U.S. Strategic Petroleum

Reserve (SPR)

Jaime SigaránShih-Hsu

Matthew Yorzinski

• 1944 Harold Ickes - Secretary of the Interior

• 1952 President Truman’s Mineral Policy Commission

• 1956 President Eisenhower reaction to Suez Crisis

• 1970 Cabinet Task Force on Oil Import Control

SPR Advocates

Energy Policy and Conservation Act (EPCA)

• 1973-1974 OPEC Oil Embargo.• 1975, December 22, President Ford signed P.L. 94-163 (S.622).• To provide for the creation of a Strategic Petroleum Reserve

capable of reducing the impact of severe energy supply interruptions.

• “The Congress finds that the storage of substantial quantities of petroleum products will diminish the vulnerability of the United States to the effects of a severe energy supply interruption, and provide limited protection from the short-term consequences of interruptions in supplies of petroleum products.”

• Authorized participation in the International Energy Agency (IEA).

• 2005 President Bush signed Energy Policy Act directed fill to 1 billion barrels.

• 2008 DOE issued a Notice of Intent to prepare a Supplemental Environmental Impact Statement and to solicit additional public comments. 

• 2010 the decision was made to suspend further expansion activities.

• • 2011, a Notice of Cancellation was published in the Federal

Register.

1 billion barrels

• 1977 Construction began & first fill of 412,000 barrels of Saudi Arabian light crude oil

• 1994 purchasing suspended with 591.7 million barrels.

• 1999 fill continued with Royalty in Kind Program (RIK).

• 2001 President Bush directed 700 million barrels.

• 2005 reached 700 million barrels, again in 2008,

• 2009 RIK ended.

• 2009 DOE purchased 10.7 million barrels at a cost of $553 million with revenue from 2005 SPR sale after Hurricane Katrina. 

US SPR Fill

Bryan Mound, TexasBig Hill, Texas

Bayou Choctaw, LAWest Hackberry, LA

Crude Oil Storage by Site

Bryan Mound, TX - holds 240.7 MMB in 20 caverns: 64.4 MMB sweet and 176.3 MMB sour.

Big Hill, TX - holds 164.7 MMB in 14 caverns: 67.3 MMB sweet and 7.48 MMB sour.

West Hackberry, LA - holds 215.8 MMB in 22 caverns:107.8 MMB sweet and 108.0 MMB sour.

Bayou Choctaw, LA - holds 73.6 MMB in 7 caverns: 21.7 MMB sweet and 51.8 MMB sour.

Current storage capacity - 727 million barrels

When can the Reserve be used?

• There are generally three types of drawdowns envisioned under the Energy Policy & Conservation Act (EPCA) of 1975

• Full Drawdown

• Limited Drawdown

• Test Sale or Exchange

Definition of “Severe Energy Supply Interruption”:

The term “severe energy supply interruption” means a national energy supply shortage which the President determines—,

(A) is, or is likely to be, of significant scope and duration and of an emergency nature;

(B) may cause major adverse impact on national safety or the national economy; and

(C) results, or is likely to result, from (i) an interruption in the supply of imported petroleum products, (ii) an interruption in the supply of domestic petroleum products, or (iii) sabotage or an act of God.

International Energy Agency Requirement

90 days of import protection (both public and private stocks). 

In past years, the United States has met its  commitment with a combination of SPR stocks and industry stocks.  The days of import protection may vary based on actual net U.S. petroleum imports and the inventory level of the SPR.

Current Days of Import Protection

The SPR holds the equivalent of 137 days of import protection (based on 2014 net petroleum imports).

.  Note: In 1985 the SPR held 118 days of import protection.

Draw down Capability

Maximum nominal drawdown capability - 4.4 million barrels per day

Time for oil to enter U.S. market - 13 days from Presidential decision

Average price paid for oil in the Reserve

$29.70 per barrel

Investment to Date:About $25.7 billion;

$5 billion for facilities

$20.7 billion for crude oil

Past U.S. SPR Sales2014 Test Sale - 5 million barrels

2011 IEA Coordinated Release - 30,640,000 barrels (total IEA Countries contribution - 60,000,000 barrels) 

2005 Hurricane Katrina Sale - 11 million barrels

1996-97 total non-emergency sales - 28 million barrels

1990/91 Desert Shield/Storm Sale - 21 million barrels (4 million in August 1990 test sale; 17 million in January 1991 Presidentially-ordered drawdown)

1985 Test Sale - 1.0 million barrels

Short-term price elasticity of demand for crude oil

• Gasoline has few alternatives because people with a car, need to buy petrol.

• For many people, driving is a necessity.• Gasoline demand is highly price inelastic,

implying that changes in gasoline prices have a small effect on the demand for gasoline.

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Demand elasticity / inelasticity

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Demand elasticity / inelasticity v. Supply change

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Diamonds, cigarettes, and iPhones are all examples with inelastic price

demand

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We are all price inelastic!!!

Something about crude oil supply

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• Oil companies’ production capacity depends on investments made years earlier.

