The Energy Department is preparing to announce it will allow U.S. producers to store excess oil in the federal government’s emergency Strategic Petroleum Reserve, people with knowledge of the plan told the Washington Examiner.
Allowing companies to rent space in the reserve would aid the industry, which is projected to run out of storage for the first time in history. At least one U.S. pipeline operator has even asked oil companies to voluntarily curb production because the glut has overwhelmed storage capacity.
There will be a surplus of 1.8 billion barrels of oil in the first half of 2020, the consultancy IHS Markit projected last week, an amount that exceeds empty storage capacity in the world, which is 1.6 billion barrels. The Energy Department did not respond to a request for comment.
“Producers are putting oil where ever they can, and there’s a very active market trying to create temporary storage — so DOE’s move will be welcomed by producers,” Dan Eberhart, CEO of the oil services firm Canary and a Trump donor, told the Washington Examiner.
The United States has become the world’s top producer of oil and gas thanks to the shale boom, but the sector is facing financial catastrophe as demand has been crushed by the coronavirus pandemic at the same time that Saudi Arabia and Russia have engaged in a price war, flooding the market.
The Energy Department’s move to rent storage space comes after Congress, as part of its phase three pandemic relief package, chose not to fund a request from President Trump to purchase low-priced oil to store in the SPR.
Without the necessary funding, the department withdrew a solicitation for buying 30 million barrels of oil from U.S. producers, which would have been the first round of purchases for a total of 77 million barrels — the full amount of open capacity in the SPR.
Allowing producers to store their extra crude would not require an appropriation from Congress, according to a former Trump administration official.
“Letting someone park their car in your unused spot for a small fee isn’t as good as buying a new car for yourself at a huge discount, but it’s better than nothing,” the former Trump official said.
He said the Energy Department briefed Capitol Hill staff on the concept earlier this week, indicating it doesn’t require new funding, only a small amount of operational funding, which is available under existing appropriations.
Eberhart said that the Energy Department looked at renting space in one or more of the SPR’s four salt caverns in Louisiana and Texas back in 2018.
“It makes financial sense — the federal government will collect rent for storing the oil, and it should tamp down speculation that’s roiling future markets. It will also allow production to continue at wells that are already pumping,” Eberhart said.
Congress created the SPR in response to the Arab oil embargo in the 1970s as a way to mitigate supply disruptions. The SPR currently holds just shy of 635 million barrels of oil, according to the Energy Information Administration, with room for 77 million more barrels to meet its authorized capacity of 713.5 million barrels of oil.
