US DOE announces new SPR fill contracts

By OGJ editors
WASHINGTON, DC, Feb. 12 --The US Department of Energy Thursday said it awarded five new contracts to deliver oil to the Strategic Petroleum Reserve (SPR) this spring under the royalty-in-kind (RIK) exchange program.

Atlantic Trading and Marketing Inc., ExxonMobil Corp., Glencore Ltd., Koch Supply and Trading LP, and Shell Trading (US) Co. were awarded 6-month contracts. Crude deliveries of 104,000 b/d are slated to begin in April.

DOE said 643 million bbl of oil currently are stored in the SPR's underground salt caverns along the Gulf Coast of Louisiana and Texas. DOE expects the SPR will reach its 700 million bbl capacity in 2005.

The crude oil will come from exchange arrangements that the companies make for RIK crude produced from federal offshore leases in the Gulf of Mexico and owed to the US government. The US Department of Interior's Minerals Management Service manages the RIK program and tracks federal leaseholder royalty obligations.

Under the RIK program, federal Outer Continental Shelf tracts are leased to crude oil producers who deliver royalty oil from designated Gulf of Mexico production platforms to market centers along the Gulf Coast. The companies then receive crude from the market centers and deliver "in-kind" oil to the SPR.

Actual volumes delivered to the SPR take into account adjustments for transportation and quality differentials.

Some fuel consumers and state groups have criticized the DOE/DOI program.
The Air Transport Association has urged the White House to slow SPR deliveries when fuel prices are high. The group alleged last December that jet fuel prices could spike if the SPR fill continues on its current course.

DOE rejected that contention, saying SPR deliveries represent a very small percentage of world crude supplies. Meanwhile, some state governments that rely on oil and gas royalties for a portion of their budget have maintained that RIK programs do not give taxpayers or states the fair market value of the oil from the lease.

Officials of those states would prefer that all royalties be paid out on a cash basis. But DOE and DOI say companies in certain cases should be allowed to meet their royalty obligations by giving the government crude instead of cash.