Strategic Petroleum Reserve Mission (2020 DOE Transition)
| Book 2 - Issue Papers
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| Entire 2020 DOE Transition book As of October 2020 |
The Strategic Petroleum Reserve (SPR) is a critical national energy and economic security asset for crude oil supply interruptions or surplus and fulfills U.S. obligations under the International Energy Program.
Summary
The SPR protects the U.S. economy from severe petroleum supply interruptions through the acquisition, storage, distribution, and management of emergency petroleum stocks and carries out U.S. obligations under the International Energy Program. The SPR was created in 1975 pursuant to the Energy Policy and Conservation Act following an oil embargo by the Organization of Arab Petroleum Exporting Countries from October 1973 to March 1974. In FY20, DOE entered into a crude oil storage lease agreement with the Government of Australia, which allows for the storage of Australian-owned crude oil in the SPR.
The SPR is funded by two accounts: The SPR Account and the SPR Petroleum Account. The SPR Account funds the program’s operational readiness, drawdown capabilities, and management. The SPR Petroleum Account funds activities related to the acquisition, transportation, and injection of petroleum products into the SPR; test sales of petroleum products; and drawdown, sale, and delivery of petroleum products from the SPR.
Over the next several years, the SPR must simultaneously and safely maintain operational readiness and drawdown capabilities, execute a major life extension project (known as LE2), and conduct Congressionally-mandated sales, including Energy Security & Infrastructure Modernization (ESIM) sales, without spilling a drop of oil. The COVID-19 pandemic caused a demand (rather than supply) interruption that created a supply surplus and ushered in a new national need (e.g., to prevent U.S. crude oil producers from having to shut in production) for the SPR that resulted in an emergency storage exchange program and a crude oil purchase.
During COVID-19, small to mid-sized U.S. crude oil producers temporarily stored crude oil in the SPR, which was returned once market conditions improved. In exchange, these companies left behind a percentage of the oil stored (known as “premium barrels”) to compensate the U.S. Government for the use of the SPR. This expanded use of the SPR mission amplifies SPR’s economic and energy security value.
Congress mandated several sales of SPR crude oil as an offset to various laws requiring additional funding during FY17-FY28 (see table below). These sales will reduce the SPR inventory from nearly 700 million barrels to about 400 million barrels. DOE proposed to disestablish the Northeast Gasoline Supply Reserve (NGSR) in the FY21 budget. As proposed, DOE would draw down and sell one million barrels of refined petroleum product from the NGSR during FY21, with $19 million of the proceeds from the sale to be deposited into the SPR Petroleum Account for Congressionally-mandated crude oil sale logistical/transportation costs. Any proceeds in excess of $19 million collected from the sale shall be deposited into the general fund of the Treasury during FY21 and dedicated to deficit reduction. Congress rejected previous proposals to disestablish the NGSR.
The NGSR was administratively established in 2014 as part of the SPR to ease regional shortages resulting from sudden/unexpected supply interruptions. The NGSR consists of 1 million barrels of gasoline blendstock stored in leased commercial storage terminals located in Maine, Massachusetts, and New Jersey. It represents less than one day of gasoline consumption in the Northeast, and it has never been used for its intended purpose and is not cost efficient or operationally effective.
In FY20, the SPR conducted two Congressionally-mandated, non-emergency oil sales raising ~$567M for deposit into the U.S. Treasury. Due to the negative effects of COVID-19, the SPR executed an Emergency Storage Exchange Program that provided storage for 21.1 million barrels of U.S. produced crude oil from U.S. producers with 1.2 million barrels to remain in SPR as “premium barrels” (~$50M present value). The SPR also executed a crude oil purchase of 124 thousand barrels ($5M) sourced from small/midsize U.S. oil producers to test market conditions and SPR purchase processes.
Status
- The number and volume of sales over this 12-year period is unlike anything the SPR has previously experienced. Congressionally-mandated sales and demand disruption create an added strain on the infrastructure during the execution of the LE2 project. The FY21 House Mark provides $195M without support to disestablish NGSR. If the Mark prevails, an additional $20M is required above the request to maintain the NGSR annual lease; otherwise, SPR maintenance programs will be cut during a time maintenance is crucial to ensure requisite infrastructure to safely meet requirements.
- Congress allowed for a delay to the final ESIM sale (marked as TBD in the top row of the sales chart), but did not delay any other sales, so unless Congress delays the FY21 mandated sale of 10.1 million barrels, that sale will proceed in spring 2021.
- The FY21 Budget Request did not include a request for direct appropriation for the SPR Petroleum Account; instead, DOE proposed the sale of the NGSR’s one-million barrels of refined petroleum product (gasoline blendstock) and requested authorization to deposit sale proceeds into the SPR Petroleum Account up to $19 million. The House Mark provided $7.5M in the SPR Petroleum Account. To support ~30 million barrel drawdown capability during a supply interruption, SPR historically attempts to maintain ~$15M in the SPR Petroleum Account; readiness to support a ~30 million barrel fill action would require an additional $6M. Due to the execution of FY20 unplanned activities in response to the COVID-19 demand destruction, the SPR Petroleum Account resources for emergency drawdown/fill are estimated to be $8.5M which supports ~17 million barrel emergency drawdown. A larger drawdown would require additional funds. The following table reflects FY20 SPR Petroleum Account balances and FY21 requirements based on the House Mark.
- Hurricane Laura damaged the West Hackberry site. The initial damage assessment cost range was $25M - $95M. Congress requested to be kept apprised of estimates as they evolve.
- The additional supply surplus mission has not been formalized. A requirements study and a configuration study were in Departmental coordination prior to the new fill mission’s identification as a possible Departmental need (not yet formalized). To account for supply surplus use, the requirements and configuration studies are being updated to reflect impacts of the new mission.
Major Decisions
Decisions on whether to seek Congressional relief on the timing of mandated sales, delay the ESIM sale and related LE2 project, formalize an SPR storage mission during demand disruption, and seek Hurricane damage relief are required in FY21.
Milestone(s)
The major milestones for the SPR program are to execute the FY21 mandated oil sale of 10.1 million barrels and the sale to raise $450 million for the ESIM fund by FY22.