Filling the Strategic Petroleum Reserve
Established in 1975 in the aftermath of the OPEC oil embargo, the Strategic Petroleum Reserve was originally intended to hold at least 750 million barrels of crude oil as an insurance policy against future supply cutoffs (the maximum size was later reduced when a geologically unstable storage site was decommissioned). Today's design capacity is 714 million barrels.
Early fill of the SPR was primarily accomplished by purchasing crude oil on the open market. Concern over the vulnerability of the United States to additional oil cutoffs prompted the federal government to purchase most of the oil for the SPR in the late 1970s and early 1980s when world oil prices often exceeded $30 per barrel. Since that time, world oil prices have fluctuated from the mid-teens to record-breaking highs exceeding $100 per barrel during 2008. The average price per barrel for crude oil in the SPR reflects the value of the crude oil at the time it was acquired.
Direct purchases were suspended in 1994 during the Clinton Administration due to the federal budget deficit and, in fiscal years 1996 and 1997, approximately 28 million barrels of oil were sold for deficit reduction purposes. Oil imports to the United States continued to increase, however, and the protection offered by the Reserve -- then with an inventory of less than 600 million barrels -- steadily declined.
The direct purchase of crude oil resumed in January 2009 to replace inventory sold in 2005 in response to Hurricane Katrina. Oil was also purchased in 2015 to replenish inventory sold during a test sale in 2014.
The Royalty-in-Kind Program
Royalty oil is owed to the U.S. government by operators who acquire leases on the federally-owned Outer Continental Shelf. Under current law, federal ownership ranges from 12.5 percent to 16.7 percent of the oil produced from federal leases. The Department of the Interior's Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE) (formerly known as the Minerals Management Service or MMS and prior to the end of the Royalty in Kind Program in 2009) was responsible for collecting royalities.
MMS had traditionally collected royalties from federal oil and gas leases in cash but in 1998 it started testing the effectiveness of collecting royalties "in kind" - that is, accepting ownership of the crude oil itself.
Consequently, in February 1999, the Clinton Administration announced a new plan to resume fill of the Strategic Petroleum Reserve with federal royalty oil from production in the Central Gulf of Mexico. The initiative was originally designed to replace oil that had been sold in 1996 and 1997.
From 1999 through December 2009, the SPR accepted royalty-in-kind transfers of crude oil as a primary means of acquiring oil for the SPR. In fact, the final cargo that completed fill to the SPR's capacity on December 27, 2009, was royalty-in-kind exchange oil.
(Note: On September 16, 2009, the Department of the Interior announced the termination of the royalty-in-kind program. Existing contracts would be honored but no new agreements would be negotiated.)
President Bush's 2001 Royalty-In-Kind Initiative to Fill the Reserve
In May 2001 the Bush Administration released its National Energy Policy. The Policy endorsed adding oil to the Strategic Reserve using the Royalty-in-Kind program and, in November 2001, President Bush announced his intent to fill the Reserve to 700 million barrels.
On several occasions, the Energy Department agreed to reschedule incoming oil shipments to the Reserve at the request of contractors, deferring the deliveries for several months to a year or more. In these instances, companies under contract to deliver crude oil to the Federal Government agree to increase the volume of oil delivered to the Reserve at the later date at no additional cost to the taxpayer. The additional volumes, or premium barrels, are similar to interest payments.
Delivery of the final cargos of Royalty-in-Kind crude oil to take the SPR to the President's goal of 700 million barrels was completed by August 26, 2005. It remained at that level for about a week.
Procedures for the Acquisition of Crude Oil
Also in August 2005, the Energy Policy Act 2005 was signed into law by President George W. Bush. The Act required that formal procedures be developed for the acquisition of crude oil for the Strategic Petroleum Reserve. No new Royalty-in-Kind agreements were pursued while a rulemaking process was initiated and promulgated. The Procedures for the Acquisition of Petroleum for the Strategic Petroleum Reserve were published in the Federal Register on November 8, 2006.
Timeline of Royalty-in-Kind Fill Initiative
January 16, 2009 - SPR Awards Exchange Contracts to Complete Fill to 727 Million Barrels
DOE awarded contracts for both the purchase of crude oil and the final phase of Royalty-in-Kind (RIK) exchange contracts that together, were planned to fill the SPR to its 727 million barrel capacity. Delivery of oil purchases of 10,683,000 barrels were completed during February-April 2009. Delivery of the RIK oil occurred from March 2009 through January 2010. The RIK contracts with Shell Trading and Glencore provided 6,157,000 barrels of inventory to the SPR.
