To Refill or Not to Refill the SPR
Maybe the SPR will never be refilled
According to the the department of energy(DOE), ‘The Strategic Petroleum Reserve (SPR), the world's largest supply of emergency crude oil was established primarily to reduce the impact of disruptions in supplies of petroleum products and to carry out obligations of the United States under the international energy program.’
The reserves are not just simply storage facilities but large salt dome caverns underground near the coast that were originally developed for use in the 1970s. The caverns are created through a process of solution mining where the cavern is accessed through drilling and injected with fresh water to dissolve the salt for use in storage. The rock salt on the outliers that are formed in these caverns create a eco friendly barrier of low porosity and permeability that are essentially self healing thanks to the high pressure of the liquids weight. However these caverns are not formed to specific shapes and are focused on the volume that can be held across the combined capacity of 714M barrels leaving some odd and unknown characteristics to these storages sites deep underground.
The International Energy Agency(IEA) requires 90 days of import protection from both public and private commercial stocks and the SPR has a nominal drawdown capacity of 4.4M barrels per day of oil with a 13 day lag in time for oil to enter the market. The goal of the current administration in conjunction with the DOE is to release roughly 1 million barrels per day in oil from the SPR in order to tame oil prices and as mentioned in previous articles the Whitehouse expects domestic production to replace these current barrels by Q3 of 2022.
Following the trends of declines across many prolific fields in the US Shale production it is hard to see where these 1 million barrels will come from in the next few weeks when most data is pointing to a loss of 500K barrels per day of production domestically by the end of H1 2023. The SPR also has many budgetary sales planned through the coming years that will drawdown the total supply more. On March 31, 2022 the Whitehouse announced the sale of 180M barrels from the SPR in order to combat the price spikes caused by the war in Ukraine.
At the time, the statement outlined that gas prices were at a national average of $4.20 up from $3.30 and it seems the release has done its job in somewhat stabilizing prices where GasBuddy recent data shows the National average at $3.75 and a continued decline. Some states are doing much better than others with current prices but factoring in-state taxes is also an important part of the final price at the pump.
The DOE may plan to begin refilling the SPR at some point in the future utilizing the funds from the recent sales but that statement would assume that the buy back would be in a range lower than the price of the recent sales. As the US continues to sell into late November, off of the recent extension of the timeline, this brings the average sell price down significantly from the spikes and there are plenty of cheaper barrels being sold at a discount.
It’s important to remember that the SPR has never been depleted at the current rate that it has been pushed to in recent months and regardless of if this is politically motivated it may be more structurally damaging to the salt domes. Exploring possibilities that could disrupt supply side dynamics is always important when analyzing the current price of commodities and a possible price shock premium. The SPR is no different where certain unplanned problems could arise. Since the SPR was designed and developed with a mindset of post Arab Oil Embargo that centered around the idea that imports were increasing and domestic production was decreasing the ideology and planning of what is needed in the reserve has changed dramatically since the US Shale Revolution revitalized the domestic production side. Problems with rapid or frequent utilization of the SPR were outlined in a paper in 2014 by the Energy Policy Research Foundation:
In early 2010, officials managing the SPR program concluded that the engineering design of the storage facilities was not well matched to a policy of more frequent use. There are several reasons for the mismatch in design and use. First, the large number of small oil removals that occurred in the previous 20 years had caused several caverns to deviate from their ideal shape, and those caverns are now suffering damage due to salt falls and other geologic activity. Second, in order to remove excess natural gas from the oil inventory (a common problem in large scale storage of crude oil), the surface facilities are being used extensively at slow speeds rather than the high speed, short intervals for which they were designed, resulting in the degradation of the surface production facilities. Third, the underground storage caverns are shrinking due to continuous geologic pressure.
The paper goes on to outline some solutions for these shortcomings of the SPR but the most notable is to reduce the actual official capabilities of the SPR current inventory to a more realistic value:
There are two known options for addressing the scope of these problems. The first is to have a second Life Extension Program (the first Life Extension Program was initiated in the 1990s) that would increase cavern capacity, address the impacts of equipment deterioration and well damage, and upgrade facilities to accommodate the smaller oil sales that have become the hallmark of the SPR over the past 20 years. The second option is to reduce the size and official capabilities of the SPR to fit within the diminishing capabilities.
With regular removal and refilling of the SPR there is a natural addition of storage capacity but this addition also creates its own caveats:
Every time oil is removed from an SPR site, the oil is extracted by injecting fresh water into the bottom of caverns to push the oil out of the top. The water used for this purpose is either fresh water or unsaturated brine. The result is that more salt is dissolved and new space is created in the cavern. The rule of thumb estimate used by the SPR Office is that for every 100 barrels of oil removed from a cavern 15 barrels of salt are dissolved. In theory, oil sales should increase the total capacity of the Reserve, but in practice salt dissolution, especially during small movements, may create problems.
