DOE sets out to ‘right-size’ archaic Strategic Petroleum Reserve

By Nathanial Gronewold, Jenny Mandel | 07/07/2015 08:23 AM EDT

FREEPORT, Texas — From the air and on-site, the Bryan Mound federal government storage site here looks little different from other oil and gas industrial facilities. A couple of storage tanks rest next to pipes and pumps, all of it surrounded in part by two dozen old well pad sites with operating wells. But beneath each one of these 20 pad sites, about 1,000 feet down, sits an artificial cavern much larger than the volume of the Empire State Building carved out of the rock and filled with millions of barrels of oil.

FREEPORT, Texas — From the air and on-site, the Bryan Mound federal government storage site here looks little different from other oil and gas industrial facilities.

A couple of storage tanks rest next to pipes and pumps, all of it surrounded in part by two dozen old well pad sites with operating wells. But beneath each one of these 20 pad sites, about 1,000 feet down, sits an artificial cavern much larger than the volume of the Empire State Building carved out of the rock and filled with millions of barrels of oil.

Bryan Mound is one of four locations on the Gulf of Mexico coast that make up the nation’s Strategic Petroleum Reserve, a government-run storehouse of crude created in the wake of the 1970s Arab states oil embargo. The SPR is designed to temporarily backstop the U.S. oil industry with supplies should international unrest put a crimp on imports again.

The Bryan Mound
The Bryan Mound federal government storage site in Freeport, Texas, is part of the nation’s Strategic Petroleum Reserve.

During a recent tour, Jorge Aguinaga, the Department of Energy’s senior site representative, said the facilities here are pretty much the same as they were when building was completed in the 1980s, save for a 25-year "life extension" retrofit finished in 2000.

Yet the United States’ oil industry has changed dramatically since the 1970s and ’80s.

The United States is now importing much less oil than it has in the past, and U.S. docks are expected to see fewer waterborne barrels in the years ahead. The nation imports little to no light sweet crude anymore thanks to the shale oil boom, and imports of middle sour crudes are falling, as well. Ultimately, Canada is seen as the greatest future source of heavy sours and not the Gulf of Mexico’s imports.

With so much having changed in the oil sector, DOE is weighing how it can update the SPR to match. The agency sees some of the same transportation and other bottlenecks within the emergency supply system that the oil industry itself faces, along with new policy hurdles that have appeared with evolution of the international energy arena.

The trick for DOE is figuring out the right size and form for the strategic stockpile at a time when many in the United States are trumpeting a new national "energy abundance."

In Washington, D.C., Energy Secretary Ernest Moniz and other officials have been pressing the need for catch-up maintenance on the asset, as well as studies for a more radical reshaping. The administration’s 2016 budget request includes $26 million for maintenance work on the network of salt caverns, as well as $257 million, a roughly 25 percent increase over last year’s enacted funding levels, for "development, operation and management" of the SPR.

"Today’s lower oil prices, increased domestic oil production and reduced oil import dependence may lead some to view the SPR as having diminished value as a tool in our energy security arsenal," Moniz told a D.C. audience during a talk at an U.S. Energy Information Administration event last month. "We don’t believe this is the case."

Moniz said he wants to undertake a careful analysis of what the right size for the SPR is, and whether U.S. consumers would be well served by additional stockpiles of crude or refined products stashed in strategic locations around the country for proximity to key markets.

Last year, Moniz authorized the creation of the first gasoline supply reserve, a group of storage facilities in New England geared to head off fuel shortages like those that arose after Superstorm Sandy in 2012, using funds realized from the SPR test sale. He has floated the idea of establishing additional refined product reserves throughout the country to quickly meet regional needs during a disruption.

But the staff at Bryan Mound voiced skepticism that their own facilities or other SPR storage caverns could be retooled to do the same.

"We’ve heard noise about refined products, but we haven’t seen anything else as far as that actually taking place," Aguinaga said.

