5 Mar 2011

Strategic Petroleum Reserve: leak risk complicates draw down options

Written by energyscout

Oil prices bump up over $100 per barrel and here come the mounting, knee-jerk, calls to draw down a portion of the 726 million barrels of crude oil stored in salt caverns in Texas and Louisiana.

If they think the unrest in Libya is an emergency deserving of a draw-down, they’d better check their grasp of oil market fundamentals and what the future likely holds given America’s reliance on oil.  Better yet, Congress should scale up — and sustain — efforts to shift the U.S. to alternatives.

But there is a complication. One of the storage caverns, reportedly, could spring a leak any day now. And that raises a the question of whether to sell the oil or move it to caverns that still have capacity.

According to the Houston Chronicle, the cavern in question – Bayou Choctaw Cavern 20 near Baton Rouge – sits within 60 feet from the edge of a salt dome, defying a federal requirement for a salt barrier of at least 300 feet to contain stored material.

Source: U.S. Department of Energy

Energy Secretary Steven Chu testified in mid-February that it was better for the government to cash in on the crude rather than risk it seeping out or chance an overflow as  the oil is moved to other storage sites.  Unfortunately, the unrest in Libya might be making this decision for him.

Since it became operational in 1985 with a test sale, the U.S. government has sold oil from the Strategic Petroleum Reserve five times. The first was during the 1990-91 Persian Gulf conflict. The last was following Hurricane Katrina in 2005. What the U.S. and other oil-thirsty economies around the world are experiencing now does not yet resemble any such magnitude.

Congress has authorized the Energy Department to spend $33.5 million for a replacement, and officials are buying a privately owned cavern – also in the Bayou Choctaw salt dome – with a 10-million-barrel capacity.

Currently the United States is not running short of oil.  What’s important to watch are the supplies of  “sweet” , or low-sulfur, crude which Libya had been supplying to buyers, especially European oil refineries producing diesel fuel.

By releasing sweet crude from the Reserve, Washington might relieve a bidding competition between American and European refiners for the other sweet crudes, which are produced by Algeria and Nigeria.

Saudi Arabia holds most of OPEC’s spare capacity, but its crude is mostly sour, low-sulfur, crude. It cannot easily replace the Libyan sweet crude lost amid its domestic turbulence.

“If you take it out of the sweet cavern,” Tom Kloza, chief oil analyst at Oil Price Information Service, told The New York Times last week, “would help the Europeans and spank the speculators.”  That may be so. But it still doesn’t meet the test of an emergency that draw downs should be reserved for.

Kloza said the average price of U.S. gasoline at the pump — $3.43 a gallon last week — would quickly rise another 5 cents to adjust for rising wholesale oil price.



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