The world’s largest emergency stockpile of crude oil is quickly falling apart.
The stockpile’s infrastructure, which currently stores 695.1 million barrels at four sites along the US Gulf Coast, is nearing the end of its design life and in need of a roughly $2 billion makeover, US Department of Energy officials claim.
“We’ve had several significant equipment failures over the last couple years that have affected our operational capability,” said Bob Corbin, the DOE deputy assistant secretary who oversees the stockpile, formally known as the US Strategic Petroleum Reserve.
In April, a water pipe at the DOE’s Big Hill site in Winnie, Texas failed, less than a year after a crude oil storage tank failed at the Bryan Mound SPR site near Freeport, Texas.
Throughout the system, pipes are corroding, tank floors need to be replaced, wells are failing mechanical integrity tests and pump motors, after decades of dealing with harsh weather and salty air off the Gulf of Mexico, are breaking down beyond repair, DOE officials claim.
Corbin said these issues complicate the ability of DOE to both drawdown and distribute crude oil at times of severe supply distributions, which is the primary reason the SPR was created more than four decades ago. They also complicate US’ ability to meet obligations under international agreements and could endanger energy security.
Last week, Corbin led a media tour of the Bryan Mound SPR site, the largest of the four SPR sites in Texas and Louisiana.
Bryan Mound is a 500-acre site which currently holds 245 million barrels of crude (2.1 million barrels below its design storage capacity) in 19 operational storage caverns.
The SPR has two types of caverns in salt domes: SPR-designed caverns and Early Storage Reserve-caverns. The ESR caverns are typically repurposed salt domes and have operational restrictions the more current SPR-designed caverns do not have. The ESR caverns at the Bryan Mound site were originally used by Dow Chemical to store magnesium. The entire SPR has 49 SPR-designed caverns and 11 ESR caverns.
Cavern 5 at Bryan Mound is the largest crude oil storage cavern in the world and can store up to 37 million barrels of crude. DOE claims that underground caverns, which are roughly 2,000 to 2,200 feet in depth and 200 feet in diameter, can be built for about 1/5 of the cost of conventional surface tanks and have operating costs of less than 30 cents/barrel. The SPR primarily holds light crude, but has 75 million barrels of medium sour, roughly 10.8% of its total inventory. It currently hold 266.1 million barrels of light sweet crude, 38.3% of its inventory, and 354 million barrels of light sour, or 50.9%.
Bryan Mound currently holds 68.6 million barrels of sweet crude in six caverns and 176.4 million barrels of sour crude in 13 other caverns. The site has 45 operational wells and connects to four crude oil distribution sales points: Freeport terminal ship docks; Jones Creek pipeline; Texas City terminal ship docks; and Texas City terminal pipeline.
Congress has approved sales of millions of barrels of SPR crude to help pay for unrelated transportation plans and a modernization effort for the SPR. These sales, which will continue through fiscal 2025, could take the SPR from its current inventory of 695.1 million barrels to 530 million barrels, a threshold DOE needs to stay above in order for the President to maintain statutory authority to approve emergency releases from the stockpile.
“If you get below 530 million barrels…that would basically take away the authority of the president to conduct limited drawdowns, which means small disruptions, not even huge disruptions, would be difficult, if not impossible to respond to as a result,” Corbin said.
Corbin said while millions of barrels of SPR crude will be sold off over the next nine years, he’s not sure if that crude will ever be replaced.
“Buying and selling oil at the same time, from a net inventory result, I think is counterproductive, but you just don’t know what’s going to happen,” he said.
In a report Corbin authored, DOE is expected to recommend an ideal size for the SPR, in light of the ongoing growth of US shale oil. Corbin declined to comment on that recommendation, but said the SPR will be “smaller than it is today” but its exact size is yet to be determined. The report is expected to be released within a month.
The SPR’s drawdown rate, the pace at which crude can be pushed out of storage caverns to pipelines, is designed to be 4.415 million b/d over 90 days before the rate begins to fall. But a smaller SPR could reduce that rate dramatically, hindering the ability of DOE to bring crude to a distressed global market.
“As you reduce your inventory levels, and reduce the number of caverns that oil is stored in, because of flow hydraulics, it changes both the drawdown rate and the maximum duration that you can sustain that rate,” Corbin said.
At the same time, the SPR is also losing as much as 2.4 million barrels per year by both natural creep, caused by the force of the earth pushing on the caverns, and induced creep, which occurs when a cavern needs to be depressurized for maintenance, he said.
“The creep issues will continue going forward, there is nothing anybody can do about those,” Corbin said. “The question becomes, from a planning perspective how does creep impact your storage capacity going forward and how does it impact your requirements for storage capacity going forward?”
Each SPR site uses a system where water is injected into caverns, displacing stored oil and brine and pushing it into crude pipes and eventually sent into pipelines and ships to the Gulf of Mexico.
