Strategic Petroleum Reserve: DOE Needs to Strengthen Its Approach to Planning the Future of the Emergency Stockpile
Released: 2018-06-28T00:00:00

Letter

Background

Changing Petroleum Markets

Oil and petroleum products markets have changed substantially in the years since the establishment of the SPR. Specifically, U.S. domestic crude oil production has generally been increasing, consumption has been relatively stable, and crude oil and petroleum products markets have become increasingly global. Additionally, U.S. crude oil production is projected to rise further in the future, according to EIA and IEA projections, further reversing a decades-long decline. Recent technological improvements have made onshore production from shale formations economically viable, and domestic crude oil production began to rise in about 2008. The combination of increasing production and relatively stable consumption has resulted in declining net crude oil and petroleum products imports, from a high of about 12 million barrels per day in 2005 to fewer than 4 million barrels per day in 2017.

Since these trends are expected to continue, the IEA and EIA both project net U.S. crude oil and petroleum products imports will decline to zero sometime in the late 2020s and the United States will become a net exporter shortly thereafter. Since the IEA 90-day reserve obligation is based on a country’s net imports, there is no such obligation for net exporters; therefore, the United States would have no 90-day reserve obligation as long as it is a net exporter, though it would still be obligated to release reserves in response to supply disruptions. Over the longer term, EIA’s projections show U.S. net exports peaking in 2037 and the United States again becoming a net importer between 2040 and 2050.

At the time of the Arab oil embargo, price controls in the United States prevented the prices of oil and petroleum products from increasing as much as they otherwise might have, contributing to a physical oil shortage that caused long lines at gasoline stations throughout the United States. In addition, in the 1970s, oil prices were often set in long-term contracts, which meant that prices would not automatically rise in the face of greater scarcity. This generally reduced incentives for producers to expand production and sales as well as for consumers to reduce consumption in the face of greater scarcity caused by a supply disruption. Now that crude oil and petroleum product markets are global, the prices of these commodities are determined in the world market, primarily on the basis of supply and demand. In the absence of long-term contracted prices or price controls, scarcity from a supply disruption is generally expressed in the form of higher prices, as purchasers are free to bid as high as they are willing to pay to secure oil supply. In a global market, a large enough supply disruption anywhere in the world raises prices everywhere. This creates incentives for producers unaffected by the disruption to increase their production and release existing inventories and for consumers everywhere to reduce consumption in the ways they find most efficient and least disruptive. While it can take time for some of these actions to affect crude oil and petroleum product markets—according to DOE officials, it can take approximately 6 months from when a producer drills an oil well until oil production comes on line—all these actions tend to mitigate the effects of supply disruptions.

Strategic Petroleum Reserve

The Energy Policy and Conservation Act of 1975 authorized the creation of the SPR, partly in response to the Arab oil embargo of 1973-1974 that caused a shortfall in the international oil market. The purposes of the SPR are, among other things, to reduce the impact of disruptions in supplies of petroleum products and to carry out obligations of the United States under the international energy program. Specifically, the 1974 International Energy Program Agreement, a joint strategy and treaty, established the IEA to address oil security issues on an international scale. The SPR is owned by the federal government, managed by DOE’s Office of Petroleum Reserves, and maintained by Fluor Federal Petroleum Operations LLC. The SPR stores crude oil in underground salt caverns along the Gulf Coast in Louisiana and Texas. The SPR currently maintains four storage sites—Bayou Choctaw, Big Hill, Bryan Mound, and West Hackberry—with a design capacity of 713.5 million barrels.

Under conditions prescribed by the Energy Policy and Conservation Act, as amended, the President has discretion to authorize the release of petroleum products from the SPR to minimize significant supply disruptions. When oil is released from the SPR, it is distributed through commercial pipelines or on waterborne vessels to refineries, where it is converted into gasoline and other petroleum products, and then transported to distribution centers for sale to the public.

According to DOE documents, well-functioning infrastructure is fundamental to the SPR’s ability to maintain operational readiness and meet mission requirements. However, most of the critical infrastructure for moving SPR oil has exceeded its serviceable life, which has led to increasing maintenance costs and decreasing system reliability. Specifically, the reserve relies on a complex system of salt caverns, pipelines, wells, and pumps, with other infrastructure and equipment. Any failures, such as ruptured pipelines, could affect the readiness of a site for an oil release. According to DOE officials, a growing backlog of major maintenance needs raises concerns about the ability of the system to operate as designed. In addition, there have been equipment failures that have rendered parts of the system temporarily inoperable. For example, the SPR has experienced at least five major equipment failures since fiscal year 2013, including the Big Hill site pipe failure shown in figure 1.

