[Federal Register Volume 62, Number 83 (Wednesday, April 30, 1997)]
[Notices]
[Pages 23437-23441]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-11146]
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DEPARTMENT OF ENERGY
Office of Strategic Petroleum Reserve; Opportunity for Public
Comment
AGENCY: Department of Energy, Fossil Energy, Office of Strategic
Petroleum Reserve.
ACTION: Opportunity for Public Comment on Strategic Petroleum Reserve
Policy.
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SUMMARY: In preparation for the issuance of an Administration Statement
of Policy concerning the capacity, size, use, and financing, among
other issues, of the Strategic Petroleum Reserve, the Department of
Energy, Office of Strategic Petroleum Reserve, extends this opportunity
for interested persons to submit written comments. All submissions in
response to this notice will be made available to the public.
DATES: Interested persons are invited to submit written comments at the
address below by June 16, 1997.
ADDRESSES: Mr. Richard D. Furiga, Deputy Assistant Secretary, Strategic
[[Page 23438]]
Petroleum Reserve, FE-40, Room 3G-024 1000 Independence Ave. S.W.,
Washington, D.C. 20585.
Comments may also be submitted by use of the Internet by linking to
the DOE Fossil Energy web site at: http://www.fe.doe.gov/spr.html
Requests for further information may be addressed to: Mr. John D.
Shages, Strategic Petroleum Reserve, FE-432, Room 3G-052 1000
Independence Ave. S.W., Washington, D.C. 20585, Phone: (202) 586-1533,
Fax: (202) 586-0835, Internet: john.shages@hq.doe.gov
Opportunity for Public Comment
As a result of changes in the overall energy environment that have
occurred since initial authorization of the Strategic Petroleum Reserve
(the Reserve) in 1975 and creation of the International Energy Agency
(IEA) in 1974, and agreement by the Department's witness before the
Senate Energy and Natural Resources Committee on May 15, 1996, that a
Statement of Administration Policy on the Reserve would be prepared,
the Department intends to prepare, on behalf of the Administration, a
statement of policy addressing fundamental issues affecting the future
of the Reserve. As an initial step in the development of the Reserve
Policy Statement, the Department solicits the views of all interested
persons on the issues listed below. After compilation of the public
comments, the Administration will conduct an Interagency review of the
issues, and develop positions on the major issues of the capacity and
inventory of the Reserve, which will be a touchstone for decisions
regarding the Reserve, including proposals to use the Reserve's
inventory for purposes other than energy supply shortages,
interruptions, and international obligations.
Background on U.S. Oil Emergency Response Policy
Creation of the International Energy Agency and the Strategic Petroleum
Reserve
Following the 1973 Arab oil embargo, the United States determined
that its vital foreign policy, national security, and economic
interests were threatened by our dependence on imported oil and the
possibility of recurring severe supply disruptions. As a result, in
1975 the Energy Policy and Conservation Act, Public Law 94-163 (the
Act), was enacted, authorizing both American participation in the IEA
and creation of the Reserve.
It was intended at the time that the Reserve would serve several
functions. It would protect the national economy by providing the
capability to supplement oil supplies in the event of disruptions due
to political, military, or natural causes. It also would sustain U.S.
foreign policy objectives, especially in the Middle East, by providing
the President the freedom to take action free of concern for essential
oil supplies. The Reserve would provide U.S. military forces with a
secure source of oil supplies in a crisis. It would also be a deterrent
to countries or parties that might seek political gain by intentionally
disrupting world oil exports.
The Reserve also was intended to fulfill a U.S. international
obligation. Under U.S. leadership, and drawn together by a common
interest in maintaining secure oil supplies, 12 industrialized nations
met in Washington in February 1974 to begin a process that would lead
to the signing of an Agreement on an International Energy Program. This
was the charter of the IEA, which today has 23 members. The member
nations of the IEA agree to take common effective measures to develop
emergency self-sufficiency in oil supplies and to cooperate in a
crisis. Each member of the IEA commits to maintaining the equivalent of
90 days of net oil imports as an emergency reserve. Throughout its 22
year history, the United States has been the IEA's foremost advocate of
building and maintaining strategic oil stocks. In establishing the
Reserve, it was a U.S. goal to lead by example, setting a high standard
for others to follow.
