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US abandons plans for refined product reserves: Energy Department official

Washington — The US Department of Energy has abandoned all plans to build petroleumproduct reserves on the West Coast and in the Southeast, citing high costs andthe potential for market distortion, according to Steven Winberg, the agency'sassistant secretary for fossil energy.

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* Says West Coast, Southeast reserves costly

* Trump administration has recommended selling existing gasoline reserve

* New SPR report expected this fall

In a letter made public Thursday, Winberg called refined product reserves"an inefficient and expensive solution to respond to regional fuel supplydisruptions," and said there would be "significant" initial capital andacquisition costs and "extremely high" lifecycle costs in them.

"Unlike stored crude oil, refined petroleum products in storage must beperiodically rotated to maintain product quality and usefulness in anemergency," Winberg wrote. "This would require the US government tocompletely turn over the existing inventory multiple times a year,resulting in an almost constant cycle of selling existing inventory andbuying new inventory."

This cycle of buying and selling, Winberg wrote, would put the USgovernment in direct competition with the private sector and would"distort markets."

Winberg's letter, dated May 11, was in response to a new US GovernmentAccountability Office report on the US Strategic Petroleum Reserve whichrecommended that DOE undertake studies on the costs and benefits ofpetroleum product reserves for all regions of the US.

In an oil market that is increasingly global "higher levels of privatereserves can benefit the United States and the rest of the world byhelping mitigate a supply disruption," the GAO report, released Thursday,states.

In the proposed fiscal budget unveiled in February, the Trumpadministration called for the sale of the 1-million-barrel NortheastGasoline Supply Reserve, saying it was unnecessary and costly to operate.

"The [gasoline reserve] has not been utilized and has issues surroundingcost efficiency and operational functionality," the proposed budgetstated.

The Obama administration set up the reserve following gasoline shortagescaused by Hurricane Sandy in 2012. It currently holds 700,000 barrels inNew York Harbor, 200,000 barrels in Boston and 100,000 barrels in SouthPortland, Maine.

In 2015, DOE studied possible regional product reserves along the Westand Southeast coasts.

"According to DOE officials, weather events in the Southeast Coast are ofhigher probability but lower consequence, and events in the West Coastare of lower probability but higher consequence," the GAO said in thereport released this week.

Those 2015 studies initially concluded that a Southeast product reservewould provide "significant net economic benefits" to the region and US,particularly if a major hurricane struck, but said "further analyses"were needed on the benefits of a West Coast reserve. Those studies werenever finalized.

GAO CALLS FOR DIVERSIFIED SPR

The new GAO report said DOE should look at diversifying the SPR toinclude more gasoline and other refined products. The SPR's currentinventory "may not be effective at mitigating the effects of petroleumproduct disruptions such as those that have occurred when hurricanesknocked out petroleum product refineries or distribution infrastructure."

Winberg, however, rejected this recommendation.

"Given that the United States has the most robust refining capability inthe world, it is much more economic for the SPR to supply additionalcrude oil to refineries to help resupply refined petroleum productmarkets through existing distribution systems," Winberg wrote.

The GAO report comes as DOE is the early stages ofcongressionally-mandated sales of an estimated 290 million barrels ofcrude from the SPR through fiscal 2027. The SPR currently holds 660million barrels of crude, including 254.6 million barrels of sweet crudeand 405.4 million barrels of sour crude. Total inventory is forecast tofall to 405 million barrels by the end of 2027, but uncertainty aboutpotentially additional sales have complicated DOE plans to modernize thecrude reserve.

The GAO report, which makes no recommendations on an optimal size for theSPR, claims that DOE has not considered future market conditions, such asfalling net imports, nor the role that commercial reserves can play inresponding to supply disruptions.

On Thursday, Energy Secretary Rick Perry said he would not recommend theUS tap its SPR should prices spike after sanctions on Iranian crude arere-imposed in November.

"The Strategic Petroleum Reserve is in place for emergency naturaldisasters," Perry told reporters at the World Gas Conference inWashington, DC. "So I would not recommend [tapping it], and I don't thinkthe president would either."

"We look at this as an opportunity for OPEC members to fill this gap, ifyou will," he added.

The GAO report recommends that DOE look at new uses for SPR assets,including closing off an SPR site and selling a connected pipeline andmarine terminal, or leasing excess storage capacity to other countries orprivate industry.

"DOE officials told us that they do not plan to examine these options,"the GAO report states.

In his letter in response to the study, DOE's Winberg said the agencywould be conducting analysis of the "purpose, goals, and objectives ofthe SPR, taking into account private sector response, oil marketprojections, and any other relevant factors, that will lead to anevaluation of possible optimal sizes of the SPR in the future."

Winberg said that study is expected to be completed in October. --Brian Scheid, brian.scheid@spglobal.com

--Edited by Kevin Saville, newsdesk@spglobal.com