US solicits bids to fill strategic reserve with Gulf of Mexico royalty oil

The US Minerals Management Service last week began soliciting written bids from prequalified companies to fill the Strategic Petroleum Reserve with federal royalty oil from Gulf of Mexico fields. Rather than purchase oil on the world market, MMS plans to collect 22 million bbl between this April and March 2003 by dramatically expanding its royalty-in-kind program.

WASHINGTON, DC, Jan. 22 --The US Minerals Management Service last week began soliciting written bids from prequalified companies to fill the Strategic Petroleum Reserve with federal royalty oil from the Gulf of Mexico.

Rather than purchase oil on the world market, US officials plan to collect 22 million bbl between this April and March 2003 by dramatically expanding MMS' royalty-in-kind program.

President George W. Bush announced the program last November. MMS currently takes royalties of 100,000 b/d oil in-kind, rather than in cash. About half of that is sold to small refiners (OGJ Online, Nov. 13, 2001).

Industry has sought to expand RIK to all federal leases, saying it is a more equitable way of judging what the true market value of oil is. The Interior Department however maintains RIK can make sense in established market centers but may not be appropriate for some onshore leases where market conditions are less competitive because there are fewer bidders for the oil.

The White House effort is seen by top administration officials as a cost-effective way to address national security issues and industry concerns simultaneously.

However, due to ongoing, unrelated legal problems with the Department of Interior website, federal lease holders interested in the program must fax their bids to MMS by Jan. 31 instead of the usual e-mail route.

Interior officials downplayed the switch saying the internet problems might cause "minor" delays but would not deter them from moving forward.

Some critics of the administration plan said if the US was serious about filling the reserve it would just buy the oil from the world market because it will be cheaper and faster than waiting the 2 years for RIK oil to be deposited in the stockpile, located along the Louisiana and Texas coastline.

MMS aims to help fill the reserve to its 700 million bbl capacity by 2005. Currently the reserve holds 545 million bbl, equal to about 50 days of imports.

As part of the SPR fill efforts, the Department of Energy expects 41 million bbl of oil to be delivered to the SPR by 2003 under a separate program that predates the current administration.

That oil was part of a plan by President Bill Clinton that sought to lower heating oil costs by allowing oil companies to "borrow" oil from the SPR with the understanding they would return higher volumes of oil later when prices were lower.

The Department of Energy is helping coordinate the royalty oil transfers. The MMS solicitation calls for the royalty oil to be delivered from offshore platforms to designated "market centers." Companies awarded contracts under the DOE solicitation would acquire the royalty oil at these "market centers" and exchange it for oil that meets SPR specifications. The "exchange oil" would then be delivered to one of three storage sites in the Strategic Reserve's complex: the Big Hill and Bryan Mound sites in Texas, and the West Hackberry site in Louisiana, DOE said.

Because SPR crude oil typically exceeds the quality of most offshore crudes, companies will likely deliver somewhat less than the 22 million bbl of royalty oil to the reserve after adjusting for the quality differences, DOE said. The companies can also make adjustments to account for their costs to deliver oil to the Reserve sites. DOE has asked that offers be received at the Reserve's New Orleans Project Management Office by Feb. 5. Exchange oil deliveries to the Energy Department could begin as early as Apr. 1, and must be completed by Apr. 30, 2003.

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