CONGRESSIONAL RESEARCH SERVICE LIBRARY OF CONGRESS O10-1 03861689 ENERGY: TEE STRATEGIC PETROLEUM RESERVE ISSUE BRIEF NUHBER IB79121 AUTHOR: Lindahl, David 3. Environment and Natural Resources Policy Division Davis, David Howard Environment and Natural Resources Policy Division THE LIBRARY OF CONGRESS CONGRESSIONAL RESEARCH SERVICE MAJOR ISSUES SYSTEM DATE ORIGIHATED 1141 3122 DATE UPDATED gggggggg FOR ADDITIONAL INFORHATION CALL 287-5700 0305 CRS- 1 1379’ 12 1 UPDATE-O2/29/80 £§§E§-2§§lE£2lQE In order to protect against a repetition of the 1973-74 Arab oil embargo, in 1975 Congress authorized a Strategic Petroleum Reserve (S?R). The SP3 was to contain enough crude oil to replace imports for 90 days. A revised plan set out the following schedule. 250 million barrels (HUB) to be stored by December 1978 500 million barrels (MHB) to be stored by December 1980 750 million barrels (MHB) to be stored by December 1985 Since its inception, the program has fallen behind schedule. On Dec. 31, 1978, the SPR was supposed to contain 250 MMB, when it actually had only 69 HEB. when the Iranian revolution cut supplies in the spring of 1979, the Strategic Petroleum Reserve Office (SPRO) of DOE suspended purchases to reduce the upward pressure on world oil prices. At present, the SPR has about 90 HEB in storage and its future is uncertain. Questions concerning the SPR that currently face Congress are: Is the strategic value of the SPR still worth the cost? Is the SPR competently managed? Can oil currently be physically withdrawn from the SPR in an emergency? u. should the United States continue to purchase oil for the SPR if a world crude oil shortage persists? 5. Should the United States and Canada cooperate on oil storage? 6. Can the storage sites be sufficiently maintained to prevent leakage and accidents and blowouts? 7. Under what emergency conditions could oil be withdrawn from the SPR and how would it be distributed? _ 8. Why has there been no regional or product storage outside of industrial stocks? Uul\>..a out EAQEEEQQE2.&§2.2QLI§Z_A§ALI§;§1 The Energy Policy and Conservation Act of 1975 (EPCA) Sections 151-166 authorized an SPR on the following schedule: 50 MMB to be stored by June 1978 .15O1HMB to be stored by December 1978 325 HMB to be stored by December 1980 500 HUB to be stored by December 1982 As part of his National Energy Plan on nay 25, 1977, President Carter submitted a revised schedule doubling the planned size of the reserves: 250 HHB to be stored by December 1978 S00 HEB to be stored by December 1980 — 750 HEB to be stored by December 1985 (government storage only) CRS- 2 IB79121 UPDATE—02/29/80 1000 HMB to be stored by December 1985 (government and possible private storage) In fact, none of these schedules has been met. From the beginning, the SPR was beset by multiple problems of planning, management, execution, and safety. This, combined with the fact that Iran, now a hostile state, was until the end of 1978 a major supplier to the SP3 (26.fl% of total fill in 1978). The loss of that source and the inability to withdraw oil from the SPR during the Iranian crisis has called the entire program into question. RATIONALE The rationale for the SPR was to mitigate the impact of future supply interruptions and, possibly by this preparedness, to deter an embargo. The utility of the SPR depends on two main factors: (1) the amount and duration of the shortfall and (2) the amount available in the SPR. Several scenarios illustrate this. 0 §esneri2 #1-11973—74l The embargo by the Organization of Arab Petroleum Exporting Countries (OAPEC) reduced crude oil imports to the United States by approximately 1-9 HMB/D for five months, December through April. This amounted to 16% of tota crude oil input to refineries during that period. Thus an 39B of 285 HMB would have completely offset the shortage (150 days x 1.9 MMB/D = 285 M58). In reviewing the embargo, it is useful to consider the shortfall in a longer timeframe because drawdovns of industrial petroleum stocks and greater domestic production can substitute for imported crude. For the year September 1973 to September 197a, the shortfall averaged 0.9 HMB/Dt(7%). §2eneri2-iZ-1l2Z2L when President Carter determined on Nov. 12, 1979, that the United States would boycott Iranian oil, and Iran reciprocated by embargoing sales of Iranian oil to the United States, the United States was buying approximately 0.4 MHB/D (this was slightly below the 1978 level of 0.5 HEB/D). The shortfall of Iranian oil amounted to 4% of imports and less than 2% of total ocrude oil input to domestic refineries. Thus, if the boycott continued, an SPR of 60 million barrels could carry the United States for five months (150 days X 0.5 HEB/D = 60 HHB) and an SPR of 1&6 million barrels would sustain the country for a full year (365 days x 0.4 nun/n =1u5 HHB). This assumes the United States could not offset the 0.4 MMB/D shortfall through substitution of oil from other sources, such as Saudi Arabia