Eleven companies were high bidders for 3.925 million bbl of U.S. Strategic Petroleum Reserve oil last week.
Their bids averaged $34.14/bbl for sour crude and $38.68/bbl for sweet.
The Department of Energy had offered 5 million bbl, the maximum allowed by law for a "test sale," which does not require an energy emergency declaration, and 33 bidders made 40 offers totaling 10.4 million bbl.
DOE said the lack of bids for one of the six types of crude offered resulted in a little less than 4 million bbl being sold, rather than the full 5 million bbl. It said that was not a serious concern and would not reduce the value of the exercise.
President Bush Sept. 26 ordered DOE to hold the sale as a readiness exercise of the government's system for distributing crude in a severe supply disruption (OGJ, Oct. 8, p. 25).
Energy Sec. James Watkins said, "At this point, we are meeting every one of our test sale milestones precisely according to schedule. With today's selections, we are ready to move into the final phase of contract awards and delivery of oil."
Amoco Oil Co. was high bidder on the most oil, 1.12 million bbl.
SITE BY SITE
DOE said the lack of bids for sour crude from the SPR's Weeks Island site southwest of New Orleans was most likely the result of an increase in the flow of Alaskan North Slope crude oil to the Gulf Coast expected in November.
DOE had offered 800,000 bbl of sour crude from Weeks Island.
Companies offered bids on specific "line items" of crude oil from different SPR storage sites.
If all contracts are awarded, DOE will sell all of the 600,000 bbl of sweet crude and 1 million bbl of sour crude it offered from the Bryan Mound site near Texas City, Tex.
Likewise, bids were received for all of the 600,000 bbl of sweet crude offered from the Bayou Choctaw site near Baton Rouge.
All of the 1 million bbl of sweet crude from the West Hackberry site near Lake Charles, La., will be sold.
However, of the 1 million bbl of sour crude oil offered from West Hackberry, only 700,000 bbl will be sold. The remaining bids for West Hackberry sour were considered too low and did not meet the requirement that selected bids in a test sale be at least 90% of the market value of comparable crude.
Average high bid prices ranged from $34.14/bbl for West Hackberry sour to $38.68 for Bayou Choctaw sweet. Including rejected offers, bids ranged from a low of $27.85 to a little more than $39.06.
PRICE ADJUSTMENT
DOE said the final prices for all crude oil purchased will be adjusted following delivery of the oil to reflect changes in market prices. DOE tracks the changes daily under a price index system.
Under that system, bidders based their offers on their assessment of the SPR crude oil's value compared with a base reference price set by DOE when it asked for bids.
DOE set the base reference price at $37.029 for sweet crude and $36.4907 for sour crude.
The prices were determined by averaging prices for several domestic crudes shortly before the call for bids was issued.
The reference prices will be used to track daily changes in the price of crude oil since the department issued its Sept. 28 notice of sale for SPR crude.
When companies make their final payments, their bid prices will be raised or lowered by the same amount the reference price has changed between the time bids were requested and the time crude oil is delivered.
DOE set up the index system to give prospective bidders confidence that their offers would track price changes in the market. Because final payments are not made until the oil is delivered, which may be several days or weeks after bids are submitted, an index system was considered especially important to attract bidders during a time of volatile prices.
Another advantage of the index system is that it allows bidders to prepare their bids early in the sales process. Because companies know their bids will be adjusted according to a reference price set at the time bids are requested rather than to the market price when bids are due, they did not need to wait until the final deadline to submit bids.
Copyright 1990 Oil & Gas Journal. All Rights Reserved.
