US to use offshore royalty crude to top off Strategic Petroleum Reserve

Nov. 13, 2001
Confirming expectations, President George W. Bush Tuesday said the US will fill the Strategic Petroleum Reserve to its capacity of 700 million bbl. Bush said rather than buy oil on the world market, over the next several years the US will fill the reserve with federal royalty oil from Gulf of Mexico fields.

HOUSTON, Nov. 13 -- Confirming earlier reports, President George W. Bush Tuesday said the US will fill the Strategic Petroleum Reserve to its capacity of 700 million bbl.

Rather than purchase oil on the world market, over the next several years the US will fill the reserve with about 108 million bbl of federal royalty oil from Gulf of Mexico fields. The process will take more than 2 years.

Bush said, "The SPR will be filled in a deliberate and cost-effective manner. This will be done principally through royalty-in-kind transfers to be implemented by the Department of Energy and the Department of the Interior.

"Our current oil inventories, and those of our allies who hold strategic stocks, are sufficient to meet any potential near-term disruption in supplies. Filling the SPR up to capacity will strengthen the long-term energy security of the US."

The SPR has a capacity of 700 million bbl at four salt-dome storage sites on the Gulf Coast. It holds about 545 million bbl, equivalent to just over 50 days of imports (OGJ Online, Oct. 30, 2001).

Under a Clinton administration program, several oil companies "borrowed" crude from the SPR and are obliged to replace it with more crude than they took, a transaction that will bring the SPR to about 590 million bbl.

Interior Sec. Gale Norton directed Deputy Sec. Steve Griles to work with the Minerals Management Service to implement the transfer as quickly as possible.

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.

The agency will begin taking about 60,000 b/d in April for the SPR and expects the volume to grow to 130,000 b/d by October 2002.

This is the second time that Interior has transferred oil to the SPR. In 1999 and 2000, MMS transferred 28 million bbl to the reserve.

The American Petroleum Institute said, "This good-sense decision reflects sound thinking on energy."

Rep. Billy Tauzin, (R-La.), House Energy and Commerce Committee Chairman, also applauded the decision. He had deferred legislation in anticipation of a White House decision.

Tauzin said, "Filling the SPR will provide America with a vitally-important 'rainy day' reserve of crude oil in the event of future supply disruptions. It is important for our economy and it is important from a national security standpoint."

Recently, the Petroleum Industry Research Foundation Inc., New York City, recommended that the administration buy oil on international markets for the SPR because a fill with royalty oil could not begin until next year and would be limited to the level of federal offshore royalty oil output (OGJ Online, Oct. 30, 2001).

Paul Horsnell, head of energy research for JP Morgan Chase & Co., noted "The royalty in-kind transfers ... [have] the effect of reducing the amount of domestic crude oil available for the US market, and hence increasing imports. More details will follow about projected fill-rates, but the main importance of the statement is in its timing and symbolism," Horsnell said.

In effect, he said, the US decision to take royalty in-kind oil -- announced the day before OPEC's planned meeting -- supports OPEC price defense mechanisms. "Of all the statements from non-OPEC countries in recent days, OPEC has had the best support from the US."

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