At its origin, the IEA adopted an emergency system based on
allocation of available supplies among the oil importing countries.
Since then the United States has gained experience with the
difficulties and negative consequences of price and allocation
regulations, and the Reserve has moved from being merely a plan, to
becoming a viable petroleum stockpile. With time, the U.S. position has
evolved to aggressively advocate use of free markets even in a
disruption. The existence of the Reserve lends credibility to urging by
the U.S. to the other member countries that the most efficient response
to an emergency would be to allow markets to balance supply and demand.
In order to formalize this position, the United States enunciated a
policy, in the event of an emergency or shortage, to rely on market
forces to allocate supply, and to ordinarily supplement supply by the
early drawdown of the Reserve in large volumes and in coordination with
our allies and trading partners. This policy recognizes that the best
way to dampen the price increase associated with an emergency, and
mitigate the economic impact resulting from a significant disruption,
is to inject additional supplies into the market in a timely manner. It
is the U.S. position that the member countries of the IEA, acting in
concert, can leverage the impact of their collective actions well
beyond the mitigating impacts of independent action by each state
acting alone.
The Strategic Petroleum Reserve Structure
The Act authorized a Reserve up to one billion barrels and provided
for a range of policy options such as storage of refined products in
regional reserves. The Act also required that the Executive Branch
prepare a comprehensive plan for the Reserve that required approval of
the Congress, and that substantial changes to the plan be formalized as
amendments. The plan was submitted, approved, and implemented. The
Reserve, as planned, consists of crude oil stored in salt caverns
located on the Gulf Coast. That configuration allows the lowest
construction, maintenance, and operations costs; the greatest
logistical flexibility; and the lowest cost for procuring and storing
petroleum.
Today the Reserve is composed of five oil storage sites with
surface facilities consisting of pipes, pumps, motors, meters, and
other equipment typical of oil storage facilities. Two of the sites are
in Texas and three in Louisiana, with a Project Management Office
located in New Orleans. The oil is stored below ground in caverns
created within salt domes. The total capacity of the caverns is 750
million barrels, but is being reduced to 680 million barrels by the
decommissioning of the Weeks Island, Louisiana, storage site due to
structural instability. The peak oil inventory in the Reserve was 592
million barrels during the period July 1994-March 1996. Approximately
18 million barrels of oil were sold in fiscal year 1996, leaving the
inventory of the Reserve at 574 million barrels of which one-third is
low sulfur (sweet) and two-thirds high sulfur (sour). During fiscal
year 1997, the Reserve sold another 10 million barrels of mostly sour
oil, to raise $220 million in satisfaction of appropriation law
requirements. The resulting current inventory is approximately 564
million barrels of oil.
Strategic Petroleum Reserve Drawdown
The Act provides the President wide latitude to anticipate and
react to events that are of an emergency nature, cause petroleum prices
to rise, adversely impact the national economy and safety,
[[Page 23439]]
or trigger United States international obligations. The authority of
the President to drawdown the Reserve may not be delegated. Once the
President makes a finding of an interruption, shortage, or determines
that drawdown is necessary to meet United States obligations under the
International Energy Program, the Secretary of Energy has discretion as
to the volume and type of oil to draw down, and the administration of
sales is preplanned, including periodic exercises. The Secretary also
has discretion to draw down and sell up to 5 million barrels of oil to
test the distribution systems for oil sales. In fiscal year 1986
Congress directed the Secretary to use the test sale authority to
conduct a sale of one million barrels. The Secretary also used the test
sale authority in 1990 after the invasion of Kuwait by Iraq. There has
been only one Presidentially directed drawdown, in January 1991. The
United States, simultaneously with commencement of the air war against
Iraq, and following activation by the IEA of its coordinated emergency
response contingency plan for the Desert Storm war, offered for sale 33
million barrels of oil, and after consideration of the bids, actually
sold and delivered 17 million barrels of crude. Whenever Reserve oil is
offered for sale, the volume, type, and location of the oil is
announced in a Notice of Sale. Awards are made to qualified bidders
solely on the basis of price and the availability of drawdown and
distribution facilities.
