U.S. Energy Department Negotiates Contracts to Store Surplus Crude Amid Falling Demand

The U.S. Energy Department is negotiating contract awards with nine U.S. companies to store about 23 million barrels of crude oil in the Strategic Petroleum Reserve, or SPR, according to an April 16 news release. This act aims to relieve oil producer’s stress in dealing with excess production under the combined effects of COVID-19 pandemic and recessive international oil market.

The SPR is the world’s largest and a federally-owned stockpile of over 700 million barrels of crude oil for emergency fuel. But now, it has another responsibility –  to accommodate the extra oil. The crude oil to be stored will be distributed into all four SPR sites along the coastline of the Gulf of Mexico. Most of these deliveries will be received in May and June 2020, with possible early deliveries in April. Awardees can arrange the return of their oil through March 2021, leaving a small amount of oil as the SPR’s storage cost. The industry welcomes the move.

On April 2, the department issued a solicitation to make 30 million barrels of the SPR’s storage capacity available to oil producers. The temporary storage is expected to receive up to 685,000 barrels per day. Prior to February 28, the department issued a Notice of Sale to sell up to $450 million worth of crude oil from the three SPR sites to carry out the SPR Life Extension Phase II project.

President Trump has directed the agency to maximize the reserve capacity to tackle the oil surplus crisis. However, the SPR’s capacity is limited. The oil industry is facing an unprecedented challenge where supply shock and demand shock happen at the same time. Many producers may be forced to shut down wells sooner because of a lack of storage facilities and even go into bankruptcy. The historic glut of oil is going to reshape the oil market and the energy industry.