Strategic Petroleum Reserve: Observations on the Emergency Stockpile
Released: 2018-07-24T00:00:00

Letter

Unlike the United States, Most IEA Members Rely on Private Reserves to Meet Reserve Obligations and Hold Significant Proportions of Their Reserves as Petroleum Products

As we found in our May 2018 report, in terms of how they meet their IEA 90-day reserve obligations, most other IEA members differ from the United States in two basic ways. First, as of December 2017, most other IEA members rely at least in part on private rather than public reserves to meet their obligations. As of December 2017, 18 of the 25 IEA members that met their 90-day reserve obligation and had a formal process for holding and releasing reserves relied entirely or in part on private reserves to meet their obligations. Specifically, based on IEA data as of December 2017, these 18 countries met their 90-day reserve obligations through private reserves and either had no public reserves or had public reserves of less than 90 days. Unlike the 18 countries that rely at least in part on private reserves, as of December 2017, the United States and 6 other IEA members met the 90-day reserve obligation exclusively through public reserves. The second way other IEA members differ from the United States is that most hold at least a third of their reserves as petroleum products, according to a 2014 IEA report. Holding petroleum products can be advantageous during certain disruptions because such reserves can be directly distributed to consumers, whereas crude oil must first be refined and turned into products, adding response time. In contrast, more than 99 percent of the SPR (665.5 million barrels as of March 2018) is held as crude oil. Because of the large U.S. refining sector, crude oil from the SPR can be domestically refined into petroleum products to meet demand.

DOE Has Not Identified the Optimal Size for the SPR or the Potential Need for Regional Product Reserves

As we found in our May 2018 report, DOE has not identified the optimal size or the potential need for additional petroleum product reserves for the SPR. In 2016, DOE completed a long-term strategic review of the SPR after its last comprehensive examination had been conducted in 2005. The 2016 review examined the expected benefits of several SPR sizes, but it did not identify an optimal size and was limited in several ways. In particular, in the review, DOE did not fully consider recent and expected future changes in market conditions, such as the implications of projected fluctuations in net imports or the role of the private sector in responding to supply disruptions. Recent changes have contributed to SPR and private reserves reaching historically high levels on a net imports basis. These changes are expected to continue to evolve— according to government projections, the United States will become a net exporter in the late 2020s before again becoming a net importer between 2040 and 2050. In February 2005, we found that agencies should reexamine their programs if conditions change. Without addressing the limitations of its 2016 review and periodically performing reexaminations in the future, DOE cannot be assured that the SPR will be sized appropriately into the future. In May 2018, we recommended that DOE (1) supplement its 2016 review by conducting an additional analysis that takes into account, among other things, the costs and benefits of a wide range of different SPR sizes and (2) take actions to ensure that it periodically conducts and provides to Congress a strategic review of the SPR. DOE partially agreed with the first recommendation and stated that it will conduct an additional analysis to assess the purpose, goals, and objectives of the SPR, taking into account private sector response, oil market projections, and any other relevant factors, that will lead to an evaluation of possible optimal sizes of the SPR in the future. DOE agreed with the second recommendation.

DOE has also not fully identified whether additional regional petroleum product reserves should be part of the SPR. The Quadrennial Energy Review of 2015 recommended that DOE analyze the need for additional or expanded regional product reserves by undertaking updated cost- benefit analyses for all of the regions of the United States that have been identified as vulnerable to fuel supply disruptions. In response, DOE studied the costs and benefits of regional petroleum product reserves in the West Coast and Southeast Coast, though it did not finalize or publicly release these studies. Nevertheless, the draft studies concluded that a product reserve in the Southeast would provide significant net economic benefits to the region and the United States, particularly in the event of a major hurricane, while further analyses are needed to determine the potential benefits of a reserve on the West Coast. According to DOE officials, the agency has no plans to conduct additional studies. Without completing studies on the costs and benefits of regional petroleum product reserves, DOE cannot ensure that it and Congress have the information they need to make decisions about whether additional regional product reserves are needed. In our May 2018 report, we recommended that DOE conduct or complete such studies. DOE disagreed with this recommendation, though we continue to believe that conducting these analyses will provide Congress with needed information.

DOE Has Taken Steps to Update Its Modernization Plans but Is Hindered by Uncertainty Regarding the SPR’s Long-term Size

As we found in our May 2018 report, DOE has taken steps to account for the effects of congressionally mandated oil sales in its plans for modernizing the SPR, though DOE’s current plans, developed in 2016, are based on information largely developed prior to recent congressionally mandated sales of an additional 117 million barrels of oil. According to DOE documents, the SPR modernization program is focused on a life extension project to modernize aging infrastructure to ensure that the SPR will be able to meet its mission requirements for the next several decades. The project’s scope of work has undergone several revisions since its inception in response to changing conditions and requirements, according to the agency. DOE has estimated that the SPR’s modernization will cost up to $1.4 billion, and according to officials, the agency had spent $22 million as of the end of February 2018. According to DOE officials, in March 2018, DOE commenced a study— the SPR post-sale configuration study targeted for completion in October 2018—to examine potential future reserve configurations and to account for the effects of congressionally mandated sales on the reserve and its modernization. Information from the study will inform DOE’s updates to the SPR’s modernization plans, according to DOE officials.

Although the SPR had a design capacity to hold 713.5 million barrels of oil, in January 2017, the SPR held 695 million barrels. As shown in figure 2, congressionally mandated sales will cause excess storage capacity to grow to 308 million barrels or more by the end of fiscal year 2027— meaning that about 43 percent of the SPR’s total design capacity to store oil would be unused.

