U.S. deal: 12.3M barrels to oil reserve

WASHINGTON, Nov. 8 (UPI) -- The Energy Department is opting to fill the strategic oil reserve with oil pumped from U.S. reserves instead of collecting royalties on the oil sales.

The department says it’s mandated by Congress to fill the strategic petroleum reserve, and even expand it, but it comes at a time when the already tight market is helping push oil prices toward the $100 per barrel mark.

The department announced a contract with Shell Trading Co., Sunoco Logistics and BP North America to supply around 70,000 barrels per day for six months to the reserve, 12.3 million barrels total.

“The contract terms apply royalty-in-kind exchange provisions that require the contractor to take delivery of oil owed to the U.S. government from offshore Gulf Coast federal leases and deliver to the SPR a volume of crude oil, adjusted for transportation and quality differentials, that meets the SPR's quality specifications,” the department statement said.

Companies producing oil from federally administered land pay royalties to the government, which can take the royalty in oil.

“It strikes me that when supplies are tight, taking 70,000 or 100,000 barrels a day off the market -- even though its inconsequential in terms of volume, at a time when we are trying to urge Saudi Arabia and others to increase production -- makes absolutely no sense,” said Frank Verrastro, director of the Energy Program at the Center for Strategic & International Studies in Washington.

He said the oil being produced is less vulnerable to the geopolitical issues that are driving prices up and threatening supply.

The strategic reserve holds 694 million barrels currently, according to the Energy Department, with a 727 million barrel capacity. The department is in the process of boosting capacity to 1 billion barrels.

The oil is stored as a rainy day fund; 11 million barrels were released when Hurricane Katrina took rigs offline in 2005.