Research Triangle Energy Consortium

There is a lot of teeth gnashing about President Biden ordering a limited drawdown of the Strategic Petroleum Reserve (SPR) earlier this year. A New York Times piece warns that the SPR is at its lowest level in four decades (see chart). How relevant is that statistic?

Let’s go back to how it all began. In 1973 the US was importing 6.2 million barrels per day (MMbpd). Today, it is the largest oil producer and a net exporter by a small margin. But importantly, about half the imports are from Canada, with whom the US has a mutual dependency. Canada has heavy crude the bulk of which is refined in the US, with a resulting export of refined products. Viewed in North American terms, imports from other parts of the world are minor.

Back to 1973. The Arab Oil Embargo to countries such as the US and the UK caused a tripling of the price of oil. To avoid such disruption, the US decided in 1975 to create the SPR. Since then, the crises that drove the decision have not materialized. Drawdowns have been few and light (see chart). In other words, even before shale oil and the resulting North American self-sufficiency, strategic access has not been needed. And yet, pundits, such as those in the NY Times piece, keep maintaining that someday the reserve may be needed*. We discuss that premise here.

The SPR comprises four salt caverns, created by drilling into salt bodies and excavating using circulating water. These are ideal for storage of oil. In fact, salt has been an important impermeable stratum to trap oil in reservoirs. At its peak the reserve had about 719 MM barrels. It was filled over the years and has a low average purchase cost of USD 28 per barrel. While the President’s purpose was to ease the cost of gasoline at the pump for the populace, the sale of SPR oil is coincidentally generating a profit for the government at today’s prices.

Oil is not all the same. One reason the US imports oil from Canada and Mexico, while at the same time exporting domestic production is that US refineries prefer the heavy oil from those countries. They have expensive process equipment to refine such oil, which they get at a large discount because the cost to refine is higher for these crudes. To pay more for light shale oil, while at the same time idling the expensive kit, makes no economic sense. And unlike the European situation with Russian oil and gas, the imports are from friendly neighbors who need the US refineries.

Similarly, the oil in the SPR is not all the same. Over 60% of it is high in sulfur (designated sour) and has significantly lower value than the sweet oil.  The final withdrawals this year are 85% sweet, possibly because that is the mix most suited for purchasers. If, and when, shale oil is injected, it will improve the quality of the balance. But that ought not to be necessary. Here is why shale oil could directly address any shortfalls in supply.

First, there is a significant inventory of DUC wells. DUC stands for drilled and uncompleted and is pronounced duck. I will spare you duck hunting allusions. The hydraulic fracturing portion of the completion is the costly part of the operation. It was suspended for some wells during the low oil prices of a few years ago and the wells were mothballed. Such wells can come on stream in a matter of weeks. Second, even new reservoirs can be accessed and flow oil in a few months. Environmentalists are concerned that new wells will perpetuate fossil fuel production. Ordinarily they would be right for, say, deep water wells. But shale oil wells are burdened with high rates of reservoir depletion. Production from the first couple of years must justify the return on investment. The capital asset does not need years of production to provide the return, as it would for conventional plants such as refineries, or deep water wells, for that matter.

The drawdown executed by the US administration of about 1 MMbpd for 180 days is nearing the end, with 160 MM barrels already released. The reserve is at about 420 MM barrels and will drop to 400 MM barrels by the end of the year. In the unlikely event that the strategic purpose of the SPR is invoked, and it has not since its inception, that amount provides a cushion while additional shale oil is brought on stream.  Over the last few years, the shale oil industry has been more restrained than in the past, seeking better returns. If this were to be a national security issue, short term policy measures could overcome that hurdle.

Shale oil in the ground is our strategic petroleum reserve.

Vikram Rao

October 1, 2022

*’Cause someday never comes, from Someday Never Comes, Creedence Clearwater Revival (1972), written by John Fogerty.