On January 25, the US Energy Department’s Office of Fossil Energy awarded contracts for the first of several sales of crude oil from the Strategic Petroleum Reserve. The move was made possible by a Continuing Resolution enacted in December, which included a provision for the DOE to sell up to $375.4 million in crude oil from the SPR. The EIA said last week that this sale will be the first of several planned sales totaling almost 190 million barrels during fiscal years 2017 through 2025.
As of January 13, the SPR held more than 695 million barrels of crude oil, or about 97% of its design capacity of 713.5 million barrels. The SPR is the biggest stockpile of government-owned emergency crude oil globally. It was established during the 1970s to help alleviate supply cuts resulting from geopolitical events, severe weather, transport disruptions, unplanned supply outages, and delivery interruptions. The SPR is located in four storage sites along the Gulf of Mexico.
One of the first buyers of SPR oil is Phillips 66. On January 23, the company said it would purchase the crude after submitting a winning bid in an auction held in early January by the DOE. That oil will be sourced from the Bryan Mound, Big Hill, and West Hackberry sites along the Gulf Coast.
Interestingly, the average daily drawdown of the 8 million barrel sales is about 133,000 bpd, around the size of Kuwait’s production cut pledge of 131,000 bpd per OPEC’s November 30 agreement.
Several acts of legislation in recent years have green-lighted sales from the SPR. The 2015 Bipartisan Budget Act includes authorization for funding and SPR modernization program to support improvements considered necessary to preserve the long-term integrity and utility of SPR’s infrastructure through the sale of up to $2 billion worth of SPR oil in fiscal years 2017 through 2020. Per this legislation, the SPR must receive congressional authorization for the requested sales.
Another section of the same act requires SPR crude oil sales for fiscal years 2018 through 2025 on a volumetric, rather than dollar, basis. The revenues from these sales will be deposited into the US Treasury Department’s general fund.
The 21st century Cures Act, implemented late last year, calls for the sale of 25 million barrels of SPR oil for fiscal years 2017 through 2019. The first tranche of these sales is slated for late spring 2017. Finally, the Fixing America’s Surface Transportation Act, enacted in December 2015, calls for SPR sales summing 66 million barrels from fiscal years 2023 through 2025.
One of the principal mission of the SPR is to fulfill US obligations under the International Energy Program (IEP), the 1974 treaty that established the International Energy Agency. Per the IEP, the US must be able to contribute to an IEA collective action based on its share of IEA oil consumption. Based on recent analysis, the US must be ready to contribute around 44% of the barrels released in an IEA-coordinated response. And it’s the SPR on which the government relies to fulfill this commitment. Previously, the US contributed as much as half of the total IEA collective action in the wake of oil supply disruptions due to hostilities in Libya in 2011.
As an IEA member, the US is required to maintain crude oil and petroleum product stocks to provide at least 90 days of net import coverage. Based on October 2016 levels of these imports, the SPR holds crude oil stocks equal to 145 days of import coverage. Private crude oil stocks provide an additional 489 million barrels, equivalent to another 102 days of import coverage.
Decisions to withdraw crude oil from the SPR are made by the President of US. The SPR has been used only three occasions per these circumstances, most recently in response to the aforementioned Libya-based conflicts in the Middle East in 2011 amid the Arab Spring.
On July 21, 1977, the first oil – approximately 412,000 barrels of Saudi Arabian light crude – was delivered to the SPR, marking the first time when the SPR was filled. On November 13, 2001, President George W. Bush ordered the SPR to be filled to approximately 700 million barrels. In 2005, Congress directed the SPR to take actions to fill to its authorized size of one billion barrels. Because the Reserve had a design capacity of 727 million barrels, the SPR prepared a plan to expand to one billion barrels and conducted a site selection process to construct additional storage facilities. An environmental impact statement was also formulated. However, efforts to expand the SPR to one billion barrels were terminated in 2011.
The genesis of the SPR goes back to the World War II era, when Secretary of the Interior Harold Ickes advocated the stockpiling of emergency crude oil in 1944. President Truman’s Minerals Policy Commission proposed a strategic oil supply in 1952. President Eisenhower suggested an oil reserve after the 1956 Suez Crisis. The Cabinet Task Force on Oil Import Control recommended a similar reserve in 1970. However, the 1973-74 Arab oil embargo dramatically highlighted the need for a strategic oil reserve.