Regional Petroleum Product Reserves

The United States has two regional petroleum product reserves—the Northeast Home Heating Oil Reserve and the Northeast Gasoline Supply Reserve.

The Northeast Home Heating Oil Reserve, which is not part of the SPR, holds 1 million barrels of ultra low sulfur distillate, a petroleum product essentially equivalent to diesel fuel but that is also used for heating oil. The Northeast United States is heavily dependent on the use of heating oil in winter months. The distillate is stored in leased commercial tank storage in terminals in Connecticut, Massachusetts, and New Jersey. In 2000, the President directed the creation of the reserve to hold approximately 10 days of inventory, the time required for ships to carry additional heating oil from the Gulf of Mexico to New York Harbor.

The Northeast Gasoline Supply Reserve, a part of the SPR, holds 1 million barrels of gasoline for consumers in the northeastern United States. According to DOE’s website, this region is particularly vulnerable to gasoline disruptions as a result of hurricanes and other natural events. For example, Hurricane Sandy caused widespread gasoline shortages in the region in 2012. DOE conducted a test sale of the SPR in 2014 and used a portion of the proceeds from the sale to create the reserve. The gasoline is stored in leased commercial tank storage in terminals in Maine, Massachusetts, and New Jersey.

IEA Obligations

The SPR helps the United States meet its IEA obligation to hold the equivalent of 90 days of net imports of crude oil and petroleum products. In order to meet the IEA 90-day reserve obligation, countries, including the United States, can count existing private reserves of crude oil and petroleum products in addition to public reserves (in the United States, the SPR). In most years, the United States has met its 90-day reserve obligation with a combination of SPR and private reserves. The days of import protection may vary based on actual net U.S. crude oil and petroleum products imports as well as the inventory levels of the SPR and private reserves. As discussed previously, because the IEA 90-day reserve obligation is based on a country’s net imports, there is no such reserve obligation for countries that are net exporters of crude oil and petroleum products.

The United States also relies on the SPR to meet its IEA obligation to release reserves in the event of a collective action to respond to a supply disruption. Countries contribute to an IEA collective action based on their share of IEA oil consumption, and they can meet their obligation by whatever measure they choose, including release of public or private reserves, or demand restraint. IEA collective actions are designed to mitigate the negative effects of sudden supply shortages by making additional crude oil and petroleum products available to the global market through a combination of emergency response measures, which include increasing supply and reducing demand. In the event of a global market disruption, IEA member countries can call for a collective action after reaching consensus on whether a response is needed. DOE stated that the collective action IEA obligation is more relevant to the SPR’s mission of protecting the U.S. economy from severe petroleum supply interruptions than the 90-day reserve obligation. The United States has participated in each of the three IEA collective actions. In 1991, with the commencement of Operation Desert Storm, DOE released 17.3 million barrels of SPR crude oil. After Hurricane Katrina in 2005, DOE released 11 million barrels of SPR crude oil. Most recently, in June 2011, in response to crude oil supply disruptions driven by hostilities in Libya, DOE released 30.6 million barrels of crude oil from the SPR. The Libya collective action is an example of how, in practice, member countries participate according to national circumstances. After consultations with IEA member countries, all IEA member countries agreed to the Libya collective action, under which 12 of the 28 members at that time contributed to the action. In addition to the three IEA collective actions, the SPR has been used 10 times in response to U.S. domestic supply disturbances that were not IEA collective actions, most notably in response to severe weather events.

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

In terms of how they meet their IEA obligations, most other IEA members differ from the United States in two basic ways. Specifically, as of December 2017, most IEA members rely at least in part on private rather than public reserves to meet their obligations, and most hold significant proportions of these reserves as petroleum products rather than as crude oil.

