum Reserve, or SPR, and details about its plans should be revealed in coming weeks.

The Energy Department is expected to send Congress a report detailing a proposal to modernize the SPR, a string of crude-filled underground salt caverns guarded by sharpshooters in four remote locations on the coasts of Texas and Louisiana. The system holds 695 million barrels, or what the entire country uses in about five weeks.

The North American oil boom, in which U.S. crude output has risen to more than 9.4 million barrels per day in 2015 from more than 5 million bpd in 2008, has reshaped the domestic oil market and helped crimp the ability of the SPR to make speedy releases.

Many pipelines that once pushed SPR oil north to refineries, such as the Seaway Pipeline linking the Gulf Coast to Oklahoma, have been reversed to send oil produced in Canada and North Dakota south to be processed.

“Our analysis has determined that we have a gap in our distribution capabilities,” Bob Corbin, deputy assistant secretary of the reserve, told reporters. If the gap is not addressed “you will have shortfalls in your response capability,” to react to supply disruptions, he said.

A 2014 test sale of 5 million barrels of SPR oil showed officials that aging infrastructure has reduced the SPR’s ability to speed oil to market at its design rate of 4.4 million barrels per day.

Problems sending oil from the SPR were also revealed during its last major release in 2011, when the United States sold 30 million barrels amid supply disruption in Libya during its civil war.

Henry Kissinger pushed for the creation of the SPR in 1975, when he was secretary of state, after the Arab oil embargo caused gasoline price spikes and harmed the economy. Since then upkeep has not been a priority.

The last upgrade was in the late 1990s, and in April 2016 internal corrosion led to a burst in a raw water pipeline that impaired drawdown capacity at the Big Hill SPR site in Texas.

“Maintenance has been deferred for so long it has gone from low priority to high priority,” said Kevin Book, energy policy analyst at ClearView Energy Partners in Washington. “The failure to maintain the SPR would be an abandonment of its role as a crucial national security asset.”

At least eight of the SPR’s more than 60 caverns, created by injecting water into salt formations and pumping out the dissolved remains, have changed shape with the weight of the crude over time and should be fixed, said John Shages, who ran the SPR during the administrations of George W. Bush and Bill Clinton.

President Barack Obama, who wrote Congress in April that SPR infrastructure is “at the end of its design life,” wants to sell more than $375 million worth of SPR oil, or about 7.3 million barrels at today’s prices, in fiscal 2017, which starts in October, to fund the overhaul. It would be the first of a series of such sales, laid out late last year in a spending bill passed by Congress totaling $2 billion by the end of fiscal 2020.

It remains to be seen exactly how the Obama administration will approach the overhaul, and the next president, after she or he takes over in January, may have different ideas. Energy Secretary Ernest Moniz has indicated one priority, since pipelines are clogged, is to build additional terminals and docks at the SPR so more ships can move oil.

SPR oil could be shipped faster to the East Coast, or abroad for the first time after Congress last year ended a 40-year ban on U.S. crude exports.

Another option the Department of Energy has studied is creating more oil product reserves that are closer to consumers such as the East Coast gasoline reserve created after 2012’s Superstorm Sandy caused local shortages. The Southeast and California could benefit from such reserves, but storing gasoline is pricier than stashing crude, potentially boosting the SPR’s annual $200 million cost.

And some of the misshapen caverns could be shut permanently, Shages said, since Congress has authorized other SPR sales from 2018 to 2025 that could eventually reduce crude stored at the SPR by more than 20 percent.

MARKET INTERVENTION?

Moniz has been optimistic about the ability of the reserve to prevent potential price spikes from harming the U.S. economy. He said at an energy conference last year that the SPR could be used in an “anticipatory” way to head off such spikes faster.

Others are not so sure.

“It’s not necessarily clear that we want to unleash a new realm of government intervention in oil markets, which could potentially then lead to a whole other series of regulations on when it happens and how it happens,” said Carlos Pascual, who was Obama’s top energy diplomat until 2014 and is now vice president for global energy issues at research provider IHS.

Still, a more nimble SPR, even if it holds less crude in coming years, could help the U.S. maintain alliances with Europe and other regions in a risky world where potential oil disruptions in Nigeria, Venezuela and the Middle East threaten markets.

Amy Myers Jaffe, director of the energy and sustainability program at the University of California, Davis, said an advantage of an overhaul would be helping allies deal with potential shortages.

“It’s an important arsenal in our strategic foreign policy that’s non-military,” she said. “If we are not willing to help our allies, why the hell would they help us?”

*Timothy Gardner; Editing – Meredith Mazzilli – Reuters

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