Case Study--U.S. SPR Program and the Environment

U.S.
Strategic Petroleum Reserve
(SPR)
Jaime Sigarán
Shih-Hsu
Matthew Yorzinski

• 1944 Harold Ickes - Secretary of the Interior
• 1952 President Truman’s Mineral Policy
Commission
• 1956 President Eisenhower reaction to Suez Crisis
• 1970 Cabinet Task Force on Oil Import Control
SPR Advocates

Energy Policy and
Conservation Act (EPCA)
• 1973-1974 OPEC Oil Embargo.
• 1975, December 22, President Ford signed P.L. 94-163 (S.622).
• To provide for the creation of a Strategic Petroleum Reserve capable of
reducing the impact of severe energy supply interruptions.
• “The Congress finds that the storage of substantial quantities of
petroleum products will diminish the vulnerability of the United States to
the effects of a severe energy supply interruption, and provide limited
protection from the short-term consequences of interruptions in supplies
of petroleum products.”
• Authorized participation in the International Energy Agency (IEA).

• 2005 President Bush signed Energy Policy Act directed fill to
1 billion barrels.
• 2008 DOE issued a Notice of Intent to prepare a
Supplemental Environmental Impact Statement and to solicit
additional public comments.
• 2010 the decision was made to suspend further expansion
activities.
•
• 2011, a Notice of Cancellation was published in the Federal
Register.
1 billion barrels

• 1977 Construction began & first fill of 412,000 barrels of Saudi
Arabian light crude oil
• 1994 purchasing suspended with 591.7 million barrels.
• 1999 fill continued with Royalty in Kind Program (RIK).
• 2001 President Bush directed 700 million barrels.
• 2005 reached 700 million barrels, again in 2008,
• 2009 RIK ended.
• 2009 DOE purchased 10.7 million barrels at a cost of $553 million
with revenue from 2005 SPR sale after Hurricane Katrina.
US SPR Fill

Bryan Mound, Texas
Big Hill, Texas
Bayou Choctaw, LA
West Hackberry, LA

Crude Oil Storage by Site
Bryan Mound, TX - holds 240.7 MMB in 20 caverns: 64.4
MMB sweet and 176.3 MMB sour.
Big Hill, TX - holds 164.7 MMB in 14 caverns: 67.3 MMB
sweet and 7.48 MMB sour.
West Hackberry, LA - holds 215.8 MMB in 22
caverns:107.8 MMB sweet and 108.0 MMB sour.
Bayou Choctaw, LA - holds 73.6 MMB in 7 caverns: 21.7
MMB sweet and 51.8 MMB sour.
Current storage capacity - 727 million barrels

When can the Reserve be
used?
• There are generally three types of drawdowns
envisioned under the Energy Policy &
Conservation Act (EPCA) of 1975
• Full Drawdown
• Limited Drawdown
• Test Sale or Exchange

Definition of “Severe Energy
Supply Interruption”:
The term “severe energy supply interruption” means a national
energy supply shortage which the President determines—,
(A) is, or is likely to be, of significant scope and duration and of
an emergency nature;
(B) may cause major adverse impact on national safety or the
national economy; and
(C) results, or is likely to result, from (i) an interruption in the
supply of imported petroleum products, (ii) an interruption in the
supply of domestic petroleum products, or (iii) sabotage or an
act of God.

International Energy Agency
Requirement
90 days of import protection (both public and
private stocks).
In past years, the United States has met
its commitment with a combination of SPR
stocks and industry stocks. The days of import
protection may vary based on actual net U.S.
petroleum imports and the inventory level of the
SPR.

Current Days of Import
Protection
The SPR holds the equivalent of 137
days of import protection (based on 2014
net petroleum imports).
. Note: In 1985 the SPR held 118 days of import
protection.

Draw down Capability
Maximum nominal drawdown capability -
4.4 million barrels per day
Time for oil to enter U.S. market -
13 days from Presidential decision

Average price paid for oil in the Reserve
$29.70 per barrel

Investment to Date:
About $25.7 billion;
$5 billion for facilities
$20.7 billion for crude oil

Past U.S. SPR Sales
2014 Test Sale - 5 million barrels
2011 IEA Coordinated Release - 30,640,000 barrels
(total IEA Countries contribution - 60,000,000 barrels)
2005 Hurricane Katrina Sale - 11 million barrels
1996-97 total non-emergency sales - 28 million barrels
1990/91 Desert Shield/Storm Sale - 21 million barrels (4
million in August 1990 test sale; 17 million in January 1991
Presidentially-ordered drawdown)
1985 Test Sale - 1.0 million barrels

Short-term price elasticity of
demand for crude oil
• Gasoline has few alternatives because people
with a car, need to buy petrol.
• For many people, driving is a necessity.
• Gasoline demand is highly price inelastic,
implying that changes in gasoline prices have a
small effect on the demand for gasoline.
19

Demand elasticity / inelasticity
20

Demand elasticity / inelasticity v. Supply
change
21

Diamonds, cigarettes, and iPhones are all
examples with inelastic price demand
22
We are all price inelastic!!!

