Resources, Community, and Economic Development Division B-233820.6 November 28,199O The Honorable Mike Synar Chairman, Environment, Energy, and Natural Resources Subcommittee Committee on Government Operations House of Representatives Dear Mr. Chairman: This report responds to your May l&1989, request that we examine the Department of Energy’s (DOE)SPR drawdown plans because of concerns about DOE’S ability to meet its objectives for withdrawing and distributing SPR oil. The report suggests additional authority that the Congress may want to consider granting to prevent potential distribution problems and makes recommendations to the Secretary of Energy to (1) examine the effectiveness of the review process for requests for waivers of the requirement that U.S. vessels be used to transport SPR oil and (2) improve oversight of contractor compliance with”pipeline safety requirements. As arranged with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from the date of this letter. At that time, we will send copies to the Secretary of Energy and other interested parties. We will also make copies available to others upon request. This work was done under the direction of Victor S. Rezendes, Director, Energy Issues, (20‘2) 275-1441. Other major contributors to this report are listed in appendix I. Sincerely yours, J. Dexter Peach Assistant Comptroller General The current crisis in the Persian Gulf has brought renewed attention to Purpose the role of the Department of Energy’s (DOE) Strategic Petroleum Reserve (SPR) in mitigating the effects of an oil supply disruption. The SPR provides insurance against future oil supply interruptions and the impact of such interruptions on the nation’s economy. To provide this protection, however, DOE must be able to offset the supplies lost by quickly drawing down SPR oil from its storage sites and distributing it to purchasers. At the request of the Chairman of the Environment, Energy, and Nat- ural Resources Subcommittee of the House Committee on Government Operations, GAO examined DOE'S SPR drawdown plans. Specifically, GAO was asked to (1) review DOE'S current and planned capability for removing the oil from SPR sites and getting it to users through oil distri- bution networks, (2) examine the SPR'S compliance with pipeline safety requirements, and (3) determine the status of DOE actions to correct problems GAO had previously reported. The SPR currently stores over 580 million barrels of crude oil in caverns Background and mines in salt domes in Louisiana and Texas. In an energy emer- gency, the oil will be sold to the highest bidders. SPR sites are connected to te;-minals with access to commercial distribution pipelines or to marine docks where the oil can be loaded onto barges or tankers for waterborne transportation. GAO has discussed drawdown and distribu- tion problems in two previous reports: Evaluation of the Department of Energy’s Plan to Sell Oil From the Strategic Petroleum Reserve (GAO/ - ~~~~-86-80, June 5, 1986) and More Assurance Is Needed That Strategic Petroleum Reserve Oil Can Be Withdrawn as Designed (GAO/RCED-86-104, Sept. 27, 1985). To achieve its purpose, SPR oil must be quickly and effectively intro- Results in Brief duced into the market. Any operational delays encountered in drawing down the SPR could lessen its impact on oil prices and thus on the IJS. economy. Currently, DOE estimates it can withdraw and distribute oil from the SPR at a maximum rate of about. 3.5 million barrels a day. These estimates are based on the results of a number of drawdown and other system tests. In September 1990 DOE announced a sale of 5 million bar- rels of oil as a further test of the SPR. DOE expects delivery to begin in late October and last 30 to 45 days. Page 2 GAO/WED-91-M Oil Reserve:Some Concerns Remain Executive fhmmary A major distribution could be hampered because buyers of SPR oil are required to use U.S.-flag tankers to transport the oil between U.S. ports. DOE and industry officials believe that not enough U.S.-flag vessels would be available, and questions remain about the efficiency of proce- dures to authorize the use of foreign vessels. Problems with pipeline operations could also hamper an SPR drawdown. DOE attempts to comply voluntarily with Department of Transportation pipeline safety standards. However, DOE did not have a complete picture of the extent of overall compliance with these standards, and GAO found that the SPR was not in full compliance with certain standards related to inspections and records retention. DOE has acted on previous GAO recommendations concerning (1) further testing of site drawdown capabilities, (2) testing the adequacy of water distribution systems to support drawdown at two sites, (3) resolving piping integrity and corrosion control concerns, and (4) completing auto- mated control and integrated logistics support systems. Principal Findings Operational Problems An SPR drawdown could help mitigate the effects of an oil supply disrup- Could Offset Expected tion by keeping oil price increases lower than they would otherwise be. To achieve this, SPR oil must be quickly and effectively introduced into Economic Impact of SPR the market to replace lost supplies and ease market participants’ con- Use cerns about supply shortages. Any problems encountered in drawing down the SPR could lessen its impact on oil prices. Based on the results of a DOE model used to analyze a hypothetical oil shortage of 4 million bar- rels per day lasting for one quarter, crude prices could be almost $6 per barrel higher if the SPR were drawn down at 2.6 million barrels per day rather than at 3.6 million barrels per day. Currently, DOE estimates that it can withdraw and distribute oil from the SPR at a maximum rate of about 3.5 million barrels a day, DOE'S estimates of its drawdown capability are based on more realistic tests and anal- yses than those identified during the 1986 GAO drawdown review. DoE could maintain this rate for 90 days, after which the rate would gradu- ally decline. If the SPR were drawn down at the maximum achievable rate, the bulk of the oil would be drawn down within 200 days. Page3 GAO/RCED-91-16OilReserve:SomeConcenwRemain ExecutiveSummary Problems in Securing According to a DOE official, at the maximum 3.5 million barrels per day Marine Transportation drawdown rate, it is likely that between 40 and 60 percent of the oil would be moved by water. DOE and industry officials indicated that the Could Hamper Drawdow n number of U.S.-flag vessels available would be insufficient to move the portion of SPR oil planned for marine distribution at the higher drawdown rates. DOE believes that enough foreign-flag vessels would be available to pro- vide the additional capacity needed. However, to use foreign-flag ves- sels, oil purchasers would have to obtain Jones Act waivers from the Treasury Department. Although that agency, DOE, and the Maritime Administration have established an expedited waiver review process, this process has never been tested. Further, DOE and industry officials are concerned that the volume of waiver requests submitted during a large drawdown could overwhelm the system and lessen the economic impact expected from an SPR drawdown. During last winter’s heating oil price spike, Treasury received six requests to allow the use of foreign vessels to transport heating oil and propane. The events occurred during the year-end holidays, and Maritime took from 1 to 7 days to provide information on the availability of qualified U.S.