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What are exchanges of oil?  How does an exchange differ from a sale?
Crude oil exchanges are authorized as a means of acquiring oil for the SPR at no cost to the SPR.  "Loans" are a form of time exchange generally used after a disruption to commercial oil supplies has occurred that resulted from an event outside the control of the company, such as a hurricane in the Gulf or a ship channel closing.  The event must be of sufficient scope and duration that DOE determines it would be in the public interest to make the loan. Loans are initiated at the request of the company.

Exchange authority requires that oil of a similar quality be repaid to the SPR, along with premium barrels (similar to interest), within a specified time. The amount of the premium barrels and the repayment date are determined through contract negotiations.  Additionally, the costs to the SPR for drawdown and transportation of the crude oil are included in the value of the premium to be paid.

Broad authority for exchange contracts is found in Section 159 of the Energy Policy and Conservation Act, P.L. 94-163. EPCA provides that the Secretary may acquire oil for the SPR by "purchase, exchange or otherwise." There also exists special authority for the Secretary to conduct a test sale or exchange.

How long does an exchange agreement take?  What about a sale?
It is possible for exchange agreements to be completed within a few days of the receipt of a request from a company.  Movement of the oil can occur when the contractor has made arrangements for the transportation of the oil -- usually within 24 hours of contract award.  A sale and drawdown from the SPR is conducted online competitively. Deliveries of the crude oil can begin as early as 13 days after announcement of the sale, depending upon the scheduling and transportation arrangements made by the contractor for receipt of the oil.

Broad authority for exchange contracts is found in Section 159 of the Energy Policy and Conservation Act, P.L. 94-163. EPCA provides that the Secretary may acquire oil for the SPR by "purchase, exchange or otherwise."  There also exists special authority for the Secretary to conduct a test sale or exchange.

Has President Bush's 2001 fill initiative been completed? 
Yes, President Bush's November 2001 directive to fill the SPR to 700 million barrels at a moderate rate using royalty-in-kind crude oil from U.S. Outer Continental Shelf leases was completed on August 27, 2005.  However, Hurricane Katrina hit the region on August 29, 2005 and the resulting emergency loans of 9.8 million barrels and sale of 11 million barrels reduced the inventory to about 680 million barrels.

The SPR's 700-million barrel milestone was again reached on April 2, 2008, using a combination of repayments of the Katrina loaned volumes plus accompanying premium barrels and resumption of the royalty-in-kind transfer program in 2007.

Of the Katrina loans and associated premium barrels, 4.2 million barrels were repaid during October and November 2005, an additional 4.4 million barrels were repaid between February and May 2006, and the remaining 1.7 million barrels owed were repaid in April and May 2007.  The 11 million barrels of oil sold were replaced through royalty-in-kind transfers.

What are royalty-in-kind transfers? 
The royalty-in-kind (RIK) transfer program was operated by the Department of the Interior.  It was cancelled in September 2009.  The RIK program was specific to crude oil that is produced from federal leases in the Gulf of Mexico and paid to the U.S. Government in lieu of cash royalty payments.  The program provided that "in kind" payment of a percentage of the lease's production be paid to the Department of the Interior; ownership of the oil was then transferred at the market center to the Department of Energy for SPR fill.  The SPR frequently solicited to exchange the oil delivered to the market center for crude oil that would meet the quality specifications of the SPR.  The exchange contracts included adjustments to the volume to be delivered to the SPR due to quality differences in the crude oil and to cover the transportation costs.

The RIK program is authorized by the Outer Continental Shelf Lands Act and the Energy Policy and Conservation Act.  On September 16, 2009, the Department of the Interior announced the termination of its royalty-in-kind program.

What are deferrals and premium barrels? 
The Department of Energy has occasionally agreed to delays in scheduled deliveries to the SPR due to tight markets or disruptions in the marketplace that lead to, or contribute to, a backwardated market, i.e., prices in the future are lower than current prices.  Deferrals are a means of acquiring oil for the SPR at no cost to the taxpayer.

Deferrals are requested by the contractor and, if agreed to by the Department of Energy, are negotiated to provide premium barrels (similar to interest) to the SPR, along with the contracted volumes, at a later date.  Both the contractor and the Government benefit from the arrangement.

