[House Hearing, 106 Congress]
[From the U.S. Government Printing Office]
STRATEGIC PETROLEUM RESERVE
=======================================================================
OVERSIGHT HEARING
before the
SUBCOMMITTEE ON ENERGY
AND MINERAL RESOURCES
of the
COMMITTEE ON RESOURCES
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
on
CLINTON ADMINISTRATION'S PROPOSAL TO UTILIZE TWENTY-EIGHT MILLION
BARRELS OF FEDERAL ROYALTY OIL TO PARTIALLY FILL THE STRATEGIC
PETROLEUM RESERVE (SPR)
__________
APRIL 15, 1999, WASHINGTON, DC
__________
Serial No. 106-20
__________
Printed for the use of the Committee on Resources
Available via the World Wide Web: http://www.access.gpo.gov/congress/
house
or
Committee address: http://www.house.gov/resources
______
U.S. GOVERNMENT PRINTING OFFICE
56-730cc WASHINGTON : 1999
COMMITTEE ON RESOURCES
DON YOUNG, Alaska, Chairman
W.J. (BILLY) TAUZIN, Louisiana GEORGE MILLER, California
JAMES V. HANSEN, Utah NICK J. RAHALL II, West Virginia
JIM SAXTON, New Jersey BRUCE F. VENTO, Minnesota
ELTON GALLEGLY, California DALE E. KILDEE, Michigan
JOHN J. DUNCAN, Jr., Tennessee PETER A. DeFAZIO, Oregon
JOEL HEFLEY, Colorado ENI F.H. FALEOMAVAEGA, American
JOHN T. DOOLITTLE, California Samoa
WAYNE T. GILCHREST, Maryland NEIL ABERCROMBIE, Hawaii
KEN CALVERT, California SOLOMON P. ORTIZ, Texas
RICHARD W. POMBO, California OWEN B. PICKETT, Virginia
BARBARA CUBIN, Wyoming FRANK PALLONE, Jr., New Jersey
HELEN CHENOWETH, Idaho CALVIN M. DOOLEY, California
GEORGE P. RADANOVICH, California CARLOS A. ROMERO-BARCELO, Puerto
WALTER B. JONES, Jr., North Rico
Carolina ROBERT A. UNDERWOOD, Guam
WILLIAM M. (MAC) THORNBERRY, Texas PATRICK J. KENNEDY, Rhode Island
CHRIS CANNON, Utah ADAM SMITH, Washington
KEVIN BRADY, Texas WILLIAM D. DELAHUNT, Massachusetts
JOHN PETERSON, Pennsylvania CHRIS JOHN, Louisiana
RICK HILL, Montana DONNA CHRISTIAN-CHRISTENSEN,
BOB SCHAFFER, Colorado Virgin Islands
JIM GIBBONS, Nevada RON KIND, Wisconsin
MARK E. SOUDER, Indiana JAY INSLEE, Washington
GREG WALDEN, Oregon GRACE F. NAPOLITANO, California
DON SHERWOOD, Pennsylvania TOM UDALL, New Mexico
ROBIN HAYES, North Carolina MARK UDALL, Colorado
MIKE SIMPSON, Idaho JOSEPH CROWLEY, New York
THOMAS G. TANCREDO, Colorado
Lloyd A. Jones, Chief of Staff
Elizabeth Megginson, Chief Counsel
Christine Kennedy, Chief Clerk/Administrator
John Lawrence, Democratic Staff Director
------
Subcommittee on Energy and Mineral Resources
BARBARA CUBIN, Wyoming, Chairman
W.J. (BILLY) TAUZIN, Louisiana ROBERT A. UNDERWOOD, Guam
WILLIAM M. (MAC) THORNBERRY, Texas NICK J. RAHALL II, West Virginia
CHRIS CANNON, Utah ENI F.H. FALEOMAVAEGA, American
KEVIN BRADY, Texas Samoa
BOB SCHAFFER, Colorado SOLOMON P. ORTIZ, Texas
JIM GIBBONS, Nevada CALVIN M. DOOLEY, California
GREG WALDEN, Oregon PATRICK J. KENNEDY, Rhode Island
THOMAS G. TANCREDO, Colorado CHRIS JOHN, Louisiana
JAY INSLEE, Washington
------ ------
Bill Condit, Professional Staff
Mike Henry, Professional Staff
Deborah Lanzone, Professional Staff
C O N T E N T S
----------
Page
Hearing held April 15, 1999...................................... 1
Statements of Members:
Cubin, Hon. Barbara, a Representative in Congress from the
State of Wyoming........................................... 1
Prepared statement of.................................... 2
Underwood, Hon. Robert A., a Delegate to Congress from the
Territory of Guam.......................................... 3
Prepared statement of.................................... 4
Statements of witnesses:
Cruickshank, Walter, Associate Director, Policy and
Management Improvement, Minerals Management Service,
Department of the Interior................................. 6
Prepared statement of.................................... 16
Furiga, Richard D., Deputy Assistant Secretary, Strategic
Petroleum Reserve, Office of Fossil Energy, U.S. Department
of Energy.................................................. 5
Prepared statement of.................................... 14
OVERSIGHT HEARING ON CLINTON ADMINISTRATION'S PROPOSAL TO UTILIZE
TWENTY-EIGHT MILLION BARRELS OF FEDERAL ROYALTY OIL TO PARTIALLY FILL
THE STRATEGIC PETROLEUM RESERVE (SPR)
----------
THURSDAY, APRIL 15, 1999
House of Representatives,
Subcommittee on Energy and Mineral Resources,
Committee on Resources,
Washington, DC.
The Subcommittee met, pursuant to notice, at 2:03 p.m., in
Room 1324, Longworth House Office Building, Hon. Barbara Cubin
[chairman of the Subcommittee] presiding.
STATEMENT OF HON. BARBARA CUBIN, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF WYOMING
Mrs. Cubin. The Subcommittee on Energy and Mineral
Resources will come to order.
The Subcommittee is meeting today to hear testimony on the
Clinton Administration's proposal to utilize 28 million barrels
of Federal royalty oil to partially fill the Strategic
Petroleum Reserve.
Under Rule 4(g) of the Committee rules, any oral statements
at hearings are limited to the chairman and the Ranking
Minority Member. This will allow us to hear from our witnesses
sooner and help all these members here keep to their schedules.
So, I am not going to go on and read the rest of this script.
If all of these members here have any statements, we will put
them in the record.
On February 11th of this year, the Energy and Interior
Departments jointly announced that the proposal to take 28
million barrels of royalty oil from the outercontinental shelf
leases in the Gulf of Mexico to replace a like volume which had
been drawn down since the Gulf War. Although the Subcommittee
on Energy and Mineral Resources is not the oversight panel per
se of the SPR, we are the congressional keepers of the mineral
leasing law from which the obligation to pay these royalties
arises, and that is how we have jurisdiction.
