U.S. energy secretary: ‘Topping off’ reserve with U.S. purchases signals confidence in industry

President Donald Trump’s push to refill the country’s oil reserves is intended to reassure domestic producers at a time when collapsed prices are straining the industry and a substantive rebound appears to be months away at the earliest, the nation’s top energy official said in an interview Tuesday.

Trump last week directed the Department of Energy to purchase upwards of 77 million barrels of domestic oil to top off the Strategic Petroleum Reserve.

Energy Secretary Dan Brouillette said by phone that the reserve, or SPR, exists specifically “to mitigate these types of disruptions, if you will, wherever they come from.”

The current price collapse started gradually in early February as traders reacted to lower demand forecasts from China due primarily to the country’s response to COVID-19, which amounted to a major and ongoing slowdown of the country’s massive economy.

The price fall picked up speed earlier this month when Saudi and Russian officials could not agree on curbing production rates to stabilize oil markets in the face of less demand due to the virus curtailing economic activity worldwide. That disagreement quickly turned into a price war, with officials from each side refusing to cut production on the premise they can outlast the other in a time of painfully low prices for each oil-dependent government.

The West Texas Intermediate benchmark price for Lower 48 oil has fallen nearly 40 percent since the end of February to $28.70 per barrel on March 16. Alaska North Slope crude prices have closely followed that trend, ending that day at $29.30 per barrel, according to figures provided by the state Department of Revenue.

According to aggregated figures provided by the Department of Revenue, Alaska companies currently spend nearly $39 per barrel, on average, to produce oil and ship it to West Coast refineries.

ConocoPhillips leaders have said they restructured their operations during the 2015-16 price downturn to be profitable at prevailing prices of $40 per barrel.

“We want to send a very strong signal to the American producing community that we believe in them. They’re a very good industry, a very strong industry and we liken this and the president likens this to much like a company buying back its own stock,” Brouillette told the Journal. “You have confidence in your enterprise and you show the world that by investing in it yourself.”

He said the administration is also trying to take advantage of a “good time to buy” that could save taxpayers hundreds of millions of dollars versus making the purchase at higher prices.

Alaska crude largely sold in the mid-$60s per barrel range for more than a year prior to the current price collapse.

Constructed following the oil embargo of the mid-1970s, the Strategic Petroleum Reserve is the country’s counter to volatility in oil markets and supply chains. It is made up of oil stored in cleared salt caverns along the Gulf Coast and has an overall capacity to store up to 713.5 million barrels of oil, according to the Department of Energy.

While Trump announced the plan, it relies on funding from Congress and Brouillette said the administration is working closely with lawmakers and has bipartisan support in both chambers, including from Sens. Lisa Murkowski and Dan Sullivan, to get an SPR funding package passed.

Sullivan said in a statement from his office March 16 that he proposed only purchasing oil produced in the United States to fill the reserve in discussions with Brouillette.

“The energy sector supports tens of thousands of jobs in Alaska, and millions of jobs across the country. It’s crucial that we do what we can to shore up our domestic energy market by purchasing only American-produced, and in particular for our state, Alaskan-produced oil — all of which the Department of Energy has the authority to do,” Sullivan said, adding it should be done as quickly as possible.

The oil and gas industry provides approximately 10.9 million jobs nationwide, according to the American Petroleum Institute. In Alaska, oil accounts for nearly 10,000 direct industry jobs, with thousands more oil-related jobs in closely tied support sectors, such as construction and engineering.

Brouillette said current market prices in the $30 per barrel range would necessitate a $2.3 billion to $2.5 billion appropriation to buy the 77 million barrels, but $3 billion could be needed if expectations of a purchase send prices slightly higher ahead of the sale.

It’s unclear exactly where the oil would come from and what price the government would ultimately pay because a purchase would be done through an auction, according to Brouillette. He said Energy officials would start by soliciting proposals from sellers and review bids ahead of making purchases.

Department officials are confident they can begin purchases within two weeks of Congress approving the funding, according to Brouillette.

He also said that the idea has widespread industry support, but stressed that “they certainly don’t see it as a lifeline or anything like that. What they see is a common-sense policy decision being made by the president, so they’re just very, very supportive of that.”

Frank Macchiarola, a senior vice president of economics and policy at the American Petroleum Institute, wrote in an emailed statement that the industry group is not seeking policy relief from the current situation, and added that the Trump administration is simply exercising the authority afforded it by Congress to manage the SPR.

Murkowski said in a statement for the Journal that she believes near-term SPR purchases would ease oversupplied markets and “likely result in a small bump in oil prices.”

Murkowski chairs the Senate Energy and Natural Resources Committee.

“The health of Alaska’s economy is inextricably tied to the health of our resource industries, and plummeting oil prices are having a detrimental effect on our state. I support President Trump’s proposal to fill the Strategic Petroleum Reserve — right now, we have an opportunity to buy low and buy American — and my team and I are working with Senate leadership and administration officials to make that happen,” she said.

Representatives from the Alaska Oil and Gas Association and ConocoPhillips Alaska said they did not have enough information to comment on the sale’s specific impact on Alaska producers at this point.

Longtime Alaska petroleum economist Roger Marks said in a brief interview that he doesn’t think the sale will boost oil prices domestically because it would be a small amount relative to overall production, but it could offer producers another place to sell their oil during a market glut.

The Energy Information Administration estimates U.S. production will hit 13 million barrels per day this year.

Brouillette said it’s unclear when oil markets will rebalance, in part because it’s hard to know when downward pressure on oil demand stemming from the global response to COVID-19 will ease. However, he expects demand to rebound quickly once the virus subsides. The day-to-day changes in the situation also make it difficult to quantify immediate demand, which makes it hard to know how out-of-balance oil markets are worldwide, Brouillette said.

He added that a major pandemic-induced demand drop is not something energy market observers are familiar with.

“It’s unprecedented, in that sense,” he said.

More generally, the EIA is predicting a global surplus of about 1.5 million barrels per day in the first quarter of the year and a surplus of 2 million barrels per day in the second quarter. The EIA expects global oil production and consumption to align in the fourth quarter of 2020 at about 102 million barrels per day, according to its Short-Term Energy Outlook published earlier this month.

Last fall, Gov. Mike Dunleavy urged former Energy Secretary Rick Perry to consider building a second SPR at the site of the remote former naval base on Adak Island in the Aleutian chain.

Brouillette said he believes adding redundancy to the oil storage system would be a good thing but he hasn’t given Dunleavy’s proposal much additional consideration.

Elwood Brehmer can be reached at elwood.brehmer@alaskajournal.com.