In December 2017, before Mexico joined the IEA in early 2018, there were 29 member countries. Of these 29 countries, 25 IEA members had two common attributes: (1) as net importers, they had a 90-day reserve obligation and met that obligation, and (2) they had formal processes for holding and releasing these reserves. As of December 2017, 18 of these 25 members relied entirely or in part on private reserves to meet their reserve obligations. Specifically, based on IEA data as of December 2017, these 18 countries met their 90-day reserve obligation through private reserves and either had no public reserves or had public reserves of less than 90 days. According to a 2014 IEA report, some of these countries require industry to hold reserves and, when needed, release them. For example, according to a 2014 IEA report and documentation provided by government officials, the United Kingdom meets its entire obligation by requiring private industry to hold reserves. In contrast, New Zealand had publicly held reserves amounting to 26 days of net imports, according to IEA data as of December 2017. According to a 2014 IEA report, New Zealand relied on industry reserves held for commercial purposes to meet the rest of its 90-day reserve obligation, although New Zealand does not formally require industry to hold reserves specifically for this purpose.

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. Specifically, according to IEA data on member reserves, Estonia, Finland, Germany, Hungary, Ireland, Japan, and the United States held public reserves equal to 90 days or more of net imports. Although the United States currently meets its IEA 90-day reserve obligation solely with public reserves, for most of the SPR’s existence, public reserves were insufficient to meet this obligation, so the United States also had to rely on private reserves. Specifically, according to EIA data, the United States has relied, at least in part, on private reserves together with the SPR to meet the 90-day reserve obligation with the exception of two time periods (1984-1987 and 2012-present), when the United States has relied solely on the SPR. The United States does not require industry to hold reserves for the purposes of meeting IEA obligations. Figure 2 compares the United States’ reserves in days of net imports to the IEA’s 90-day reserve obligation.

According to a 2014 IEA report, most IEA members hold at least a third of their reserves as petroleum products, such as gasoline and diesel fuel, rather than as crude oil. 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. According to the IEA’s 2014 report, Germany’s stockholding agency holds 55 percent of its reserve as petroleum products. Similarly, France holds only petroleum products that are distributed geographically across the country so that the reserves can be used quickly in the event of a supply disruption. In contrast, more than 99 percent of the SPR (665.5 million barrels as of March 2018) is held as crude oil, all of which is stored at the four storage sites in Louisiana and Texas. The exception is the Northeast Gasoline Supply Reserve, which, as mentioned previously, is a 1 million barrel gasoline reserve in terminals in Maine, Massachusetts, and New Jersey that was established in 2014 after Hurricane Sandy and that is considered part of the SPR. According to DOE officials, there are several reasons the SPR holds predominantly crude oil, including that it is more costly to store petroleum products than crude oil and that the United States has the largest refining capacity of any IEA member country. Because of the large U.S. refining sector, crude oil from the SPR can be domestically refined into petroleum products to meet demand.

Some IEA member countries store some of their reserves abroad, though the United States does not. According to a 2014 IEA report, some IEA member countries allow part of their reserves to be stored abroad to leverage spare storage capacity or more cost-effective storage by utilizing available storage space or excess private reserves in other countries. For example, approximately 30 percent of Ireland’s reserves are held in other European Union countries. In some of these cases, countries use short-term contracts, also known as tickets, instead of directly acquiring and storing oil and petroleum products. For example, according to documents provided by government officials, since 1995 the United Kingdom has increased its reserves held under ticket agreements outside of the country from around 10 percent of its total reserves to more than 25 percent.

In addition, unlike the United States, some IEA countries specify the size of their public or private reserves in terms of net imports or consumption, rather than a specific volume. In the United States, the total volume of crude oil and petroleum products held in the SPR is the result of amounts historically purchased to fill the reserve and subsequent sales as mandated by Congress or released in response to a supply disruption. According to DOE, it cannot otherwise reduce or increase volumes held in reserve without congressional action—either through requirements to purchase additional oil or laws authorizing or mandating sales. On the other hand, some IEA countries have tied their reserves’ volumes of crude oil and petroleum products to a metric such as days of net imports or a percent of consumption. For example, according to documentation provided by government officials, in 2015 Japan changed how it specifies its target reserves from a specified amount to days of net imports. In specifying the size of reserves in this way, the amount held is adjusted as market conditions change—for example, if net imports change and require more or fewer reserves to meet the IEA 90-day reserve obligation, or when other underlying factors affecting a nation’s energy security needs change.

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

While DOE has examined a range of sizes for the SPR, it has not identified the optimal size for the SPR to meet U.S. energy security needs and IEA obligations, and DOE’s analysis of SPR sizes was limited in three ways. DOE also has not identified whether additional regional petroleum product reserves should be part of the SPR in U.S. regions identified as vulnerable to fuel supply disruptions.