November 8, 2007 - SPR Awards Exchange Contracts to Three Companies
DOE awarded contracts to Shell Trading Company, Sunoco Logistics, and BP North America for exchange of 12.3 million barrels of royalty oil produced from the Gulf Coast. Deliveries began in January 2008 for a period of six months.
May 10, 2007 - SPR Awards Exchange Contract to Shell Trading
DOE awarded a contract to Shell Trading for exchange of 8.7 million barrels of royalty oil produced in the Gulf Coast. The exchange oil was delivered to two SPR sites from August 2007 through January 2008.
February 10, 2005 - Final Royalty-In-Kind Contracts Awarded to Complete Fill of the Strategic Petroleum Reserve to 700 Million Barrels
DOE awarded two new contracts to deliver crude oil to the Strategic Petroleum Reserve beginning in May. Deliveries continued until the inventory reaches 700 million barrels, in August 2005.
August 9, 2004 - Contracts Awarded for Continued Fill of the Strategic Petroleum Reserve
DOE awarded three new contracts to deliver crude oil to the Strategic Petroleum Reserve in the fall of 2004 under the RIK exchange program.
February 12, 2004 - New Contracts Awarded for Continued Fill of the Strategic Petroleum Reserve
DOE awarded five new contracts to deliver crude oil to the Strategic Petroleum Reserve in early 2004 under the RIK exchange program.
May 23, 2003 - Strategic Petroleum Reserve Tops 600 Million Barrels
The Strategic Petroleum Reserve, the nation's emergency oil stockpile, passed the 600-million-barrel mark in May, 2003 on its way to President Bush's goal of 700 million barrels.
February 10, 2003 - New Contracts Awarded for Planned Spring Acceleration of Oil Fill for Strategic Petroleum Reserve
DOE awarded three new crude oil delivery contracts in preparation for accelerating fill of the Strategic Petroleum Reserve this spring.
August 8, 2002 - Koch Submits Winning Bid to Supply Additional Oil to Strategic Reserve
Koch Supply & Trading, LP, became the newest supplier of crude oil to the Strategic Petroleum Reserve under President Bush's plan to fill the emergency oil stockpile to its full capacity by 2005.
July 26, 2002 - Administration to Increase Fill Rate of Strategic Petroleum Reserve
The Bush Administration boosted the rate at which it is filling the Strategic Petroleum Reserve.
February 11, 2002 - Energy Department Signs Contract with Equiva to Increase Strategic Petroleum Reserve
DOE signed a contract with Equiva Trading Co. of Houston, Texas that another 18.6 million barrels of crude oil to the Strategic Petroleum Reserve.
January 22, 2002 - Energy Department Opens Call to Begin Filling Strategic Oil Reserve
The first stage of President Bush's plan to fill the nation's Strategic Petroleum Reserve began with DOE's call for offers from industry to exchange oil produced from federal offshore leases in the Gulf of Mexico.
November 13, 2001 - President Directs Energy Secretary to Increase Strategic Reserve
President Bush directed the Secretary of Energy to increase the U.S. Strategic Petroleum Reserve up to 700 million barrels using principally royalty oil from federal offshore leases.
The 1999 Royalty-in-Kind Initiative
September 16, 2009 - Salazar Ends Controversial Royalty-in-Kind Program
Secretary of the Interior Ken Salazar announced he would reform and restructure the Department of the Interior's management of U.S. energy resources, starting with the termination of the Minerals Management Service’s controversial Royalty-in-Kind program that accepts oil and natural gas from producers in lieu of cash royalties.
June 16, 1999 - Energy, Interior Departments Sign New Contracts to Use Federal Royalty Oil to Re-Fill Strategic Reserve
April 28, 1999 - Energy, Interior Departments Begin Second Phase of Initiative To Transfer Royalty Oil to Nation's Strategic Reserve
March 31, 1999 - First Contracts for Royalty Oil Transfer To Strategic Petroleum Reserve Signed
February 11, 1999 - Richardson Announced Plan to Re-Fill the Strategic Petroleum Reserve