And this brings us to our two witnesses here today. I would
like to establish for the legislative record that the Clinton
Administration can and will utilize the option of requiring
lessees to surrender a fraction of their production to the
government rather than sending the same fraction of value
received for the production as dollars to the Treasury. I
continue to be interested in this royalty-in-kind methodology
as a means to increase efficiency in royalty collections
through diminished audit burdens certainly for lessees that
they have paid all that they owe when the oil is delivered as
well as provide taxpayers with the opportunity to receive added
value from downstream marketing or direct utilization by the
Government, such as the MMS is now pilot testing with the R-I-K
natural gas being burned by the General Services Administration
to heat the very building that we are meeting in today.
Now, I realize that the motives of the administration to
exercise its R-I-K option for this is SPR non-fill idea may not
be so pure as what I have just described. Indeed, the
Department of Energy has not had to come begging to the
Congress for an appropriation to purchase the 28 million
barrels of oil precisely because R-I-K is an option here. At
this morning's crude oil price, this represent approximately
$460 million that they didn't have to ask the Congress for; not
exactly small change, but if were an appropriator rather than
an authorizer, I might be upset that my control of the purse
strings was being subverted by this plan. But I am a supporter
of this plan chiefly because I believe it makes very good sense
to take even this small amount of oil out of the supply-demand
equation at this time.
When the administration announced the plan, I believe that
the oil prices were less than $13 a barrel; now, they are
slightly over $16 for May 1999 deliveries of light sweet crude
at Cushing, Oklahoma. This recent rise was certainly welcome,
but my constituents in this business are still hurting, and
they are getting far less than NYMEX prices for their
production. Any uptick in prices that will result from the
100,000 barrels of oil per day not flowing into refineries is
good for our domestic producers, albeit it is small in
comparison to the effect which the recent OPEC quota has
appeared to have on global prices.
In conclusion, I do wish to thank DOE and the MMS for
sending us their experts to discuss the mechanics of this
proposal. I have not asked any oil industry folks to testify at
this juncture, because no R-I-K deliveries have been made yet,
so there is no track record to examine. But, I reserve the
opportunity for follow-up should this Subcommittee become aware
of problems with the upstream end of the program managed by the
Interior Department.
[The prepared statement of Mrs. Cubin follows:]
Statement of Hon. Barbara Cubin, a Representative in Congress from the
State of Idaho
The Subcommittee meets today to review the Administration's
plans to partially fill the Strategic Petroleum Reserve, or
SPR. On February 11th of this year, the Energy and Interior
Department's jointly announced that proposal to take 28 million
barrels of royalty oil from outer continental shelf leases in
the Gulf of Mexico to replace a like volume which had been
drawn down since the Gulf War. Although the Subcommittee on
Energy & Mineral Resources is not the oversight panel per se of
the SPR, we are the Congressional keepers of the mineral
leasing law from which the obligation to pay these royalties
arises.
And this is what brings our two witnesses here today. I'd
like to establish for the legislative record that the Clinton
Administration can and will utilize the option of requiring
lessees to surrender a fraction of their production to the
government rather than sending the same fraction of value
received for the production as dollars to the Treasury. I
continue to be interested in this royalty-in-kind (R-I-K)
methodology as a means to increase efficiencies in royalty
collections through diminished audit burdens, certainty for
lessees that they have paid all they owe when the oil is
delivered, as well as provide taxpayers with the opportunity to
receive added value from downstream marketing or direct
utilization by the government, such as the Minerals Management
Service is now pilot testing with R-l-K natural gas being
burned by the General Services Administration to heat the very
building we are meeting in today.
Now, I realize that the motives of the Administration to
exercise its R-I-K option for this SPR non-fill idea may not be
so pure as what I've just described. Indeed, the Department of
Energy has not had to come begging to Congress for an
appropriation to purchase 28 million barrels of oil precisely
because the R-I-K option is there. At this morning's crude oil
price this represents approximately $460 million. Not exactly
small change. If I were an appropriator, rather than an
authorizer, I might be upset that my control of the purse
strings was being subverted by this plan. But, I am a supporter
of this plan, chiefly, because I believe it makes very good
sense to take even this small amount of oil out of the supply-
demand equation at this time.
When the Administration announced the plan I believe oil
prices were less than $13 per barrel. Now they are slightly
over $16 for May 1999 deliveries of light sweet crude at
Cushing, Oklahoma. This recent rise has certainly been welcome,
but my constituents in this business are still hurting--and
they are getting far less than NYMEX prices for their
production. Any uptick in prices that will result from 100,000
barrels of oil per day not flowing to refineries is good for
our domestic producers, albeit it is small in comparison to the
effect which the recent OPEC quota cuts has appeared to have on
global prices.
In conclusion, I wish to thank the DoE and the Minerals
Management Service for sending us their experts to discuss the
mechanics of this proposal. I have not asknot asked any oil
industry folks to testify at this juncture because no R-I-K
deliveries have been made yet, so there is no track record to
examine. But, I reserve the opportunity for follow-up should
the Subcommittee become aware of problems with the ``upstream''
end of the program managed by the Interior Department.
Mrs. Cubin. The chairman now recognizes the Minority
Ranking Member for any statement that he might have.
STATEMENT OF HON. ROBERT A. UNDERWOOD, A DELEGATE TO CONGRESS
FROM THE TERRITORY OF GUAM
Mr. Underwood. Thank you, Madam Chairman, and please bear
with me while my voice recovers. Thank you.
Legislation considered in this Subcommittee during the last
Congress would have required the Federal Government to abandon
its traditional practice of taking oil and gas royalties from
production on public lands and cash payments and begin taking
them ``in kind'' or as part of the lessees' production in
barrels or via pipeline.
Our colleagues, Representatives Mac Thornberry, Kevin
Brady, and Barbara Cubin, introduced last year's bill, H.R.
3334. However, the bill would not simply have required oil and
gas companies to pay royalties-in-kind instead of cash. It
would have also the Federal Government to turn the royalty oil
and gas over to a private marketer who would aggregate the oil
and gas and sell it on the market, deducting the marketing
costs and keeping part of the proceeds.
The administration strongly opposed this legislation,
maintaining that the Mineral Leasing Act and the Outer
Continental Shelf Lands Act provide adequate authority to take
royalties-in-kind when and if needed. The Committee did not
complete action on this bill, and a comparable bill has not
been reintroduced this Congress.
Royalty-in-kind is nonetheless he subject of administration
action and today's hearing. On February 11th, taking advantage
of historically low crude oil prices and a glutted oil market,
the administration underscored its belief that it has
sufficient legal authority by announcing plans to collect
royalties-in-kind from companies producing oil on Federal
leases in the Gulf of Mexico to partially refill the Strategic
Petroleum Reserve.
The administration's proposal to refill the Strategic
Petroleum Reserve with crude oil should result in removing some
surplus crude oil volumes from the market supply and refilling
the volumes drawn down during and after Desert Storm. Since oil
that is currently stored in the Reserve was purchased at prices
that average about $27 per barrel, adding oil to the Reserve
with the current prices of oil near $15 would result in a net
decrease in the average price per barrel for oil stored there.
The oil industry and a bipartisan group of congressional
House and Senate Members representing oil-rich States have
enthusiastically endorsed the plan, because is should help our
domestic producers during a period of all-time low prices of
crude oil. Their support appears to buttress the
administration's position regarding its legal authority. Yet,
despite nearly universal support for the administration's plan,
there are nevertheless questions about this proposal which
should be explored today. For instance, how does the
administration intend to actually transfer the petroleum to the
SPR? How will the administration deal with the various quality
factors, such as sulfur-acid content and viscosity?
