US MMS announces SPR exchange contracts

The US Department of the Interior's Minerals Management Service Wednesday said it along with three major oil companies agreed to a 6 month 100,400 b/d royalty in-kind arrangement designed to help fill the Strategic Petroleum Reserve.

March 25, 2004

2 min read

By OGJ editors

WASHINGTON, DC, Mar. 24 -- The US Department of the Interior's Minerals Management Service Wednesday said it along with three major oil companies agreed to a 6 month 100,400 b/d royalty in-kind arrangement designed to help fill the Strategic Petroleum Reserve.

MMS will take crude oil instead of cash for certain Gulf of Mexico leases operated by the three companies—ChevronTexaco Corp., Royal Dutch/Shell Group, and ExxonMobil Corp. The US Department of Energy in turn will exchange the RIK oil for crude that can be better stored in SPR storage sites in Louisiana and Texas.

MMS also will ship 12,000 b/d of royalty crude directly to DOE at onshore market centers, with one unspecified producer transporting another 2,700 b/d to DOE.

MMS said the combined transactions means a total of 115,000 b/d gets sent to the SPR from April through September. The SPR is now about 93% full; its capacity is about 700 million bbl.

Some in Congress would like to see the reserve expanded to 1 billion bbl but given building new capacity could cost several billion dollars, it's unlikely that idea will seriously be considered unless the US sees severe supply shocks in the near future.

Meanwhile, some lawmakers want DOE to suspend the current fill program while crude prices are higher than normal. But US Sec. of Energy Spencer Abraham recently ruled out deferring the SPR fill. He told lawmakers this week that the security benefits of filling the reserve far outweigh any negative market signal that comes when the crude is pulled off the market. He also brushed off some congressional calls to release SPR crude, arguing the reserve is meant for supply emergencies and is not meant to control prices.

DOE, however, has not completely ruled out temporarily halting the fill program if there are supply shocks in the market. Last year DOE suspended some deliveries because of a confluence of market factors that threatened crude imports. These included a general strike in Venezuela, civil unrest in Nigeria, and imminent military action against Iraq.

Wyoming RIK program
Separately, MMS has coordinated a royalty crude oil sale with Wyoming. Teppco Partners LP, Houston, Nexen Inc., Calgary, and Tesoro Petroleum Corp., San Antonio, won contracts for a total of 1,300 b/d of federal and state crude.

Delivery is scheduled to begin Apr. 1 and will continue through Sept. 30.