Public versus Private Reserves:
The obligation of the United States to the IEA is to store the
equivalent of 90 days of net imports by a combination of Government
owned reserves and private reserves. While the Government's Strategic
Petroleum Reserve at one time equated to 118 days of net imports,
increasing imports, a hiatus in oil acquisition, and the non-emergency
sales conducted during FY 1996 and 1997 reduced the days of net import
equivalency to 67 by December 1996. Although the United States has
urged other members to build government-owned stocks and to move away
from the regulation of industry, the United States currently satisfies
its obligation by virtue of private inventories even though those
stocks are not controlled by the Government for strategic purposes.
Primary Issues
1. Should the United States Continue to Maintain the Strategic
Petroleum Reserve?
The International Energy Agency (IEA) and the Reserve were created
in response to the market power of the Arab Organization of Petroleum
Exporting Countries, as demonstrated by the international embargo and
price increase of 1973-74. Since then, the geographical location of the
world's oil reserves, production, and exports have become more diverse.
Regardless of their causes, recent price increases appear to be self
correcting by attracting increased supply.
In addition, the existence of Government owned strategic reserves
may dampen or eliminate incentives for private industry to carry
inventories in excess of immediate operational needs. Within the
context of this question the Department solicits views on private
sector inventory behavior and the private sector's likely inventory
response to decommissioning the Reserve.
The cost of the Reserve is approximately $200 million per year for
operations, maintenance, construction, and management, exclusive of any
costs of acquiring oil. The Reserve is currently in the fourth year of
a seven year Life Extension Program to extend the useful operating life
of all critical Reserve systems to the year 2025. After completion of
the Life Extension (construction) projects, the annual budget for
operations, maintenance, and management of the Reserve will be
approximately $150 million per year. The United States is unique among
oil stockpiling countries in assigning all of the cost of the Reserve
to the general taxpayer. Most other stockpiling countries partially
shift the cost burden to the oil industry by requiring that their oil
companies maintain inventories in excess of working needs. The Energy
Policy and Conservation Act (the Act) provides authority to the
Secretary of Energy to require private companies to create an
Industrial Petroleum Reserve. If it is desirable to maintain a Reserve,
the Department solicits views on whether the Government should
privatize the management and cost of strategic stockpiling.
Alternatively, if the Government continues to manage the nation's oil
stockpiles, the Department solicits views on whether the cost should be
borne by oil importers, refiners, or consumers rather than the general
public.
2. What Should be the Size and Composition of the Reserve Facilities
and Oil Inventory?
The United States' international obligation (under the Agreement on
an International Energy Program) is, as a Nation, to maintain petroleum
stocks equal to 90 days of net imports. Based on calculations by the
International Energy Agency in the Spring of 1996, the United States
has 157 days of imports, approximately 74 of which are provided by the
Reserve. The remainder are private inventories that are calculated by
the International Energy Agency to be stocks available during an
emergency. However, the Federal Government has no control over these
private stocks.
As of November 1, 1996, the Reserve had an effective capacity of
680 million barrels, and an inventory of 571 million barrels of crude
oil. After completion of the sales directed by the FY 1997
appropriations act, the Reserve will have an inventory of approximately
564 million barrels of oil. The Act authorizes a Reserve of up to 1
billion barrels, and had an initial target of 90 days of net imports.
The Strategic Petroleum Reserve Plan, which contains the
configuration of the Reserve, provides only for crude oil storage.
Although regional, refined product storage was authorized in the Act,
the Strategic Petroleum Reserve Plan concluded that centralized crude
oil storage was preferrable both in the interests of cost reduction and
in the belief that crude oil is the most flexible form of petroleum for
responding to emergencies. In addition to questions regarding size and
inventory, the Department solicits views on (1) whether the philosophy
of private inventory managers of refined products regarding stock
maintenance has changed permanently within the last few years, (2)
whether other circumstances that bear on the analysis of regional and
refined product storage have changed with time, and (3) the option of
storing refined products either centrally or regionally.