One thing that sticks out in the paper is even though the original designers of the SPR had planned on large drawdowns the reserves at the time of this paper’s writing had never reached 30 million barrels in a month or 1 million barrels per day that is being toted by the current administration.
This is because the dissolution of salt during a drawdown always begins at the bottom of the cavern and if the cavern is only partially emptied the shape of the cavern will become distorted with a bulge at the bottom, similar to the shape of a thermometer. Gravity then puts stress on the overhanging salt formation, and massive falls can occur. These falls often damage hanging steel tubulars, which are expensive and time consuming to replace.
The US SPR is not the only reserve in the world and many countries have their own SPR to call on and in part, the Whitehouse was able to coordinate releases from these reserves as well. A research group looked at the salt caverns utilized in Jintan, China gas storage to model through software some of the shortcomings of their caverns. Similarly finding that faults in the nonuniform structure of the caverns could lead to damaged equipment or trapped products.
Similar to the US SPR the design of the caverns was meant to be tall and cylindrical in shape but the actual shapes are not as uniform as expected.
Their analysis came up with a model that proves a risk of overhanging interlayers would essentially be prone to stress due with the removal and addition of products at faster rates of the previously mentioned deterioration of salt from the water displacement process to remove the products.
According to the cavern shape of the first stage in a relatively low-insoluble area, the standard dissolution rate of salt and the bulking factor of the broken insoluble are determined by trial and error. Worth to mention, the development of the south and north sides of the cavern is quite different, because of the inhomogeneity of the formation.
When the overhanging interlayer is long enough, it will collapse again (Fig. 12f). This cycle repeats and the cavern keeps developing. Due to the inclination angle of the interlayers, the southern overhanging interlayers are long and thin, while the northern interlayers are thick and short. The dissolution-collapse-dissolution cycle repeats on the southern side, while the northern side stops developing due to the self-locking. This provides a possible explanation for the uneven development of the cavern.
With 60 salt domes in the US SPR ranging in different geometries across different levels of pressure due to the change in water added and the caverns filled at different rates over time, it is safe to assume from the two papers that a potential loss of structure in at least some of the caverns can be expected. Each cavern was designed to be roughly 10M barrels of capacity with the natural expansion over time from water being added and removed which would leave very minimal loss of capacity if only a few caverns failed and could not be refilled. However there is still the possibility of barrels being trapped due to structural failures that would change the accountability of the current SPR levels by the DOE.
The scale of the release this year is off the charts where the term ‘emergency’ is used loosely by the DOE where there have only been four emergency releases in SPR history.
Early storage reserve(ESR) caverns range from 8-37mm barrels of capacity and are old brine mining caverns used to get SPR up and running quickly on an initial release. ESR are limited due to their shape and are a typically single draw storage where the original design of the SPR was for 5 major drawdowns according to the DOE. With the drawdown of the ESR that cannot be reused this removes 142M of refill capacity from the current SPR.
The last time a review of the SPR was done for Long Term Strategic strategies was in 2016 during a time of oil glut caused by the ramping of production of OPEC nations in 2014, most notably Saudi Arabia. At the time of the review, the planned sales of barrels from the Bipartisan Budget Act of 2015 were plotted against the decline in barrels of the SPR prior to the 180M barrels of emergency releases by the Biden Administration.
DOE can model the impact on the SPR’s drawdown rate for varying inventory sizes and site configurations, which calculates the maximum days of availability for each SPR stream for a maximum drawdown rate. As indicated in the table, the SPR can sustain a maximum drawdown rate of 4.1–4.3 MMbbl/d for 90 days. For all starting inventory levels except 430 MMbbl, as the number of caverns with stored oil decreases, the length of time for which a maximum drawdown rate can be sustained decreases.
It’s almost impossible to factor in all that could potentially go wrong with the massive SPR release and how many barrels could forever be trapped across the many caverns that make up these reserves, but the Administration is not currently held to a minimum reserve with the way stocks are calculated, combining commercial stocks and the SPR against import protection. Since the Shale Revolution took hold, the US is now a net exporter of crude and this fact negates the need to hold stocks to protect imports to combat events like the Arab Embargo of the 1970s. With that in mind, certain events such as natural disasters should lead the DOE to hold certain levels of stock in the Early Stage Reserve storage for a quick release to the market in the event of gulf oil disruption.
Knowing the requirements are no longer there and a push by many global markets to move towards renewable energies leaves little incentive for the DOE to ever begin refilling the SPR back up. The release of the SPR by design may have been a major factor in suppressing the price of oil from spiking it doesn’t seem like it will come into play as a catalyst for pushing prices in the other direction in the future and in this writers opinion the SPR will never be refilled to levels seen in the past. Except for maybe under certain war time events and no one should be betting on or hoping for those scenarios.
Great writeup, thanks a lot. Main point is that SPR sales will stop in Q4, removing a major down pressure on oil prices.