-flag ships. In two cases, the cargoes were shipped to foreign ports before a decision was received on the waiver request. Giving the President standby authority to issue limited blanket waivers, which he could use if delays in the case-by-case waiver review process were slowing the SPR drawdown, could provide additional insurance for SPR use without unnecessarily jeopardizing the interests of the US. fleet. Better Oversight of The SPR oil pipelines are the link between the storage sites and the com- mercial facilities (pipeline and marine terminals) that will be used to dis- Compliance W ith Pipeline tribute oil from the SPR. Problems with pipeline operations during Safety Standards Needed drawdown could slow or prevent distribution and result in‘severe eco- nomic and environmental impacts. While the Department of Transporta- tion establishes and enforces pipeline safety standards for privately owned pipelines transporting crude oil, the SPR is not required to follow these standards. DOE has established a policy of voluntary compliance and requires its contractors to adhere to the Department of Transportation’s pipeline construction, maintenance, and operations standards. However, GAO'S review of selected standards identified instances of noncompliance in calendar year 1989. For example, the contractor that operates the SPR Page4 GAO/RCEDOl-18OilBeserve:&me~n~~Remain Executive Summary for DOE had not performed the right-of-way and corrosion control equip- ment inspections as frequently as required and was not retaining pipe- line repair records for the useful life of the pipeline. Further, no single DOE official was responsible for overseeing the extent to which the SPR complies with the pipeline safety standards. Instead, responsibility for the functions affected by the standards is spread over a large number of DOE and contractor offices. In October 1990 DOE desig- nated an SPR Pipeline Manager with responsibility for operation, mainte- nance, and construction of all SPR pipelines. According to SPR officials the pipeline manager will also be’responsible for ensuring compliance with the federal pipeline safety standards, but procedures for accom- plishing this task have not yet been established. DOE Acted on Prior GAO DOE has implemented several prior GAO recommendations. DOE'S actions Recommendations included (1) conducting 20 drawdown-related tests between 1986 and 1989, (2) developing a program to identify piping conditions and correc- tive actions needed, (3) completing automated controls designed to operate valves and pumps and monitor control equipment from a central control room, and (4) developing an integrated logistics support system to ensure an adequate supply of spare parts for a sustained drawdown period. GAO recommends that DOE (1) develop a realistic test of the effectiveness Recommendation to of the expedited waiver review process under various SPR drawdown the Secretary of conditions and rates and (2) ensure that procedures and information Energy systems are developed to monitor contractor compliance with pipeline safety standards. Because of the likelihood that Jones Act waivers will be needed to move Matter for SPR oil expeditiously and the uncertainty about prompt action under the Congressional current waiver review process, the Congress may wish to consider Consideration granting standby authority allowing the President to issue a blanket waiver to the Jones Act requirement if delays resulting from the case- by-case review process are limiting DOE'S ability to draw down the SPR. As requested, GAO did not obtain official agency comments on a draft of Agency Comments this report. However, GAO did meet with agency officials and has made changes based on their comments where appropriate. Page 5 GAO/RCED-01-MOil Reserve:&me Concerns Remain Contents Executive Summary 2 Chapter 1 8 Introduction SPR Development Recent Events Have Focused Renewed Attention on the 8 14 SPR DOE’s Organizational Structure for SPR Management 14 Scope and Methodology 14 Chapter 2 16 DOE’s Estimates of Questions Raised About Possible Limitations on SPR Drawdown Process 16 Current Drawdown Drawdown and Distribution Capability Estimated at 3.5 18 Capability Appear Million Barrels Per Day Insufficient Number of U.S. Vessels to Distribute SPR Oil 22 Reasonable,but at Higher Drawdown Rates Tanker Availability Conclusions 25 Could Affect Recommendation 26 26 Matter for Consideration by the Congress Distribution Chapter 3 27 Better Oversight DOE’s Compliance With Pipeline Safety Standards Is Voluntary 27 Needed of Contractor Pipeline Problems Could Have Significant Impact 28 Compliance With DOE Lacks Comprehensive Information on Contractor 28 Compliance With Standards Pipeline Safety SPR Not in Full Compliance With DOl’ Safety Standards 29 Standards DOE Efforts to Ensure Integrity of SPR Pipelines 31 Conclusions 32 Recommendation 32 Chapter 4 33 Status of DOE’s Drawdown and Water System Tests Usually Met * Objectives but Identified Some Problems 33 Actions on Previous DOE Initiated a Program to Identify and Correct Pipeline 35 GAO Corrosion Problems Installation of Automated Instrumentation and Control 35 Recommendations Systems Completed Late Basic Integrated Logistics Support System Now in Place 35 Page 6 GAO/WED-91-16 Oil Reserve:Some ConcerneRemain Contents Appendix Appendix I: Major Contributors to This Report 38 Related GAO Products 40 Tables Table 1.1: DOE’s Current and Planned Oil Storage at SPR 9 Sites as of December 31,1989 Table 2.1: Impacts Predicted for a Disruption of 4 Million 18 Barrels Per Day for One Quarter Table 2.2: DOE’s Current and Planned Maximum 19 Drawdown Rates at SPR Sites as of December 3 1, 1989 Table 4.1: Type of SPR Drawdown Tests Conducted 34 Between 1986 and 1989 and Extent Stated Objectives Were Achieved Figures Figure 1.1: Fluid Flow During Drawdown 11 Figure 1.2: Strategic Petroleum Reserve Complexes and 13 Associated Pipelines and Terminals Abbreviations DOE Department of Energy LKYr Department of Transportation GAO General Accounting Office NPC National Petroleum Council SPR Strategic Petroleum Reserve Page 7 GAO/MXD-91-M Oil Reserve:SomeCkmcemaRemain Chapter 1 - Introduction The oil supply disruptions of the 1970s demonstrated the severe eco- nomic distress that can occur when even a portion of oil imports are threatened or interrupted. In 1975 the Congress, concerned about the effects of oil import disruptions, authorized a Strategic Petroleum Reserve (SPR). The SPRcurrently contains over 580 million barrels of crude oil. To accomplish the SPR’Sintended purpose of replacing any lost oil supplies in the event of supply disruptions and thus reducing any related economic impacts, the Department of Energy (DOE) must be pre- pared for a timely withdrawal (drawdown) and distribution of SPRoil. In a letter dated May 16, 1989, the Chairman of the Environment, Energy, and Natural Resources Subcommittee of the House Committee on Government Operations asked us to examine DOE’SSPRdrawdown plans because of concerns about DOE’Sability to meet its objectives for withdrawing and distributing SPRoil. Based on the request letter and subsequent discussions with the requester’s office, our specific objec- tives were to (1) review DOE’Scurrent and planned capability for removing the oil from SPRsites and getting it to users through oil distri- bution networks, (2) determine whether the SPRis required to comply with federal pipeline safety standards, and (3) determine the status of DOEactions to correct drawdown problems previously reported, particu- larly concerns about the adequacy of DOE’Stesting program. The SPR,created by the Energy Policy and Conservation Act (Public Law SPR Development 94-163, Dec. 22, 1975, as amended), is intended to supplement U.S. industry stocks and supplies, thereby mitigating the effects of any supply disruption on the national economy and reducing the nation’s vulnerability to such disruptions. Further, the SPRhelps the United States meet its commitment, as a member of the International Energy Agency, to maintain a reserve equal to 90 days of net oil imports1 As initially planned in February 1977, the SPRwas to be large enough to offset the highest amount of oil imported during a consecutive 3-month period in 1974-75, or approximately 600 million barrels, and the storage sites were to be designed to permit drawdown of the reserve within 150 days. The plan also provided for SPRstorage of crude oil in underground caverns or mines located in salt domes in Louisiana and Texas. Because of an increase in U.S. petroleum imports during 1977 and revised esti- mates of future import levels, the SPRplan was amended in May 1978 to ‘Net oil importsaretotal importsminusexports. Page 8 GAO/RCED-91-16Oil Reserve:Some Concerns Remain Chapter 1 introduction provide for storage of 750 million barrels of oil. Table 1.1 shows the current and planned oil storage by site. Table 1.1: DOE’r Current and Planned Oil Storage at SPR She8 as of December 31, Barrels in Millions -- ___--.