In 1990, the Reserve capacity reached 750 million barrels. However,
due to geologic instability the Department is decommissioning the Weeks
Island, Louisiana site and its 70 million barrels of capacity. In 1992,
the Act was amended to require the Administration to prepare an
amendment to the Strategic Petroleum Reserve Plan for an expansion of
the Reserve to one billion barrels. The Administration has postponed
submitting this amendment to reflect the reality that the inventory of
the Reserve is not increasing, and in
[[Page 23440]]
1994 and 1995 proposed an amendment to the Act that would require the
preparation of its expansion plan only when it becomes likely that
funding sufficient to fill the existing Reserve facilities becomes
available.
The Act also requires that inventory be added to the Reserve at the
rate of 75,000 barrels of oil per day. This requirement has been waived
for many years in annual appropriations acts, and the volume of crude
oil acquired has been determined by the spending limits contained in
that legislation.
If desired, additional crude oil storage capacity could be added to
the existing Big Hill and Bayou Choctaw sites. By using the existing
infrastructure, approximately 100 million barrels could be added at
those sites at an incremental site development cost of approximately
$2.00 per barrel. If expansion were desired above 750 million barrels,
a new site(s) would be required and the cost would be approximately
$5.00 per barrel. Creation of a new salt dome storage site, requiring a
National Environmental Policy Act review process for site selection,
land acquisition, construction, and leaching would require
approximately nine years.
3. How Should Reserve Oil be Distributed?
The Department maintains the Reserve in a state of readiness that
allows for delivering oil within 15 days of notice to the field office
to proceed. The primary means of distributing oil is by competitive
sale, i.e., oil is sold to the highest responsible bidders. The bids
are made in response to an offer of specific types and volumes of oil
available at each Reserve location. The basic terms and conditions of a
competitive sale are available in a document titled, ``Standard Sales
Provisions.'' The bidders must accept all terms and conditions of the
offer, and bid only on price, volume, location, delivery mode, and
delivery date. The current Reserve Drawdown and Distribution Plan
provides the Secretary of Energy with the option to direct sales of up
to 10 percent of the oil to be sold by means other than competitive
bid, although the Strategic Petroleum Reserve Office has no plans to
implement the allocation authority.
4. What Should be the Drawdown and Distribution Capability for the
Reserve?
In the initial 1976 Strategic Petroleum Reserve Plan for a 500
million barrel Reserve, drawdown and distribution capability was
designed to equal 60 percent of daily imports, implying a drawdown rate
of 3.3 million barrels per day and complete drawdown of the Reserve in
150 days. When the planned size of the Reserve increased to 750 million
barrels, the initial drawdown and distribution rate was increased to
4.5 million barrels per day, which in 1990 was equal to 63 percent of
imports. If the Reserve were expanded to one billion barrels with a
drawdown and distribution capability of 6.0 million barrels per day,
that capability would be the equivalent of 60 percent of projected
imports in the year 2000. Due to decommissioning the Weeks Island site,
drawdown and distribution capability will be reduced to 3.9 million
barrels per day, although the rate eventually will be restored to 4.5
million as part of the Reserve's Life Extension Program. The drawdown
and distribution rate of 4.5 million barrels per day will decline as a
percentage of net imports as imports rise. In the years 2000, 2005, and
2010, the percentage will be 45%, 39%, and 38% respectively, based upon
projections by the Energy Information Administration.
5. What Is an Appropriate Policy for Revenue Raising Sales From the
Reserve?
