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U.S. Govt Agency Exposes Faults in Key Oil Report

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(THE WALL STREET JOURNAL via Dow Jones), Mar. 19, 2010

The U.S. government faces "critical" shortcomings in producing its oil-inventory data, according to internal Department of Energy documents, casting doubt on figures that affect the production and prices of the world's most important industrial commodity.

The documents, obtained through a Freedom of Information Act request, expose several errors in the Energy Information Agency's weekly oil report, including one in September that was large enough to cause a jump in oil prices, and a litany of problems with its data collection, including the use of ancient technology and out-of-date methodology, that make it nearly impossible for staff to detect errors. A weak security system also leaves the data open to being hacked or leaked, the documents show.

Moreover, problems with EIA data underscore the hazards of depending on companies or other firms to self-report data.

Internal emails and a report from a consulting firm prepared in September describe a process at the EIA that served the oil world well in 1983, the first year that oil futures traded, but hasn't kept up as the inventory data have become more influential and the nation's oil infrastructure has become more complex.

The EIA has been producing the data on oil and fuel inventories since the early 1980s, and the release of the report each Wednesday at 10:30 a.m. is a major event for oil markets. The division collects data from thousands of facilities, all reporting the number of barrels held in storage around the nation. But many of its systems haven't been updated for 30 years, and much of the data input is done manually, according to one report commissioned for the EIA, prepared by consultants SAIC Inc. The consulting group directed questions to the EIA.

The EIA, the statistical arm of the Department of Energy, didn't find most of SAIC's findings a surprise, said Stephen Harvey, director of the EIA's office of oil and gas, which puts out the weekly data.

"Should you be concerned? Yes. Is it as good as we'd like it to be? No. Is it better or worse than some other countries where we'd like to know this information? It's probably a whole lot better," Mr. Harvey said.

The internal documents obtained by Dow Jones Newswires cataloged several instances in the past three years in which companies misreported the amount of oil they had in storage, sometimes by over two million barrels in each weekly survey over the course of a year, a significant error considering that amount can account for the entire change in inventories from week to week. Other errors were too small to significantly affect the market's perception of nationwide commercial crude-oil supplies, which the EIA currently totals at 344 million barrels.

On Sept. 16, the EIA released data showing almost four million barrels of oil had vanished from the Cushing storage hub in Oklahoma during a single week. The market paid particular attention because Cushing is the nation's most important commercial storage facility. Its oil is used to fill orders from buyers on the New York Mercantile Exchange. Oil futures jumped 2.2% after the report

But out of the sizable drop at Cushing, 1.7 million barrels represented a correction made after the EIA discovered a previous error in one company's reporting, according to the emails. James Beck, who heads the team that conducts the weekly survey, confirmed the correction in an interview.

A second company's Cushing inventories also were off by a wide margin earlier in 2009, the emails indicate.

Market participants consider the EIA data to be the best window into U.S. supply and demand, with the American Petroleum Institute, an industry lobby group, the only other major weekly source.

"The EIA data is very important to us," said Francisco Blanch, an oil analyst with Bank of America Merrill Lynch in London. "If this data was called into question, it would obviously limit the validity of some of our analysis, particularly as it relates to the U.S. market."

In the gas market in the early part of the last decade, several companies were found to have submitted false trades to industry publications to influence the ultimate value of indexes, and paid millions of dollars in fines.

None of the documents assert that the companies were deliberately reporting incorrect oil-inventory data, and the EIA was alerted to many of the errors by the firms themselves. The Federal Trade Commission last year implemented regulations punishing companies that put out intentionally misleading inventory data.

Mr. Harvey of the EIA said a number of measures are being implemented to cut down on the number of errors, even in the absence of new funding. After a series of budget cuts in the mid-1990s, calls in recent years from the agency for additional funding largely have fallen on deaf ears.

The EIA "has clearly not devoted adequate resources to the ongoing evolution of the [weekly report] over the last decade," the SAIC consultants said in the report. While SAIC said the weekly report "is not broken," it added that "the current approach . . . may create an unacceptable risk of failure for this flagship EIA report."

The EIA largely has cited budget problems for the lapses. In a 2009 budget request, the EIA said the data have become "increasingly compromised" and the problems will take "a significant investment over several years to resolve." Requests for additional funding have been mostly denied.

The current version of the 2011 fiscal budget includes $18 million in additional funding requested by Energy Secretary Steven Chu for the EIA. Sen. Jeff Bingaman (D., N.M.), chairman of the Senate's Energy Committee that oversees the department's budget, in a February hearing called additional funds for the EIA "long overdue."

The agency faces an uphill battle just to maintain its current level of accuracy, SAIC said.

Copyright (c) 2010 Dow Jones & Company, Inc.

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