Hopefully, today's hearing will provide answers to these
and other questions. I look forward to hearing the testimony of
our witnesses--Mr. Rick Furiga, from the Department of Energy,
and Dr. Walter Cruickshank, from the Minerals Management
Service, Department of Interior. Thank you, Madam Chairman.
[The prepared statement of Mr. Underwood follows:]
Statement of Hon. Robert Underwood, a Delegate in Congress from the
Territory of Guam
Legislation considered in this Subcommittee during the last
Congress would have required the Federal Government to abandon
its traditional practice of taking oil and gas royalties from
production on public lands in cash payments and begin taking
them ``in kind,'' or as part of lessees' production in barrels
or via pipeline.
Our colleagues, Reps. Mac Thornberry, Kevin Brady and
Barbara Cubin introduced last year's bill--H.R. 3334. However,
their bill would not simply have required oil and gas companies
to pay royalties-in-kind instead of cash. It also required the
Federal Government to turn the royalty oil and gas over to a
private marketer who would aggregate the oil and gas and sell
it on the market, deducting the marketing costs and keeping
part of the proceeds.
The administration strongly opposed the legislation,
maintaining that the Mineral Leasing Act and the Outer
Continental Shelf Lands Act provide adequate authority to take
royalties-in-kind when and if needed. The Committee did not
complete action on H.R. 3334, and a comparable bill has not
been re-introduced during this Congress.
Royalty-in-kind is nonetheless the subject of
administration action and today's hearing. On February 11,
taking advantage of historically low crude oil prices and a
glutted oil market, the administration underscored its belief
that it has sufficient legal authority by announcing plans to
collect royalties-in-kind from companies producing oil on
Federal leases in the Gulf of Mexico to partially refill the
Strategic Petroleum Reserve.
The Administration's proposal to refill the Strategic
Petroleum Reserve with crude oil should result in removing some
surplus crude oil volumes from the market supply, and refilling
the volumes drawn down during and after Desert Storm. Since oil
that is currently stored in the reserve was purchased at prices
that averaged about $27 per barrel, adding oil to the reserve
with the current prices of oil near $15 would result in a net
decease in the average price per barrel for oil stored there.
The oil industry and a bipartisan group of Congressional
House and Senate Members representing oil-rich states have
enthusiastically endorsed the plan because it should help
domestic producers during a period of all-time low prices on
crude oil. Their support appears to buttress the
Administration's position regarding its legal authority.
Yet, despite nearly universal support for the
Administration's plan, there are nevertheless questions about
this proposal which should be explored today. For instance, how
does the Administration intend to actually transfer the
petroleum to the SPR? How will the Administration deal with the
various quality factors, such as sulphur, acid content, and
viscosity?
Hopefully, today's hearing will provide answers to these
and other questions. I look forward to hearing the testimony of
our witnesses, Mr. Rick Furiga, from the Department of Energy,
and Dr. Walter Cruickshank, from the Minerals Management
Service, U.S. Department of the Interior.
Mrs. Cubin. Thank you, Mr. Underwood.
Now we will hear from the witnesses. Let me remind the
witnesses that, under our Committee rules, they must limit
their oral testimony to five minutes, but that your entire
statement will appear in the record.
And, with that, I would like to recognize the first
witness, Mr. Furiga, Deputy Assistant Secretary for the
Strategic Petroleum Reserve, U.S. Department of Energy.
STATEMENT OF RICHARD D. FURIGA, DEPUTY ASSISTANT SECRETARY,
STRATEGIC PETROLEUM RESERVE, OFFICE OF FOSSIL ENERGY, U.S.
DEPARTMENT OF ENERGY
Mr. Furiga. Thank you, Madam Chairman. Madam Chairman, Mr.
Underwood, it is a pleasure to be here for the first time
before this Subcommittee. I won't take time to go into the
history of the Strategic Petroleum Reserve or its physical
makeup. Just let me say that the Reserve consists of four
separate storage sites on the Gulf Coast, two in Texas and two
in Louisiana. These four sites have a total storage capacity of
700 million barrels. In that capacity, we currently have 561
million barrels of crude oil.
Let me move right into the Royalty-In-Kind Program which we
are very enthused about. That program essentially involves
receiving 28 million barrels of royalty oil from the Minerals
Management Service to use to add to the Reserve's crude oil. We
decided to split the program into two phases. When this program
was announced, interest was extremely high on the part of
industry. As you have mentioned, we had universal support for
implementing this program. We decided to strike while the iron
was hot.
Under Phase 1, we chose the largest producers of the
royalty oil and sought to obtain up to 50,000 barrels a day for
a 3-month period from these large producers to start deliveries
as soon as we possibly could. As of right now, we have
completed three agreements with Shell, Texaco and BP-Amoco.
Tuesday, we finished negotiations with Exxon, and we expect to
have an agreement signed by next Tuesday. So, we have four
agreements totaling over 43,000 barrels per day for a 3-month
period which will be delivered to our Bayou Choctaw site in
Louisiana. Until Phase 2--which I will describe in a moment--
until Phase 2 of the program is completed, we would prefer not
to disclose the exchange ratios that were used in reaching
these agreements so as not to jeopardize the participants in
Phase 1 offers during Phase 2. We would be pleased to provide
those in a closed session if you so desire, but we would just
prefer that they not be public at this particular time.
I would like to point out that the Strategic Petroleum
Reserve is experienced in buying, selling, and exchanging oil.
Recently, we did a very successful exchange of about 11 million
barrels of very heavy, sour crude for 8.5 million barrels of
high quality, light sour crude. The ratios that we are
experiencing under Royalty-In-Kind compare very favorably to
what we have experienced in the past.
Phase 2 is where we will seek up to 100,000 barrels per day
of royalty oil under a competitive solicitation. This
solicitation will be open to all comers. We expect this
solicitation to be issued by the end of the month, offers to be
received by the end of May, contracts by June 15th. The Phase 2
team is working as I speak to have a solicitation ready so that
we can meet that schedule.
In concluding my oral statement, I would like to make a few
points. The cooperation between the Minerals Management Service
personnel and the Strategic Petroleum Reserve personnel has
been very gratifying. They hit the ground running. We formed a
Phase 1 team and a Phase 2 team made up of personnel from both
offices, and they have worked extremely well together. It is a
complex job getting these solicitations together and conducting
the negotiations, but they have been performing very well.
Industry interest has remained high, and their cooperation and
their seriousness in going into these negotiations has been
very gratifying.
The first delivery under Phase 1 will start this coming
Monday. The oil will be put into the pipeline and will be sent
up to our Bayou Choctaw site. Almost 50 percent of the oil
being obtained under Phase 1 is domestic crude, which I
consider very important.
And, finally, I would like to say that our West Hackberry
site, one of our largest sites, is in Congressman John's
district, and to the best of my knowledge he is the person who
planted the seed of using royalty oil to help fill the SPR last
year at a meeting with a member of my staff. That idea worked
its way until it became the number one item on the Secretary's
list to do to help the oil reserve.
