Trump’s Plan to Stockpile Oil Plan Has a Rotten-Egg Smell

(Bloomberg Opinion) -- The U.S. shale oil industry may not benefit as much as President Donald Trump hopes from his plan to top up the country’s Strategic Petroleum Reserve as oil prices plunge to historically low levels. He vowed to fill it “right to the top” with home-pumped crude in order to support domestic producers and boost American stockpiles at cheap prices.

But there’s a hitch in his plan. The problem is sulfur — which smells like rotten eggs — or rather the lack of it in the crude pumped from wells drilled into the shale rocks of Texas and elsewhere.

About two-thirds of the spare capacity in the Strategic Petroleum Reserve, or SPR, is for sour crude — with a sulfur content of more than 0.5% — but the crude pumped from the shale formations of West Texas and elsewhere in the U.S. has very low concentrations of sulfur, if any at all. This will make it unsuitable for blending into the sour crude stored in the SPR.

The reserve consists of 60 underground solution-mined salt caverns spread across four sites along the Gulf coast of Texas and Louisiana. Each site holds both sweet crude — with less than 0.5% sulfur — and sour crude in separate caverns. The total capacity of the SPR is currently 275 million barrels of sweet crude and 479 million barrels of sour, with 250 million barrels of sweet crude and 385 million barrels of sour already in the caverns.

The Strategic Petroleum Reserve Crude Oil Assay Manual, published in March 2017, shows that both sweet and sour crudes can have an API gravity — a measure of density — of between 30 degrees and 45 degrees, while the maximum sulfur concentration for sweet grades is 0.5% and for sour is 1.99%. Much of the shale oil output would meet the density requirements, but have too little sulfur to permit it to be blended into the sour crude pool. Only crude oils of similar composition are commingled in storage and the Department of Energy noted in the report that shale oils “present logistics and environmental concerns for the SPR.”

The Department of Energy’s intention to focus on small to midsize producers is laudable, as they’re going to suffer from the crash in oil prices the soonest. It’s seeking solicitations for an initial 30 million barrels of crude for delivery in May and June and says the SPR is  “mission-ready” to receive up to 685,000 barrels a day.

The idea of pumping oil out of the ground in one part of Texas to store it back underground in another part of the state is an idea that would have appealed to the economist John Maynard Keynes,  who advocated the government burying bottles filled with banknotes in old coalmines for private enterprise to dig up again in times of recession. But it is more likely to benefit crude producers in Latin America and the Middle East than it is those in west Texas or North Dakota. 

Data on the composition of crude in each of the SPR storage facilities show that only about 19% of the sweet crude and just 16% of the sour crude held in the reserve is of domestic origin.

Those figures are also from the 2017 Crude Oil Assay Manual, but most of the changes in storage volumes in the SPR since 2015 have been withdrawals, so the proportions probably haven’t changed greatly.

The U.S. crude streams in the sweet portion of the SPR are predominantly Light Louisiana Sweet and Heavy Louisiana Sweet, while the sour portion of the stockpile includes Mars crude from the Gulf of Mexico and Alaskan North Slope.

While taking any volume of crude out of the current over-supplied market is a positive step for overall supply/demand balances, the impact on the U.S. shale sector will be smaller than the headline figure touted by the Department of Energy — at most 24 million barrels, or less than six days’ worth of Permian basin production. Shale drillers are going to need a lot more than that to weather the current oil price war.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Julian Lee is an oil strategist for Bloomberg. Previously he worked as a senior analyst at the Centre for Global Energy Studies.

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