DOE Examined a Range of Sizes for the SPR but Has Not Identified the Optimal Size for SPR and the Agency’s Analysis Was Limited in Three Ways

DOE has not identified the optimal size for the SPR and though the agency examined a range of SPR sizes, its analysis was limited in at least three ways. In response to direction from Congress and recommendations from GAO and the DOE Inspector General, DOE developed and published a long-term strategic review of the SPR in August 2016. In DOE’s 2016 review, the agency examined the expected economic benefits of SPR sizes ranging from 430 million to 695 million barrels of oil over a 25-year time horizon (2016 through 2040), but it did not recommend an optimal size for the reserve.

DOE’s review did not identify the optimal size for the SPR because of three limitations:

DOE did not fully evaluate implications of market fluctuations and estimate needs. DOE did not fully evaluate the implications of falling net imports of crude oil and petroleum products with respect to meeting IEA obligations to hold the equivalent of 90 days of net imports and to respond to collective actions. As mentioned previously, the United States is expected to become a net exporter of crude oil and petroleum products by the late 2020s. Since the IEA 90-day reserve obligation is based on a country’s net imports, this means that at that point the United States would not have a 90-day reserve obligation. However, even as a net exporter, the United States would still have to meet the IEA obligation to respond to a collective action. Yet, DOE’s analysis did not evaluate the SPR’s configuration as it relates to projected fluctuations in net imports or estimate the minimal amount of reserves needed to meet potential future collective actions. Without considering projected fluctuations in net imports or providing an analysis of how much oil is estimated to be needed to meet IEA collective actions, DOE cannot fully advise Congress on the optimal size of the SPR.

DOE did not consider private-sector response. DOE’s analyses in its 2016 review focused on the publicly held reserves in the SPR as the only means to respond to oil supply disruptions and did not consider a response from the private sector or through consumers reducing demand. According to DOE’s 2016 review, the underlying analysis for the benefits of the SPR did not consider a response from the private sector for three reasons: (1) while U.S. commercial stocks could conceivably address part of a supply disruption, private industry could also hold oil inventories in a crisis instead of releasing them; (2) unlike most other IEA member countries, the United States does not require private-sector response; and (3) research on the exact nature of private-sector response during a disruption is needed. DOE officials told us the agency has not studied the extent to which SPR releases of crude oil displace what would otherwise have been private releases of inventories.

As we reported in September 2014, changing market conditions— most importantly the significant increase in domestic production of oil—have implications for the SPR’s size because increased production has led to increasing private reserves. According to IEA data as of December 2017, U.S. private reserves held the equivalent of 194 days of net import protection coverage, up from about 59 days in 2006. Further, private reserves in the United States consist of both crude oil and petroleum products with more than half in the latter category. For example, as of January 2018, total private reserves of crude oil and petroleum products were about 1.215 billion barrels, of which about 420 million barrels were in the form of crude oil and 795 million barrels were petroleum products, according to the EIA. As of 2013, these private reserves were distributed across the entire country in more than 1,400 terminals, according to the EIA.

As we reported in December 2007, international trade in oil and petroleum products has expanded significantly over the past 2 decades, making markets for gasoline and other petroleum products increasingly global in nature. In such a global oil market, higher levels of private reserves can benefit the United States and the rest of the world by helping mitigate a supply disruption. Most experts and stakeholders we interviewed generally agreed that the private sector is in a better position to respond to supply disruptions than they were when the SPR was created. With regard to demand response, DOE officials told us they do not consider this because there is no mechanism to require industry to respond to supply disruptions or consumers to reduce demand in response to a supply disruption. However, DOE has not studied how voluntary response to changes in petroleum product prices affects the need for or efficacy of strategic releases. Without conducting an analysis of how private parties respond to supply disruptions, DOE cannot advise Congress on the optimal size of the SPR because it cannot know how effective such private responses could be in mitigating supply disruptions.

DOE did not fully examine costs of differently sized reserves.

DOE’s review of the expected economic benefits of differently sized reserves did not fully examine the corresponding costs of those sizes. According to DOE officials, there was no requirement or need to conduct a formal cost benefit analysis of the SPR because the SPR’s oil acquisition and initial capital costs to create the reserve are sunk costs and the ongoing operational costs to maintain the reserve are minimal in comparison. However, this does not take into account the opportunity cost to the government that holding reserves represents; as Congress has mandated several times recently, crude oil from the reserve can be sold to fund other federal priorities. Without additional analysis, such as of the costs and benefits of SPR’s size, DOE cannot fully advise Congress on the optimal size of the SPR.