That concludes my oral statement, Madam Chairman.
[The prepared statement of Mr. Furiga may be found at the
end of the hearing.]
Mrs. Cubin. Thank you, Mr. Furiga.
The Chair now calls on Dr. Walter Cruickshank, Associate
Director of Policy and Management Improvement for the MMS,
Department of Interior.
STATEMENT OF WALTER CRUICKSHANK, ASSOCIATE DIRECTOR, POLICY AND
MANAGEMENT IMPROVEMENT, MINERALS MANAGEMENT SERVICE, DEPARTMENT
OF THE INTERIOR
Mr. Cruickshank. Thank you, Madam Chairman, Mr. Underwood.
I appreciate the opportunity to appear today to talk about the
joint initiative between the Departments of Energy and the
Interior to move Federal royalty oil into the Strategic
Petroleum Reserve Program.
First, I would like to second Mr. Furiga's comment. I think
our two agencies have been working exceptionally well together
to make this project a success.
The SPR Royalty Initiative will be implemented in two
phases. In the first phase, we have now concluded negotiations
with some of the largest crude oil-producing companies in the
Gulf of Mexico for deliveries of royalty oil to DOE for its
production months of May through July of this year. We realize
the importance of filling the SPR as quickly as possible during
this period of low oil prices, and Phase 1 has been designed to
accomplish this. By targeting the largest available royalty
volumes and directly negotiating with the producer, we believe
we can obtain efficient of significant volumes to the SPR in a
minimum amount of time.
Mr. Furiga noted we have successfully completed
negotiations with four companies to deliver approximately
43,000 barrels per day over the next 3 months. In Phase 2, we
will expand the initiative to take the remaining volumes
identified for this program and increase the fill rate for the
Strategic Petroleum Reserve. We will conduct a competitive
process in which the royalty oil at the lease will be offered
in exchange for the delivery of crude oil meeting SPR
specifications to locations at or near the SPR facilities. The
objective is to include all potential market participants in
order to maximize competition and minimize the cost of
delivering crude to the SPR.
All OCS leases are included in this program except for the
following: leases subject to section 8(g) of the OCS Lands Act.
These leases are excluded because coastal States receive 27
percent of the royalty receipts associated with those leases,
and to the extent the leases are dedicated to this initiative,
there would be a loss of revenue to those States. We have also
included section 6 leases, because those leases generally do
not give the government the option to take royalties-in-kind.
However, if the lessees agree, we will include those leases in
this program.
We also have leases dedicated to supplying small refiners.
As you know, the OCS Lands Act allows the Secretary to provide
royalty oil to eligible small refiners if needed, and a
significant borrowing of royalty oil has been set aside for
this purpose. These leases will be included when and if they
are dropped from the Small Refiner Program.
Finally, some 208 Gulf of Mexico leases are included in the
Royalty Management Program's reengineering effort. In this
initiative, we are partnering with industry, States, and tribes
to streamline and simplify our processes for royalty compliance
and revenue dispersement. This is a top MMS priority as we
intend to reengineer our business processes to be cutting edge
in the next century. Nevertheless, we expect many of these
leases will be available for under the Phase 2 process in the
year 2000.
The MMS role in this initiative is to support the lead
agency, the Department of Energy, in some of the analyses and
in the upstream logistics of delivering royalty oil.
Specifically, the MMS role is to identify the leases from which
oil royalties will be taken ``in kind'' and to generate the
information associated with these leases that is necessary for
program implementation. We will also notify lease owners of the
decision to take the royalties-in-kind and inform them of their
rights and responsibilities. We will continue to perform the
lease measurement and production accounting functions and
supply the Department of Energy with the data on lease
production and the royalty entitlement. And, finally, we will
assist DOE in conducting the Phase 2 competitive solicitation
and evaluating the offers received in that process.
Through the combined Phase 1 and Phase 2 Programs, we plan
to take 28 million barrels of royalty oil at the lease. At the
time this program was announced, OMB estimated that this will
reduce revenues to the Treasury by $170 million in this fiscal
year and $200 million in the next fiscal year. The actual
fiscal impacts will depend on the delivery dates and the market
price of oil at that time, and, as you noted in your opening
statement, the prices have already gone up.
It is also premature at this time to identify how many
barrels will actually be delivered into the SPR facilities
themselves. The primary determinant will be the location and
quality differentials between the value of the royalty oil at
the least and the value of the oil delivered to the SPR
facilities.
In closing, let me state that we look forward to continuing
to work with the Department of Energy to complete the transfer
of the 28 million barrels of royalty oil to the SPR Program. We
believe that this program will enhance the energy security of
our Nation, and we also believe that this program illustrates
that as managers of pubic assets, we can and must remain agile
and flexible to respond to changing public needs and
priorities.
Thank you, Madam Chairman and Congressman Underwood. This
concludes my remarks, and I would be pleased to answer any
questions.
[The prepared statement of Mr. Cruickshank may be found at
the end of the hearing.]
Mrs. Cubin. Thank you very much. And I would like to
express my appreciation, as well, for the cooperation that you
have had, not only between one another's agencies but also with
the congressional staff and for the briefing that you came up
for; it was very beneficial to me, and I wish I could have
stayed for the whole thing, but, anyway, thank you for that.
I am going to start my questioning with Dr. Cruickshank,
because I understand that you are missing the initial--that
your Ph.D. is in mineral economics and that you are missing the
initial meeting of--you are the president, I guess, of a
professional society of those folks, and you are missing that
initial meeting, and we appreciate that. If it weren't so
difficult to get room time, we might not have had to have it
today, but thank you for being here.
Could you estimate for me, Dr. Cruickshank, what the price
impact of Phase 1 and Phase 2 will be?
Mr. Cruickshank. The impact on oil prices?
Mrs. Cubin. Right.
Mr. Cruickshank. The Department of Energy may actually be
more qualified to answer that question, but we think that the
impact on prices in the oil markets will not be something that
could actually determine; that there will be some small
negligible impact on oil prices, but nothing that we could tie
directly to this program.
Mrs. Cubin. Like maybe 35 cents or something like that?
Mr. Cruickshank. I believe the Department of Energy has
done some estimates on that.
Mr. Furiga. We have a rule of thumb, a million barrels
taken off the market a year is a penny, so maybe we are talking
25 to 28 cents.
Mrs. Cubin. Okay, thank you. Mr. Furiga, is SPR currently
able to accept R-I-K oil from onshore producers in the event
that additional contracts could be solicited for future
refills?
Mr. Furiga. We are talking onshore?
Mrs. Cubin. Onshore.
Mr. Furiga. Physically--if we are talking the Gulf Coast
area, physically, we can. I am going to have to defer to Dr.
Cruickshank on this, but it is my understanding that if we get
into the onshore, there is a legal prohibition about
transferring it to us, plus the fact that we have to consider
the States' revenues that would be lost with onshore royalty
oil.
Mrs. Cubin. I think I am speaking more in terms of
infrastructure than legalities and that sort of thing.
Mr. Furiga. Infrastructure, we can receive domestic crude
by pipeline. There are no truck unloading facilities. There
have been proposals in the past to use stripper well
production. The Stripper Well Association knows that we can't
physically move stripper well production to the Reserve, but
along the Gulf of Mexico we are connected to the industry
infrastructure, and it is currently moving by pipeline. We can
probably receive it. So, physically, the answer is yes, Madam
Chairman.