-__ 1999 Oil inventory Storage site -__- Current _____-.I___~ Planned Bryan Mound -.- -___ ___---- 221 -__ 226 West Hackberrv 206 219 Sulphur Mines 25a 0 Big Hill ______-.--___- lb -___- 160 Bavou Choctaw 54 72 Weeks Island ~l-------.--.-----~ 73 73 580 - 750 QOE plans to increase capacity at Big Hill and Bayou Choctaw to replace this site, which is scheduled to be decommissioned in 1992. bThis oil was used for cavern development purposes. Oil fill of the first cavern began in June 1990. The Energy Policy and Conservation Act Amendments of 1990, enacted in September 1990, extend SPRauthorization to September 30, 1994, and require DOEto develop plans to increase SPRstorage to 1 billion barrels of petroleum product and to test mechanisms for storing refined petroleum products. In addition, the amendments authorize (1) SPRuse for disrup- tions in domestic oil supplies, (2) suspension of SPRacquisitions and sale of purchases already en route when severe energy supply interruptions are imminent, (3) leasing of petroleum products and storage facilities for the SPR,and (4) sale of up to 5 million barrels of SPRoil as part of a test drawdown. DOE'SOctober 3 1, 1979, SPRdistribution plan (as required by the Energy Policy and Conservation Act) describes the methods for withdrawing and distributing crude oil from SPRstorage sites. As directed by the Energy Emergency Preparedness Act of 1982, in December 1982 DOE developed a second distribution plan which provided that the principal method of distributing SPRoil would be price-competitive sales: oil would be sold to the highest bidders. The sale would be open to the largest possible number of eligible buyers to ensure efficient distribution of SPR oil. With the exception of the Weeks Island site, the process used to draw down the caverns is very similar to the leaching process used to create Page 9 GAO/RCEB91-16Oil Reserve:SomeConcerns Remain chaptm 1 Inlxodnction the storage caverns in the salt deposits2 During drawdown, water is pumped into the bottom of the caverns, forcing the oil out through the top into the on-site piping. (See fig. 1.1.) Because fresh water is used, the drawdown process will enlarge the caverns by dissolving additional amounts of salt. noE-constructed caverns were designed to withstand at least five drawdowns without threatening cavern integrity. Oil stored in the Weeks Island site, which is located in a former salt mine, must be pumped out using submerged pumps. From the on-site piping the oil is pumped through DOEpipelines to terminals connected to commercial dis- tribution pipelines or to marine docks where it can be loaded onto crude oil barges or tankers for waterborne transportation to refineries. 21nthe leachingprocess, freshwateris pumpedintosaltdeposits. Thewaterdissolves thesalt, formingbrine.Removing the brineleavesa cavitywhichcanbeusedfor crudeoil storage. Page 10 GAO/RCRD-91-16Oil Reserve:Some Concerns Remain Chllpter 1 Mraduction Figure 1.1: Fluid Flow During Drawdown ‘\ SRINE PRESSURE PVMPS ,j ./ OIL PRESSURE PUMPS -1 Source: Department of Energy. Page 11 GAO/RCED91-16Oil Reserve:SomeConcerns Remain Chapter 1 Introduction The SPR storage sites are connected to pipelines that can be used to move SPR oil directly to 41 refineries as well as 4 marine terminals, where the oil can be loaded onto tankers or barges for transport to other refineries. The sites are configured in three complexes. (See fig. 1.2.) It is up to the purchaser to select the delivery route and make arrangements to move the oil to the refinery where it will be processed. 9 Seaway Complex: The Bryan Mound storage site is connected to Phillips Petroleum Company’s terminal in Freeport, Texas, and to the ARCO ter- minal in Texas City, Texas. These terminals provide connections to two marine terminals and nine refineries in Texas. . Texoma Complex: The West Hackberry, Sulphur Mines, and Big Hill sites are connected to the Sun Pipe Line Company’s terminal in Nederland, Texas. This terminal provides access to five refineries in Texas and Arkansas, a marine terminal, and a pipeline that can be used to reach six refineries in Kentucky, Michigan, and Ohio. The West Hackberry site is also connected to a pipeline with access to three refineries in Loui- siana and Texas, and DOE is preparing a request for proposals to provide additional distribution capacity for this complex. l Capline Complex: The Weeks Island and Bayou Choctaw storage sites are connected to DOE'S St. James marine terminal; the LCCAP terminal, with access to two Louisiana refineries; and the Capline Terminal, with access to an interstate pipeline that can be used to distribute oil to 22 refineries in the central part of the United States, including the 6 refin- eries also served by the Texoma complex. Page 12 GAO/RCED-91-16Oil Reserve:SomeConcerns Remain Chapter 1 Introduction Flgure 1.2: Strategic Petroleum Reserve Complexes and Associated Pipelines and Terminals l 8PRBTORAOE FACNJTY 0 PlPElJNE TERMINAL @ REFININO CENTERS - CRUDE OIL PIPELINES TEXAS SULPHUR MINES , @ST HACK&lY “=I’“” * I 1 GULF OF MEXICO ,I I-,-.---“- .“..-I..- Source: Department of Energy. The rapid increases in crude oil and gasoline prices after Iraq’s August Recent Events Have 1990 invasion of Kuwait have brought attention to the role of the SPR. Focused Renewed The oil market’s reaction to the invasion also demonstrated that the Attention on the SPR price and economic impacts of an oil disruption can begin immediately. The embargo on trade with both countries imposed by the United Nations Security Council interrupted crude oil imports by the United States and other countries. In 1989, Iraq and Kuwait collectively pro- ” duced an average of 4.6 million barrels of oil per day. This represented about 7.8 percent of worldwide oil production. After the August 1990 invasion, increased demand, perceptions of shortages, and expectations of higher future prices almost immediately resulted in increased prices Page 13 GAO/RCED-91-16Oil Reserve:SomeConcems Remain Chapter 1 Introduction for oil and petroleum products. Between August 1 and September 28, the price for oil futures on the New York Mercantile Exchange increased from $21 per barrel to almost $40 per barrel. Surveys conducted by the American Automobile Association showed that during the same period average gasoline prices rose almost 25 cents per gallon. DOE’S SPR Program Office in Washington, D.C., is responsible for overall DOE’s O rganizational program management and planning for achieving the goals and objec- Structure for SPR tives of the SPR program. Responsibility for SPR project management and Management implementation is assigned to the Oak Ridge Operations Office in Oak Ridge, Tennessee. The Operations Office has delegated these activities to the Project Management Office (Project Office) in New Orleans, Loui- siana. Under an &year management and operations contract, Boeing Petroleum Services, Inc., provides the personnel and services needed to run the government-owned SPR facilities. DOE retains responsibility