and Nigeria. Scenario #3 11981; An 0APEC_embargo in the near future would have a greater impact because the United States now depends more on Middle Eastern oil than it did six years ago. An Arab embargo would decrease crude supplies by 3.1 HMB/D. Iranian crude imports in 1978 averaged more than 0-5 HHB/E. This was before the Iranian revolution decreased production and. before President Carter CRS— 3 IB79121 UPDATE-02/29/80 t,clared that the United States would not buy Iranian oil. A Pan-Islamic embargo (excluding Indonesia) that might deprive the United States of Arab and Iranian oil could result in a shortfall of 58% of U.S. imports and 25% of the total throughput to domestic refineries. If a 1980 embargo .lasted five months, therefore, an SP8 of S40 HEB would be required (150 day x 3.6 EH3/D = 530 HEB). For a full year, a five-month shortfall would average 1.5 HHB/D (19%). 9.rh.e£..2a2r2 re The dimensions of the shortfall and the size of the reserve are the main factors, but others include changes in domestic demand, availability of alternative supplies, and the level of European and Japanese demand. In the event of another embargo the United States presumably would limit demand. In 1973-7Q and again in 1979, the Federal Energy Administration (FEA) allocated gasoline, and DOE (its successor) would probably do so again, although. such action at best can only redistribute supplies so that shortages are not in some areas excessive. Even though higher prices might dampen demand eventually, the time required suggests that it would probably not have an immediatei effect in the case of an embargo. The Energy Policy and Conservation Act of 1975, Section 203 (amended by the Emergency Energy Conservation Act of 1979) authorizes the President to implement a rationing r‘an, presumably using coupons. Section 202 gives his authority to establish J c,ner conservation plans as needed. In case of another embargo, the United States would seek alternative sources of supply. It could increase domestic supplies by ordering increased production up to the maximum efficient rate for private wells, increase production from the Naval Reserves such as Elk Hills, and import more from other countries not participating in the embargo. For example, in 1973-74, Iraq did not participate in the Arab embargo and was a major source of oil’ for the United States. European, Japanese, and other foreign demand is a third factor.‘ It would be futile for the United States to sacrifice when other countries do not, and vice versa. Following the divisive unilateral deals sought by industrial countries with producing countries in 197$, 20 industrial countries joined together in the International Energy Agency (IEA) to coordinate their energy consumption goals and to plan strategies for dealinga witht future. energy supply problems. The IEA Emergency Program is designed to share the burden of a disruption equally among its members. Each member country has agreed to maintain (1) a 70-day reserve and (2) a demand restraint program. In the case of an emergency, the IEA_ oil sharing system would distribute the sacrifice among the members. No such organization existed in 1973-7a. Then the major oil countries allocated oil according to previous consumption. According to Robert Stobaugh of the. Harvard Business School, the international oil companies largely ignored the Arabs’ demands to embargo the U"ted States and the Netherlands. Instead, the majors spread the burden jnore or less equally by shifting oil from non-Arab countries and even, he suggests, by deception ¢$hg_Qi;_§;i§i§: 192-200). WHAT IS THE OPTIMAL RHOUNT OF OIL T0 STORE? Without foreknowledge of the size of the shortfall and its duration, the optimal amount of oil to store cannot the known. For the first scenario cas- 4 IB79121 UPDATE-O2/29/80 (1973-74) it would have been 285 HEB, for the second scenario (1979) it would have been 60 MHB, and for the third (1981), it would be 5&0 HMB. In addition to the expected length and severity of a future embargo, factors determining an optimal level include industrial storage, likely conservation rates, and storage costs. When President Carter revised the schedule to double storage in 1985, one option for the final 250 MHB was private industrial storage. Although there is a considerable amount of refined product in private storage, it has not yet been formally included in the program. Likely conservation and use of alternative fuels is the second factor. As in 1973-7a, consumers would face shortages forcing them to use less oil. Driving less, further lowering thermostats, and burning coal, natural gas, or wood are alternatives, though of limited application. Greater energy efficiency through insulation, improvements in manufacturing processes, and greater fuel efficiency in new cars would not help in the short-term. Indeed, insofar as considerable conservation has already been achieved, the nation is now more vulnerable than it was during the 