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Analysis: Tapping oil from reserve may be trickier than ever

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By Ayesha Rascoe
WASHINGTON | Fri Mar 16, 2012 1:01pm EDT

(Reuters) – The U.S. Strategic Petroleum Reserve is not quite as strategic as it used to be.

As President Barack Obama moves closer to an unprecedented second release of the U.S. emergency oil stockpile in a bid to bring down near-record fuel prices, experts say dramatic logistical upheavals in the U.S. oil market over the past year may now make such a move slower and more complicated.

Moving to tap the four giant Gulf Coast salt caverns that hold 700 million barrels of government-owned crude would still almost certainly knock global oil futures lower, delivering some relief at the pump for motorists and helping Obama in the November election if he can prevent gasoline from rising above $4 a gallon nationwide.

On Thursday, prices fell by as much as $3 a barrel after Reuters reported that Britain was set to agree to release stockpiles together with the United States later this year. UK officials said the timing and details of the release would be worked out prior to the summer, when prices often peak.

But the logistics of getting that crude oil to willing refiners are more complicated than ever.

The reversal of a major Texas-to-Oklahoma pipeline will lower the distribution capacity of the SPR’s largest cavern, according to John Shages, who oversaw the U.S. oil reserves during the Bush and Clinton administrations. A resurgence in domestic oil output and the potential closure of the East Coast’s biggest refinery is curtailing demand for crude.

There is little doubt that SPR oil would eventually find buyers, since it is basically auctioned to the higher bidder. But it may move more slowly than the government hopes.

“The logistical system in the United States is shifting,” said Guy Caruso, the former head of the Energy Information Administration. “That probably is going to cause SPR officials to rethink how that oil would be distributed especially in an extreme scenario.”

The mechanics of the release may prove almost as tricky for Obama as rallying international support for a second intervention in as many years, or fending off attacks from Republicans who will likely brand it as a pre-election gimmick.

ANOTHER ERA

The U.S. shale oil boom and rising imports of Canadian oil sands crude have transformed the U.S. energy landscape, with industry now scrambling to move a glut of oil from the center of the country down to the U.S. Gulf Coast — reversing historical trends that were the basis for the SPR’s original planning.

The nation’s emergency oil stockpile, created by Congress in the mid-1970s after the Arab oil embargo, was designed to transport oil primarily via pipeline from the Gulf to refineries in the area and to buyers further north.

“The fact that pipelines go south and not north is a major change,” says Edward Morse, global head of commodities research at Citigroup and a former energy expert at the State Department.

The Department of Energy says the SPR can distribute crude to 49 refineries with a capacity of more than 5 million barrels per day — about one-third the U.S. total — and five marine terminals. It is designed to be capable of releasing oil within two weeks of an order, and to sustain a rate of 1 million bpd for as long as a year and a half, enough to meet 5 percent of U.S. demand.

Today it can discharge oil at a maximum rate of 4.25 million bpd, just below its 4.4 million bpd design capacity, a department official said. The reduction was due to a damaged storage tank.

Industry analysts, however, are skeptical.

Morse says that the maximum rate now appears unachievable, and that logistical problems constrained the government’s release of 30 million barrels of oil last summer — its largest ever — in response to the disruption of Libyan oil supplies.

Oil from the reserves must compete with crude already being transported via pipeline or tanker, often on crowded waterways, so there may not be enough capacity in the system to immediately take in millions of additional barrels of oil.

The Energy Department released an average of 743,000 bpd last August.

The department said it conducts thorough assessments of commercial capabilities to move oil from the reserves on a routine basis and remains confident it could supply the market with 4.25 million bpd if needed.

Many analysts doubt that much would ever be needed at once.

“Absent a serious disruption of great magnitude, it is inconceivable that the U.S. would draw down its inventory of SPR at the maximum rate,” said Shages, who now runs his own firm, called Strategic Petroleum Consulting, LLC.

SEAWAY, PHILADELPHIA

Even so, the system now has less flexibility.

The move to reverse the flow of the 350,000 bpd Seaway Pipeline to move crude oil from Cushing, Oklahoma, where there is a glut, to Gulf Coast refineries will almost certainly hurt the distribution capability of the SPR’s Bryan Mound storage tank in Freeport, Texas, says Shages.

Bryan Mound is the largest of the four sites, capable of holding about a third of the SPR’s total crude. About 43 percent of last year’s release came from Bryan Mound, data show.

After operator Enterprise Products completes the process of reversing the line by June, it will be limited to shipping crude via two Gulf of Mexico terminals and a system of local pipelines into Houston area refineries.

But Bryan Mound will still be able to discharge crude at a rate of 1.25 million bpd, according to an energy department official.

“When the pipeline is reversed, the distribution capability of crude from the SPR site will still be nearly 25 percent more than the site’s maximum drawdown rate, ensuring more than sufficient distribution capability,” the official said.

The Capline from Louisiana to Illinois, the largest such south-to-north pipeline, in theory has plenty of spare capacity since it has been running at less than a quarter of its 1.2 million bpd — but that is because a glut of Canadian and North Dakota crude is already sating the big Midwest refiners.

Meanwhile Gulf Coast plants are filling up on growing output from the Eagle Ford shale in Texas, reducing import demand. Because most U.S. crude oil cannot legally be exported, SPR supplies will typically only displace seaborne imports.

