Some oil companies storing crude in the US Strategic Petroleum Reserve (SPR) under a special program are compensating the federal government with crude that would sell for substantially less than the cost of commercial storage.
Nine oil companies and trading firms signed contracts in April to store up to 23mn bl of crude in the SPR in anticipation of a recovery in prices. Injections under the program were scheduled to finish up yesterday.
Payments for storage costs are made in crude. Three of the companies have contracts under which they will provide an amount of sweet and sour grades that, based on yesterday's WTI Houston price of $40.21/bl, would translate into paying 4¢-44¢/bl per month for storage, according to an Argus analysis of government contracts obtained under the Freedom of Information Act.
That compares with a cash storage price of 55¢/bl per month during a 7 April auction for sour commercial storage space in May and June at the Louisiana Offshore Oil Port.
But other companies have committed to pay higher storage fees. And beyond the storage costs, the program offers broader benefits, by enabling producers to avoid shutting in production and by boosting the US' emergency stocks.
The US Energy Department began the program on 2 April as a way to help the oil industry during an historic crash in prices and demand, brought about by a sudden disagreement in production levels by Opec+ countries and efforts to limit the spread of the Covid-19 pandemic. The Energy Department, which sought competitive bids for up to 30mn bl of storage, said it would award contracts to the companies offering the highest "exchange ratio," which is the percentage of crude a company agrees to leave in the SPR each month as payment for using the storage capacity.
The agency eventually leased 23.2mn bl of storage, and it is unclear if any bids were rejected.
Companies will leave an average of 1.9pc of the crude in the reserve each month as payment for storage, or up to 440,000 bl/month, the contract documents show.
But some of the contracts provide far less compensation, at rates that at today's crude prices would be equivalent to a fraction of the cost of commercial storage. The result was the government accepted exchange ratios as low as 0.1pc, or paying 1 bl of crude for every 1,000 bl stored.
Norway's Equinor submitted the successful bid with the 0.1pc exchange ratio for storing offshore grade Southern Green Canyon, under which it will transfer 320 bl/month for storing 320,000 bl at an SPR facility in West Hackberry, Louisiana. The company won a similar bid to store the same amount of crude at the same facility, paying an exchange ratio of 0.5pc. The company did not respond to a request for comment.
ExxonMobil, which won the largest SPR contract, for 10mn bl of storage, will pay an average exchange ratio of 0.75pc, or a payment of 74,500 bl/month. The company paid its lowest exchange ratio, 0.25pc, to store 3.5mn bl of crude at the SPR's Bryan Mound site in Texas. ExxonMobil said it participated in the storage program but did not respond to any questions.
Chevron will pay an exchange ratio of 1pc for storing 750,000 bl of crude at the SPR's Bayou Choctaw site in Louisiana, or a payment of 7,500 bl/month. Chevron confirmed it was awarded a storage lease but said it does not discuss commercial matters.
The nine companies participating in the storage program signed their contracts on 13-16 April, when storage was in high demand primarily because of a collapse in demand caused by Covid-19 and a surge of supply from Opec+ members. On those days a company with access to storage and transportation could make a profit of $13/bl, by buying a crude futures contract for May delivery at $20/bl and selling the same contract for August delivery at more than $33/bl. The contracts were signed days before a storage crunch in Cushing, Oklahoma, contributed to the Nymex WTI crude price dropping to -$37.63/bl.
The potential profits from a market in contango could have supported decisions by the trading firm Vitol to offer an exchange ratio as high as 5.6pc for storing 600,000 bl of crude at SPR's Big Hill site in Texas. The company as a whole agreed to an average exchange ratio of 4.1pc for storing a total of 2.4mn bl of crude at the Big Hill site, meaning it will transfer about 94,400 bl/month to the SPR.
The wide variation in exchange ratios could have been driven by infrastructure constraints, bidding strategies and attractiveness of storing crude at specific SPR sites.
The Energy Department did not respond to a request for comment.
A program 'worth doing'
The storage program as a whole seems to have been a good deal for taxpayers, consultancy ClearView Energy Partners managing director Kevin Book said. The budget for operating the SPR, alongside recent modernization programs, suggests a cost of nearly 4¢/bl each month to maintain the SPR's 713.5mn bl design capacity, he said.
The nine companies in the program, on average, will transfer to the SPR an amount of crude equivalent to paying 74¢/bl each month at today's prices. And by next spring, when oil companies are required to withdraw all the crude from storage, their payments could add 1.8mn-4mn bl of crude to the SPR, depending on how soon they begin withdrawing.
The program also benefited the oil sector by opening up large amounts of storage at a time when little was available, avoiding the need for some operators to curtail production. The SPR over the past two months has been filled at an average rate of more than 300,000 b/d, according to government data, which is the equivalent of operating a large refinery. The storage program added 20.5mn bl of crude into the SPR as of 26 June.
"What is it worth to keep an industry going?" Book said. "If small operators got a boost from this, then there are probably some folks who say that even if it caused wear and tear on the SPR, it was worth doing."
The Energy Department for more than two months declined to release the terms of compensation, which it said was "confidential." Argus last month obtained redacted versions of the contracts through a Freedom of Information Act request, and then successfully filed an appeal challenging the redactions. The agency's quasi-judicial arm, the Office of Hearing and Appeals, last week ruled there was "no basis" to claim the bids were confidential and ordered the agency to release the records.
| SPR Storage Contracts | |||
| Company | SPR site | Storage (bl) | Exchange ratio |
| Equinor | West Hackberry | 320,000 | 0.1% |
| Equinor | West Hackberry | 320,000 | 0.5% |
| ExxonMobil | Bryan Mound | 3,500,000 | 0.2% |
| ExxonMobil | West Hackberry | 4,500,000 | 1.0% |
| ExxonMobil | Bayou Choctaw | 1,200,000 | 1.0% |
| ExxonMobil | Bill Hill | 800,000 | 1.1% |
| Chevron | Bayou Choctaw | 750,000 | 1.0% |
| Total | Big Hill | 600,000 | 1.3% |
| MVP Holdings | Big Hill | 500,000 | 1.8% |
| Delek | Bayou Choctaw | 1,000,000 | 2.0% |
| Sunoco Partners | Big Hill | 6,200,000 | 3.0% |
| Mercuria | Big Hill | 1,144,000 | 3.1% |
| Vitol | Big Hill | 600,000 | 2.6% |
| Vitol | Big Hill | 600,000 | 3.6% |
| Vitol | Big Hill | 600,000 | 4.6% |
| Vitol | Big Hill | 600,000 | 5.6% |
| — US Energy Department | |||