Mrs. Cubin. But not to a great degree, is that right? Are
there any modifications in the SPR infrastructure that would be
needed to expand that to a realistic level? I don't even really
know if it is realistic that more contracts will be solicited;
I hope so.
Mr. Furiga. Oh, do you mean as far as capacity in the
Reserve?
Mrs. Cubin. No capacity.
Mr. Furiga. Not capacity. Pipeline capacity?
Mrs. Cubin. That is correct. Just what kind of
infrastructure is therefore possible onshore?
Mr. Furiga. We are connected in the eastern part of a
Louisiana to the Capline Pipeline system which goes all up to
Illinois. We are connected to the Seaway-Arco Pipeline systems
west of Texas. We are connected to the Mobil Pipeline system
and the Texaco Pipeline system. So, we are connected to a lot
of commercial systems right to our sites. Now, there may be a
problem, depending on the quantities we are talking about, with
obtaining space on those pipelines. If someone wants to ship
oil to us, which would be their responsibility, they would have
to nominate their shipments, and there may not be room. Some
pipelines in the recent past have been a proration status.
Mrs. Cubin. Thank you. Dr. Cruickshank, as you know, I am a
proponent of using the R-I-K to eliminate disputes over the
valuation of crude at or near the lease when there is no arm's
length transaction involved. In your testimony, you
acknowledged that deliveries of the initial volumes for the SPR
non-fill plan will be at St. James, Louisiana, not at the
lease. Would you please elaborate for me the factors necessary
to net back from St. James to the facility measurement point?
Mr. Cruickshank. The way this program is actually going to
work is that we are taking the royalty oil at the least and
transferring title to the Department of Energy at the facility
measurement point which is generally at or near the lease. The
Department of Energy is then arranging--they are negotiating
agreements with the companies for exchanges of the royalty oil
at the lease for oil that meets SPR specifications delivered at
St. James. And, so, in essence, the various costs of moving the
quality and location differentials of moving from the lease to
the market center is captured in the rate at which they are
exchanging oil at the market center for the oil at the lease,
but we are physically taking delivery of the royalty oil at the
lease.
Mrs. Cubin. At the lease. Would you mind explaining that to
me again? I did not understand your answer.
Mr. Cruickshank. Okay, we are taking delivery of the
royalty oil at the lease, and that is where the lessee has met
his obligation to the Department of Interior for paying
royalties when we accept delivery of the royalty oil at the
lease. What is then happening, in essence, is we have
negotiated these agreements--or will in Phase 2 through a
competitive process--invite people who want to take the royalty
oil at the lease and physically take that and deliver us other
oil at the market center or at the SPR facility. So, in
essence, we are not physically moving the royalty oil from the
lease to the SPR facility, but rather we are exchanging it, so
the company is actually keeping the royalty oil at the lease
and giving us some other barrels at the SPR facility.
Mrs. Cubin. Okay, so there is no net back involved in that
at all.
Mr. Cruickshank. That is correct.
Mrs. Cubin. Would you comment on that, too, Mr. Furiga?
Mr. Furiga. Well, I can add that----
Mrs. Cubin. About the negotiations with the operators.
Mr. Furiga. Well, the Strategic Reserve obtains two types
of crude oil: very high quality sweet crude, which means the
sulfur is less than 0.5 percent and a very high quality sour
crude; sulfur there is a maximum 1.99 percent. Those
specifications were developed in conjunction with industry and
studies that were done when the program started, and it kept
up--the ratio runs about 60 percent sweet and 40 percent sour
crude.
For Phase I, we are using the available space at our Bayou
Choctaw site. That space is for sweet crude, high quality
crude. Not all of the OCS production meets our specifications.
So, we are meeting with the companies and, as Dr. Cruickshank
said, we take title at the lease and then the company can
either make an offer to deliver the lease oil, the royalty oil,
if it meets our specifications or they can exchange the royalty
oil for oil that does meet our specifications, again, for
delivery to the SPR site. Industry is picking up the tab for
delivery to our site. And, so that would quite naturally mean
that you are not going to get a one for one just based on
transportation, let alone a quality difference. We are getting
very good crude in exchange for royalty oil.
Mrs. Cubin. Thank you very much. Mr. Underwood, do you have
any questions for the witnesses.
Mr. Underwood. Thank you very much, Madam Chairwoman.
Basically, I guess, as I understand this administration's
effort, there is widespread support in order to kind of
alleviate some of the distress that is being felt by domestic
oil producers, yet, as I understood your presentation, the
purchase or the acceptance of this oil petroleum has only a 50
percent requirement that it come from domestic sources. How did
we arrive at the figure or is that pretty much standard
practice in that past or is there a way to up that figure or
exactly what is the basis of that?
Mr. Furiga. Mr. Underwood, I didn't mean to imply that we
had established that 50 percent of the oil received has to be
domestic. Under the Phase 1 agreements, the exchange rates as
the numbers fell out indicate that 50 percent of the oil came
using the royalty oil exchange will, in fact, be domestic
crude, but our viewpoint is that a barrel is a barrel is a
barrel. Oil is a fungible commodity. If we take a barrel off
the market in the Gulf Coast, it doesn't matter if it is
domestic or foreign, it still has that--if it is a million
barrels of foreign, it has a penny impact; if it is a million
barrels of domestic, it has a penny impact.
Mr. Underwood. Well, what happens to the--you know, I mean,
I understand that in terms of the value to the government, but
what about the independent producers? I guess, I am trying to
understand if there is a gap between the way this effort is
being sold and actually what we are doing. Is that really a
great assistance to the independent oil producers?
Mr. Furiga. I think it is a help. As I said, if we take a
barrel of oil off the market, that affects all producers. Now,
under Phase 1, we went to the largest producers. Under Phase 2,
the competitive solicitation, independents will be in that
particular solicitation, but to get the program off the ground,
we chose to split it into Phase 1 and Phase 2. Phase 1 was
confined to the largest producers; Phase 2 will be open to
everybody.
Mr. Underwood. I am interested in a couple of statements,
one about the issue of quality and how that is dealt with in
terms of your calculations and also in terms of transportation,
which may help me understand exactly what you are trying to do.
Mr. Furiga, in your statement, you mentioned that crude taken
``in kind'' and delivered to the Reserve will be required to
meet your standard quality specifications, and, then, on the
other hand, Dr. Cruickshank, you stated that allowances will be
made and deductions allowed to reflect differences in the
quality of the oil delivered to MMS and the oil actually
delivered to DOE. Isn't there some kind of contradiction in
there about how we are actually dealing and how we are actually
calculating the effect of the difference in the quality of the
oil?
Mr. Furiga. I don't think so. On the one hand, we have----
Mr. Underwood. Boy, I must be very simpleminded then.
[Laughter.]
Mr. Furiga. On the one hand, we have----
Mr. Underwood. I need a Ph.D. in----
[Laughter.]
