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Last Updated: June 15, 2016
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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

Crude Oil Infrastructure North America Supply/Demand
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In 2018, the United States consumed more energy than ever before

U.S. total energy consumption

Source: U.S. Energy Information Administration, Monthly Energy Review

Primary energy consumption in the United States reached a record high of 101.3 quadrillion British thermal units (Btu) in 2018, up 4% from 2017 and 0.3% above the previous record set in 2007. The increase in 2018 was the largest increase in energy consumption, in both absolute and percentage terms, since 2010.

Consumption of fossil fuels—petroleum, natural gas, and coal—grew by 4% in 2018 and accounted for 80% of U.S. total energy consumption. Natural gas consumption reached a record high, rising by 10% from 2017. This increase in natural gas, along with relatively smaller increases in the consumption of petroleum fuels, renewable energy, and nuclear electric power, more than offset a 4% decline in coal consumption.

U.S. total energy consumption

Source: U.S. Energy Information Administration, Monthly Energy Review

Petroleum consumption in the United States increased to 20.5 million barrels per day (b/d), or 37 quadrillion Btu in 2018, up nearly 500,000 b/d from 2017 and the highest level since 2007. Growth was driven primarily by increased use in the industrial sector, which grew by about 200,000 b/d in 2018. The transportation sector grew by about 140,000 b/d in 2018 as a result of increased demand for fuels such as petroleum diesel and jet fuel.

Natural gas consumption in the United States reached a record high 83.1 billion cubic feet/day (Bcf/d), the equivalent of 31 quadrillion Btu, in 2018. Natural gas use rose across all sectors in 2018, primarily driven by weather-related factors that increased demand for space heating during the winter and for air conditioning during the summer. As more natural gas-fired power plants came online and existing natural gas-fired power plants were used more often, natural gas consumption in the electric power sector increased 15% from 2017 levels to 29.1 Bcf/d. Natural gas consumption also grew in the residential, commercial, and industrial sectors in 2018, increasing 13%, 10%, and 4% compared with 2017 levels, respectively.

Coal consumption in the United States fell to 688 million short tons (13 quadrillion Btu) in 2018, the fifth consecutive year of decline. Almost all of the reduction came from the electric power sector, which fell 4% from 2017 levels. Coal-fired power plants continued to be displaced by newer, more efficient natural gas and renewable power generation sources. In 2018, 12.9 gigawatts (GW) of coal-fired capacity were retired, while 14.6 GW of net natural gas-fired capacity were added.

U.S. fossil fuel energy consumption by sector

Source: U.S. Energy Information Administration, Monthly Energy Review

Renewable energy consumption in the United States reached a record high 11.5 quadrillion Btu in 2018, rising 3% from 2017, largely driven by the addition of new wind and solar power plants. Wind electricity consumption increased by 8% while solar consumption rose 22%. Biomass consumption, primarily in the form of transportation fuels such as fuel ethanol and biodiesel, accounted for 45% of all renewable consumption in 2018, up 1% from 2017 levels. Increases in wind, solar, and biomass consumption were partially offset by a 3% decrease in hydroelectricity consumption.

U.S. energy consumption of selected fuels

Source: U.S. Energy Information Administration, Monthly Energy Review

Nuclear consumption in the United States increased less than 1% compared with 2017 levels but still set a record for electricity generation in 2018. The number of total operable nuclear generating units decreased to 98 in September 2018 when the Oyster Creek Nuclear Generating Station in New Jersey was retired. Annual average nuclear capacity factors, which reflect the use of power plants, were slightly higher at 92.6% in 2018 compared with 92.2% in 2017.

More information about total energy consumption, production, trade, and emissions is available in EIA’s Monthly Energy Review.

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A New Frontier for LNG Pricing and Contracts

How’s this for a first? As the world’s demand for LNG continues to grow, the world’s largest LNG supplier (Shell) has inked an innovative new deal with one of the world’s largest LNG buyers (Tokyo Gas), including a coal pricing formula link for the first time in a large-scale LNG contract. It’s a notable change in an industry that has long depended on pricing gas off crude, but could this be a sign of new things to come?

Both parties have named the deal an ‘innovative solution’, with Tokyo Gas hailing it as a ‘further diversification of price indexation’ and Shell calling it a ‘tailored solutions including flexible contract terms under a variety of pricing indices.’ Beneath the rhetoric, the actual nuts and bolts is slightly more mundane. The pricing formula link to coal indexation will only be used for part of the supply, with the remainder priced off the conventional oil & gas-linked indexation ie. Brent and Henry Hub pricing. This makes sense, since Tokyo Gas will be sourcing LNG from Shell’s global portfolio – which includes upcoming projects in Canada and the US Gulf Coast. Neither party provided the split of volumes under each pricing method, meaning that the coal-linked portion could be small, acting as a hedge.

However, it is likely that the push for this came from Tokyo Gas. As one of the world’s largest LNG buyers, Tokyo Gas has been at the forefront of redefining the strict traditions of LNG contracts. Reading between the lines, this deal most likely does not include any destination restriction clauses, a change that Tokyo Gas has been particularly pushing for. With the trajectory for Brent crude prices uncertain – owing to a difficult-to-predict balance between OPEC+ and US shale – creating a third link in the pricing formula might be a good move. Particularly since in Japan, LNG faces off directly with coal in power generation. With the general retreat from nuclear power in the country, the coal-LNG battle will intensify.

What does this mean for the rest of the industry? Could coal-linked contracts become the norm? The industry has been discussing new innovations in LNG contracts at the recent LNG2019 conference in Shanghai, while the influx of new American LNG players hungry to seal deals has unleashed a new sense of flexibility. But will there be takers?

I am not a pricing expert but the answer is maybe. While Tokyo Gas predominantly uses natural gas as its power generation fuel (hence the name), it is competing with other players using cheaper coal-based generation. So in Japan, LNG and coal are direct competitors. This is also true in South Korea and much of Southeast Asia. In the two rising Asian LNG powerhouses, however, the situation is different. In China – on track to become the world’s largest LNG buyer in the next two decades – LNG is rarely used in power generation, consumed instead by residential heating. In India – where LNG imports are also rising sharply – LNG is primarily aimed at petrochemicals and fertiliser. LNG based power generation in China and India could see a surge, of course, but that will take plenty of infrastructure, and time, to build. It is far more likely that their contracts will be based off existing LNG or natural gas benchmarks, several of which are being developed in Asia alone.

If it takes off  the coal-link LNG formula is likely to remain a Asian-based development. But with the huge volumes demanded by countries in this region, that’s still a very big niche. Enough perhaps for the innovation to slowly gain traction elsewhere, next stop -  Europe?

The Shell-Tokyo Gas Deal:

Contract – April 2020-March 2030 (10 Years)

Volume – 500,000 metric tons per year

Source – Shell global portfolio

Pricing – Formula based on coal and oil & gas-linked indexes

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