1973-7a Arab oil embargo. The current cost of developing crude oil storage sites is about $3.00 per barrel. Oil is stored in caverns in salt domes along the Gulf coast in Louisiana and Texas. From there it can be pumped into existing pipelines for distribution to refineries. The Louisiana and Texas sites were chosen because of the availability of salt formations and access to both ships and pipelines. Alternative storage could be in abandoned mines, mothball ships, and steel tanks. All of these would be more expensive. Even though the cost of storage in the caverns is low, the law of diminishing returns still applies. At some point -- 500 MMB, 1,000 MHB, or whatever -- the reserve will be large enough to serve its purpose as a buffer and enough time will have passed for the United States to increase production from fields such as Naval Petroleum Reserve No. 1 at Elk Hills, California. SOURCE OF CRUDE OIL Until the Iranian revolution occurred, the specific source of crude oil meeting DOE specifications to fill the salt caverns made little‘ difference because the world price was the marginal price. If DOE bought OPEC oil it paid the OPEC price adjusted for quality differences. OPEC prices now vary widely, however -- $26-35/bbl. Purchases from Saudi Arabia would be far less costly than from the spot market. If DOE were to buy lower tier domestic oil it might pay a lower price ($6.00/bbl), but it would force some refiner to pay the price of whatever foreign oil he could get, probably at a premium price, to replace the domestic crude he would have otherwise received. Hence, there is no inherent advantage in not placing foreign oil in the SPR. Since no national goal would be served by storing only domestic oil -- and to avoid disruption of existing market arangements - DOE bought foreign oil and paid the world price. when the Iranian revolution reduced supplies leading to price increases 1 early 1979, DOE suspended purchases in order to lessen world demand. Prices rose anyway but presumably not as much as if DOB had continued to buy. In July 1979, Saudi Arabia raised production by one million barrels a day. As a condition of the increase, the Saudis apparently required that U.S. purchases of oil not be used for storage in the SPR. The Saudis were concerned that other Arab states would cut back production if they knew that the incremental production was going to the SPR. Under those circumstances CRS- 5 IB79121 UPDATE-02/29/80 the Saudis did not feel that they would be willing to take the political risk of increased production solely for the benefit of increasing American stored reserves. It may be possible, however, to divert other crudes to the SPR so that the potentially offending direct link is broken. SITE SELECTION DOE chose the storage sites in Louisiana and Texas because salt cavern storage is the cheapest method and the domes are located close to trunk pipelines. Storage on the Gulf Coast is remote from refineries in the Northeast, Hawaii, Puerto Rico, and the Virgin Islands, although it is close to the largest refining center in the world. In march 1978, DOE proposed to satisfy East Coast needs by storing 20 HEB of residual fuel oil (not crude) in sites in the Gulf Coast and in Eastern Canada. The rationale was that the. Northeast is particularly dependent on residual oil and, if an embargo occurred in the winter, the region would need extra protection. On Apr. 17, 1978, the Senate voted to reject DOB's proposal as providing inadequate reserves for the Northeast. Canada has also proposed that the United States store crude oil for the Northeast in sites in Newfoundland and Nova Scotia. To date, no such regional storage exists outside of private inventories. Storage for Hawaii, Puerto Rico, and the Virgin Islands remains unresolved as well. These islands obtain virtually all their oil from foreign ( tntries. On the other hand, it is unlikely that an embargo would be so total as to deprive them of all foreign supplies. Although oil refined in Puerto Rico and the Virgin Islands for shipment to the mainland would be reduced, the islands would probably have more than enough for their own use, while the SPR in Louisiana and Texas would be available for the mainland. Hawaii could probably be supplied with domestic crude oil to supplement the imports that it would continue to receive. WHEN TO USE THE SPR The decision to use the SPR must be made by the President at his discretion. There is no automatic trigger based on the number of barrels or the percentage of the shortfall. On Oct. 31, 1979, DOE transmitted Energy Action No. 5 proposing how and when the SPR would be used. DOE has listed ten factors that would determine when oil would be withdrawn "from the reserve, including the likely magnitude and length of the embargo, the state of the economy, and the size of the SPR. This flexibility contrasts with the 20% trigger for gasoline rationing (Emergency Energy Conservation Act of 1979) and the 7% trigger ford the