for overall project management and technical direction, while Boeing, the operating contractor, is responsible for the SPR’S day-to-day management. To review DOE’S current and planned capability for withdrawing and dis- Scopeand tributing SPR oil, we obtained information from SPR officials in Wash- Methodology ington, DC., and New Orleans, Louisiana. We analyzed drawdown and distribution plans, reviewed the mathematical models used to estimate drawdown and distribution capabilities, and examined storage develop- ment plans and reports. To get an indication of the potential benefits of an SPR drawdown, we also used a DOE model, the Disruption Impact Sim- ulator, to estimate the potential impacts of selected SPR drawdowns on crude oil prices, the Gross National Product, and other economic indica- tors. We did not, however, conduct a detailed evaluation of the model. At the recommendation of the National Petroleum Council (NPC), we dis- cussed the SPR oil distribution system with representatives of Mobil Oil Corporation in Fairfax, Virginia, and Shell Oil Company in Houston, Texas. We also reviewed a recent NPC study of the industry’s oil pipeline distribution system in which Mobil and Shell participated: We discussed the procedures for processing waivers to allow the use of foreign-owned tankers to transport SPR oil with DOE and Maritime Administration officials in Washington, D.C. We obtained estimates from SPR officials on the number of ships that would be needed for an SPR Page 14 GAO/RCED-91-16Oil Reserve:Some ConcernsRemain Chqterl Introduction drawdown and reviewed their calculations of the number of US. tankers that might be available to transport SPR oil. To determine whether the SPR is required to comply with federal pipe- line safety standards, we discussed the applicability of Department of Transportation (nor) hazardous liquid pipeline safety standards to the SPR's pipelines with SPR officials in New Orleans, Louisiana, and MJT’s Office of Pipeline Safety officials in Washington, DC., and Houston, Texas. We also discussed pipeline industry standards and inspection practices with the Mobil and Shell representatives. We examined infor- mation on SPR compliance with pipeline industry standards obtained from DOE officials in Washington, D.C., and New Orleans, Louisiana, and reviewed pipeline inspection plans and reports. To determine the status of DOE actions to correct drawdown problems previously reported, we obtained information from SPR officials in New Orleans, Louisiana, on the status of the SPR automated control and inte- grated logistics support systems, examined reports on SPR drawdown tests and inspections to determine the integrity of SPR pipelines. We also discussed the adequacy of the SPR'S drawdown testing with the Mobil and Shell representatives. This work was performed from May 1989 to September 1990 in accor- dance with generally accepted government auditing standards. We dis- cussed the accuracy of the information presented in this report with responsible agency officials and have incorporated their comments where appropriate. However, as requested, we did not obtain official agency comments. Page16 GAO/RCFDOl-16OilReserve:SomeConcemaRemdn Char&r 2 . DOE’s Estimaks of Current Drawdown Capability Appear Reasonable,but Tanker Availability Could Affect Distribution Uncertainty resulting from the current situation in Iraq and Kuwait has brought renewed attention to SPR operational concerns. Operational delays that limit an SPR drawdown could lessen the economic impact of using the SPR. DOE estimates that it can currently withdraw and distribute oil from the SPR at a maximum sustainable rate of approximately 3.5 million barrels per day. Although in the past we have questioned DOE'S drawdown esti- mates, we believe that DOE'S current estimates are more realistic because it has conducted a number of drawdown and other system tests and adjusted rates to reflect actual performance. Although these tests were still of limited volume and duration, in late September 1990, DOE announced a sale of 5 million barrels as a test of the SPR system. DOE will not be able to reach its drawdown goal of 4.5 million barrels per day until the planned drawdown and distribution enhancements are completed and enough oil is stored at the Big Hill site to support its planned drawdown rate. While DOEhas improved its capability considerably since 1985 when we last reported on drawdown,’ insufficient availability of tankers could still hamper SPRdrawdown and distribution. Buyers of SPR oil are required to use U.S.-flag tankers to transport the oil between US. ports, but DOE and oil industry officials believe that there will not be enough U.S. tankers available to move the amount of oil that must be moved by marine distribution at the higher drawdown rates. The agencies involved have agreed to an expedited review process for Jones Act waiver requests, but questions remain about the effectiveness of the process. The volatility in the oil markets since Iraq’s invasion of Kuwait has Questions Raised brought renewed attention to the SPR and the key role it plays in an About Possible energy emergency. Media and industry officials have again raised ques- Limitations on SPR tions about whether the SPR drawdown system can operate as planned to quickly and reliably deliver the oil. This issue is of vital importance Drawdown Process because it could limit the extent to which the SPR can be used to offset supply disruptions and the resulting economic impacts. ‘MoreAssurance Is Needed ThatStrategicPetroleum Reserve OilCanBeWithdrawnasDesigned y _ _ (CTAO/R Page 16 GAO/RCED-91-16Oil Reserve:Some Concerns Remain Chapter 2 DOE’s Edmate~~ of Current Drawdown CapabIlity Appear Reasonable,but Tanker Availability Could Affect Distribution In a 1985 report we noted that a number of studies indicate that, in a disruption, an SPRdrawdown would keep price increases lower than they would otherwise be.z The SPR,however, can accomplish this objec- tive only if the oil is quickly and effectively introduced into the market to replace lost supplies and reduce market participants’ concerns about future supply shortages. In both the current and previous disruptions, some have argued that oil prices have risen further than would be expected from the actual supplies lost. One explanation is that expecta- tions about rising prices and fears that the disruption will worsen may lead oil market participants to accumulate oil stocks. This could lead to further supply shortages and increased prices. As a result, any delays encountered in drawing down the SPRcould lessen its potential impact, particularly if such delays increase market participants’ uncertainties about future supplies. To get an indication of the potential benefits of an SPRdrawdown, we used a DOEmodel, the Disruption Impact Simulator, to estimate the potential impacts on crude oil prices, the Gross National Product, and other economic indicators, of selected SPRdrawdowns. We examined drawdowns of 2.5 and 3.5 million barrels per day related to a hypothet- ical disruption of 4 million barrels per day lasting one quarter only. As shown in table 2.1, the model predicts that during that quarter crude prices could be almost $5 per barrel higher if the SPRdrawdown rate is 2.5 million barrels per day than if it is 3.5 million barrels per day.3 2Evaluation of the Department of Energy’Plan s to SellOil FromtheStrategicPetroleum Reserve, @WRm J- 85-80 , June6,1986). 31tshouldbenotedthat althoughtable2.1showsimpactsonlyfor theparticularquarterin whichthe disruptionoccurred, the modelresultsindicateimpactsfor subsequent quartersaswell. Page 17 GAO/RCED-91-16Oil Reserve:Some Concerns Remain Table 2.1: Impacts Predicted for a Disruption of 4 Million Barrels Per Day for SPR daily drawdown rate One Quarter Base case assumptions (no 3.5 million 2.5 million ___-- disruption) barrels barrels None Petroleum orices: Crude oil (per barrel) .