Federal oil reserve at a crossroads
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WASHINGTON – For four decades the U.S. government has stored vast seas of crude oil in underground caverns along the Texas and Louisiana Gulf Coast, providing a backstop in the event the world’s oil supply is disrupted.
But as those facilities age, and the need for such a large reserve seemingly wanes, the U.S. Strategic Petroleum Reserve faces a significant reduction in size, a potential shift in purpose and hundreds of millions of dollars in repairs and upgrades to its storage and transportation systems.
As that oil is sold off over the next nine years, the money generated by those sales will fund everything from deficit reduction to highway construction to maintenance of the reserve, which is nearing the end of its intended life.
Meanwhile, the U.S. Department of Energy is wrapping up a yearlong review of the program to determine not only if the reserve is too large, but also whether it should remain in its current locations. The review will also examine whether the nation’s energy security would be better served by storing gasoline and other refined products rather then crude oil.
Significant quantities of the reserve have been sold before to ease potential shortages and moderate prices – most recently when civil war broke out in Libya in 2011. But energy analysts said these latest moves represent a significant shift in U.S. energy policy.
Kevin Book, managing director of the Washington-based consulting firm ClearView Energy Partners, said the combination of the Obama administration’s advocacy of more gasoline reserves and Republicans’ desire to generate revenue through oil sales represents a major shift from the government’s historical push to grow the nation’s oil stockpile.
“They’re selling a fifth of the nation’s oil security and only a small part of that is going to preserve the asset,” he said.
Created in 1975 following the Arab oil embargo, the national petroleum reserve holds close to 700 million barrels of oil – enough to maintain U.S. consumption for five months. That’s more than double the supplies available in 2005, when President George W. Bush ordered the Strategic Petroleum Reserve increased to 1 billion barrels.
But since then, the U.S. shale boom has increased domestic oil production 60 percent to 8.8 million barrels a day. That has reduced the need for oil from abroad to feed the country’s demand of 19.4 million barrels a day.
Simultaneously, the system of old salt caverns, pipelines and pumps that make up what government officials refer to as the Strategic Petroleum Reserve is falling into disrepair. That came into clear view this year when a water pipe used to move oil around the storage caverns at the Big Hill reserve in East Texas – one of only four storage sites nationwide – burst. The facility was flooded and shut down for weeks, as contractors made emergency repairs.
A report from the Energy Department last year described a long backlog of maintenance work at the four reserve sites, as well as an out-of-date design of pipelines and shipping terminals that could not effectively get oil to market in the event of an emergency. Officials blamed the problem on a shale boom that led the flows of many pipelines to be reversed to get domestic oil and not imported oil to refineries.
The agency put a price tag of up to $2 billion on upgrades, which included plans for the construction of a docking facility on the Gulf Coast to get the oil to market via tanker instead of pipelines. Congress tentatively set aside funding for the overhaul in a budget bill late last year – on the condition it be paid for by the sale of oil from the reserve.
Bipartisan sticking point
That and other projects funded by oil reserve sales, which would be worth $8 billion at today’s prices, has received bipartisan support. The first of the oil sales are scheduled to begin next year and run through 2025. But the prospect of selling government crude in the midst of an oil bust that has slashed prices to half their 2014 level has rankled lawmakers, both Republicans and Democrats.
“If they started selling it now, our slow growth in the price of oil could end and prices would go back down,” said Rep. Gene Green, D-Houston. “Let’s wait a couple years and try to make more money on it.”
How big should the reserve be then? The International Energy Agency, the international group representing oil-importing countries including the United States, advises member states to maintain a three-month supply.
The Energy Department is studying the question of size. Its recommendations, which would need congressional approval to take effect, are expected to be released this summer.
But the Obama administration has signaled some of its intent. After a test sale of 5 million barrels in 2014, the Energy Department used the proceeds to establish three gasoline storage facilities in the Northeast, after Hurricane Sandy disrupted that region’s fuel supply in 2012.
Still, at a Senate hearing in October, U.S. Energy Secretary Ernest Moniz said the need for a petroleum reserve remained critical.
I’m not going to talk about a specific size,” he said. “The real issue is a major disruption that leads to a substantial price incursion that affects all of us.”
Since its creation four decades ago, the Strategic Petroleum Reserve has been used only three times. In addition to Libya, the government released oil to the market in 1991 after Iraq invaded Kuwait and again in 2005 after Hurricane Katrina shut down Gulf production, pipelines and refineries.
Expensive insurance policy
Considering its cost of more than $180 million a year, critics have wondered why the government maintains the reserve.
Fred Beach, assistant director for energy policy at the University of Texas’ Energy Institute, said commercial oil storage has grown to the point where it is nearly the same size as the government’s stockpile, with far easier and quicker access. But, he said, he does not expect the reserve to be decommissioned any time soon.
“It’s an insurance policy. It’s a safety blanket,” he said. “How do you argue against a what if?”
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