Mr. Furiga. On the one hand, we have the Reserve's quality
specifications, which, as I said, it is very high quality
crude. The royalty oil, some of it does not meet those
specifications or even come close. In arriving at these
agreements with industry, we take into consideration the fact
that their royalty oil is of a lower grade, and, therefore, of
a lower value, and we know we are not going to get a barrel for
barrel exchange when we are receiving high quality sweet crude
and they have, for example, high sulfur sour crude; we know
that. And, so there are formulas that we use; we have done
exchanges before; we know how to do that, the people in New
Orleans who are handling these contracts.
And then there is the transportation. The tariffs of the
pipelines, for example, from the Gulf Coast up to the St. James
terminal are published; they are known. We know what it is
going to cost industry to transport that oil to our site. That
value is subtracted off too, which, again, decreases the amount
of the very high quality crude you are going to get compared to
what they are giving up at the lease which doesn't meet the
specifications.
Mr. Underwood. So, in your own statement, you said that the
producer in Phase 1 will pay the transportation costs, but now
you are indicating that, in fact, transportation costs--that
the calculation will take into account the transportation
costs.
Mr. Furiga. Which the producer pays.
Mr. Underwood. Yes, run that by me again.
Mr. Cruickshank. If I may add to the answer?
Mr. Underwood. Sure.
Mr. Cruickshank. In essence, what is happening is that
there a certain amount of oil at the lease that, in this case,
the producer has, and he has promised to deliver some other
volume of oil to the SPR. The two volumes are not going to be
exactly the same, because the quality of the oil will be
different and because the value of the oil at the market center
is more than the value at the lease. So, in essence, he is
going to shrink that volume. If he is taking a 100 barrels of
oil at the lease, he is going to offer something less to us at
the SPR facility to account for that difference in location and
difference in quality. And, so, in essence, the cost of
transportation, if you will, is embedded in that exchange rate.
And, so we receive fewer barrels at the SPR than we are giving
up at the lease.
Mr. Underwood. If I could just ask a question about the SPR
in general. You said that you have 700 million barrel capacity?
Mr. Furiga. Yes.
Mr. Underwood. And how much of that is filled at the
current time?
Mr. Furiga. We have 561 million barrels in storage.
Mr. Underwood. Okay. So, are the current activities in
Yugoslavia going to affect that in any serious way over the
next few months?
Mr. Furiga. I am not aware of any plans to use the SPR as
we have done in Desert Storm.
Mr. Underwood. Okay, thank you very much.
Mrs. Cubin. Just because I am a little dense here, I want
to get this straight as far as the quality factor and the
transportation is concerned. Bottom line, if 28 million barrels
are delivered at the platform, how many barrels go underground
in the SPR?
Mr. Furiga. I can't give you an exact barrel number, but it
will be something less, I can guarantee you that. As I said,
when Phase 2 is done, we will be pleased to provide the ratios.
I can tell you that based on the exchanges we have done in the
past, the ratios we have obtained in Phase 1 compare quite
favorably to what we have experienced in the past, but it is
not going to be barrel for barrel.
Mrs. Cubin. Do you know what those ratios are?
Mr. Furiga. I know what they are.
Mrs. Cubin. Is that what you didn't want to say?
Mr. Furiga. I would prefer not to state them in an open
hearing; in a closed session, we would be very happy to----
Mrs. Cubin. Okay. So, 28 million barrels at the platform, a
lesser amount delivered underground, and that accounts for the
quality and the transportation.
Mr. Furiga. Yes.
Mrs. Cubin. Okay. So, I don't see how, then, that
transportation is a producer cost. It is not a producer cost.
Mr. Cruickshank. No, the producer is arranging for the
transportation, but he is, in essence, charging----
Mrs. Cubin. Less.
Mr. Cruickshank. [continuing] for it by keeping some of the
barrels.
Mrs. Cubin. Okay, that makes it clear to me then. Thank you
very much.
Mr. Underwood. Mr. Inslee.
Mrs. Cubin. Thank you. Mr. Inslee, did you have any
questions?
[Laughter.]
Mr. Inslee. Thank you, Madam Chair. I don't have any
questions. Thanks for the assistance from Guam.
Mrs. Cubin. Oh, you know, when you are a middle-aged woman,
you can't be held responsible for things.
Well, I would like to thank the panel very much, again, for
your cooperation in working together and getting this done, and
while all of us realize it isn't a solution to the problem that
the domestic oil is facing, it certainly has been helpful, and
I truly appreciate your cooperation, and I hope you have a good
meeting for the rest of your convention, Dr. Cruickshank. Thank
you very much.
This Subcommittee is adjourned.
Mr. Furiga. Thank you.
[Whereupon, at 2:40 p.m., the Subcommittee was adjourned.]
[Additional material submitted for the record follows.]
Statement of Richard D. Furiga, Deputy Assistant Secretary, Strategic
Petroleum Reserve, Office of Fossil Energy, U.S. Department of Energy
Madam Chairman and Members of the Subcommittee:
I am pleased to represent the Department of Energy and to
appear with my colleague from the Department of the Interior to
testify on the resumption of oil acquisition for the Strategic
Petroleum Reserve.
A joint DOE/DOI team has been putting this initiative
together quickly and effectively. The efforts of the staff from
our Office of Fossil Energy and from Interior's Minerals
Management Service have allowed us to take advantage of low oil
prices and begin adding to our Nation's energy security.
In fact, I am pleased to report that beginning this coming
weekend the first crude oil will be delivered to the Strategic
Petroleum Reserve under an expedited delivery request from
Equiva Trading Company in exchange for royalty volumes from
Shell and Texaco.
Before I go into more detail on the progress made to date
and our plans for the immediate future, let me describe briefly
the significance of the Strategic Petroleum Reserve to the
energy and economic health of this Nation.
The Strategic Petroleum Reserve--An Investment in Energy
Security
The Strategic Petroleum Reserve is the cornerstone of our
capability to respond to an energy supply emergency.
Numerous times in the past three decades the world has
experienced disruptions in the supply of oil exports. In 1973
the first energy crisis made most Americans aware that our
economy is highly dependent upon the availability of imported
oil, and that crude oil prices were, for the most part, no
longer within our control. That price shock led to passage of
the Energy Policy and Conservation Act in December 1975. Among
other things, the Act authorized the creation of a petroleum
reserve of up to one billion barrels.
Today, the Strategic Petroleum Reserve consists of four
sites, two in Texas and two in Louisiana, with a capacity of
700 million barrels. All of the storage capacity is in 62 huge
caverns that have been leached from salt domes thousands of
feet below the surface.
The first crude oil was added to the Reserve on July 21,
1977. In the early 1980s, in the aftermath of the 1979 Iranian
revolution and accompanying oil disruption, the Reserve was
filled as fast as the facilities could accept crude oil; by the
end of 1985, it contained 489 million barrels of oil. In the
late 1980's and early 1990's, constrained by tightening
budgets, fill continued albeit at a slower pace. In 1994, fill
stopped completely at a peak inventory of 592 million barrels.
The Reserve has been used once under Presidential direction
in response to oil supply concerns. In January 1991, at the
onset of Operation Desert Storm and in conjunction with our
allies in the International Energy Agency, the Department of
Energy activated a drawdown of the Reserve, ultimately awarding
competitive contracts for the sale of 17.3 million barrels. The
Desert Storm sale, and other test sales, successfully
demonstrated the Reserve's ability to function efficiently in a
real world emergency situation.