U.S. crude oil imports into the Gulf Coast region, known as Padd 3, fell 8 percent last year to below 5 million bpd, the lowest level since the 1990s.

Last year, at least some of the crude released from the SPR traveled further afield, beyond the Gulf Coast.

Tesoro, whose only refineries are on the West Coast, bought 1.2 million barrels, while East Coast refiner Sunoco bought 1.4 million barrels. Obama issued 44 waivers to the Jones Act to allow companies to use non-U.S. tankers for shipments last year.

But the East Coast looks a less likely market this year. Sunoco is set to close its 335,000 bpd Philadelphia refinery before June if it does not find a buyer. That could cut the region’s capacity to less than 700,000 bpd.

Ultimately the rate of release means little if you cannot get the oil quickly to those who need it most, says Mark Routt, a senior oil market consultant at KBR Advanced Technologies.

“To say that you have this drawdown capability, but you’re putting oil in places it doesn’t need to go, isn’t really helpful to the market,” Routt said.

(Editing by Russell Blinch and Jonathan Leff)

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Obama, the politics of the SPR and energy (lack of) exploration!

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Graphic source: Hot Air  (click to enlarge)

For starters, what is the Strategic Petroleum Reserve (SPR)?

The SPR was created in the United States after the Arab oil embargo that occurred between 1973 and 1974. It holds over 700 million gallons of crude oil and was initially to provide crude oil during any major supply interruption to the US.

Its mandate was expanded by Congress later to include potential release to address a severe spike in oil prices. It is in effect a national security tool for a president!

There is not however any legal rationale to tap the SPR for use as a political tool, which is what a release decision by President Obama at this point in time would seem to be.

If however some incident along the lines of Iran preventing shipments through the Strait of Hormuz were to occur, that would be an entirely different story.

Forgetting for a moment about the SPR, what about the reserves that the Obama administration has refused to tap?

It is an absolute truism that any release from the SPR designed to effect a decrease in crude oil prices would be a short-lived one at best as the country currently consumes over 18 million barrels a day. The last sale out of the SPR was 30 million barrels in 2011 or less than a two-day supply!image

Another even more important truism is provided by examining the graphic above.

This graphic shows that the moves made by this President, instead of lowering energy prices and boosting jobs and the economy, will instead have the effect of higher crude oil prices, less jobs and a slower economy.

It all makes one wonder, yet again, about some of the choices of this White House.

I think that it is fair to say that basically any way you slice it, for this President most if not all decisions are about politics and an administration doing whatever is necessary to try and get a 2nd-term in office.

A belief in letting the chips fall where they may as long as any political benefit may exist!

Finally, to provide some historical perspective about the use of the SPR consider:

SPR releases through time!

OIL SALES:

* June 2011 Libya war – Sold 30 million barrels.

* Sept 2005 Hurricane Katrina – Sold 11 million barrels.

* 1996-97 Nonemergency sales – Sold 28.1 million barrels (5.1 million in Weeks Island sale to pay for decommissioning of storage site and transfer of its oil; 12.8 million to reduce the federal budget deficit; 10.2 million to pay for the cost of operating the SPR).

* 1990-91 Iraqi invasion of Kuwait – Sold 21 million barrels (3.9 million in Oct 1990 test sale; 17.2 million in Jan 1991 drawdown ordered by president).

* Nov 1985 Test sale – Sold 967,000 barrels.

OIL LOANS:

* Sept 2008 – Loaned 5.4 million barrels of crude to five oil companies after hurricanes Gustav and Ike cut supplies.

* June 2006 – Loaned 750,000 barrels of sour crude to ConocoPhillips and Citgo after the Calcasieu Ship Channel closed and deliveries stopped to Louisiana refineries.

* Jan 2006 – Loaned 767,000 barrels of sour crude to Total Petrochemicals USA after the Sabine Neches ship channel closed and deliveries stopped to Texas refineries.

* Sept/Oct 2005 – Loaned 9.8 million barrels of sweet and sour crude after Hurricane Katrina disrupted Gulf of Mexico production and damaged terminals, pipelines and refineries.

* Sept 2004 – Loaned 5.4 million barrels of sweet crude due to disruptions in the Gulf of Mexico caused by Hurricane Ivan.

* Oct 2002 – Loaned 98,000 barrels to Shell’s Capline Pipeline to keep storage tanks full to withstand Hurricane Lili’s winds.

* Oct 2000 – Loaned 30 million barrels to boost winter heating oil supplies in the Northeast.

* Aug 2000 – Exchanged 2.8 million barrels of crude oil for 2 million barrels of heating oil to create Northeast Home Heating Oil Reserve.

* June 2000 – Loaned 500,000 barrels each to Citgo and Conoco after the Calcasieu Ship Channel closed and blocked crude oil shipments to Louisiana refineries.

* Dec 1998 to Feb 2000 – Exchanged 11 million barrels of lower-quality heavy crude in SPR with Mexico’s PEMEX for 8.5 million barrels of higher-quality sweet crude more suitable for U.S. refineries.

* April 1996 – Loaned 900,000 barrels of SPR crude to ARCO after company’s pipeline to Cushing, Oklahoma, had blockage. (Source)

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