When we reviewed the SPR in 2006 and 2014, we found that DOE had not periodically re-examined the strategic reserves. In 2006, we recommended that the Secretary of Energy reexamine the appropriate size of the SPR. In its response to our recommendation, DOE stated that its reexamination had taken the form of more “actionable items,” including not requesting expansion funding in its 2011 budget and canceling and redirecting the prior year’s expansion funding to general operations of the SPR, based on the Administration’s decision that the SPR’s current size at the time was adequate. Similarly, as previously mentioned, in 2014 we found that changing market conditions have implications for the size, location, and composition of the SPR, but DOE had not reexamined the SPR’s size since 2005. Accordingly, we recommended that the Secretary of Energy undertake a comprehensive reexamination of the appropriate size of the SPR. In response to our recommendation, the 2014 DOE Inspector General recommendation mentioned previously, and the Bipartisan Budget Act of 2015, DOE published its 2016 review.

As previously mentioned and reported, crude oil and petroleum markets are constantly changing, but DOE conducted its full evaluations of the SPR more than a decade apart. According to DOE officials, there is no formal policy to periodically reevaluate the SPR. We previously found that federal programs should be reexamined if there have been significant changes in the country or the world that relate to the reason for initiating the program. In that report, we found that many federal programs and policies were designed decades ago to respond to trends and challenges that existed at the time of their creation. Moreover, the Office of Management and Budget Circular A-94 for benefit-cost analysis of federal programs includes guidelines that apply to any analysis used to support government decisions to initiate, renew, or expand programs or projects that would result in a series of measurable benefits or costs extending for 3 or more years into the future. Given changing market conditions and future projections, without conducting additional analysis to supplement its 2016 review and thereafter periodically reexamining the SPR to take into account changes in market conditions and include a thorough consideration of the costs and benefits of a wide range of SPR sizes, DOE cannot provide information to Congress to inform decisions about the appropriate size of the SPR and risks holding too much or too little in the SPR to meet the United States’ evolving energy security needs and IEA obligations.

DOE Has Not Identified Whether Additional Regional Petroleum Product Reserves Should Be Part of the SPR

DOE has also not fully identified whether additional regional petroleum product reserves should be part of the SPR. Because the SPR stores oil nearly exclusively along the Gulf Coast, the SPR is configured primarily to respond to global oil supply disruptions. However, as we reported in November 2017, the SPR has primarily been used in response to domestic disruptions. The SPR is limited in its ability to respond to domestic disruptions because reserves are almost entirely composed of crude oil and not refined petroleum products, which may not be effective in responding to disruptions that affect the refining sector. For example, as we reported in November 2017, Hurricanes Harvey, Irma, and Maria damaged infrastructure and property, caused the loss of life, and disrupted the operations of refineries representing at least 15 percent of the nation’s refining capacity. DOE has identified regions subject to product supply vulnerabilities as shown in Figure 3.

The Quadrennial Energy Review of 2015 recommended that the agency 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 to this recommendation, DOE studied the costs and benefits of regional petroleum product reserves in the West Coast and Southeast Coast. According to DOE officials, weather events in the Southeast Coast are of higher probability but lower consequence, and events in the West Coast are of lower probability but higher consequence. DOE did not finalize its 2015 studies on regional petroleum product reserves and make them publicly available. However, the draft 2015 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. A prior DOE study also suggests that petroleum product reserves merit consideration—in 2011, DOE carried out a cost-benefit study of the establishment of a refined product reserve in the Southeast and estimated that such a reserve would reduce the average gasoline price rise by 50 percent to 70 percent in the weeks immediately after a hurricane landfall, resulting in consumer cost savings, according to the Quadrennial Energy Review of 2015. According to DOE officials, the agency has no plans to conduct additional studies. DOE’s 2016 review of the SPR did not fully assess whether there is a need for additional regional product reserves in other U.S. regions identified as vulnerable to fuel supply disruptions, as recommended by DOE’s studies and the 2015 Quadrennial Energy Review. Without completing studies on the costs and benefits of regional petroleum product reserves for all the vulnerable U.S. regions and publicly releasing the results, DOE cannot ensure that it and Congress have the information they need to make decisions about whether additional regional product reserves are needed.