Under the Act, the oil in the Strategic Petroleum Reserve may only
be drawn down in the event of a Presidential finding of a shortage,
interruption, or international obligation, with the exception of
limited test sales. Aside from test sales (after which the Reserve is
required by the Act to replace the oil sold), the Department has
advocated a non-emergency sale only once, in FY 1996, to fund the cost
of decommissioning the Weeks Island site. However, beginning in 1992,
Congress has applied outlay caps to the funds available for oil
acquisition, thereby severely limiting oil purchases and making those
funds subject to transfer for other purposes. In addition, the
Administration agreed with Congress on a deficit reduction sale of $227
million worth of oil in FY 1996, and an additional sale of $220 million
worth of oil in FY 1997. These proposals, which lower the level of oil
inventory in the Reserve, are in conflict with the provisions of the
Act, discussed above, which require plans for oil fill and facility
expansion. The Department of Energy has also advised against any
further sales of oil for revenue generation purposes.
6. Should the Reserve's Facilities Be Available for Alternative Uses?
Initially the Reserve facilities are exclusively dedicated to the
storage and distribution of Government-owned oil. However, the surface
pipelines and docking facilities which were built by the Government in
conjunction with the storage sites could be used by the private sector.
The Act provides authority for the Department to ``use, lease,
maintain, sell or otherwise dispose of storage and related
facilities.'' Beginning in 1994, the Department proposed a
``commercialization'' program to lease or sell its underutilized or
idle distribution pipelines and marine terminaling facilities for
commercial crude oil operations, while retaining priority use of these
facilities to distribute Reserve crude oil in the event of a national
emergency. In October 1996, the Reserve leased the St. James terminal
and the Bayou Choctaw pipeline, and sold the Weeks Island pipeline. The
Department expects the commercialization program to reduce the
maintenance costs of the Reserve by transferring those costs to the
lessees, generate revenue from unutilized facilities, and assist
industry.
The Department's current policy regarding commercialization is to
lease or sell the off-site facilities provided that their capabilities
are maintained and available to the Reserve in the event of a drawdown.
The Department would also be willing to lease certain on-site
facilities that may, in the future, be attractive as lease candidates.
The Reserve also has almost 100 million barrels of underutilized
storage capacity. Other member countries of the International Energy
Agency and non-member countries need capacity to store their oil, and
the United States could lease the underutilized space to those
countries. In 1995, the Administration proposed a lease program to the
other member countries of the International Energy Agency. The
Administration's policy is to explore the possibility of leasing
storage capacity to foreign countries in order to generate revenues,
preserve Reserve capacity for future use, and to promote stockpiling by
other nations.
7. Should the Reserve Attempt To Raise Funds Through Alternative
Financing, Innovative Financial Instruments, or Buying and Selling
Inventory?
Part C of the Act authorizes the acquisition of oil for the Reserve
that would remain the property of another person provided the
Government controls the drawdown of the oil. This authority was added
to the Act in 1990, in hopes of reducing carrying costs of the oil in
inventory. Since passage of the legislation the Department has not had
any success at ``leasing'' or otherwise acquiring alternatively
financed oil, and in recent years has abandoned the initiative due the
overall budget
[[Page 23441]]
situation. Nevertheless, the Department is willing to store non-
Government oil for long-term storage in the Reserve if oil acquisition
is resumed. The Department solicits views on the use of alternative
financing for oil acquisition.
The Department also solicits views on the use of financial options,
futures and other financial instruments. The Department would have to
become active in the oil markets if it wished to sell options for the
purchase and sale of Reserve oil. The intent of this activity would be
to generate funds for the Government and provide an automatic mechanism
for the release of oil. Additionally, the oil industry could be
provided a hedging instrument backed by oil. The Administration has not
taken a position on whether Reserve oil should be offered for trade on
public markets.
In addition, the Department seeks views on whether it should sell
and repurchase Reserve inventories on a continuous basis to take
financial advantage of market anomalies, such as high current prices
and low future prices.
The operating, maintenance and management expenses of the Reserve
are approximately $200 million per year currently, and are expected to
decline to approximately $150 million per year over time. The
Department seeks views on other alternatives for funding these expenses
other than appropriations from general revenues.
Issued in Washington, D.C. on April 24, 1997.
Robert S. Kripowicz,
Principal Deputy Assistant Secretary, Fossil Energy.
[FR Doc. 97-11146 Filed 4-29-97; 8:45 am]
BILLING CODE 6450-01-P