Has the oil that was released after Hurricane Katrina in 2005 been replaced? 
The volume of crude oil that was released after Hurricane Katrina was restored to the SPR at moderate rates over time.  Repayments of loaned oil began during late Fall 2005 and concluded in the final repayment delivery in May 2007. 

Replacement of the sold oil was managed through the royalty-in-kind program.  The pre-Katrina inventory level was reached in April 2008. Replacement of the sold crude oil was attempted in 2007 using both direct purchase and the royalty-in-kind program.  Solicitations for crude oil acquisition by direct purchases were issued in April and May 2007; funds for the purchases were to be from the Fall 2005 emergency sale receipts.  However, neither solicitation resulted in award because the Department determined that the prices proposed were too high, and not a reasonable value for the taxpayer. Had the purchase offers been successful, it would have been the first direct purchases of crude oil for the SPR since 1994.

Prior to releasing the solicitations for both the direct purchase exchange contracts, an economic analysis was prepared in accordance with the Procedures for the Acquisition of Petroleum for the Strategic Petroleum Reserve.  

What actions are being taken in response to the Energy Policy Act of 2005 (EPAct) that requires fill of the SPR to its authorized size of one billion barrels? 
Activities towards the goal of expansion of the SPR to one billion barrels, as directed by Congress in the 2005 Act, were cancelled in 2011 after Congress rescinded all remaining expansion funds.  Prior to cancellation, the SPR had completed a process to select a new site for development and plans to increase the size of two existing sites. EPACT 2005 also required that procedures for acquisition of crude oil be promulgated, an action that was completed with publication in the Federal Register of the final rule on November 8, 2006.  On December 8, 2006, the Final Environmental Impact Statement for Selection of Sites for Expansion of the Strategic Petroleum Reserve was published in the Federal Register.  The Secretary of Energy signed the Record of Decision on February 14, 2007, and the Department published a Plan for Expansion of the SPR to One Billion Barrels in June 2007.

In January 2008, DOE issued a Notice of Intent to prepare a Supplemental Environmental Impact Statement and to solicit additional public comments.  That process continued until 2010, when the decision was made to suspend further expansion activities.  Congress rescinded funding for the expansion initiative and, on September 9, 2011, a Notice of Cancellation was published in the Federal Register.

What are Acquisition Procedures and how will they ensure that oil is acquired "without incurring excessive cost or appreciably affecting the market price of petroleum products to consumers"?
Should DOE need to acquire oil in the future (due to either replacement of current stock or expansion),  DOE will strive to avoid incurring excessive cost or appreciably affecting the price of petroleum products to consumers by analyzing market activity for crude oil and related commodities and prices of oil for delivery in future months, as well as the perceived availability of near term and forward supplies.

In doing so, DOE will consider the current level of the SPR and private inventories; national and regional import dependency; the outlook for international and domestic production levels; oil acquisition by other stockpiling entities; the extent to which the SPR fill rate and prices paid will impact supply availability and prices in the marketplace; incipient disruptions of supply or refining capability; the level of market volatility; the demand and supply elasticity to price changes; logistics and economics of petroleum movement; and any other considerations that may be pertinent to the balance of petroleum supply and demand.

The timing of DOE entry into the market, its sustained presence, and the quantities sought will all be sensitive to these factors.

When can the Reserve be used? 
The circumstances that might require the use of the Strategic Petroleum Reserve are defined in the Energy Policy and Conservation Act (EPCA).  Generally, there are three possible types of drawdowns envisioned in the Act:

Full drawdown:  The President can order a full drawdown of the Reserve to counter a "severe energy supply interruption." EPCA defines this as "a national energy supply shortage which the President determines -
(A) is, or is likely to be, of significant scope and duration, and of an emergency nature
(B) may cause major adverse impact on national safety or the national economy; and
(C) results, or is likely to result, from (i) an interruption in the supply of imported petroleum products, (ii) an interruption in the supply of domestic petroleum products, or (iii) sabotage or an act of God.

EPCA also states that a severe energy supply interruption "shall be deemed to exist if the President determines that -
(A) an emergency situation exists and there is a significant reduction in supply which is of significant scope and duration;
(B) a severe increase in the price of petroleum products has resulted from such emergency situation; and
(C) such price increase is likely to cause a major adverse impact on the national economy."