DOE Has Taken Steps to Update Its Modernization Plans, But Is Hindered by Uncertainty Regarding the SPR’s Long-term Size DOE Has Taken Steps to Update Its Modernization Plans for Currently Mandated Sales

DOE has taken steps to take into account the effects of congressionally mandated oil sales in its plans for modernizing the SPR, though DOE’s current plans are based on information largely developed prior to the most recent congressionally mandated oil sales. According to DOE, the SPR modernization program is focused on a life extension project to modernize aging infrastructure to ensure 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 the total cost for the SPR’s modernization at up to $1.4 billion. DOE raised about $323 million for modernization through the sale of SPR oil in fiscal year 2017, and the Consolidated Appropriations Act of 2018 provided that DOE is to draw down and sell an amount of crude oil not to exceed $350 million for modernization in fiscal year 2018. As of the end of February 2018, DOE has spent $22 million on modernization efforts and the additional funds will allow DOE to continue moving forward with the project, according to agency officials. According to DOE’s modernization plans, the first major construction is scheduled for fiscal year 2019. However, these plans are largely based on information DOE analyzed before recent congressionally mandated sales of an additional 117 million barrels of oil.

Since the most recent mandated sales, DOE has taken steps to update its modernization plans and has changed its assumptions for SPR’s modernization. For example, DOE now assumes that the reserve will hold about 405 million barrels of oil and that one of the four SPR sites may close after congressionally mandated sales are completed at the end of fiscal year 2027, according to agency officials. However, DOE has not fully updated the SPR’s modernization plans based on these assumptions. According to DOE officials, in March 2018, DOE commenced a study—the SPR post-sale configuration study—to examine potential future reserve configurations. This study is to take into account the effects of congressionally mandated sales on the reserve and its modernization, and is targeted for completion in October 2018, according to agency officials. Information from the study will inform DOE’s updates to the SPR’s modernization plans, according to DOE officials.

As part of its post-sale configuration study, DOE plans to examine how the agency may handle the potentially excess SPR facilities created by the mandated sales. In January 2017, the SPR had a design capacity to hold 713.5 million barrels of oil and actually held 695 million barrels. As shown in figure 4, without action by DOE to reduce the SPR’s design capacity or otherwise use SPR facilities, 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.

DOE plans to explore some options to use these potentially excess SPR assets in its ongoing post-sale configuration study. 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, 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 has not entered into any such leases with other countries and has not considered such leases because, according to DOE, the SPR has historically lacked capacity to store additional oil. DOE has not proposed any of these options or explored the revenue the agency could generate by selling or leasing these assets. According to DOE officials, the agency will examine the feasibility of such options in the ongoing SPR post-sale configuration study.

Uncertainty Has Hampered DOE’s Efforts to Account for Potential Future Mandated Sales

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. According to DOE officials, this uncertainty makes it extremely difficult to effectively perform any mid-to long-range planning efforts for the SPR’s modernization project, including the execution of major maintenance projects. Congress has generally set the SPR’s size by mandating purchases or sales of oil, and has established and amended the minimum size of the SPR as it pertains to the release of oil for emergency protection. Since 2015, Congress has, across six pieces of legislation, mandated 290 million barrels in additional oil sales. However, DOE developed its modernization plans in 2016. DOE officials told us they do not know whether additional sales will be mandated over the next 10 years or whether other changes may be required to the configuration of the reserve. Any additional congressionally mandated sales or direction to pursue additional petroleum product reserves 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. Under current projections, the United States may fluctuate between being a net importer and net exporter over the next several decades. Specifically, 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. This uncertainty creates 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.

Having a long-term target for the size and configuration of reserves helps other IEA member countries manage their reserves. For example, as previously discussed, unlike the United States, some other IEA members have specified in dynamic terms the amount of reserves to be held, such as days of net import protection or days of consumption, rather than specifying a specific static volume amount. Under such approaches, the amount held varies over time as entities managing the reserve acquire or sell reserves in order to meet the target. Setting a long-term target for the size and configuration of the SPR—taking into account projections for oil production, consumption, and IEA obligations—could better position DOE to ensure that funds spent on the SPR’s modernization do not modernize a system that is no longer needed and that DOE is able to adequately plan for potentially excess SPR assets.