• They can only respond to higher or lower oil prices by increasing or decreasing investments in new production capacity.

• Short-term elasticity of oil supply with respect to price is quite small.

Supply elasticity / inelasticity

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Other examplesInelastic supply

Nuclear power. It would take considerable time to increase the supply of nuclear power because it needs skilled labor, large investment and it would take a long time to build.

Elastic supplyFirms operating below full capacity. If a car factory is operating at 70% capacity, then it can easily increase supply and produce more cars in response to changes in price.

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Why short-term price elasticitiesof oil supply and demandgenerate oil price spikes?

1. Unplanned supply interruption

2. Demand reduces little3. Short-term supply

increase is not possible4. Price rises significantly.

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Oil price – Economic growth – Oil production investment cycle

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SPR v. oil price1. SPR protects the economy against future oil supply

disruptions.2. Prompt release of emergency reserves prevents an

economically damaging oil-price spike until supply is restored.

3. SPR does not increase the short-term elasticity of oil supply since its release depends on government actions that are only taken in response to a serious oil supply disruptions.

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Is SPR effective?

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Reduction or expansion?

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Salt Dome Geology• Salt domes are geologic

structures that grow and develop as sediments are being deposited around them

• Cap-rock is composed mainly of anhydrite, gypsum, and calcite

• Gulf Coast cap rocks range in thickness from 0 to 2,000 feet • Shallow salt domes < 3,000 feet deep

Gulf Salt Dome

Creating the SPR• To store the petroleum reserves, the DOE carves

caverns out of the underground salt domes through a process known as “solution mining”

• Massive amounts of freshwater are injected into the salt domes to dissolve the salt

• The resulting brine is pumped out and injected underground or discharged into the Gulf of Mexico

Storage Well

Natural Resources • Salt production• Sulfur production • Storage caverns • Cap-rock brine disposal

Natural Resources (cont.)

SPR Storage Facility: Expansion

• In 2007, DOE announced Richton, MS would be the new site for expanding the SPR

• EPAct 2005 directs Secretary to expand the capacity of the SPR to 1 billion barrels

• Richton, MS chosen for “for its large and undeveloped salt dome, enhanced oil distribution capabilities, and inland location that is less vulnerable to the damaging effects of hurricanes”

Lessons Learned? • 2005 - Hurricane Katrina

• Oil rigs were largely unaffected with the exception of four large platforms which suffered extensive damage—3 to 6 months to get back online. 37 other small platforms accounting for less than 1% of production. Total: 41/4,000.

• Did prices come down after tapping into the SPR? • Hard to say. Crude prices fell back to where they were pre-Katrina. Although, SPR release helped some refiners

start operating again

Lessons Learned? (cont.) • 2011 – Forgotten Bayou

• Disturbances noticed in 2011 and in 2012 a sinkhole began to develop• Sinkhole had grown to cover 24 acres (about 750 ft. deep) • Methane gas rose up from the unstable rock below sinkhole• Six feet of natural gas sits on top of the aquifer under the community. Homes monitored for explosive levels of natural gas • Sinkhole contributing to geologic activity (releasing methane gas)

Lessons Learned? (cont.) • Grand Bayou- Dow Chemical offered

residents a buyout after the Napoleonville Salt Dome lost contents into the subsurface and gasses vented into homes

• String or column takes fresh water into the salt dome and brings back salt water or brine, when it stopped functioning cavern was shut down

• Barbers Hill- farming and ranching community located on top of a salt dome rich in oil deposits. 1950 oil deposits were depleted and by 1970 the caverns in the salt dome became storage for volatile hydrocarbons. Town sat on top of 100 million barrels of petrochemical products

Compared to private industry the government has done a much better job monitoring health, safety, and environmental risks. To date only one U.S. salt dome cavern storage has lost mechanical integrity

Environmental Concerns• Within the cap rock itself, chemical reactions occur

that require of low temperature, low salinity groundwaters

• The development of fresh groundwater and salt dome resources has increased the potential for contamination of shallow aquifers

• Resource extraction and leakage have further perturbed the natural system

Environmental Concerns

Environmental Concerns (cont.)• Withdrawing 50 million gallons of water would have a

significant impact on aquatic life. • Fish may not be able to survive chronic low-flow conditions• Brine discharge into the Gulf of Mexico would greatly

increase the salinity near sensitive wetland areas• Local community drinking water supply may be threaten

Public Outcry• Hundreds of thousands of people

petitioned their local representatives and state senators in opposition to DOE project

• 2011- Congress rescinded $71 million in funding for the DOE

• The Gulf Restoration Network stated “this irresponsible oil storage scheme would have required the removal of 50 million gallons of water a day from the Pascagoula River for 5 to 6 years to dissolve underground salt deposits.”

Protecting the Environment“We must ask how much are we wiling to sacrifice for the production and storage of petrochemicals? As long as the country relies on fossil fuels, the danger from storage, pipelines, transport accidents, and spills is likely to continue to threat public health and safety, and endanger the environment.”