Limited drawdown:  If the President finds that -
(A) a circumstance, other than those described [above] exists that constitutes, or is likely to become, a domestic or international energy supply shortage of significant scope or duration; and
(B) action taken....would assist directly and significantly in preventing or reducing the adverse impact of such shortage" then the Secretary may drawdown and distribute the Strategic Petroleum Reserve, although in no case:
"(1) in excess of an aggregate of 30,000,000 barrels....
(2) for more than 60 days....
(3) if there are fewer than 500,000,000 barrels....stored in the Reserve."

Test Sale or Exchange:  The Secretary of Energy is authorized to carry out test drawdowns and distribution of crude oil from the Reserve. If any such test drawdown includes the sale or exchange of crude oil, "then the aggregate quantity of crude oil withdrawn from the Reserve may not exceed 5,000,000 barrels during any such test drawdown or distribution."

Can oil be withdrawn from the Reserve for other reasons? 
Yes.  The Department of Energy has the authority to exchange crude from the Reserve.  Exchanges have been used in the past to replace less suitable grades of crude oil with higher-quality crudes and for limited, short-duration actions to assist petroleum companies in resolving oil delivery problems.  In 2000, crude oil from the Reserve was exchanged for storage capacity and stocks to create the Northeast Heating Oil Reserve.  During Fall 2005, an exchange was conducted at the request of refineries in the Gulf Region when Hurricane Katrina caused disruptions to scheduled deliveries.  During 2006, small exchanges occurred in January and June when accidents in shipping channels disrupted marine deliveries to refiners.  In 2008, test exchange authority was used to provide crude oil to industry after Hurricanes Gustav and Ike shut down Gulf production and marine deliveries along the Gulf Coast.  Short-term, discrete time exchanges are sometimes referred to as loans.

What is the relationship between the United States and the International Energy Agency (IEA)? 
The United States is a founding member of the IEA.  The organization was created in 1974 following the Arab oil embargo.  Enactment of the Energy Policy and Conservation Act of 1975 (Pub.L. 94-163) authorized U.S. participation in the International Energy Program.  United States representatives to the IEA are provided by DOE and the State Department.  Today the IEA has 29 member countries that are committed to (1) take common effective measures to meet oil supply emergencies, and (2) reduce dependence on oil in the long-term.  Members are required to hold strategic stocks equal to no less than 90 days of petroleum imports based on the previous year's net imports.

IEA member countries coordinate their energy policies, share energy information, and cooperate in the development of national energy programs.  A formal process for coordinated emergency response measures is used to assess and determine whether and in what way IEA members will respond to petroleum supply issues.

How fast can oil be released from the Reserve? 
Should the President order an emergency sale of Strategic Petroleum Reserve oil, DOE can conduct a competitive sale, select offers, award contracts, and be prepared to begin deliveries of oil into the marketplace within 13 days.  Oil can be pumped from the Reserve at a maximum rate of 4.4 million barrels per day for up to 90 days, then the drawdown rate begins to decline as storage caverns are emptied. At 1 million barrels per day, the Reserve can release oil into the market continuously for nearly a year-and-a-half.

What type of crude oil is stored in the Reserve? 
During the years that the Strategic Petroleum Reserve has existed, crude oil has been acquired from 25 countries. The oil is categorized as either "sweet" (with a sulfur content not exceeding 0.5 percent by weight) or "sour" (with a sulfur content greater than 0.5 percent but less than 2.0 percent).  The SPR accepts only crude oil that meets its quality specifications and it is co-mingled in caverns designated as either sweet or sour.

Why is only crude oil stored in the Reserve? 
The SPR is authorized by law to store both refined products and crude oil.  However, in preparing the 1977 SPR Plan for development of the Reserve, an analysis of the U.S. refining industry indicated that the industry was robust and had the refining capacity to satisfy the major portion of the nation's demand for petroleum products.  This continues to be true today--over 30 years later.  The U.S. petroleum import dependency is overwhelmingly crude oil, not refined products.  In addition, crude oil is cheaper to acquire, store and transport than refined products.  Crude oil quality does not degrade over time as do refined products and crude oil provides flexibility in responding to fluctuations in refined product market needs; whereas, refined products are expensive to maintain and are subject to changes in specifications mandated by environmental legislation.

