... Washington Watch: Impacts of Strategic Petroleum Reserve Releases
 

Washington Watch: Impacts of Strategic Petroleum Reserve Releases

During Thanksgiving week, the Biden administration disclosed conflicting measures to influence oil supplies and thereby gasoline prices. First, the White House announced releases from the Strategic Petroleum Reserve (SPR) with the stated goal of increasing supplies to decrease prices at the pump. Later, the Department of Interior (DOI) issued a report recommending less federal land be available for oil and gas leasing and that developers pay more for the leases, with the unstated goal of decreasing supplies, which would increase pump prices. This juxtaposition becomes even more striking, once the elements of each proposal are explained below.

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way.”

— A Tale of Two Cities, by Charles Dickens

Strategic Petroleum Reserve

On the day President Joe Biden took office, the United States was the No. 1 oil producer in the world, and Canada, our closest ally, was No. 4. However, to appease his base, the president imposed a moratorium on drilling on federal land, and he revoked the Presidential Permit for Keystone XL. Now, the United States is no longer the leading oil producer, and oil prices — and gasoline prices at the pump — have risen dramatically, fueling inflation concerns.

/*** Advertisement ***/

Ironically, in Glasgow at COP26, the president pledged his fealty to combatting climate change, despite also pleading with the Organization of Petroleum Exporting Countries and Russia (OPEC+) to increase production. While foreign producers were contemplating whether to reduce the value of their commodity, in order to decrease U.S. gasoline prices and help the president’s falling approval ratings, the White House acted. On Nov. 23, it announced “releases of 50 million barrels [MMB] of oil from the Strategic Petroleum Reserve to lower [gasoline] prices for Americans ….” The announcement indicates that the SPR release would occur over the following months and may be coordinated with five “major energy consuming nations” — China, India, Japan, Republic of Korea and the United Kingdom.

The SPR, created in response to the energy crisis in the 1970s, consists of approximately 727 million barrels of oil stored by the federal government in four underground caverns in the Gulf Coast. In the last 10 years, the SPR has been tapped only twice, each with relatively small releases responding to storms in the Gulf of Mexico: 5.2 MMB released in August 2017 because Gulf Coast refineries were shut down for fuel shortages from Tropical Storm Harvey, and 1 MMB released in September 2012 due to disruptions following Hurricane Isaac. No “Act of God” precipitated the “Thanksgiving” release.

The SPR announcement merits a few more clarifications. First, the releases will not occur right away, but rather over coming months, which gives OPEC+ time to reconsider potentially increasing production. Indeed, the SPR releases could be offset by retaliatory production decreases from OPEC+ and do more harm than good.

Second, 50 MMB isn’t really 50 MMB. Congress previously authorized the sale of 18 MMB to help finance other projects. That means only 32 MMB is the subject of
new releases.

Third, the 32 MMB is technically an “exchange” or physical loan, with trading companies taking the oil in the near future, but returning it within a scheduled period.

Fourth, the international coalition’s petroleum reserves pale in comparison to the United States and, likewise, their possible releases are much smaller. India is expected to release 5 MMB, Japan 4.2 MMB, and the UK 1.5 MMB. Details about China and the South Korea are unknown. Indeed, when asked, Beijing was non-committal about whether or when it might release oil reserves.

Fifth, the amount of price relief and how long it will last is anyone’s guess, especially given that SPR releases are a “drop in the bucket.” Current OPEC production is about 29.57 million barrels per day (bpd), while last year the United States consumed on average approximately 18.19 million bpd of petroleum.
Rather than authorize the largest release from the SPR, the administration could have taken measures to increase domestic oil production. However, few would have predicted that the day after Thanksgiving, the administration would suggest ways to hamper domestic production and increase costs.

Report

On Nov. 26, DOI issued a report on its comprehensive review of federal oil and gas permitting and leasing practices. The report was required by one of Biden’s first Executive Orders, Tackling the Climate Crisis at Home and Abroad, which also “paused” production on federal lands until a federal court said otherwise.
Oil from federal land accounts for approximately 20 percent of U.S. production; gas production is lower. The Bureau of Land Management (BLM) manages the development of oil and gas on federal public land. Similarly, the Bureau of Ocean Energy Management (BOEM) manages oil and gas production in the Outer Continental Shelf.

The report recommends reducing the federal land available for leasing and increasing leasing costs. In particular, the proposed changes to the “fiscal components” of the oil and gas leasing programs include raising:

  • Royalty Rates from the current 12.5 percent to keep pace with higher state rates;
  • Bonus Bids (paid at the sale for an oil and gas lease) from the minimum $2/acre to deter speculation and undeveloped leases;
  • Rental Rates (paid until the lease is in production, at which royalties are paid) from $1.50/acre for the first five years, and $2/acre for the next five years; and
  • Bonding Requirements (e.g., surety bonds to ensure compliance with lease obligations) to provide sufficient financial assurance for decommissioning and account for technological changes, complexity and depth of wells, and risk of abandonment.

The DOI report notes that while the minimum offshore royalty rate is 12.5 percent, BOEM “will be continuing to study the most appropriate method for revising royalty rates and other fiscal terms to monetarily account for the costs of carbon dioxide, methane, and nitrous oxide.” Further, BOEM intends to develop a “Fitness to Operate” standard for those seeking to be oil and gas operators and evaluate its application to new lessees.

The report also urges BLM to consider additional reforms, including 1.) not affording oil and gas a priority over other land uses; 2.) adjusting the leasing program to avoid leasing low potential lands, focusing instead on areas that have a high potential for oil and resources and are near existing pipeline infrastructure; 3.) ensuring that bidders are publicly identified and qualified (both technically and financially) to develop leases; 4.) revising area-wide leasing, where an entire planning area is offered with few exclusions for lease sale; and 5.) increasing consultation with the Tribes and soliciting public opinion regarding the leasing and permitting process.

The administration’s Thanksgiving actions prompted a new Senate bill prohibiting Strategic Petroleum Reserve releases for reasons other than a severe energy supply interruption, unless accompanied by a DOI a plan to increase oil and gas production on federal lands. The bill is unlikely to pass, but the point has been made.

Washington Watch is a regular report on the energy pipeline regulatory landscape. Steve Weiler is an attorney at Dorsey & Whitney LLC in Washington, D.C. Contact him at weiler.steve@dorsey.com.

Tags: , , ,

Comments are closed here.