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US Congress approves budget, selling off more than 100 million barrels of government oil

London — Congress early Friday approved a two-year budget agreement which mandates thesale of 100 million barrels of crude oil from the Strategic Petroleum Reservewithin a decade and authorizes sales of another $350 million ofgovernment-owned crude this fiscal year.

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The House of Representatives passed the legislation by a 240-186 vote afterthe Senate approved it by a 71-28 vote early Friday. The passage of the bill,which President Donald Trump signed into law Friday morning, ended a brief,partial government shutdown when a funding deadline was missed at midnight.

The budget deal, which will boost federal spending by nearly $300 billion,calls for a total of 30 million barrels of crude to be sold from the SPR infiscal 2022 through 2025, 35 million barrels to be sold in fiscal 2026, and 35million barrels in fiscal 2026.

A Congressional Budget Office analysis of the bill, released Thursdayafternoon, said the sales would raise $6.36 billion in federal revenue between2022 and 2027. The analysis assumed an average oil price of nearly $64/b, butignored the initial cost of purchasing the crude and the costs of storing itin underground salt caverns for years.

The legislation also authorized sales "not to exceed" $350 million worth ofcrude from the SPR in fiscal 2018. Proceeds from the 2018 sales, initiallymandated in a 2015 budget bill, will be used for upgrading and modernizing theSPR, according to the text of the bill.

'RESOUNDING DECLARATION' OF ENERGY SECURITY

The proposal to sell off 100 million barrels from the SPR, the largestnon-emergency selloff of government-owned crude in US history, would hinderthe purpose of the stockpile, which was created to lessen the impact of apotential supply shock in the global oil market, said Robbie Diamond,president and CEO of Securing America's Future Energy.

"Geopolitical risk is alive and well in the oil market, and the SPR isAmerica?s only formal short-term line of defense against oil supplydisruptions and price spikes," Diamond said.

Kevin Book, managing director with ClearView Energy Partners, said theproposal to sell 100 million barrels of SPR crude was "a resoundingdeclaration of lawmakers' new perspective on energy security."

As of last week, the SPR held 665.1 million barrels of crude, including 406.2million barrels of sour crude and 258.9 million barrels of sweet crude.

Millions of barrels of crude were already scheduled to be sold from thereserve in sales mandated by Congress through 2025.

After the sales now mandated by Congress take place, the SPR will hold aslittle as 406 million barrels of oil within a decade after all the mandatedsales, or about 56% of its total capacity, according to estimates from theDepartment of Energy, which manages the reserve.

The Trump administration last May announced plans to sell off 270 millionbarrels of crude from the SPR over the next decade, while shutting two of fourstorage sites along the Gulf Coast, and selling a 1 million barrel gasolinereserve to the highest bidder. The administration later backed off of thoseplans.

The US in 1974 reached an agreement with 29 International Energy Agencycountries to hold inventories equal to at least 90 days of net crude andpetroleum product imports.

The SPR currently holds an estimated 141 days of import protection, and ifdomestic commercial stocks are counted, the US holds 216 days of importprotection, according to the Government Accountability Office.

BIODIESEL CREDIT

The budget deal passed Friday also includes a $1/gal US tax credit forblending biodiesel, which would be restored retroactively through end-2017.

The biodiesel tax credit expired at the end of 2016.

Biofuel proponents have been lobbying for a multiyear extension of theincentive since its expiration, and some had urged Congress to convert it froma blender's credit to a producer's credit so it would no longer apply toimported fuel.

ENHANCED OIL RECOVERY

The bill also extends and modifies a tax incentive for enhanced oil recovery,a measure pushed by top Permian oil producer Occidental Petroleum andgovernors of six oil- and gas-producing states including North Dakota andOklahoma.

The new incentive offers credits worth $35/mt of CO2 used in EOR and $50/mt ofCO2 permanently stored underground.

Smaller tax credits already existed for EOR, but the program was nearly tappedout. The existing program offered credits worth $10/mt of CO2 used in EOR and$20/mt of CO2 stored underground, with an overall program cap of 75 millionmt.

ClearView Energy Partners said the existing incentive was on pace to max outin the first half of this year.

Oxy President and CEO Vicki Hollub said last year that it was "imperative"that Congress pass the legislation because the current EOR incentive hasreached its limit.

Oxy produced 150,000 b/d of oil equivalent from EOR in third-quarter 2017,about 25% of its overall output of 600,000 boe/d.

That makes Oxy the largest injector of CO2 in the Permian. As of Q2 2017, itoperated 34 CO2 projects in Permian, with more than 15,000 active wells, ofwhich 6,100 are injectors.

By flooding mature fields with CO2, Oxy said it boosts oil recovery by10%-25%.

--Brian Scheid, brian.scheid@spglobal.com