Jon Larvick, a contractor with Fluor who is serving as the site director for Bryan Mound, said it would be challenging to use the SPR itself for refined products storage, because "the characteristics of a refined product aren’t suitable for sitting someplace for long periods of time." Some of the crude in storage at Bryan Mound is so old that it came from Iran, put in place before the U.S. embargo on Iranian oil.

Aguinaga conceded that it could be done, but at a price. "I’m a mechanical engineer, and I can tell you that it’s going to be costly to do it."

How big?

Bryan Mound has the largest capacity of the four SPR sites, able to store up to 254 million barrels of oil. Together with the other three locations — Big Hill in Texas, and West Hackberry and Bayou Choctaw in neighboring Louisiana — the entire SPR can store up to 727 million barrels of oil. Legislation that created the SPR authorized capacity for up to 1 billion barrels, but no funds were ever appropriated for such an expansion.

The government chose Bryan Mound and the Gulf of Mexico coastline for its geology, specifically the large number of underground salt domes, mushroom-shaped formations that extend to at least 55,000 feet, though no one knows just how large they really are. The Gulf Coast location also matched the U.S. oil industry’s needs the best in the 1970s and ’80s: convenient to federal offshore production, import terminals and the largest concentration of refining complexes in the United States.

The oil industry created five irregularly shaped caverns at Bryan Mound when it was used to produce brine for drilling. DOE created the other 2,000 foot-high cylindrical caverns by leaching out the salt with water, carving out an empty cavity surrounded by hard rock. Water is used to push the oil out, and the stored crude and water at the bottom exert pressure that keeps the cavities from closing in naturally.

"Our mission is to draw down at certain rates and be able to do it in 13 days," Aguinaga said. Technically, the oil can be removed a lot quicker than that, but it takes 13 days to arrange a sale of large volumes of crude, so the constraint is mainly caused by paperwork.

Under a decades-old agreement with the International Energy Agency, the oil consuming world’s answer to OPEC, the United States is required to maintain at least 90 days of "import protection" in a combination of government and private-sector stocks. With imports falling and stock levels high, the SPR alone represents 137 days of import protection, according to DOE figures.

But Moniz said that may not be the right number.

"Harm to the U.S. economy from a global import disruption is no longer measured by days of import protection, as it was when the SPR was established in the 1970s, regardless of how much oil the U.S. imports and from where," Moniz said. "In today’s global oil markets, a severe market disruption would largely have the same effect on domestic petroleum product prices, whether or not U.S. refineries import crude oil from disrupted countries. … Unless disrupted oil supplies are in place on the global market, world oil prices will skyrocket, and the U.S. and global economies will be harmed."

Passing grade?

Government officials are also looking at the SPR’s maintenance costs and infrastructure update needs.

Bryan Mound officials said the United States’ crude storage costs already are among the cheapest in the world, at an estimated 22 cents per barrel per year. This figure was put in contrast with an estimated $2.40-per-barrel cost for the industry and a $3-per-barrel storage cost for Japan’s strategic reserve.

But DOE says the SPR is showing its age, both in terms of the facility’s condition and how its design measures up to current needs, and is due for updates.

As officials put it in the Quadrennial Energy Review, a lengthy self-assessment that wrapped up in February: "The design of the SPR and the infrastructure for utilizing it were determined in 1975, when domestic oil production was in decline, oil price and allocation controls separated the U.S. oil market from the rest of the world, there was no global commodity market for oil at all, and there were no hedging mechanisms to manage risk."

The upshot, they said, is that the SPR "requires updating in light of changed circumstances, including significant maintenance and upgrades to enhance its distribution capability."

That assessment was based in part on a test sale of 5 million barrels of oil that DOE carried out last year. The sale, in which major buyers bid on discounted SPR crude in a setup geared to put the delivery system through its paces, revealed that certain pipelines, storage tanks and other infrastructure assets that officials expected to use for deliveries were not available.