International Energy Agency oil+sharing plan. DOE argued for flexibility for two reasons: (1) the number of possible interruption scenarios is so large and circumstances could vary. so much that preset triggers would not be practical; (2) the uncertainty of the American response could deter oil exporting countries from starting an embargo. DISTRIBUTIOH In case the President decides to use the ‘SPR, DOE must be able to transport and to sell the oil.v As of early 1980, four of the five storage sites were physically connected to marine terminals and two were connected to interstate pipelines. cAfter widely publicized delay, DOE has finally installed pumps to withdraw oil. A CRS- 5 IB79121 UPDATE«O2/29/80 DOE would allocate the crude according to historic use. In general, refiners would share the shortage equally (see Standby fiandatory Crude Oil Allocation and Refinery Yield Control Programs in the §g§g§a;_ gggigtgg, January 1979). DOE has not yet decided whether to let supply and demand determine market prices or to set prices administratively. Discussion in DOE Energy Action No. 5 appears to favor a market solution (p. 34). HANAGEHENT DOE's Strategic Petroleum Reserve Office (SPRO) has had a number of management problems including leadership turnover, field staff, safety, and schedule. Four men have headed the SPRO during its brief existence. when retired Air Force General Joseph DeLuca became head in the spring of 1978, the SPRO seemed to be getting the exprienced manager it needed. At the same time DOE shifted the SPRO from reporting to the Assistant Secretary (for Resource Applications to reporting to the Under Secretary. But within less than a year General DeLuca resigned for personal reasons and was succeeded by Harry Jones. Lack of staff in the field was a second problem. Until early 1979 SPRO managed the program from Washington. Problems, such as salt caverns that leaked and the contractor who allegedly stole pipe, could have been monitored better from a local office. In 1979, the SPRO finally established an offic in New Orleans. In 1978, a fire at the west Hackberry site killed one worker and caused $12 million damage and a loss of expensive crude oil. A DOE report on the fire blamed haste and carelessness on the part of the contractors. other management problems included inadequate pipelines to the Gulf of Mexico to dispose of the brine pumped out of the salt domes to form thef cavern, the need for temporary storage above ground, and demurrage charges of $8 million when tankers had to wait to unload. ALTERNATIVES Alternatives to the SPR range from minor modifications, such as different storage levels and techniques, to extremes of so-called energy independence in one direction or toleration of the risks of a future embargo in the other direction. Several other alternatives exist. Eeriena 1.l....Pe.t:.r9let.1.I;-.I$<_e§.srxs2.§ The United States has four naturally occuring reserves: Naval Petroleum Reserve No. 1 (Elk Hills), naval Petroleum Reserve No. 2 (Buena Vista), Hav Petroleum Reserve No. 3 (Teapot Dome), and National Petroleum Reserve Alaska (formerly Naval Petroleum Reserve No. 4). At present, it would take approximately 60 to 90 days to increase production from these reserves to the maximum. By laying some more connecting pipe now, it could be possible, when needed, to bring these reserves on stream nearly as quickly as it would be to drawdown the SPR in its current state. Much more oil is present in the Naval Petroleum Reserves, and with some additional wells, they could probably provide as much oil in an emergency as could the SP3, although costly cRs- 7 1379121 UPDATE-O2/29/80 Y wt-to-east pipelines from California and from Washington would probably be necessary to handle the large volume of oil. Fuel Sgitchigg A massive program of temporarily switching industries from oil to coal, natural gas, and electricity could decrease U.S. demand for oil. Unfortunately this plan has two drawbacks: (1) building and maintaining the capability to switch fuels is costly, and (2) high prices and government regulations are already bringing about a permanent shift away from oil. An energy treaty linking Canada, Hexico, and the United States could provide for a temporary surge of production in the three countries. The treaty might also provide for a temporary halt to exports outside the Western Hemisphere. In exchange for guaranteed supplies during an OPEC embargo, the United States might agree to pay a premium on increased oil imports from non-embargoing countries during embargo. Natural gas deliveries might be stepped up as well. The chief drawback to a North American treaty is that it is unlikely that there will be much extra oil and gas available that could be h ught on stream in an emergency. One solution to this might be for the three countries to establish and develop North American Petroleum Reserves similar to the U.S. Naval Petroleum Reserves. Relations with Europe and Japan are a second