WATKINS SEEKS AUTHORITY TO LEASE OIL FOR SPR

U.S. Energy Sec. James Watkins has asked Congress for authority to negotiate leasing agreements on crude oil to fill the Strategic Petroleum Reserve.

He also said the final size of the SPR should be the planned 750 million bbl, not 1 billion bbl. Watkins made the recommendations in two studies Congress required DOE to conduct, one on alternative financing approaches for the SPR and the other analyzing size options for the stockpile, which now contains 580 million bbl.

FINANCING STUDY

DOE reported that any method of filling the SPR would be expensive for the government one way or another. It found no bargain approaches.

One option considered was leasing oil from a foreign producer and storing it in the SPR. While the oil was in storage, the government would have the option to acquire it at a predetermined price.

DOE held exploratory talks on the matter with Kuwait, Mexico, Norway, Saudi Arabia, and United Arab Emirates. Less detailed discussions were held with Nigeria, U.K., and Venezuela.

The governments were unwilling to bid to supply SPR leased crude in open competition, did not want any profits to be subject to U.S. taxes, and wanted to arrange their own shipping rather than moving 50% of the oil in U.S. flag ships.

But DOE said, "There appears to be a clear potential for negotiating oil leases with one or more foreign producing nations, but the more feasible approach would involve bilateral negotiations country to country. One possible reason for conducting multiple bilateral discussions would be to accommodate SPR plans for storing multiple types of crude oil."

The study also analyzed whether the government should sell special oil bonds, denominated in a specific number of barrels of oil, and use the proceeds to buy oil for the SPR.

The payment of principal and interest to the investor would be based on the price of oil at bond maturity. But the study found that would cost the U.S. more money than direct financing.

It also saw no benefits in requiring oil refiners and large consumers to establish and maintain strategic oil stocks beyond the normal levels of inventory.

SPR SIZE

A separate report concluded the SPR will be adequate when it is expanded to 750 million bbl this decade.

"Based on a review of economic and strategic factors, the administration believes expansion of the SPR to 1 billion bbl is neither needed nor justified," Watkins said.

He said even though U.S. oil imports are increasing, the current size of the SPR and the 750 million bbl goal provide substantial protection for the U.S.

DOE found the world is better prepared to deal with an oil supply interruption today than it was in 1979. That's because International Energy Agency member countries have built strategic stocks totaling nearly 1 billion bbl and 9-13 million b/d of surplus world productive capacity could be tapped in the event of a disruption.

The SPR is being filled at a 40,000 b/d clip, and the administration has proposed increasing that to 59,000 b/d in fiscal 1991. The study said oil leasing may permit the government to increase the fill without increased expenditures.

DOE said by relying solely on direct purchases, completing fill of a 750 million bbl reserve by 1996 would cost about $3.5 billion in oil purchases alone. Filling to 1 billion bbl by 2005 would cost $15 billion.