Headlines

January 2, 2009
DOE: Time to Fill SPR Now That Crude Prices Are Down

The U.S. Department of Energy today announced that it plans to take advantage of the recent large decline in crude oil prices and has issued a solicitation to purchase approximately 12 million bbl of crude oil for the Strategic Petroleum Reserve (SPR) to replenish SPR supplies sold following hurricanes Katrina and Rita in 2005.
  
In addition, DOE is also moving forward with three other SPR acquisition and/or fill activities in order to fill the SPR as Congress directed in the 2005 Energy Policy Act (EPAct): refiner repayments of SPR emergency oil releases following Hurricanes Gustav and Ike; the delivery of deferred royalty- in-kind (RIK) oil; and the solicitation of new RIK deliveries in the spring of 2009.
  
During the second half of 2008, DOE was prohibited by law from acquiring petroleum for the SPR as long as WTI crude remained above $75/bbl (which was the case until Oct. 16, 2008). In May, the House bill to temporarily halt SPR deliveries passed both chambers of Congress by veto-proof margins, and President George W. Bush signed the legislation on May 19 (when front-month crude settled at $127.05/bbl).
  
Rep. Ed Markey (D-Mass.), one of the sponsors of the House bill that halted SPR deliveries (H.R. 6022), said in a statement today: "Now that the holiday shopping season is over, it appears the Bush administration is finally joining other consumers in shopping for some bargains. Filling our nation's oil reserves now, when prices are low, is smart energy and economic policy that will benefit consumers and taxpayers. It made little sense to buy oil for the
reserve when it was more than $140 a barrel. But now, with prices about $100 lower, resuming the purchase of oil for our reserves is warranted in order to advance America's long-term energy security goals and save taxpayer money."
  
Markey is chairman of the House Select Committee on Energy Independence and Global Warming.
  
Now that the statutory moratorium on SPR oil acquisitions has expired, and in light of substantially lower crude prices, DOE also believes it is economically prudent and in the interest of national security to move forward with filling the SPR.
  
DOE says that acquisitions in 2009 will fill the SPR to its current storage capacity of 727 million bbl and provide the United States with approximately 70 days of net import protection.

   **PURCHASE OF 12 MILLION BBL OF CRUDE**
  
DOE plans to take advantage of the recent sharp decline in crude oil prices to enter the market and, if it receives acceptable offers, purchase approximately 12 million bbl of crude oil.
  
The approximately $600 million received from DOE in 2005 from the emergency sale of crude oil following hurricanes Katrina and Rita will be used for the purchase. "Current crude oil prices provide an opportunity to replace the oil sold in 2005 and to acquire additional oil, adding to the energy security provided by the SPR," DOE said in its announcement. DOE is seeking offers for
crude oil deliveries in February, March, and April 2009.

**REFINERY REPAYMENTS OF 2008 OIL RELEASES**
  
From January through May 2009, the SPR will receive 5,395,000 bbl of oil that were released from the reserve to refiners in the fall of 2008 because of crude delivery interruptions caused by Hurricanes Gustav and Ike, along with 120,000 additional "premium" barrels of oil that the refiners are required to pay to DOE in return for releasing the oil to the refiners.
  
As reported by OPIS in the fall of 2008, the principal recipients of SPR crude in the aftermath of Gustav and Ike were Marathon, Placid Refining, Citgo, ConocoPhillips and Alon USA.

   **DEFERRED RIK DELIVERIES AND NEW SOLICITATION**
  
The SPR will also receive 2,178,000 bbl of RIK oil, originally scheduled for delivery in 2008 and deferred until the spring of 2009.
  
In addition to these deferred deliveries, DOE plans to resume a modest RIK oil fill program with the Department of the Interior at a rate of about 25,000 b/d. DOE has issued a solicitation seeking contracts to exchange 25,000 b/d of government-owned oil from federal oil leases in the Gulf of Mexico for crude oil deliveries that meet the specifications of the SPR. The RIK deliveries to the SPR would begin in May 2009.
  
The SPR has been filling using the royalty-in-kind exchange program since 1999. Under the program, the Department of the Interior contracts for the delivery of federal royalty oil to market centers along the Gulf Coast, where ownership of the oil is then transferred from the Department of the Interior to the Department of Energy. DOE awards contracts for the exchange of the federal royalty oil at the market centers for physical oil deliveries to the SPR. Actual volumes delivered to the SPR take into account adjustments for quality differentials and transportation.
  
Currently, the SPR has a storage capacity of 727 million bbl and an inventory of 702 million bbl (96.5% of capacity) stored in the SPR's underground salt caverns located along the Gulf Coast of Louisiana and Texas.
  
Activities to resume SPR fill are taken in accordance with the provisions of the Energy Policy Act (EPAct) of 2005, which directs that DOE fill the SPR to its authorized capacity of one billion barrels.


December 31, 2008
Strong West Coast Cracks Could Weaken During January
  
U.S. West Coast refining cracks outperformed all other regions by a wide margin during December, but weak demand, fuel imports from Asia, and the return of refinery units could all contribute to a retraction of PADD5 cracks in January, Tristone Capital's Chi Chow said Tuesday.
  
Chow noted that West Coast cracks in late December stood at around $25/bbl compared to cracks of $5-$7/bbl in other regions.
  
BP, ExxonMobil, Tesoro and Valero all experienced unplanned outages at their Los Angeles-area refineries in December, and that tightened regional supply.
  
"In particular, we believe the shutdown of BP's catalytic cracking unit (FCC) at Carson, Calif., has had the greatest impact on gasoline supply," Chow wrote. Tristone estimates that the Carson plant's 100,000-b/d FCC unit produces about 5% of PADD5 gasoline supply.
  
Furthermore, PADD5 gasoline inventories currently stand at seasonally low levels as refiners have reduced inventories throughout 2008 so as to free up working capital.
  
The weekly statistics issued today by the Energy Information Administration (for the week ending Dec. 26) show PADD5 total motor gasoline inventories at 26.9 million bbl, compared to 32.0 million bbl at the same time in 2007. PADD5 ultra-low-sulfur diesel (ULSD) inventories of 10.0 million bbl are on par with stock levels reported in late December 2007.
  
Despite the current strong fundamentals, "the West Coast crack spread surge is likely unsustainable for long as demand remains weak, FCC capacity could return soon and potential imports from Asia are set for delivery in January 2009," Chow wrote.
  
Meanwhile, it remains to be seen whether the 68,000-b/d Big West refinery in Bakersfield, Calif., will have chronic difficulty buying crude (and maintaining normal operations) as a result of the recent Chapter 11 bankruptcy filing of Big West's parent, Flying J.