In fiscal years 1996-97, driven by fiscal requirements,
three non-emergency oil sales totaling 28 million barrels were
carried out, leaving the Reserve at its current inventory of
561 million barrels.
Transfer of Royalty Oil to Restore SPR Inventory
The downturn in oil prices that began in late 1997 and
intensified in 1998 and early 1999 continues to pose a serious
threat to our domestic production capacity and, consequently,
to our long-term energy security. At the same time, however, it
has provided an unprecedented opportunity to begin re-acquiring
crude oil for the Reserve at relatively low prices.
Secretary Richardson brought this issue before the
Administration in late 1998. After a series of meetings with
the Department of the Interior, the Office of Management and
Budget, and the National Economic Council, it was agreed the
Administration would move as quickly as possible to transfer 28
million barrels of Federal royalty oil--the same amount sold
during 1996 and 1997 largely for deficit reduction purposes--to
the Department of Energy for use in refilling the Strategic
Petroleum Reserve. The oil to be transferred would be royalty
oil from the Gulf of Mexico Outer Continental Shelf.
This approach to acquiring oil for the Reserve while prices
are relatively low offers several advantages:
The acquisition price would be below the price for
which the Government had sold oil in FY 1996-97 and
significantly below the Reserve's historic average oil
acquisition cost.
By resuming oil fill, we would help improve the ratio
between the Reserve's inventory and the daily rate of oil
imports which had begun to escalate in recent years.
Finally, the royalty transfer plan would enable the
Federal Government to add oil to the Reserve without requiring
new appropriations, particularly important since funding has
not been appropriated to purchase oil for the Reserve since
1990.
As Secretary Richardson said in announcing the initiative on
February 11, 1999, ``By putting royalty oil in the Strategic Petroleum
Reserve today, we will get a high rate of return tomorrow--enhanced
national energy security, increased strategic assets, and a very good
deal for the American taxpayer.''
Working together, the Department's Strategic Petroleum Reserve
Office and the Minerals Management Service decided to transfer the oil
in two phases.
In Phase 1 the Government negotiated with a small number of the
largest producers on Federal lease tracts with a target of transferring
up to 50,000 barrels of oil per day, starting no later than May 1, and
ending on July 31, 1999. Phase 2 will take the remainder of the 28
million barrels from eligible producers who respond to a competitive
solicitation. Deliveries are expected to start on August 1, 1999, at a
rate of approximately 100,000 barrels per day and end in March or April
2000.
In both phases, the Strategic Petroleum Reserve will require that
the oil delivered to the Reserve meet our standard quality
specifications. In addition, the Strategic Petroleum Reserve is
requiring that bids provide for delivering the oil directly to Reserve
sites rather than to the normal transfer points at which the value of
the royalty share is calculated for payment in cash.
Due to the complexity of gathering and transporting royalty oil
with varying qualities produced from more than 1,000 Federal leases in
the Gulf of Mexico, we do not expect to transport royalty barrels
directly to the Reserve. Instead, we will arrange for exchanges of
crude oil to meet the Reserve's storage specification and provide for
efficient delivery.
Under these exchange agreements, the volume of oil received by the
Strategic Petroleum Reserve will differ from and could be somewhat less
than the volumes accepted by the Minerals Management Service. This is
because the oil delivered to the Reserve is expected to be of a higher
quality than the oil produced at the lease and additionally, the
producer in Phase 1 or the contractor in Phase 2 will pay the
transportation expenses.
For example, in the recently negotiated contracts, the crude oil to
be received by the Strategic Petroleum Reserve will be a light, low-
sulfur oil, significantly higher in quality than the oil produced from
the Federal leases. This grade of crude oil is suitable for the
``sweet'' oil storage capacity available at our Bayou Choctaw site.
Because the oil to be delivered is of higher quality than the royalty
crude, the exchange ratio is somewhat less than 1:1 due to adjustments
for crude quality.\1\
---------------------------------------------------------------------------
\1\ Exchanging crude oil to enhance the quality of the oil in the
Strategic Petroleum Reserve is not without precedent. In 1998, P.M.I.
Norteamerico S.A. de C.V., of Houston, TX, a commercial arm of the
Mexican oil company PEMEX, delivered 8.524 million barrels of higher-
grade oil in exchange for 11 million barrels of heavier, higher-sulfur
Maya crude oil.
---------------------------------------------------------------------------
In the upcoming Phase 2, we expect to continue the exchange
practice. When the Reserve receives a barrel of crude oil in exchange
for an equivalent quality royalty crude, the total volume delivered
will be close to the quantity transferred by the Minerals Management
Service, adjusted only for gathering and transportation expenses.
Recent Actions and Current Plans
On March 31, 1999, we announced our contracts under the first phase
of the royalty in kind program. Shell, Texaco, and BP-Amoco have agreed
to deliver 38,600 barrels per day of very light, low-sulphur crude oil
to our Bayou Choctaw, Louisiana, site in lieu of making a royalty
payment to the Minerals Management Service. The 3-month contracts will
result in approximately 3.5 million barrels being added to the Reserve.
Because these companies are all potential bidders during Phase 2 of
this royalty-in-kind transfer, they have asked us to treat the exchange
ratios for the royalty versus delivered oil as procurement sensitive
information, and we therefore, have not included in our public
testimony the exact volumes of royalty oil included in the contract.
Phase 2 of the royalty-in-kind program will begin with a
solicitation that we plan to issue in late April or early May. Unlike
the first phase, Phase 2 will be open to all bidders for 100,000
barrels per day of royalty oil from the Gulf of Mexico. We anticipate
awarding contracts in June and beginning deliveries on August 1, 1999.
Deliveries will continue until the total 28 million barrels of royalty
oil is transferred to the Department of Energy.
Our success in Phase 1 of this program, and our continued close
working relationship with the Department of the Interior, gives us
every reason to believe the second phase will also proceed smoothly. We
expect that the Department of Energy will add inventory to the Reserve,
lower the average cost of oil acquisition, receive fair value during
the exchange portion of the contract, and conduct its acquisition in a
manner to counter balance the extremes of the supply and demand cycles
rather than exacerbating their peaks and valleys.
This concludes my prepared statement, I will be happy to answer any
questions Members may have.
______
Statement of Walter Cruickshank, Associate Director, Minerals
Management Service, U.S. Department of the Interior
Madam Chairman and Members of the Subcommittee, I appreciate the
opportunity to appear today to present testimony on the Minerals
Management Service's (MMS) efforts in support of the joint Departments
of Energy (DOE) and the Interior (DOI) initiative to move Federal
royalty oil into the Strategic Petroleum Reserve (SPR). My testimony
today will briefly: (1) describe the initiative and its status; (2)
outline MMS' role; (3) address some of the operational considerations
in using Federal royalty in kind (RIK) oil to add to the SPR; and (4)
explain our plans for the next phase of this project.
Description and Status of the Project. The SPR RIK Initiative will
be implemented in two phases.
