US House weighs plan to lease unused SPR capacity

Republican lawmakers are considering leasing up to 200mn bl worth of spare capacity in the US Strategic Petroleum Reserve (SPR) that will become available because of an ongoing drawdown of crude from the emergency oil stocks.

The US House Energy and Commerce Committee next week will hold a hearing on a draft bill to partly open the reserve to the private sector. The concept would provide a new source of storage for traders and oil producers operating in the Permian basin and nearby fields. But it could be technically challenging and require upfront investments to make the more than 40-year-old reserve capable of frequent drawdowns and injections.

The SPR was established in 1976 in the wake of the Arab oil embargo to protect against supply shocks. Republicans on the committee say the bill is part of an effort to improve energy security and modernize the SPR, which has recently required capital investments to replace aging equipment.

"The Strategic Petroleum Reserve remains a crucial energy security asset, which is why the committee has conducted rigorous oversight and prioritized its modernization," the committee's energy panel chairman Fred Upton (R-Michigan) said.

The SPR now holds 660mn bl at four storage sites in Texas and Louisiana and has about 7pc spare capacity. Inventories are set to decline to 400mn bl over the next decade because of a surge in congressionally-mandated oil sales enacted over the past three years. That will free up about 43pc of the SPR's storage space by 2027, according to a report from the US Government Accountability Office released last month.

The draft bill, which received input from President Donald Trump's administration, would require the US Energy Department to create a pilot program to lease "underutilized" facilities in the SPR to private companies or foreign governments. The agency would be required to ensure leasing would not jeopardize the national security uses of the SPR or the ability of the US to conduct its own drawdowns.

The Energy Department would be first required to figure out which facilities could be leased and determine what types of operational changes would be needed to preserve the reserve's long-term integrity. The SPR now pumps crude to the surface by injecting fresh water, but that process dissolves the salt caverns in which oil is stored and has created issues with structural integrity.

If the SPR is leased to private companies that want drawdowns, that freshwater system might need to be replaced with a saltwater brine system that does not dissolve the caverns, consulting firm Strategic Petroleum Consulting president John Shages said. But it remains undetermined whether the government or companies leasing capacity would make that type of investment.

"That would be an expensive thing to do," said Shages, a former US deputy assistant energy secretary for petroleum reserves.

The draft bill would require companies leasing spare capacity to pay fees to "fully compensate" the US for all costs related to storage and removal of crude. Commercial leaseholders could potentially pay for those fees by making upfront investments in infrastructure, both at the SPR and downstream, that would enable them to get their products in and out efficiently.