In its ongoing SPR post-sale configuration study, DOE plans to explore some options to use potentially excess SPR assets, such as spare storage capacity. In withdrawing oil to meet congressionally mandated oil sales currently in place (290 million barrels through fiscal year 2027), DOE could close at least one SPR site based on our analysis of projected excess storage capacity. For example, if DOE were to close the smallest SPR site, Bayou Choctaw in Louisiana, the agency could also explore selling the connected pipeline and marine terminal, which are currently being leased to a private company. DOE could also consider leasing excess storage capacity to other countries so that they could store oil at the SPR. DOE had not entered into any such leases with other countries and had not considered such leases as of May 2018 because, according to DOE, the SPR has historically lacked capacity to store additional oil. DOE had not proposed any of these options or explored the revenue the agency could generate by selling or leasing these assets. However, according to DOE officials, the agency will examine the feasibility of such options in the ongoing SPR post-sale configuration study.

In the course of our work, we also identified other options for handling potentially excess SPR assets that DOE was not planning on examining as of May 2018, largely because DOE did not have the authority to pursue them, according to agency officials. First, DOE could explore leasing storage capacity to private industry. U.S. oil production has generally increased over the last decade. As a result, the private sector may want to lease excess SPR capacity, which may be cheaper than above-ground storage, according to a representative of a private company we interviewed. Fees for doing so could help defray SPR storage or maintenance costs. However, agency officials told us that the Energy Policy and Conservation Act gave DOE authority to lease underutilized storage to other countries but not to the private sector. Second, if Congress determines that the SPR holds oil in excess of that needed domestically, DOE could explore selling contingent contracts for the excess oil rather than selling the oil outright. Australian and New Zealand officials told us that such contracts would help their countries meet their IEA 90-day reserve obligations.

Australian officials told us that they have discussed this option with DOE. Currently the United States and Australia have agreed, through an arrangement, to allow Australia to contract for petroleum stocks located in the United States and controlled by commercial entities. While the arrangement does not cover government-owned oil in the SPR, if it did, based on our analysis, DOE could generate up to approximately $15 million if Australia purchased the maximum allowable amount of oil specified in an arrangement through contracts for excess SPR oil in 2018. However, although the Energy Policy and Conservation Act allows DOE to lease underutilized storage to other countries, DOE lacks the authority to sell contracts for the oil and does not plan to seek this authority, according to DOE officials. DOE officials told us that they did not plan to examine these options.

According to DOE’s real property asset management order, the agency is to identify real property assets that are no longer needed to meet the program’s mission needs and that may be candidates for reuse or disposal. Once identified, the agency is to undertake certain actions, including determining whether to dispose of these assets by sale or lease. As part of its SPR post-sale configuration study, DOE plans to determine whether it is appropriate to close SPR facilities, and the relative benefit of any closures would be informed by potential lease revenues from maintaining sites so they could be leased, according to agency officials. However, as mentioned previously, we identified other options for handling potentially excess SPR assets that DOE was not planning to examine in its study. Although DOE does not currently have the authority to implement these options, according to officials, examining their potential use, including possible revenue enhancement, could inform Congress as it examines whether it should grant such authority. Without examining a full range of options in the SPR post-sale configuration study, DOE risks missing beneficial ways to modernize the SPR while saving taxpayer resources. In May 2018, we recommended that in completing its ongoing SPR post-sale configuration study, DOE should consider a full range of options for handling potentially excess assets and, if needed, request congressional authority for the disposition of these assets. DOE agreed with this recommendation.

Finally, as DOE takes steps to plan for the SPR’s modernization, ongoing uncertainty regarding the SPR’s long-term size and configuration have complicated DOE’s efforts. Congress has generally set the SPR’s size by mandating purchases or sales of oil. DOE officials told us they do not know whether Congress will mandate additional sales over the next 10 years or whether other changes may be required to the configuration of the reserve. Any additional congressionally mandated sales would require DOE to again revisit its modernization plans and assessments of the potential uses of any excess SPR assets. Oil market projections also have implications for the future of the SPR. The United States is projected to become a net exporter by the late 2020s and would then no longer have a 90-day reserve obligation, but it is projected to return to being a net importer between 2040 and 2050. These projected fluctuations could affect the desired size of the SPR in the future. Such uncertainties create risks for DOE’s modernization plans, as DOE may end up spending funds on facilities that later turn out to be unnecessary should Congress ultimately decide on a larger- or smaller-sized SPR than DOE anticipates. In May 2018, we suggested that Congress may wish to consider setting a long-range target for the size and configuration of the SPR that takes into account projections for future oil production, oil consumption, the efficacy of the existing SPR to respond to domestic supply disruptions, and U.S. IEA obligations.

In conclusion, we found that given the constrained budget environment and the evolving nature of energy markets and their vulnerabilities, it is important that DOE endeavor to ensure that the SPR is an efficient and effective use of federal resources.

Chairman Upton, Ranking Member Rush, and Members of the Subcommittee, this concludes my prepared statement. I would be pleased to answer any questions that you may have at this time.

GAO Contact and Staff Acknowledgments

If you or your staff members have any questions about this testimony, please contact Frank Rusco, Director, Natural Resources and Environment, at (202) 512-3841 or ruscof@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Key contributors to this testimony included Quindi Franco (Assistant Director), Nkenge Gibson (Analyst-in- Charge), Philip Farah, Ellen Fried, Cindy Gilbert, Gregory Marchand, Celia Mendive, Patricia Moye, Camille Pease, Oliver Richard, Dan Royer, Rachel Stoiko, and Marie Suding.

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