Something about crude oil supply
23
• Oil companies’ production capacity
depends on investments made years
earlier.
• They can only respond to higher or lower
oil prices by increasing or decreasing
investments in new production capacity.
• Short-term elasticity of oil supply with
respect to price is quite small.

Supply elasticity / inelasticity
24

Other examples
Inelastic supply
Nuclear power. It would take considerable time to increase the
supply of nuclear power because it needs skilled labor, large
investment and it would take a long time to build.
Elastic supply
Firms operating below full capacity. If a car factory is operating at
70% capacity, then it can easily increase supply and produce more
cars in response to changes in price.
25

Why short-term price elasticities
of oil supply and demand
generate oil price spikes?
1. Unplanned supply
interruption
2. Demand reduces little
3. Short-term supply
increase is not possible
4. Price rises significantly.
26

Oil price – Economic growth – Oil production
investment cycle
27

SPR v. oil price
1. SPR protects the economy against future oil supply
disruptions.
2. Prompt release of emergency reserves prevents an
economically damaging oil-price spike until supply is
restored.
3. SPR does not increase the short-term elasticity of oil
supply since its release depends on government
actions that are only taken in response to a serious
oil supply disruptions.
28

Salt Dome
Geology
• Salt domes are geologic
structures that grow and develop
as sediments are being deposited
around them
• Cap-rock is composed mainly of
anhydrite, gypsum, and calcite
• Gulf Coast cap rocks range in
thickness from 0 to 2,000 feet
• Shallow salt domes < 3,000 feet deep

Creating the SPR
• To store the petroleum reserves, the DOE carves
caverns out of the underground salt domes through a
process known as “solution mining”
• Massive amounts of freshwater are injected into the
salt domes to dissolve the salt
• The resulting brine is pumped out and injected
underground or discharged into the Gulf of Mexico

Natural Resources
• Salt production
• Sulfur production
• Storage caverns
• Cap-rock brine disposal

SPR Storage Facility: Expansion
• In 2007, DOE announced Richton, MS
would be the new site for expanding
the SPR
• EPAct 2005 directs Secretary to
expand the capacity of the SPR to 1
billion barrels
• Richton, MS chosen for “for its large
and undeveloped salt dome,
enhanced oil distribution capabilities,
and inland location that is less
vulnerable to the damaging effects of
hurricanes”

Lessons Learned?
• 2005 - Hurricane Katrina
• Oil rigs were largely unaffected with the exception of four large platforms which suffered extensive damage—3
to 6 months to get back online. 37 other small platforms accounting for less than 1% of production. Total:
41/4,000.
• Did prices come down after tapping into the SPR?
• Hard to say. Crude prices fell back to where they were pre-Katrina. Although, SPR release helped some refiners
start operating again

Lessons Learned? (cont.)
• 2011 – Forgotten Bayou
• Disturbances noticed in 2011 and in 2012 a sinkhole began to develop
• Sinkhole had grown to cover 24 acres (about 750 ft. deep)
• Methane gas rose up from the unstable rock below sinkhole
• Six feet of natural gas sits on top of the aquifer under the community.
Homes monitored for explosive levels of natural gas
• Sinkhole contributing to geologic activity (releasing methane gas)

Lessons Learned? (cont.)
• Grand Bayou- Dow Chemical offered
residents a buyout after the Napoleonville
Salt Dome lost contents into the subsurface
and gasses vented into homes
• String or column takes fresh water into the salt
dome and brings back salt water or brine, when it
stopped functioning cavern was shut down
• Barbers Hill- farming and ranching
community located on top of a salt dome
rich in oil deposits. 1950 oil deposits were
depleted and by 1970 the caverns in the salt
dome became storage for volatile
hydrocarbons. Town sat on top of 100 million
barrels of petrochemical products
Compared to private industry the government has done a much better job monitoring health, safety,
and environmental risks.
To date only one U.S. salt dome cavern storage has lost mechanical integrity

Environmental Concerns
• Within the cap rock itself, chemical reactions occur
that require of low temperature, low salinity
groundwaters
• The development of fresh groundwater and salt dome
resources has increased the potential for
contamination of shallow aquifers
• Resource extraction and leakage have further
perturbed the natural system

Environmental Concerns (cont.)
• Withdrawing 50 million gallons of water would have a
significant impact on aquatic life.
• Fish may not be able to survive chronic low-flow conditions
• Brine discharge into the Gulf of Mexico would greatly
increase the salinity near sensitive wetland areas
• Local community drinking water supply may be threaten

Public Outcry
• Hundreds of thousands of people
petitioned their local representatives
and state senators in opposition to
DOE project
• 2011- Congress rescinded $71 million
in funding for the DOE
• The Gulf Restoration Network stated
“this irresponsible oil storage scheme
would have required the removal of
50 million gallons of water a day from
the Pascagoula River for 5 to 6 years
to dissolve underground salt
deposits.”

Protecting the Environment
“We must ask how much are we wiling
to sacrifice for the production and
storage of petrochemicals? As long as
the country relies on fossil fuels, the
danger from storage, pipelines,
transport accidents, and spills is likely
to continue to threat public health and
safety, and endanger the
environment.”

Case Study--U.S. SPR Program and the Environment

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