In the course of our work, we also identified other options for handling potentially excess SPR assets that DOE is not planning on examining, largely because DOE does not currently 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 spoke with. Fees for doing so could help defray public reserve storage costs. However, officials told us that the Energy Policy and Conservation Act gives 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 contracts or tickets for the excess oil rather than selling the oil outright. Australian and New Zealand officials told us that if DOE were to sell tickets for SPR oil, tickets would help these countries meet their IEA 90- day reserve obligations. Australian officials told us 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. According to DOE officials, the arrangement would permit Australia to receive credit from the IEA for tickets it purchases from the U.S. private sector. 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 annually if Australia purchased the maximum allowable amount of oil specified in an arrangement through tickets for excess SPR oil. However, although the Energy Policy and Conservation Act allows DOE to lease underutilized storage to other countries, DOE lacks the authority to sell tickets and does not plan to seek this authority, according to DOE officials. DOE officials told us that they do 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 officials. However, without examining a full range of options in the post-sale configuration study, DOE risks missing beneficial ways to modernize the SPR while saving taxpayer resources.

Conclusions

Given changing crude oil and petroleum product market conditions and the constrained budget environment, it is important that DOE ensures the SPR is effective at meeting U.S. energy security needs and IEA obligations while being managed and maintained in an efficient manner. In response to congressional direction and recommendations from GAO and DOE Inspector General, DOE conducted a long-term strategic review of the SPR in 2016 after its last comprehensive examination in 2005. In its review, DOE did not determine an optimal size for the SPR, and its analysis was limited in several ways. In particular, DOE did not fully consider recent and expected future changes in crude oil and petroleum market conditions such as the implications of projected fluctuations in U.S. net imports or the role that increased levels of private reserves could play in responding to supply disruptions. DOE also did not perform a full cost-benefit analysis of holding different volumes of reserves. Without supplementing its 2016 strategic review by conducting additional analysis, and periodically conducting such analyses going forward, DOE cannot provide information to Congress to inform decisions about the appropriate amounts of crude oil and petroleum products to hold in the SPR and risks holding too much or too little in the SPR to meet the United States’ energy security needs and international obligations. Such information is needed on a timely basis, to reflect the pace of change in oil and petroleum markets and other relevant factors that affect the optimal size of the SPR.

Though the SPR has primarily been used in response to domestic supply disruptions, such as hurricanes, the reserve is limited in this role because it is almost entirely composed of crude oil, and not petroleum products. In this regard, the Quadrennial Energy Review of 2015 recommended that DOE analyze the need for additional regional product reserves for U.S. regions that have been identified as vulnerable to fuel supply disruptions. DOE has not identified whether additional regional product reserves should be part of the SPR or completed studies of all vulnerable U.S. regions, and it has no plans to do so, according to DOE officials. Without conducting or completing studies for all the vulnerable U.S. regions and releasing the results, DOE cannot ensure it and Congress have the information they need to make decisions about potential additional regional product reserves.

In the face of declining net U.S. imports, Congress has taken repeated steps to reduce the size of the reserve. Given that net imports are projected to continue to decline through the late 2020s and fluctuate in the future, there may be additional congressionally mandated SPR oil sales. This has created long-term uncertainty regarding the future size and configuration of the SPR. Congress could address this uncertainty by identifying a long-term target for the size of the SPR—either by volume or in terms tied to factors, such as consumption or net import protection, that affect the country’s energy security needs and IEA obligations. Setting such a long-term target could better position DOE to ensure the efficiency and efficacy of federal funds spent on the reserve.

DOE has recently begun to study the potential effects of congressionally mandated sales on its modernization plans. 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 officials. However, we identified other options for handling potentially excess SPR assets that DOE is not planning to examine in its study, inconsistent with the agency’s order on real property asset management. 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 post-sale configuration study for handling potentially excess SPR assets, DOE risks missing beneficial ways to modernize the SPR while saving taxpayer resources.