-~ $18.00 $19.89 $24.36 $39.83 Gasoline (per gallon) 1.13 1.17 1.28 1.65 __.._ - ..^ ---_- Heating oil (per gallon) 0.86 0.90 1 .Ol 1.38 Economic impact kercentsY! Decrease in GNP b -0.25 -0.75 -1.97 Increase in unemployment --- b 0.10 0.30 0.79 Increase in inflation b 0.37 1.13 2.95 Note: Impacts only for the quarter during which the disruption occurred %nnuefized rates. bNot epplicable. These results must be used cautiously because the DOEmodel is a simpli- fied tool for analyzing very complex relationships, The model does not explicitly account for interactions between the oil market and related markets such as the natural gas market.4 Such interactions may mitigate the impacts of oil supply disruptions and result in additional impacts on the economy. The model also does not explicitly account for market par- ticipants’ expectations about future events, which may have important economic ramifications in an oil supply disruption. Hence, the model results presented in table 2.1 as the impacts of an SPRdrawdown should be viewed as a rough estimate. As of December 31,1989, DOE estimated the maximum rate for SPR Drawdown and drawdown and distribution to be 3.5 million barrels per day. (See table Distribution 2.2.) These rates could be sustained for 90 days, after which the balance Capability Estimated of the SPR’S inventory could be withdrawn at gradually decreasing rates as the inventory was depleted. At the current maximum rate, the bulk of at 3.5 M illion Barrels SPR oil would be drawn down in about 200 days. The maximum daily Per Day drawdown rate for the SPR will be gradually increased to 4.5 million bar- rels as the reserve is filled to the 750-million-barrel level. 4For example, the modelduesnot calculatethe amountof fuelswitchingthat m ightresult.In setting up the assumpWns to be used in the model,the usercan, however,specifyan amount for reduced oil demandresulting from fuel switching. Page 18 GAO/RCED-91-16Oil Reserve:some Concerns Remain As discussed in chapter 1, the SPR was designed to permit drawdown of the planned 760 million barrels of oil within 150 days. Each storage site’s caverns, pumps, and piping were designed to contribute a specified portion of this drawdown capability. Over time, DOE has adjusted these rates because of factors such as changes in the industry’s crude oil dis- tribution network and the decision to decommission Sulphur Mines. Table 2.2 shows DOE’s goals for each site’s maximum drawdown capa- bility-both for the amount of oil stored in the SPR as of December 3 1, 1989, and after the reserve has reached 750 million barrels of oil. Table 2.2: DOE’8 Current and Planned Maximum Drawdown Rates at SPR Sites Barrels in Millions a8 of December 31,1989 Maximum dais drawdown cl Complex/site __-- Current Planned Seawav Bryan Mound 1.10 1.25 Texoma West Hackberry 1.25 1.25 Sulohur Mines .lO a Big Hill a .93 1.35 2.18 Capline - Bavou Choctaw .48 .48 Weeks Island .59 .59 1.07 1.07 SPR total 3.52 4.50 ‘Not applicable. How DOE Determines DOE bases its drawdown estimates on predictions from several mathe- Drawdown and matical models that are based on performance data gathered in drawdown tests at SPR sites. Although, as discussed in chapter 4, we Distribution Capabilities questioned DOE’S estimates of its drawdown capability in our 1985 drawdown report, we believe DDE’S current estimates are more realistic because DOE has conducted a number of drawdown and other system tests. A certain amount of inherent uncertainty can never be removed because it would be impossible to simulate in a test situation an actual drawdown that would have to be sustained for several months. Although the tests conducted by DOE have been of relatively short dura- tion, they have physically tested the SPR drawdown system, and the use of data on actual operations provides greater assurance that estimated drawdown capabilities can be achieved. Further, on September 27,1990, Page19 , chapter 2 DOE’s Eatimatea of Current Drawdown Capability Appear Reasonable,but Tanker Availability Could Affect Distribution DOEannounced a sale of 5 million barrels as a test of the SPRthat will allow the private sector to increase its familiarity with the process for distributing SPRoil. Finally, DOEhas also implemented several other rec- ommendations we made in 1985, and thus provided further assurance regarding the accuracy of the drawdown predictions. DOE'Sdistribution strategy for the SPRrelies on the marketplace to deter- mine how to get the oil where it is needed. DOE'Sresponsibility ends when the oil has been delivered to the pipeline or marine terminal, where custody transfers to the buyer. DOEdoes, however, analyze the commercial transportation network to ensure that the available capacity is adequate to distribute SPRoil. WE currently estimates that a maximum of about 2.5 million barrels per day could be distributed by pipeline, using a model containing data on the 41 refineries that could receive oil from the SPRby pipeline. The model estimates potential demand for SPRoil based on the amount of imported oil historically processed by these refineries. The model calcu- lates what portion of the imports could be replaced by SPRoil consid- ering physical constraints such as pipeline size and available interconnections. DOEestimates current maximum marine distribution capability at about 2.1 million barrels per day. This is determined by the volume of oil that can be moved through the marine terminals and across docks to ships or barges. Except for the St. James terminal, which is owned and operated by DOE,DOEhas multi-year contracts to use three commercial marine ter- minals in Texas for oil fill and withdrawal. The portion distributed by either method will, of course, depend on the purchasers. If as much oil as possible is moved by pipeline, that method would account for about 70 percent of a drawdown at the maximum 3.5 million barrels per day rate, leaving 30 percent to be transported by water. Conversely, if water transportation is used to move as much of the oil as possible, it would account for approximately 60 percent of the drawdown, leaving 40 percent to be distributed by pipeline. Some Drawdown Tests at Bryan Mound identified water system limitations that affected Limitations Identified at the site’s ability to meet its drawdown goal of 1.1 million barrels per day. WE is currently constructing facilities at Bryan Mound that should Bryan Mound * raise its drawdown capability to 1.25 million barrels per day. These enhancements will (1) correct the water system limitations that prevent Page 20 GAO/RCED-91-16Oii Reserve:Some Concerns Remain chapter 2 DOE’s Estimates of Current Drawdown Capability Appear Reasonable,but Tanker Availability Could Affect Distribution attainment of the 1. l-million-barrels-per-day rate and (2) increase the drawdown capability by another 150 thousand barrels per day to offset the West Hackberry rate reduction.6 The water system enhancements include an additional water-intake line, larger pump impellers in existing pumps, and an additional water booster pump and water injection pump to increase the water flow rates. DOEexpects to complete these enhance- ments in 1991. Measures Needed to To increase drawdown capability from the current 3.5-million-barrel- Achieve a 4.5-Million- per-day rate to the planned 4.5-million-barrel-per-day rate, DOEneeds to (1) complete construction of the water and oil transportation system Barrel-Per-Day Rate enhancements at Bryan Mound mentioned above, (2) finish leaching caverns at Bayou Choctaw and Big Hill, and (3) store enough oil at the Big Hill site to support its planned drawdown rate. DOEexpects to com- plete cavern leaching at Bayou Choctaw and Big Hill in September 199 1. DOE still faces some uncertainties in increasing