The U.S. Department of Energy has decided to ship 20,000 b/d of its Elk Hills field production in California to the Strategic Petroleum Reserve on the Gulf Coast.
DOE said prices are too low to sell the high quality Elk Hills Stevens zone oil on the California market. It had warned local buyers it might divert the oil to the Gulf Coast (OGJ, May 4, p. 50).
It said shipping the Elk Hills crude to the SPR site at Big Hill, Tex., will save $2/bbl under the price of comparable crude delivered there for storage in the SPR.
Pipeline shipments are to begin June I and continue for 4 months, totaling about 2.4 million bbl. DOE may or may not continue the shipments, depending on results of the semiannual Elk Hills crude oil sale in September. Reductions in the existing 12 sales contracts will be prorated among buyers.
The 20,000 b/d volume is the most that can be shipped from the West Coast to the Gulf Coast through available pipelines.
In other action, DOE let contract to Unocal Corp. for crude oil distribution services from the company's Beaumont, Tex., terminal. In the event of an SPR drawdown, DOE will be able to distribute 200,000 b/d of crude from the West Hackberry, La., and Big Hill sites to vessels at Unocal's Beaumont terminal.
The initial term of the contract is 5 years. After that, DOE can exercise as many as three 5 year options.
CRUDE OIL PRICES
Law requires DOE to sell Elk Hills crude only when offered prices meet the higher of two price tests: at least 90% of the prevailing market value or at least equal to the price for which oil can be bought for the SPR, adjusted for quality differences and transportation costs.
DOE will price the crude delivered to the SPR at the weighted average price being paid by Elk Hills purchasers, about 515.27/bbl, plus transportation costs of $2.85-2.90/bbl.
It considered a proposal that it give current Elk Hills buyers the opportunity to match the SPR price but wants to study the idea further. DOE suspended filling the SPR shortly after Iraq's invasion of Kuwait in August 1990. It recently announced plans to resume spot market purchases but rejected initial bids received the last week of April as too high.
PRODUCERS RESPONSE
Tom Hunt, executive vice-president of the California Independent Petroleum Association, called DOE's decision "very poor government policy brought about by an even poorer policy, the refusal to let Alaskan North Slope crude find its true price.
"Taxpayers are going to have to pay for transferring oil from a hole in the ground in California to a hole in the ground on the Gulf Coast.
"It will tighten the price for light crude in California and it could really harm the price of heavy crude. It going to be a close thing. It's important that DOE carefully watch what it's doing to the San Joaquin Valley so they don't crash the market."
Copyright 1992 Oil & Gas Journal. All Rights Reserved.
