Senate panel hears pros, cons of strategic oil products reserve

Establishing a strategic products reserve could be challenging and costly, but would also increase the US capacity to respond to oil supply interruptions, witnesses told a US Senate committee.

Establishing a strategic products reserve could be challenging and costly, but would also increase the US capacity to respond to oil supply interruptions, witnesses told a US Senate committee on May 12.

The US Department of Energy still considers a large strategic petroleum reserve focused on crude oil storage the best way to protect the United States from impacts of a short-term interruption of crude supplies, said David F. Johnson, deputy assistant for petroleum reserves in DOE's Office of Fossil Energy.

"However, events of 2005 and 2005 have shown us that this system may be limited in its ability to address some short-term interruptions to our domestic refined products supply and distribution infrastructure," he told the Senate Energy and Natural Resources Committee.

"The question now to be answered is: Do we have an increased probability of events such as hurricanes in the Gulf of Mexico that lead to short-term disruptions of limited size that warrant the additional cost of developing a refined products reserve?" Johnson said.

Other witnesses included John Shages, Johnson's predecessor as deputy assistant for petroleum reserves in DOE's fossil energy office; Frank Rusco, natural resources and environment director at the Government Accountability Office; Didier Houssin, oil markets and emergency preparedness director at the International Energy Agency in Paris, and Kevin Book, managing director of ClearView Energy Partners LLC in Washington.

30 million bbl of products

They testified at a hearing examining S. 967, the Strategic Petroleum Reserve Modernization Act of 2009, which committee chairman Jeff Bingaman (D-NM) introduced last week. The measure would create a refined oil product reserve containing at least 30 million bbl of gasoline, diesel fuel and other transportation fuels as part of the nation's 1 billion bbl SPR.

"It makes sense that our reserves policy should evolve as our needs evolve. Many other countries around the world hold refined petroleum products in their strategic inventories, and it is time that we in the US did the same," Bingaman said.

Houssin said that while the IEA would welcome US expansion of its strategic reserve, it believes that simply adding more crude oil would not address vulnerabilities underlined by recent hurricanes. "Instead, we believe that additional SPR barrels in the form of finished product and held in strategic locations throughout the country, ready to be utilized when refineries or distribution networks are disrupted, would bring greater additional security for each dollar spent," he testified.

Arguments for establishing a strategic oil products reserve include increased US reliance on foreign refined products, possible reduced refining capacity during weather-related disruptions, the time needed for oil product regions to reach all US regions during such emergencies, and US port capacity bottlenecks which limit amounts of products which can imported quickly during emergencies, Rusco said.

Some of the arguments against including refined petroleum products in the SPR are the surplus of gasoline in Europe, the high storage costs of refined products, US use of boutique fuels in several regions, and policy alternatives which may reduce US reliance on oil, he continued.

Efficiency vs. versatility

Witnesses noted that oil products storage can be harder than crude oil's because products degrade more quickly. They also said that creating a products reserve will require policymakers to balance efficiency and savings resulting from a single location on one hand and versatility, but higher costs, created by locations scattered around the country.

"If you start putting in large free-standing product reserve sites not associated with underground crude oil storage, the costs grow because steel tanks would be needed. Moving to other parts of the country outside earthquake zones could result in lower land costs, but would make sense only if they were near larger population centers such as Las Vegas with distribution capability to adjacent states," said Shages.

Establishing a strategic products reserve or group of reserves raises other questions, Book noted. "Pipelines share the same vulnerability as refineries: Both require electricity to operate. A single strategic specification for emergencies could solve the boutique fuels problem, but where would it be refined? Economically attractive expansion of existing refineries could provide an alternative to strategic storage, but permits would have to be expedited," he said.

Witnesses also said that the products degradation issue also could be addressed. "The home heating oil reserve we have is turned over every day so there's not a deterioration problem. France and Germany have underground product reserves where storage can be for longer periods than in aboveground steel tanks," Shages said.

There seemed to be strong support from both the committee's members and the witnesses to limit use of any strategic reserve to supply interruptions. "To the extent that we legislate establishing a strategic products reserve, we would say that its releases would be limited in this manner and not used to offset rapidly increasing prices," Bingaman said.

Contact Nick Snow at nicks@pennwell.com

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