The ability of that system to work, however, has been complicated both by the SPR’s aging infrastructure and changes to how crude oil now moves in the US. DOE is pushing for dedicated marine terminals in order to ship out crude at times of supply shocks so that crude which would otherwise be sent out from existing marine facilities would not be displaced. Details of this request will be featured in DOE’s upcoming report, Corbin said.
The SPR was established through the Energy Policy & Conservation Act of 1975 and is beginning to show its age. The floor of this tank (pictured above) has corroded and needs to be replaced.
During the tour, a crew worked on repairing a well of one cavern which had failed a state-mandated mechanical integrity test.
The Bipartisan Budget Act of 2015 calls for sales between fiscal 2017 through 2020 totaling $2 billion from the SPR to pay for the effort to address many of these issues. But Congress still needs to appropriate the funding for this effort.
DOE warns that if sales do not take place over the next four fiscal years additional, larger volumes will need to be sold in later years when other sales are already scheduled to take place.
By Brian Scheid, Senior editor, oil news
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Headline crude prices for the week beginning 11 February 2019 – Brent: US$61/b; WTI: US$52/b
Headlines of the week
Midstream & Downstream
Global liquid fuels
Electricity, coal, renewables, and emissions
2018 was a year that started with crude prices at US$62/b and ended at US$46/b. In between those two points, prices had gently risen up to peak of US$80/b as the oil world worried about the impact of new American sanctions on Iran in September before crashing down in the last two months on a rising tide of American production. What did that mean for the financial health of the industry over the last quarter and last year?
Nothing negative, it appears. With the last of the financial results from supermajors released, the world’s largest oil firms reported strong profits for Q418 and blockbuster profits for the full year 2018. Despite the blip in prices, the efforts of the supermajors – along with the rest of the industry – to keep costs in check after being burnt by the 2015 crash has paid off.
ExxonMobil, for example, may have missed analyst expectations for 4Q18 revenue at US$71.9 billion, but reported a better-than-expected net profit of US$6 billion. The latter was down 28% y-o-y, but the Q417 figure included a one-off benefit related to then-implemented US tax reform. Full year net profit was even better – up 5.7% to US$20.8 billion as upstream production rose to 4.01 mmboe/d – allowing ExxonMobil to come close to reclaiming its title of the world’s most profitable oil company.
But for now, that title is still held by Shell, which managed to eclipse ExxonMobil with full year net profits of US$21.4 billion. That’s the best annual results for the Anglo-Dutch firm since 2014; product of the deep and painful cost-cutting measures implemented after. Shell’s gamble in purchasing the BG Group for US$53 billion – which sparked a spat of asset sales to pare down debt – has paid off, with contributions from LNG trading named as a strong contributor to financial performance. Shell’s upstream output for 2018 came in at 3.78 mmb/d and the company is also looking to follow in the footsteps of ExxonMobil, Chevron and BP in the Permian, where it admits its footprint is currently ‘a bit small’.
Shell’s fellow British firm BP also reported its highest profits since 2014, doubling its net profits for the full year 2018 on a 65% jump in 4Q18 profits. It completes a long recovery for the firm, which has struggled since the Deepwater Horizon disaster in 2010, allowing it to focus on the future – specifically US shale through the recent US$10.5 billion purchase of BHP’s Permian assets. Chevron, too, is focusing on onshore shale, as surging Permian output drove full year net profit up by 60.8% and 4Q18 net profit up by 19.9%. Chevron is also increasingly focusing on vertical integration again – to capture the full value of surging Texas crude by expanding its refining facilities in Texas, just as ExxonMobil is doing in Beaumont. French major Total’s figures may have been less impressive in percentage terms – but that it is coming from a higher 2017 base, when it outperformed its bigger supermajor cousins.
So, despite the year ending with crude prices in the doldrums, 2018 seems to be proof of Big Oil’s ability to better weather price downturns after years of discipline. Some of the control is loosening – major upstream investments have either been sanctioned or planned since 2018 – but there is still enough restraint left over to keep the oil industry in the black when trends turn sour.
Supermajor Net Profits for 4Q18 and 2018
- 4Q18 – Net profit US$6 billion (-28%);
- 2018 – Net profit US$20.8 (+5.7%)
- 4Q18 – Net profit US$5.69 billion (+32.3%);
- 2018 – Net profit US$21.4 billion (+36%)
- 4Q18 – Net profit US$3.73 billion (+19.9%);
- 2018 – Net profit US$14.8 billion (+60.8%)
- 4Q18 – Net profit US$3.48 billion (+65%);
- 2018 - Net profit US$12.7 billion (+105%)
- 4Q18 – Net profit US$3.88 billion (+16%);
- 2018 - Net profit US$13.6 billion (+28%)