the SPR’Sdistribution capability from the current 3.5-million-barrels-per-day rate to the planned 4.5-million-barrels-per-day rate. Additional distribution capacity will be needed in the Texoma complex. In 1988 and 1989 DOE tried to acquire additional distribution capacity in the Lake Charles, Louisiana, and Beaumont/Port Arthur, Texas, areas, but did not receive any acceptable proposals. DOEis currently revising its plans for a I990 solicitation. This request will solicit a combined pipeline and marine dis- tribution capacity of 700,000 barrels per day and be open to any termi- nals or pipelines that can be readily connected to Texoma facilities. Because drawdown capability will not exceed current distribution capa- bilities for several years, DOEofficials believe they have time to find a solution to the problem. They also believe that changes in the oil industry might create other distribution alternatives. For example, with the decrease in domestic production since 1985, refineries are processing more imported oil. DOEis monitoring these events, and as capacity is added to distribute imported oil to different parts of the country, DOE plans to examine ways to connect into these distribution networks. %causetestsshowed that WestHackberry couldsustaina drawdownrateof only 1.3millionbarrels perdayand excessdistributioncapacityexistedin theSeawaycomplex, DOEdecided to reduceWest Hackberry’drawdown s goalfrom 1.4to 1.26millionbarrelsperdayandincreaseBryanMound’s goal. Page 21 GAO/RCED-91-16Oil Reserve:Some ConcernsRemain chapter 2 DOE’s IWimatea of Current Drawdown Capability Appear Reaeouable,but Tanker Availability Cauld Affect Distribution DOEand industry officials indicated the number of U.S.-flag vessels Insufficient Number of available to move the SPRoil would be insufficient to move the portion of U.S. Vessels to the SPRoil planned for marine distribution at the higher drawdown Distribute SPR Oil at rates. Estimates of the point at which problems would occur ranged from 2 to 3 million barrels per day. Under the Jones Act buyers of SPRoil Higher Drawdown are required to use U.S.-flag vessels to transport the oil between U.S. Rates ports.6 To supplement the U.S.-flag vessels, oil purchasers would have to obtain Jones Act waivers allowing them to use foreign-flag vessels. Waiver requests can be granted by the Treasury Department after con- sultation with the Maritime Administration, Department of Defense, and Department of Energy. Uncertainty exists as to whether the current case-by-case waiver pro- cess will ensure that vessels are available as needed for SPRdistribution. Blanket waiver authority to suspend the Jones Act requirement for an SPRdrawdown would increase the likelihood that purchasers of SPRoil will be able to transport the oil from marine distribution terminals in a timely manner, and allow the SPRto accomplish its intended purpose. More Ships Needed Than The availability of vessels to move SPRoil from marine terminals to U.S. Fleet Can Supply refiners is a critical element in DOE’Splans to mitigate the effects of an oil supply disruption. As noted, from about 30 to 60 percent of DOE’S current 3.5million-barrels-per-day distribution capability could be moved by water. A DOEofficial pointed out, however, that waterborne distribution is more likely to range between 40 and 50 percent of the drawdown. DOEwill also solicit an additional 700,000 barrels per day of combined marine and pipeline distribution capability for its Texoma complex. Without the ability to move oil quickly through distribution networks, the economic benefits to the nation of using the SPRduring an oil supply disruption would be decreased. The Director of DOE’SSPRoffice forecasts that the number of U.S. ships available would probably be insufficient for drawdowns exceeding 3 million barrels a day. An oil industry official said that he believed there would be a shortage of U.S.-flag ships during drawdowns of even 2 mil- lion barrels per day. At the planned 4.5-million-barrels-per-day rate, Boeing Petroleum Services, the SPRoperating contractor, estimates that between 76 and 90 tankers would be needed. Based on conditions in ‘TheJonesAct (Section27of the MerchantMarineAct of 1920(46USC. app.883))promotes the continuedexistence of a fleetof U.S.-flag vessels because of its importance for nationaldefense--in a war it wouldbeneeded to movemilitarysuppliesabroad. Page 22 GAO/RCED-91-16Oil Reserve:Some Concerns Remain Chapter 2 DOE’s E&mates of Current Dmwdown Capability Appear R.eaaonable,but Tanlrer Avalhbllity Could Affect Metrlbutlon 1990, however, the contractor calculated that only 36 to 40 U.S. tankers would be available to transport the SPRoil.7 If waivers are obtained to allow foreign-flag tankers to be used, the SPR contractor believes enough ships would be available to make up for the anticipated shortage of U.S. vessels. This conclusion was based on the number of foreign-flag tankers delivering crude oil to the east coasts of western hemisphere countries in 1987. Uncertainty Remains Under the Jones Act, purchasers of SPRoil must use U.S.-flag vessels to About Effectiveness of the transport SPRoil between U.S. ports. In the interest of national defense and if U.S.-flag vessels are not available, the Department of Treasury Expedited Waiver Process can waive this requirement. Waivers are considered on a case-by-case basis. As part of the waiver request process, the Maritime Administra- tion provides information to the Treasury Department on the availa- bility of U.S.-flag vessels. In our 1985 report, we discussed the potential shortage of U.S.-flag ships and the waiver process, and reported that the National Petroleum Council had recommended that the Maritime Admin- istration develop a contingency plan to expedite Jones Act waivers.8 In 1987 DOE,the Treasury Department, and the Maritime Administration entered into an interagency agreement providing for expedited review of waiver requests associated with an SPRoil drawdown. If this process operates as designed, the Treasury Department should be able to issue a decision on a request within 3 business days. The agreement provides for early and frequent exchanges of information among the agencies involved and establishes a goal of 2 business days for the Maritime Administration to review the availability of U.S. vessels to transport the oil and advise the Treasury Department whether or not the waiver should be granted. According to an official of the Treasury Depart- ment’s Customs Service, Treasury cannot act on the waiver request until Maritime responds. Therefore, the decision will be delayed if Maritime is not able to provide this information within the allowed 2 days. According to DOEand Maritime officials, the expedited waiver agree- ment for SPRcargoes has never been tested, and delays such as those 7Theexactnumberof shipswill vary depending onthecircumstances. In estimating thenumberof availableshipsin 1990,thecontractoreliminated thoseU.S.vesselsthat aretoolargeto usetheSPR docks,thoseout of servicefor repairs,andthosecurrentlyinvolvedin transporting refinedproducts anddomestic crudeoil-since thoseactivitieswouldcontinueduringa disruption. *GAO/RCED-85-80, June6,1986. Page 23 GAO/WED-91-16 Oil heme: SomeConcernsRemain ChnPtm 2 DOE’s Euthaten of Current Lhxxwdowu CapabIltty Appear Reasonable,but Tanker Availability Could Af%ct Dietrlbution experienced during the 1989-1990 home heating fuel price spike could have a serious impact on an SPRdrawdown. Over an 8-day period in December 1989, Treasury received six requests to allow the use of for- eign vessels to move cargoes of heating oil and propane to the Northeast of the United States. Although not covered by the SPRinteragency agree- ment, the review process followed was similar. The events occurred during the year-end holidays, and Maritime took from 1 to 7 days to provide information on the availability of qualified U.S.