Matter for Congressional Consideration

We are making the following matter for congressional consideration: 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. (Matter 1)

Recommendations for Executive Action

We are making four recommendations to DOE: The Secretary of Energy should supplement the agency’s 2016 long-term strategic review by conducting an additional analysis that takes into account private-sector response, oil market projections, and costs and benefits of a wide range of different SPR sizes. (Recommendation 1)

The Secretary of Energy should take actions to ensure that the agency periodically conducts and provides to Congress a strategic review of the SPR that, among other things, takes into account changes in crude oil and petroleum product market conditions and contains additional analysis, such as the costs and benefits of a wide range of different SPR sizes. (Recommendation 2)

The Secretary of Energy should conduct or complete studies on the costs and benefits of regional petroleum product reserves for all U.S. regions that have been identified as vulnerable to fuel supply disruptions, and the Secretary should report the results to Congress. (Recommendation 3)

The Secretary of Energy, in completing DOE’s ongoing study on the effects of congressionally mandated sales, should consider a full range of options for handling potentially excess assets and, if needed, request congressional authority for the disposition of these assets. (Recommendation 4)

Agency Comments and Our Evaluation

We provided a draft of this report to DOE for review and comment. DOE provided written comments, which are reproduced in appendix I. Of the four recommendations, DOE agreed with two, partially agreed with one, and disagreed with one.

Regarding our recommendation that DOE supplement its 2016 long- term strategic review with an additional analysis that takes into account private sector response, oil market projections, and costs and benefits of a wide range of different SPR sizes, the agency partially agreed with the recommendation. DOE agreed to 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. In response to taking into account the costs and benefits of a wide range of different SPR sizes, DOE stated that the agency determined the projected benefits of a wide range of different SPR sizes ranging from 430 million barrels of oil to 695 million barrels of oil in its 2016 review. However, the minimum SPR size considered by DOE is greater than the projected SPR size after congressionally mandated sales have occurred. Further, the SPR size after congressionally mandated sales is projected to be far in excess of the IEA obligation to hold a minimum of 90 days of net imports. DOE must also consider the minimum size needed to meet its IEA obligations in the event of a collective action. In conducting additional analysis, DOE should consider a smaller lower bound, in line with congressionally mandated sales, for the size of the SPR, and more fully consider the size needed to meet the IEA 90-day net import and collective action obligations.

Regarding our recommendation that DOE conduct periodic reviews of the SPR, the agency agreed with the recommendation. DOE stated that a 5-year time interval between reviews would strike an appropriate balance between the need to periodically conduct a strategic assessment and evaluation of the SPR and the limitations on resources to plan and conduct such a review.

Regarding our recommendation that DOE conduct or complete studies on the costs and benefits of regional petroleum product reserves, the agency disagreed. DOE stated that it is the agency's position that government owned and operated regional petroleum product reserves are an inefficient and expensive solution to respond to regional fuel supply disruptions. DOE further stated, based on studies done in 2015 that DOE officials told us were pre-decisional and therefore could not be reported, that there are additional concerns associated with government-owned and operated regional refined petroleum product reserves, including little to no storage capacity for lease in commercial terminals and high costs for government owned and operated regional product reserves. However, these same studies took these concerns into account, and concluded that a product reserve in the Southeast would provide significant net economic benefits (benefits minus costs) to the region and the United States in the event of a major hurricane. These studies also concluded that additional analyses are required to inform decisions regarding the potential benefits of a similar reserve on the West Coast. Further, the Quadrennial Energy Review of 2015 recommended that similar analyses be completed for other areas deemed by DOE to be vulnerable to fuel supply disruptions. Therefore, we continue to believe that conducting these analyses, as recommended in the Quadrennial Energy Review of 2015, will provide Congress with information needed to make decisions about regional product reserves.

Regarding our recommendation that DOE consider a full range of options for handling potentially excess assets, DOE agreed with the recommendation. DOE stated that in its ongoing study, the agency will include an assessment of disposition options for any potential excess or underutilized SPR assets, to include the need for new legislative authority, as necessary, for the disposition of assets. DOE expects this study to be completed in October 2018.

DOE also provided technical comments, which we incorporated, as appropriate.

As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the appropriate congressional committees, the Secretary of Energy, and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov.

If you or your staff members have any questions about this report, please contact me 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 report. GAO staff who made key contributions to this report are listed in appendix II.

Appendix I: Comments from the Department of Energy

Appendix II: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

In addition to the individual named above, Quindi Franco (Assistant Director), Nkenge Gibson (Analyst-in-Charge), Philip Farah, Ellen Fried, Cindy Gilbert, Greg Marchand, Celia Mendive, Patricia Moye, Camille Pease, Oliver Richard, Dan Royer, Rachel Stoiko, and Marie Suding made key contributions to this report.