(Bloomberg) - The U.S. Energy Department is making the case that the nation’s emergency oil supply needs an overhaul before a massive drawdown begins later this decade.
Congress has mandated that the department sell as much as 18 percent of the Strategic Petroleum Reserve from 2018 through 2025 to offset some unrelated government expenses. The department is asking lawmakers to approve funding to modernize the reserve facilities themselves to help prepare for the sales.
“If we don’t get an appropriation from Congress, we cannot start selling oil” to pay for upgrades, Bob Corbin, the Energy Department’s deputy assistant secretary for the Office of Petroleum Reserves, told reporters yesterday at the reserve’s Bryan Mound site near Freeport, Texas.
Established in response to the Arab oil embargo in the 1970s, the reserve holds 695.1 million barrels of crude in salt caverns at four sites in Texas and Louisiana. For years, Energy Department officials have said the network of pipelines, pumps and caverns is in need of regular maintenance, like replacing rusty equipment, to withstand the humid conditions along the Gulf of Mexico.
At the Bryan Mound site, where pipes and valves span hundreds of acres of marshlands, a floating roof on a storage tank collapsed in May 2015 due to extensive wear. Corrosion was responsible for an immense gash on a 1980s-era water pipe at the reserve’s Big Hill site near Winnie, Texas in April.
Lawmakers last year agreed to fund U.S. highway maintenance with 66 million barrels in sales from the reserve from 2023 through 2025. A budget bill that President Barack Obama signed last year mandated another 58 million in sales from 2018 through 2025 as a spending offset.
Corbin said that failing to upgrade equipment “could potentially impact the ability to sell oil” later in the decade.
Critics have said the mandated sales, scheduled as oil prices were falling, were unwise, given that the Strategic Petroleum Reserve is meant to mitigate the effect of unpredictable supply disruptions.
“You can make the argument that we may need it now more than ever, given the potential for problems in Venezuela, Nigeria, Iran and Iraq,” Guy Caruso, a former Energy Information Administration chief, said in a phone interview.
The budget law also authorized the Energy Department to sell $2 billion in oil over four years - about 40 million barrels at today’s prices - to modernize the reserve. In other words, the scheduled drawdowns may have provided the agency with the window of opportunity it was seeking to upgrade the reserve facilities.
The president and the Energy Secretary can authorize a drawdown from the reserve under circumstances like national emergencies, though not for an upgrade. In April Obama asked lawmakers to appropriate $375.4 million, the first tranche of that $2 billion, which would allow sales to begin as soon as October 1.
The agency doesn’t yet have lawmakers’ approval, and no decision has been made about sales this year. In the coming weeks, the department plans to present to lawmakers its detailed upgrade plans.
There’s another reason the Energy Department wants to modernize the reserve, the world’s largest government-controlled oil stockpile. The shale revolution that has enabled the U.S. to become a global oil and gas giant in recent years has also increased and altered crude oil flows along the Gulf Coast. A 2014 test sale from the stockpile revealed bottlenecks in distributing crude to refiners via pipeline and water-borne shipments.
The Energy Department wants to use the funding to replace aging pumps and corroded equipment to ensure that the stockpile is able to fulfill its role during an emergency. It’s also seeking to add marine terminals at each of its three distribution sites so that the government doesn’t have to compete with private companies to get oil on the water quickly.
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Copyright 2016 Bloomberg News.
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