US Taps Into Its Oil Reserve
Complex distribution, storage, and sales system has so far worked smoothly
CHICAGO — AT $20 billion to build and fill, the strategic petroleum reserve (SPR) may be the most expensive component of America's response to the Gulf crisis. As the first emergency drawdown of the 586 million-barrel reserve gets under way, all the various parts of the SPR system - the storage and pumping facilities, the oil auction mechanism, and the delivery scheduling process - appear to be functioning smoothly.
Late today, the Department of Energy (DOE) expects to announce the winning bidders for 34 million barrels of SPR oil. On Monday DOE announced it had received 56 bids from 26 companies for a total of 45 million barrels of oil. Delivery will follow from Feb. 15 through March 31.
``Let's face it, we have practiced this process many, many times,'' says John Bartholomew, SPR director at the Department of Energy (DOE). ``We feel as though we're tested and ready, and have people very much motivated and trained to do the process.''
The SPR is held in equal confidence by the oil companies, refiners, and traders who are a vital link in moving the oil from salt-dome caverns in Texas and Louisiana into America's gas tanks. A test sale last fall of 5 million barrels of SPR oil ``seemed to have worked,'' says James King, senior vice president of Crown Central Petroleum Corporation in Bellaire, Texas.
``Everybody understood it,'' Mr. King adds. ``You won or you lost based on your bid, but you knew what you were doing. I think it was reasonably fair. We were in the middle of the pack, so we didn't quite make it.''
Of the 33 participants last fall, Amoco Corporation was one of 11 successful bidders. The logistics of receiving the oil from DOE were ``super, excellent, absolutely no problem,'' says Charles Mast, Amoco's vice president of supply in Chicago.
A few details related to bidding and bid guarantees have been ironed out since the test sale.
Companies calculate how much the reserve oil is worth to them compared to several common oil types named by DOE. Then they bid a ``price adjustment factor'' of so many dollars and cents above or below an average of the market prices for those reference crudes. Actual payment is calculated when the oil is delivered, so both the buyer and seller are protected as the prices of the reference crudes fluctuate during the 30 to 45 days between bidding and delivery.
New selection `improved'
For low-sulfur or ``sweet'' crude, the reference types this time are West Texas Intermediate and Louisiana Light Sweet. In last fall's test sale, Alaska North Slope (ANS) crude was a third component.
``That doesn't really make a good fit because ANS is not a light, sweet crude,'' says Michael Henson, an analyst with Chevron USA in Houston. The new selection is ``improved,'' he says.
Another change concerns the bid guarantees of $10 million or 5 percent of the amount of their bid, whichever is less, that companies must post. This can come in the form of certified check, letter of credit, or a wire transfer.
In preparing their bids for this sale, companies factored in an analysis of the action last fall. ``In one location, we were far and away the highest guy, although we thought it was a good bid,'' Amoco's Mr. Mast says.
Analysts will also be looking to see whether all of the oil being offered is sold - and if not, why. As it did last fall, DOE offered twice as much high-sulfur or ``sour'' crude oil as sweet. It buys those crudes in the same two for one ratio, which supposedly matches the needs of US refineries. Last fall some sour crude went unsold. Mast says: ``There were some people that asked, `Well, is that terrible crude? Has the government put the wrong stuff in the ground?'
``The answer to that is `no.' For that particular point in time, the economics just didn't work out or people didn't have that type of demand for their system.'' he says. ``What they'll have this time, I don't know.''
But most independent refiners, like Crown Central Petroleum, can't run sour crude, King says, while even refiners equipped for sour can run sweet. That increases the demand for sweet crude; thus, it ``would be our contention'' that DOE should increase the proportion of sweet crude in the reserve, King says.
A final question is whether the current situation is really an emergency. ``There's a lot of crude out there, and has been for several months,'' Mast says. ``Volume is not the problem.''
Fear abated in market
``I don't know if it's necessary,'' King says. ``It's probably good psychologically to let people know that they will use the reserves. It did take some of the fear out of the market and probably kept the price down.''
``Whether or not it's an energy emergency, that can change from day to day,'' Henson says. ``And the perception can also change from day to day.
``The delivery window is Feb. 15 and March 31 for this sale. There is a risk between now and then that something might go wrong in the Gulf that would impact the supply. And this can be used as a hedge against that.''