A rare look at the U.S. strategic oil reserves
FREEPORT, Texas A swamp near here is one of the most secretive places in America. There are no signs, just a 500-acre complex protected at all times by 30 armed guards in combat fatigues patrolling in sport utility vehicles.
This is part of the world's largest and most expensive filling station, the U.S. Strategic Petroleum Reserve, where a large portion of the government's nearly 700 million barrels of oil are stored in underground salt shafts that are supposed to be stable for the next thousand years or so.
Security at the complex has improved in the past three years. Visitors are required to be U.S. citizens, a rule waived recently when technicians from Russia and India toured the site as part of studies toward creating their own reserves.
American taxpayers have invested some $20 billion to build and stock this reserve - and three others in hidden locations - since it was created in 1975 in response to the Arab oil embargo. And now, after 29 years, it is finally about to be filled up to the brim for the first time.
"For a while it seemed like no one had heard of us and then, boom, we're on the radar screen," Gregory Magallanez, site operations specialist at the Strategic Petroleum Reserve, said in an interview. Usually the only unannounced visitors here are white egrets or the occasional seagull, Magallanez said. "The attention is a little worrisome sometimes."
After September 11, 2002, President George W. Bush decided to fill up the reserve to its maximum, in hopes of creating an insurance policy in the event of another oil shock.
"Say you wake up one day and there's been an Iranian-style revolution in Riyadh," said David Pursell, an expert on the reserve and a principal with Pickering Energy Partners, an energy investment company in Houston. "You simply wish you had more oil."
The question of ensuring a secure energy supply has taken on added significance in the last year, as terrorist groups have targeted petroleum infrastructure in Iraq and Saudi Arabia, and two other major oil exporters, Nigeria and Venezuela, have been hit by political turmoil.
China's growing appetite for oil has added to the jitters about the global oil supply. So, even though the reserve will soon be filled, there is no sense that it has provided the country with enough of a cushion in the event of a severe disruption in oil supplies. Altogether the reserve would only cover about two months of the country's imported oil needs.
But the notion of building a secret reserve seems to have encouraged other countries to fortify their own energy storehouses. Japan, South Korea, Taiwan and Germany already have theirs. China, which surpassed Japan in the past year as the second-largest importer of oil, and India, which is competing with China for oil supplies in some developing countries, are also moving ahead with plans to build their own strategic oil reserves. Even Russia, the largest oil producer, is considering building one.
Energy experts expect the new reserves to largely be modeled on the American system, which includes three other locations in Texas and Louisiana in addition to the site here southeast of Houston, built on a swampy hill called Bryan Mound. It is the reserve's largest complex with 232 million barrels of crude oil stored almost entirely underground in immense salt domes.
"We should consider increasing the reserve even further after it's full," said Bill Richardson, a former energy secretary in the Clinton administration and now governor of New Mexico. "I also think we should creatively find ways of releasing oil from the reserve while working together with OPEC, in an effort to bring prices down. OPEC's in a box right now and because of our continuing dependence on imported oil, so are we."
Part of the energy bill Congress will be considering next year would increase the reserve in the United States by another 300 million barrels, bringing the entire U.S. reserve system to 1 billion barrels.
Still, criticism has plagued the costly system since it was created three decades ago. Energy industry executives estimate that since then the government has spent more than $20 billion to build the system and keep it stocked.
Only about 100,000 barrels a day go into the United States reserve out of worldwide consumption of 82 million barrels a day. The United States consumes about 20 million barrels of oil a day, or about a quarter of global consumption, so at its current level of about 671 million barrels the reserve would provide the equivalent of just two months of crude imports.
Still, it is impossible to know exactly how a complete withdrawal of the reserve's oil would play out since that has never happened before. Altogether, technicians at the reserve estimate it can release a total of 4.5 million barrels a day, falling substantially short of current domestic consumption. The two largest withdrawals were 17 million barrels during the Gulf War in 1991 and 30 million barrels in 2000, neither of significant size or duration.
Releasing oil from the reserve to ease prices had mixed effects in late 2000, with prices dropping from $37 a barrel to $30 in September 2000 in the days after the first oil flowed out of the reserve but recovering to $36. Oil prices then declined to about $32 a barrel by December 2000.
From time to time the Energy Department also releases small amounts of oil from the reserve to address temporary supply interruptions, as it recently did when delivering oil to refineries in Texas after Hurricane Ivan knocked out production at some offshore platforms in the Gulf of Mexico. The salt domes in Freeport were originally created by Dow Chemical to store magnesium.
The reserve here functions differently than systems in countries such as Japan, where private companies are required to store oil and refined gasoline to complement the government's own inventories. In the United States the reserve consists almost entirely of unrefined oil acquired directly from producers instead of purchases of the oil on the open market.
The government takes the oil in place of royalty payments energy companies normally make to drill on public land, though some imported crude also goes to the reserve through exchanges to acquire a variety of blends of crude.
IHT Copyright © 2004 The International Herald Tribune
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