The main reason for that, according to DOE, is changes in U.S. oil production and consumption patterns stemming from the tight oil boom.

While SPR crude was previously expected to flow to inland refineries to replace imported oil, today those inland facilities are amply served by domestic and Canadian crude. Surplus domestic production flows south, sometimes through recently reversed pipelines, to feed Gulf Coast refineries that serve both domestic and foreign markets for refined products.

"If the SPR cannot load oil onto barges and tankers without disrupting commercial shipments, SPR sales could be offset by a corresponding decrease in domestic crude oil shipments or exports of domestically produced petroleum products," DOE warned in the QER.

The solution is to find ways to get the oil "onto the water," they say.

"[Due to] the evolution of global oil markets, the participation of the United States in those markets, the changed geography and volume of U.S. oil supplies, reduced oil imports, and congestion of commercial facilities in the SPR’s distribution region, an effective SPR release will increasingly depend on the ability to load incremental SPR oil onto barges and tankers," the QER said.

Bryan Mound officials diagrammed how oil would be moved from the SPR in an emergency, and how many days it would take to deliver the crude to various regions. The chart assumes crude would be moved by ship through the Panama Canal to Hawaii and the West Coast, and via tanker to East Coast ports.

When asked what upgrades and improvements are needed at Bryan Mound, site managers said they’ve just begun their assessment. "There is a conceptual look at additional life extension," Aguinaga said.

Self-financing, a double-edged sword

On Capitol Hill, where every spending proposal must be paired with a funding source, some see the proposals to "right-size" the SPR and to update the nation’s oil and product reserves strategy as a hand-in-glove fit.

The implication of falling imports and rising U.S. production would seem to be specifications for a smaller SPR. But David Goldwyn, a top DOE adviser during the Clinton administration and now president of Goldwyn Global Strategies, said that wouldn’t necessarily be the case.

In a back-of-the-envelope calculation, Goldwyn sketched out the impact of a hypothetical supply disruption in a major producing country like Saudi Arabia, combined with a terrorist event elsewhere in the world and transportation constraints in the response. By his calculations, such a scenario could point to a need for a larger reserve than what exists today.

Either way, allocating money for a major overhaul of the reserves could be challenging in Congress.

"It is certainly going to be tempting to Congress to find ways for SPR modernization to be self-funding," Goldwyn said, noting that one option could be to swap crude for refined product. Such a swap could offer better economics than selling SPR crude into today’s bearish oil markets, he added, though DOE could also tweak the timing of such a sale to seek better returns.

Another idea — one which he has offered up in various forms during his years in various federal roles and at D.C. think tanks, and recently reworked for the current situation — is to create shares he calls "special drawing rights" that other oil-consuming countries could use to buy into any extra capacity in the SPR.

In an op-ed published recently in The Hill, Goldwyn described how such a system could allow less wealthy members of the IEA, who may struggle to keep up with their crude stockpile obligations, to pay into the U.S. capacity. The system could be overseen by the IEA so that mechanisms already in place to keep members from using their stockpiles for political advantage come into play, he said.

"It’s a burden-sharing exercise," Goldwyn said. "It solves their problems … and it helps us monetize a portion of the reserves."

Whether policymakers look to Congress, the SPR itself or foreign investors to fund upgrades to the stockpile, Goldwyn said it will be important that some steps are taken to keep it updated, or it won’t function as intended.

Addressing the transport constraints factors into the U.S. responsibilities to its oil-thirsty allies, Goldwyn pointed out. "If they don’t address the pipeline and marine transportation piece of it, then we do not have a reserve of 4 million barrels a day drawdown capability. Then, we might have a reserve of 2 million barrels a day drawdown capability," he said.

"It kind of begs the main question: Do you really need this thing?" he said. "If not, then it’s kind of a waste, an expensive waste."

Jenny Mandel reported from Washington, D.C.