Safety net

A little-known provision in a recent law reauthorizing the Strategic Petroleum Reserve could impact the US oil industry the next time oil prices plunge.

A little-known provision in a recent law reauthorizing the Strategic Petroleum Reserve could impact the US oil industry the next time oil prices plunge.

The Energy Policy and Conservation Act (EPCA) reauthorization, enacted Nov. 9, contains a measure that allows the federal government to buy marginal well oil production at $15/bbl through 2003.

The goal of the legislation was to assure that marginal wells are not shut in during periods of extraordinarily low oil prices.

Under the provision, domestic prices would have to average less than $15/bbl for a year, and the $15 would be adjusted for inflation.

The Department of Energy would store the oil in the SPR, presumably after swapping it for grades suitable or convenient for the storage caverns.

The law defined marginal wells as those making 15 b/d or less, those making 25 b/d or less with produced water accounting for 95% or more of total output, or those producing oil heavier than 20° gravity.

Escape clause

There is a significant loophole in the law, though. It authorizes-but does not require-the Secretary of Energy to buy marginal oil.

The Congressional Budget Office estimated that if a DOE secretary activated the measure, the government might spend about $200 million/year on about 13 million bbl.

CBO said, "Under our current oil price projections, we estimate that there is about a 35% chance that the annual average price of oil will be below the $15/bbl threshold in the bill."

There's no doubt the law could slow the US production decline if prices plunge.

The Interstate Oil and Gas Compact Commission's latest report of stripper well (those producing 10 b/d or less) abandonments estimated that 13,912 were plugged in 1998, the nadir of the price curve. Oil prices were on the rebound in 1999, and only 11,227 were plugged.

IOGCC noted that US stripper wells produced more than 313 million bbl in 1999, or 27% of Lower 48 onshore oil output.

Industry view

Craig Ward, Independent Petroleum Association of America's director of crude oil policy, said the marginal well provision resulted from a "Massachusetts-Texas" compromise.

In late 1999, Rep. Joe Barton (R-Tex.), chairman of the House commerce committee's energy and power subcommitee, wanted to help oil producers survive another price plunge. Rep. Ed Markey (D-Mass.) wanted a federal regional home heating oil reserve established in the US Northeast to blunt future distillate price spikes. A deal was struck.

Ward admitted the marginal well provision "isn't much of a safety net, but it's the only safety net available to the industry right now."

He said another minor provision in the EPCA reauthorization may prove to be more significant in the long run.

Congress directed the Secretary of the Interior to inventory within 2 years all onshore federal lands containing oil and gas potential.

In a report to Congress, Interior must identify those lands and give US Geological Survey estimates of their oil and gas resources. More importantly, it must detail any restrictions or impediments to development of those resources.

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