During times of emergency releases, what type of oil is most frequently requested by industry? 
Sweet crude is most frequently requested.  Sweet crude will always have the highest demand in a supply emergency because of its value to refiners to produce transportation fuels.  Sweet crudes can be refined by all refineries from the simplest to the most complex.  To illustrate, the Hurricane Katrina emergency sale resulted in 10.8 million barrels of sweet crude sold versus 200 thousand barrels of sour.

What is the ratio of sweet and sour crudes in the SPR? 
Crude oil stored in the SPR is currently about 40% sweet and 60% sour.  The ratio was established to meet the needs of the U.S. refining industry, particularly those in the districts most likely to take SPR crude in the event of a drawdown.  Sweet crude oil can be processed by nearly all refiners; the same is not true for sour crude.

Why are the SPR sites located in the U.S. Gulf region? 
The largest concentration of U.S. refineries are located along the Gulf Coast.  Tankers bringing imported oil to the U.S. off-load their cargos there and the crude oil is delivered to the refineries for processing.  With ample salt dome storage available, access to marine terminals, distribution pipelines, and refineries, the SPR can safely store, drawdown, and quickly deliver emergency crude oil to refineries in the event of a supply interruption. 

Why is the crude oil stored in salt domes? 
Salt dome storage has advantages in cost, security, environmental risk, and maintenance. Salt formations offer the lowest cost, most environmentally secure way to store crude oil for long periods of time.  Stockpiling oil in artificially-created caverns deep within the rock-hard salt costs historically about $3.50 per barrel in capital costs.  Storing oil in above-ground tanks, by comparison, can cost $15 to $18 per barrel - or at least five times the expense.  Also, because the salt caverns are 2,000-4,000 feet below the surface, geologic pressures will seal any crack that develops in the salt formation, assuring that no crude oil leaks from the cavern.  An added benefit is the natural temperature difference between the top of the caverns and the bottom - a distance of around 2,000 feet; the temperature differential keeps the crude oil continuously circulating in the caverns, giving the oil a consistent quality.

How were the caverns created? 
Salt caverns are carved out of underground salt domes by a process called "solution mining."  Essentially, the process involves drilling a well into a salt formation, then injecting massive amounts of fresh water.  The water dissolves the salt.  In creating the SPR caverns, the dissolved salt was removed as brine and either reinjected into disposal wells or more commonly, piped several miles offshore into the Gulf of Mexico.  By carefully controlling the pressure and direction of the freshwater injection process, salt caverns of very precise dimensions can be created.

How is the salt able to contain the oil? 
Rock salt has a combination of characteristics that makes it highly attractive for cavern construction and petroleum storage.  If relatively pure and not interbedded with significant quantities of other types of rock, it is generally impervious to liquid and gas and inert to petroleum, has a compression strength comparable to concrete under the weight of the overlying and surrounding rock, moves like plastic to seal incipient fractures, and can be mined easily by dissolving (leaching) with water.

How was the authorized one billion barrel size of the Reserve determined? 
Prior to Congress authorizing a crude oil national security storage system, studies were conducted to determine the optimum amount of crude oil that should be stored.  Based upon the level of imports at that time (1974-1975), a reserve of 500 million barrels was recommended.  Congress, however, foresaw that consumption of petroleum in the United States would increase over time and that import levels would also increase.  Therefore, when the Energy Policy and Conservation Act passed in late 1975, the SPR size was authorized up to one billion barrels, with an initial size target of 500 million barrels.

How is days of import protection determined? 
The number of days of import protection are calculated by dividing the SPR's inventory level by the Energy Information Administration's (EIA) reported net petroleum imports per day.

How many people work at the Strategic Reserve? 
Currently, staffing includes 126 Federal employees, a combined total between the Project Management Office in New Orleans and the Program Office in Washington D.C., and 734 major contractors and subcontractors who provide services that support the SPR's program, as it relates to overall management and operations, security, design, construction management, and technical and business management activities.

What is a management and operating (M&O) contract? 
A M&O contract is an agreement under which the Government contracts for the operation, maintenance, or support, on its behalf, of a Government-owned or -controlled facility wholly or principally devoted to one or more major programs of the contracting Federal agency.  Following Federal Acquisition Regulations, M&O contracts are awarded competitively.