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.

Direct Purchases

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 royalties.

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.