“In the first week of the program, three sites in Louisiana were acquired by the Corps of Engineers by eminent domain. Pipeline right-of-way was similarly acquired; appraisals below industry standards made condemnation necessary. This, however, did not reduce costs or trim start-up time as intended. The associated legal proceedings increased costs and created delay, and condemnation set the stage for political trading between Louisiana and federal officials in Washington, D.C.”
In the first decades of the twentieth century, fears of an imminent exhaustion of oil led to petroleum land withdrawals and the reservation of oil-rich acreage for future military use. Four Naval Petroleum Reserves were set aside between 1912 and 1923. [1] With the discovery of major new oil fields in Oklahoma, Texas, and California in the late 1920s, the new fear – at least for the vested parts of the oil industry – became oversupply. A political response again resulted. State and federal regulation accommodated the price stabilization ideal in the name of arresting waste, as chapters two, three, and four of Oil, Gas, and Government: The U.S. Experience chronicled.
The anti-production policies of World War II swung the pendulum back toward supply uncertainty. With peace in sight, the Petroleum Administration for War leased 10 million barrels of tank storage to house aviation gasoline. The Strategic Storage Program, in preparation for an assault on Japan, allowed full avigas production to continue. [2] A crude oil stockpile was rejected because of high costs and the unknowns of below-ground storage. [3] Oil would be supplied from normal production and inventory or stay in the ground as proven reserves.
1970s Pre-History
In the 1970s, the federal government’s storage strategy would change as part of a broad-based activist program to address the energy crisis. [4] Even before the Arab Embargo of late 1973, bills began to surface in Congress to create a federal oil reserve to provide quick drawdown in case of foreign supply cutoffs. [5] The Petroleum Reserves and Import Policy Act, introduced by Senator Henry Jackson (D-Wash.) in April 1973, called for a 90-day strategic supply, much like programs already in effect in Japan, Germany, Italy, France, and Britain. [6] Lacking White House support or a well defined constituency, passage was not forthcoming.
In response to the “energy crisis” – the petroleum product shortages both before and after the Arab Embargo – and with government activism holding sway over deregulation and market solutions, the Energy Policy and Conservation Act (EPCA) became law. [7]
One provision of the far reaching law earmarked $1.1 billion for a Strategic Petroleum Reserve Office (Project Office) within the Federal Energy Administration (FEA) to implement an Early Storage Reserve (ESR) program by April 22, 1976, and a Strategic Petroleum Reserve (SPR) program by December 15, 1976. The final goal was to stockpile one billion barrels of crude oil with an interim target of 150 million barrels by December 1978.
An Industrial Petroleum Reserve (IPR) program was also authorized where crude importers and refiners would set aside 3 percent of their respective volumes for holding. As with the SPR, storage was to be “readily accessible” to each FEA region, and drawdown schedules and distribution were to be formulated.
Sixty percent of the reserve was to contain intermediate gravity (between 32 and 36 degrees API) crude oil. The remainder was to be composed of one or two grades of low sulfur crude oil (under .5 percent) of light to intermediate gravity. The advantage of having two or three types of crude was fewer separate storage facilities and the ability to meet the requirements of different refineries. [8]
On April 18, 1977, the SPR plan went into effect upon Congressional approval. [9] Storage goals were 150 million barrels by December 22, 1978, 325 million barrels by December 22, 1980, and 500 million barrels by December 22, 1982. Salt dome caverns in Texas and Louisiana were to be leached by water injection to create storage space.
Man-made storage via tankers and steel drums were rejected because of cost. Petroleum products were not to be stored – only crude oil was. Private sector “turnkey” participation, where private contractors would prepare the storage area, fill the caverns, and turn over the finished project to the government, was prohibited.
Beginnings
In the first week of the program, three sites in Louisiana were acquired by the Corps of Engineers by eminent domain. Pipeline right-of-way was similarly acquired; appraisals below industry standards made condemnation necessary. This, however, did not reduce costs or trim start-up time as intended. The associated legal proceedings increased costs and created delay, and condemnation set the stage for political trading between Louisiana and federal officials in Washington, D.C. [10]
Attention next turned to crude oil acquisition policy. Imported crude received entitlements benefits to lower its effective purchase cost. [11] Domestic crude subject to price ceilings could not be sold above the maximum allowed or be part of a “tie-in sale.” [12] Procurement responsibility was assigned to the Defense Fuels Supply Center within the Department of Defense.
[1] See Bradley, Oil, Gas, and Government: The U.S. Experience, chapter 6, pp. 278–81.
[2] John Frey and W. Chandler Ide, A History of the Petroleum Administration for War (Washington, D.C.: Government Printing Office, 1946), pp. 363-64.
[4] The practice of federal stockpiling of strategic industrial goods began in 1939, and by 1980, some 93 commodities valued at $13 billion were stored by the government for contingency use. See David Weimer, The Strategic Petroleum Reserve (Westport: Greenwood Press, 1982), p. 6.
[5] Hearings Before the Subcommittee on Energy and Mineral Resources, 97th Cong., 1st Sess., Strategic Petroleum Reserve Program, Part Two, (Washington, D.C.: Government Printing Office, 1981), p. 395. Academic discussion of a federal reserve began with an appendix to a 1970 report by the Cabinet Task Force on Oil Import Control, The Oil Import Question, A Report on the Relationship of Oil Imports to the National Security, (Washington, D.C.: Government Printing Office, 1970), pp. 299-303, and a 1971 article by Walter Mead and Phillip Sorenson, “A National Defense Petroleum Reserve Alternative to Oil Import Quotas,” Land Economics, August 1971, pp. 211-24.
[6] Weimer, The Strategic Petroleum Reserve, p. 10; OGJ, August 6, 1973, p. 25.
[7] Public Law 94-163, 89 Stat. 871 (1975). Section 151(a) stated the stockpile’s twin aims to “diminish the vulnerability of the United States to the effects of a severe energy supply interruption, and provide limited protection from the short-term consequences of interruptions in supplies of petroleum products.”
[8] Federal Energy Administration, Strategic Petroleum Reserve Plan (Washington, D.C.: Strategic Petroleum Reserve Office, 1976), p. 6.
[9] Energy Action No. 10, Submitted to Congress February 16, 1977.
[10] Weimer, The Strategic Petroleum Reserve, pp. 50-51. Among the concessions gained by Louisiana governor Edwin Edwards was to locate the SPR Project Office in the state. Said Edwards: “If the federal government is going to pour money down a rat hole, I would just as soon it be a rat hole in Louisiana.” Ibid. p. 51.
[11] 42 Fed. Reg. 21761 (April 29, 1977). See chapter 20, pp. on the refinery entitlements program.
[12] 42 Fed. Reg. 27908 (June 1, 1977). A tie-in sale was where price-controlled oil was sold to a particular buyer in return for purchasing unregulated oil at a higher price.
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NOTE: This week, MasterResource reviews the history of state and federal oil (and natural gas) storage regulation and ownership. Part I examined early (pre-SPR) regulation. Part II will review the prehistory and beginnings of the SPR. Part III will examine early problems with the Federal storage program; Part IV early fill and financing controversies. Part V concludes with an overall critical examination of the SPR from the vantage point of its first decade (mid-1980s).