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Tapping oil from reserve may be trickier than ever
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Tapping oil from reserve may be trickier than ever

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Tapping oil from reserve may be trickier than ever

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.


Analysis: Tapping oil from reserve may be trickier than ever | Reuters

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