In Phase 1, DOE and MMS are now concluding negotiations with
several of the largest crude oil producing companies in the Gulf of
Mexico for potential deliveries of royalty oil to DOE and the SPR
starting on May 1, 1999 for a 3-month period. We realize the importance
of filling the SPR as quickly as possible during this time of
relatively low crude oil prices and Phase 1 has been designed to
accomplish this. By targeting the largest available royalty volumes and
directly negotiating with the producer, we believe we can attain
efficient delivery of significant volumes to the SPR in the minimum
amount of time.
To date, we have successfully negotiated arrangements with three of
the largest crude oil producers in the Gulf of Mexico--Texaco, Shell,
and BP-Amoco--to begin delivering approximately 38,600 barrels per day
of oil to add to the Federal Government emergency stockpile. Over the
3-month term of this first phase, these companies will deliver nearly
3.5 million barrels of oil to DOE at the St. James market center for
further movement into the SPR facility at Bayou Choctaw, Louisiana.
Continuing negotiations may provide additional royalty oil volumes to
the SPR in Phase 1.
Phase 1 agreements provide for delivery at the St. James market
center of volumes of oil that are less than the government's royalty
volume entitlement at the lease. This reduction in volume reflects both
transportation and the quality and location differentials between the
generally higher quality of crude oil delivered to DOE at the market
center and the royalty oil at the lease. Negotiations focused on the
amount and value of these factors.
Under Phase 2, the SPR RIK Initiative will expand to potentially
take the remaining volumes identified for the program and increase the
fill rate for the SPR. DOE and MMS will conduct a competitive auction
in Phase 2 in which royalty oil at the lease will be offered in
exchange for delivery of crude oil meeting SPR specifications to
locations at or near at least two SPR facilities. Royalty volumes on
the order of 70,000 to 100,000 barrels per day are anticipated to be
available for bidding under Phase 2. The objective is to include all
potential market participants in order to maximize competition and
minimize costs of delivering crude to the SPR. Phase 2 begins when
Phase 1 ends, on August 1, 1999, and runs for a 6-month term with the
potential for a second term. Planning for Phase 2 is currently
underway.
All OCS leases will be available for inclusion in the program
except for:
Section 8(g) leases: These leases are excluded because
the coastal States receive 27 percent of associated royalty
receipts, and those States would lose an important revenue
stream from SPR-dedicated leases.
Section 6 leases: These leases generally do not
include language giving the government the option to take
royalties in kind. They will be included in the program upon
lessee agreement.
Leases dedicated to supply small refiners: These
leases will be included when and if they are dropped from the
small refiner program.
Leases in MMS' royalty reengineering program: Some 208
Gulf of Mexico leases are included in this important
exploration and testing of new methods to manage mineral
royalties. Some of these leases may be available under Phase 2
in the year 2000.
DOI/MMS Role. The MMS' role in the SPR initiative is to support the
lead agency--DOE--in economic analyses and in the ``upstream''
logistics of royalty oil delivery at Gulf of Mexico leases. The MMS'
role is to:
Identify the Gulf of Mexico leases for which oil
royalties can be received in kind and generate lease
information for program implementation.
Notify lease owners of any decision to take their
royalties in kind, and inform them of their rights and
responsibilities when paying royalties in kind.
Continue to perform lease measurement and production
accounting functions and supply DOE with data on production and
royalty entitlement.
Assist DOE in negotiations with lease owners for
delivery of RIK oil to the SPR under Phase 1 of the program.
In Phase 2 of the program, assist DOE in developing
and issuing a competitive solicitation for delivery of oil to
SPR facilities. We will also assist DOE in evaluating bids
received and selecting the winning bidders.
Operational Considerations. Operational and logistical
considerations that have been addressed to date include the following.
Title transfer and contracting. Using the provisions of the OCS
Lands Act, DOI will transfer title to royalty oil to DOE at the OCS
facility measurement point, typically on the lease. DOE will award and
administer contracts for delivery of crude oil to the SPR facility or
nearby market center. In both phases, crude oil will move to the SPR by
standard industry practice. We anticipate that the most common scenario
will be the award by DOE of exchange contracts in which royalty oil
will be provided to the contractor in exchange for a market-based
volume of SPR crude either at or near the SPR facility or at the market
center. DOE will arrange for any final transportation needed to move
crude from an exchange point not located at one of the SPR sites.
Imbalances. The operator/lessee will be required to maintain a
balancing account to track monthly imbalances that may occur in
deliveries of royalty oil to DOI. The operator will work together with
DOI and DOE to resolve monthly imbalances by increasing or decreasing
deliveries in the subsequent month. However, MMS retains the right to
settle imbalances via cash payment or accounting adjustment at the end
of each contract term.
De Minimis Leases. A substantial number of offshore properties
produce small amounts of crude oil, much of which is condensate
associated with natural gas production. For example, nearly 30 percent
of offshore properties produce less than 1 barrel per day. In Phase 1,
we have negotiated for RIK deliveries primarily from high producing
leases. In Phase 2, we have not yet decided whether to include all
available leases or to exclude those leases producing de minimis
amounts. The primary factors we are considering are the administrative
costs for the government to analyze the economics and monitor
compliance for each of these leases and the transaction costs for the
industry to deliver RIK for the de minimis leases.
Next Steps. For the combined Phase 1 and 2 program, DOE/DOI plan to
take up to 28 million barrels of royalty oil at the lease, which is
estimated by OMB to have a fiscal impact of $170 mm in Fiscal Year 1999
and $200 mm in Fiscal Year 2000 (using OMB's FY 2000 budget ecomomic
assumptions of price projections of $12.39 and $14.12, respectively) in
decreased revenues to the Treasury. Actual fiscal impact will depend on
actual delivery dates, quantity of oil transferred, and market oil
price at the time.
It is premature to identify at this point how many barrels will be
actually delivered into the SPR from the up to 28 million barrels of
royalty oil identified for potential delivery to DOE at the lease. The
actual amount of crude oil delivered to the SPR will depend on the
specific details of negotiated agreements (Phase 1) and successful bids
in the competitive auction (Phase 2). The primary determinant will be
the location and quality differentials between the value of the royalty
oil at the lease and the value of the oil delivered to the SPR sites.
At least 15 percent of the 28 million barrels of RIK oil will be taken
in the 3-month Phase 1 term.
We will be very busy this Spring as we work with DOE to develop and
conduct the competitive bidding process under Phase 2 for royalty oil
deliveries to the SPR. Specifically, we will assist DOE in developing
and releasing a Request for Offers (RFO); preparing an evaluation plan;
arraying economic and lease data to support the economic analysis of
bids; and evaluating, negotiating, and selecting bids. We anticipate
that contracts will be awarded on or before July 1, 1999 for Phase 2
deliveries that will commence August 1, 1999.
In closing, let me state that we look forward to continuing to work
with DOE to complete the transfer of 28 million barrels of royalty oil.
We believe that this program will enhance the energy security of our
nation. We also believe that this program illustrates that as managers
of public assets we can and must remain agile and flexible to respond
to changing public needs. Using our RIK option to partially fill the
SPR is a good example of how we can retain such flexibility.
Thank you Madam Chairman and Members of the Subcommittee, this
concludes my prepared remarks. I would be pleased to answer any
questions you may have.