consideration. Timing is also a factor. hexico has the oil reserves on which to base such a treaty but these reserves are in the early stages of development, as are the potentially large reserves in Arctic Canada. A North American emergency. partnership in energy probably could not be effective until the mid-19805. The practicality of such an arrangement would depend to a great extent upon the conditions that hexico would set for its participation. Lrcrsrggron P.L. 96-126 ¢H.n. u930) yAuthorizes Department of Interior appropriations for the SPR. Introduced July 23. Reported from Committee on Appropriations (H. Bept. 96-373) July 23. Passed House, amended, July 30. Reported to Senate from Committee on Appropriations, with amendemnt (S. Rept. 96-363) 9 Passed Senate, amended, Oct. 18, 1979. Presented to President Nov. 16, 1979. Enacted into law Nov. 27, 1979. 3.3. 3743 (Jeffords) airects Navy to conduct study regarding potential storage of NPR oil in the SPR. Introduced April 25; referred to Committee on Armed Services. H.R. H862 (Dingell et al.) Authorizes storage of synfuels in the SPR. Introduced July 19. CRS- 8 IB7 9121 UPDATE-O2/29/80 E.Res. 483 (staggers et al.) Disapproves the proposed amendment to the Strategic Petroleum Reserve Plan which sets forth a method of drawndown and distribution of the Reserve (Department of Energy energy action numbered 5). Introduced Nov. 9, 1979; referred to Committee on Interstate and Foreign Commerce. H.R. 6129 (Leach, J.) Amends the Energy Policy and Conservation Act to direct the Secretary of Energy to establish a program for the creation and maintenance of an Industrial Petroleum Reserve as part of the Strategic Petroleum Reserve. States that such Reserve shall consist of petroleum products acquired by refiners and importers and stored by them in readily available inventories, in an amount of at least 250 million barrels. Introduced Dec. 17, 1979; referred to Committee on Interstate and Foreign Commerce. 5. 688 (Jackson, by request) Authorizes Department of Energy appropriations for the SPR. Introduced Mar. 15; referred to Committee on Energy and Natural Resources. Reported with amendment (S. Rept. 96-232). S. 1516 (Bentsen) Directs Energy Mobilization Board to act as agent for purchasing synthetic oil for storage in SPR. Introduced July 13; referred to Committee on Energwp and Natural Resources. S.Res. 78 (Hatfield et al.) Expresses the sense of the Senate that the President should immediately: (1) initiate measures to increase energy supplies and reduce demands, and (2) present plans to Congress for maintaining the balance of supply and demand and for rationing gasoline in the event of protracted energy supply problems. Introduced Feb. 22, 1979; referred to Committee on Energy and Natural Resources. Reported (S.Rept. 96-37) Har. 14, 1979, with amendment. E§&§l!§§ U.S. Congress. Senate. Committee on Energy and Natural Resources. Subcommittee on Energy Resources and uaterials Production. Posture of the Strategic Petroleum Reserve. Hearing, 96th Congress, 1st session. Bar. 26, 1979. Washington, 0.5. Govt. Print. off., 1979. Publication no. 96-13 U.S. Congress. Senate. committee on Interior and Insular Affairs. selected materials on strategic energy reserves. The national fuels and energy policy study. Washington, 0.3. Govt. Print. Off., 1975. , At head of title: 94th Congress, 1st session. Committee print. “Serial no. 99-12 (92-102)" CRS- 9 IB79121 UPDATE-02/29/80 U.S. Department of Energy. Energy Action DOE no. 5. Oct. 31, 1979 - referred to Committee on Interstate and Foreign Commerce. Washington, U.S. Govt. Print. Off., 1979. At-head of title: 96th Congress, 1st session. House. Document no. 96-215. §§BQ!QLQ§X.Q§r§!§E£§ 02/20/80 +- DOE transmitted Annual Report on SPB. 10/29/79 - DOE transmitted SPR distribution plan. 09/00/79 -- Pumps installed so oil could be withdrawn. 09/21/79 - Fire at West Hackberry, Louisiana, storage site killed one worker and caused damage of over $1 million. 03/00/78 - DOE announced doubling SPR from 500 MMB to one billion ’ barrels by 1985. 1 08/00/77 -- First crude oil pumped into SPR. 12/22/75 -—-Energy Policy Conservation Act authorized the — Strategic Petroleum Reserve. 111/00/74'-—»Project Independence Report called for a petroleum reserve. . .1;2.12;.2;9mz~.1-..522.1:§§_.«:1.e;.:s..c2y.2.:..<;;=:§. Corrigan, Richard. Where is the strategic oil reserve now that we need it? Rational journal, v. 11, Feb. 20, 1979: 301-305. LRS79-1026 Kovler, Peter. The strategic petroleum rathole. Inquiry (San. Francisco) v. 2, Apr. 16, 1979: 10-12. LBS79-3179 U.S. Department of Energy. Strategic Petroleum Reserve Office. Annual Strategic Petroleum Reserve Report. Submitted pursuant to P.L. 90-163, section 165. Feb. 16, 1979. DOE/Us-0 0 03 . 0.5. General Accounting Office. Factors influencing the size of the U.S. Strategic Petroleum Reserve. June 15, 1979. Hashington, 0.3. Govt. Print. Off., 1979. ID-79-8. 0:: WASHINGTON UNi\,’EP££%ETY ST, LOUIS — mo.