-flag ships. In two cases, the cargoes were shipped to foreign ports before a decision was received on the waiver request.g Agencies Di ffer on Need To ensure that the transportation needed in an SPRdrawdown is avail- able, DOEand oil company officials have called for blanket authority to for Blanket Waiver waive the Jones Act requirement. Officials of DOEand the Maritime Authority Administration differ on the need for blanket waiver authority, but both agree that exercising such a waiver could mean that U.S. vessels might be excluded from transporting any of the SPRoil because of their higher costs. The Director of DOE’SSPRoffice believes the waiver process would be the most significant problem during a drawdown of 3 million barrels a day or larger. In his opinion, the case-by-case waiver process established by the interagency agreement would become overloaded with requests for waivers. Delays in the drawdown resulting from a shortage of ships to distribute the oil would work against the U.S. policy of drawing down the SPRearly at a maximum rate for maximum impact. Blanket waiver authority would increase the likelihood that the desired economic impact of distributing SPRoil could be achieved. Officials of the Maritime Administration, however, believe that the expedited waiver process will ensure that distribution of SPRoil will not be delayed. According to a Maritime official, their main task is to deter- mine the status of about 100 ships, and this can be accomplished through a survey of vessel availability within the 2 business days pro- vided for in the agreement. The official stated that the work can be intense initially, but quickly evolves into a series of repetitive actions. Although he could not estimate how many waiver requests might be received during an SPRdrawdown, he did not believe he or his staff of “Subsequentto thecrisis,an interagencyagreementwasdevelopedfor dealingwith futureenergy crises.Theagreement is similarto theonefor SPRdrawdowns.Wearepreparinga reportonthe possibleconsequences of that agreementontheJonesAct waiverprocessin theeventof another homeheatingfuelpricespike.In that reportweplanto addresspossiblepolicyoptions. Page 24 GAO/RCED-91-16Oil Reserve:Some ConcernsRemain Chapter2 DOE’s lMlm&m of Current Drawdown Capability Appear Reasonable,but Tanker Availability could AfYect Distributton seven employees would be overloaded. However, the experiences of last winter’s fuel price spike illustrate that Maritime’s task is not always as simple as surveying 100 vessels. Burdens on the staff increase when the people filing the waiver requests do not understand the process or do not provide all the information needed to determine whether a U.S. vessel might be available to move a particular cargo. Standby authority for limited blanket waivers that the President could use if the case-by-case waiver review were slowing the SPR drawdown could provide additional insurance for SPR distribution without unneces- sarily jeopardizing the interests of the U.S. fleet. If such authority does not exist before a disruption occurs, the effectiveness of the SPR drawdown could be severely affected because it is unlikely that action could be taken quickly enough to prevent delays in obtaining the neces- sary vessels. Delays during drawdown could limit the economic impact expected from Conclusions using the SPR. Because DOE’S estimates of its current capabilities for withdrawing and distributing SPR oil are based on a number of drawdown and other system tests, we believe they provide more assur- ance that MOEwill be able to achieve these rates during an actual drawdown. DOE will not be able to achieve the drawdown goal of 4.6 million barrels per day until several drawdown and distribution enhancements are completed and further oil fill is completed at the Big Hill site. One issue that could affect DOE'S ability to use the SPR successfully to offset the impacts of an oil supply disruption is whether purchasers of SPR oil will be able to obtain the tankers needed to move the portion of the oil that must be moved by marine transportation. Waivers of the Jones Act requirement regarding use of U.S.-flag ships are likely to be needed for SPR drawdowns exceeding 3 million barrels a day, and questions have been raised about whether the interagency agreement will expedite the waiver review process. Because the agree- ment has not yet been tested, the delays experienced in acting on Jones Act waiver requests during last winter’s home heating fuel price spike could portend similar problems in the event of an SPR drawdown exceeding 3 million barrels a day. While officials disagree about the need for a blanket waiver of the requirement that U.S. vessels be used to transport SPR oil, uncertainty Page 26 GAO/RCED-91-16Oil Reserve:SomeConcerns Remain chapter 2 DOE’s EWmates of Current Drawdown Capability Appear Reasonable,but Tanker Avallabllity Could Affect Distribution exists as to whether the case-by-casereview process will work effec- tively. Standby authority for limited blanket waivers could provide additional insurance for effective SPR distribution without unnecessarily jeopardizing the interests of the U.S. fleet. To examine the effectiveness of the expedited waiver review process, Recommendation we recommend that the Secretary of Energy direct the Assistant Secre- tary for Fossil Energy to work with the Maritime Administration and the Treasury Department to develop a realistic test that would simulate agency actions to process the number and type of waiver requests expected during SPR drawdowns of various rates. Because of the likelihood that Jones Act waivers will be needed to move Matter for SPR oil expeditiously and the current uncertainties about whether the Consideration by the waiver review process will ensure prompt action on individual waiver Congress requests, the Congress may wish to consider granting standby blanket waiver authority that would allow the President to waive the Jones Act requirement if delays resulting from the case-by-case review process were limiting DOE’s ability to draw down the SPR. Page 26 GAO/RCED-91-16Oil Reserve:SomeConcernsRemajn Chapter 3 ’ Bemr oversight Needed of Contractor Compliance With Pipeline Safety Standards The SPRoil pipelines are critical to DOE’Sdrawdown plans because they provide the link between the storage sites and the commercial facilities (pipeline and marine terminals) that will be used to distribute oil from the SPR.Problems with pipeline operations during drawdown could slow or prevent drawdown and could have severe economic and environ- mental impacts. ucrr promulgates and enforces safety standards regu- lating the transportation of hazardous liquids by privately owned pipelines. Although the SPRis not required by law to comply with these standards, DOEhas established a policy of voluntary compliance. Most functions related to the construction, maintenance, and operation of the SPRare carried out by contractors. Although DOEhas imposed D@S pipeline safety standards on the SPRcontractors, we believe DOEis responsible for overseeing the contractors to ensure compliance. We found, however, that no single DOEofficial or office had a comprehen- sive overview of the extent to which the SPRcomplies with Dm’S stan- dards. Although DOEand contractor officials believe that current SPR operations meet the urn standards, our review of selected standards identified instances of noncompliance in calendar year 1989. The nation’s pipeline safety standards, issued by D&S Office of Pipeline DOE’s Compliance Safety, cover the transportation by privately owned pipelines of haz- With Pipeline Safety ardous liquids, including crude oil, associated with interstate or foreign Standards Is commerce (49 C.F.R. 196). The standards require timely accident reporting and spell out criteria for the design, construction, hydrostatic Voluntary testing, and operation and maintenance of these pipelines. The operation and maintenance standards require periodic inspections to uncover potentially unsafe conditions, such as right-of-way infringements, eroded river crossings, and inoperative ,or defective corrosion preven- tion and detection equipment. These regulations apply to each “person” who engages in the transpor- tation of hazardous liquids or who owns or operates pipeline facilities. The definition of the term “person” in the authorizing legislation does not include the federal government, and the legislative history indicates that the law was not intended to apply to federally operated facilities.’ Since D0E is in operational control and accepts responsibility for mainte- nance and safety of SPRpipeline facilities, DOTbelieves the SPRis not sub- ject to its pipeline standards. 1Hazardous LiquidPipelineSafetyAct of 1979(49USC. app.2001(l)). Page 27 GAO/RCED-91-16Oil Reserve:Some CkmcernsRemain I Better Overeight Neededof Contractor timplhnce With Pipeline EMety Standards Although it is not required to do so, DOE attempts to comply voluntarily with these pipeline safety regulations in the operation and maintenance of all SPR oil pipelines. According to DOE officials, the criteria DOE devel- oped to guide the design of SPR facilities state that the DOTpipeline safety standards must be followed in the design, construction, and oper- ation of SPR facilities. These officials said that the pipeline construction contracts and the contract for maintenance and operation of the SPR require that contractors follow the design criteria containing the nor standard compliance statements. However, DOE retains responsibility for assessing contractor activities and ensuring compliance with pipeline safety regulations. Potentially significant environmental impacts could result from the rup- Pipeline Problems ture of SPR pipelines. There are about 260 miles of SPR oil pipelines, Could Have Significant ranging in size from 16 inches to 42 inches in diameter. During a Impact drawdown at the current maximum rate, about 146,000 barrels of oil an hour would be pumped through the pipelines, including about 52,000 barrels an hour through the highest volume line. These pipelines trav- erse fragile Gulf Coast ecological areas. The swamps, marshes, and estu- aries contain diverse varieties of fish and wildlife that support trapping, hunting, and recreational and commercial fishing. Problems with SPR pipelines during a drawdown could have an even larger impact if they hindered the SPR'S ability to serve its intended pur- pose. Previous oil supply interruptions illustrate the potential economic impact. For example, as we reported in 1985, the interruption of U.S. imports caused by the 1973-74 oil embargo and resulting oil price increase resulted in an estimated loss of $35 billion to $45 billion in Gross National Product and 600,000 jobs. Although DOE Project Office officials acknowledged that some of the DOE Lacks pipeline corrosion and integrity problems previously reported may have Comprehensive been caused by noncompliance with the nor standards, they believe that Information on current SPR maintenance and operating activities are in compliance with the nor pipeline safety regulations. At the time of our review, however, Contractor Compliance there was no focal point in DOE to determine and ensure compliance with W ith Standards the standards. An Accident Investigation Board appointed by Oak Ridge to investigate ” a 1989 rupture of the Bryan Mound brine disposal pipeline recognized the need for such a compliance focal point. It recommended in August Page 28 GAO/RCRD-91-MOil Reserve:Some ConcernsRemain Chapter 3 Better Oversight Needed of Contractor Compliance With Plpeline Safety Standards 1989 that DOE create a position in the Project Office with responsibility for overseeing all aspects of SPR pipeline operations, including compli- ance with applicable safety and environmental requirements. The Board Chairman told us that the Oak Ridge Manager approved this recommen- dation, and on October 6, 1990, the Assistant SPR Project Manager desig- nated an SPR Pipeline Manager with responsibility for operation, maintenance, and construction of all SPR pipelines. According to SPR offi- cials, the pipeline manager will also be responsible for ensuring compli- ance with the federal pipeline safety standards, but this was not mentioned in the appointment memorandum, and procedures for accom- plishing this task have not yet been established. To check SPR compliance with the DOTstandards, we selected nine SPR Not in Nl requirements and reviewed the operating contractor’s records to deter- Compliance With DOT mine compliance with the requirements. We found the contractor had Safety Standards complied with six of the nine requirements in 1989. For the remaining requirements, we found the contractor did not perform required right- of-way and corrosion control equipment inspections as frequently as required and had not retained pipeline repair records for the useful life of the pipelines as required. Pipeline Right-of-Way The n(rr standards (49 C.F.R. 196.412(a)) require oil pipeline operators Inspections Did Not to inspect surface conditions of pipeline rightszof-way at least 26 times each calendar year at intervals not exceeding 3 weeks. According to the Comply W ith Standards Project Office’s Site Management Division Director, the contractor attempts to comply with this requirement by aerial inspections of the rights-of-way. Our review of overflight inspection records for 1989 showed that the contractor performed at least 26 inspections of each line during the year but did not comply with the 3-week interval requirement on any of the lines. During the first part of the year, periods ranging from 4 to 12 weeks elapsed without aerial inspections of the lines. The Accident Investigation Board investigating the Bryan Mound brine line rupture also found flaws in the contractor’s aerial pipeline inspec- tion program. The Board found the operating contractor was not making aerial or ground right-of-way inspections as frequently as required by the contractor’s own manuals and handbooks. Specifically, the Board found that the contractor Page 29 GAO/RCED-91-16Oil Reserve:SomeConcerns Remain Chapter 3 Better Oversight Needed of Contrclctor C2mpUanceWith Pipeline Safety Standards . allowed the pipeline overflight contract to expire and did not conduct inspections on a regular basis after the contract was extended, and l failed to conduct the right-of-way land patrols required by the Off-site Pipeline Maintenance and Repair Handbook and the Security Operations Manuals when aerial patrols were not performed. The Board concluded that the inspection program lacked senior manage- ment interest and recommended that the operating contractor (1) eval- uate the pipeline surveillance program in writing on a regular basis and (2) ensure that aerial and ground inspections are made weekly with crews trained to recognize anomalies that threaten the pipelines and/or the environment. In an October 1990 meeting to confirm the factual information in this report, SPRofficials acknowledged previous problems but noted that they had acted in response to the Board’s report by revising overflight procedures and replacing the contractor. Consequently, they reported that the 38 pipeline overflights conducted from March 13,1990, to Sep- tember 28,1990, exceeded nor standards. Frequency of Pipeline Paragraph 196.416(c) of the nor standards requires owners of pipelines with cathodic protection systems to inspect the rectifiers-a key compo- Protection System nent of the cathodic protection system -6 times each year at intervals Inspections _ - Did Not Meet not exceeding 2-l /2 months.2 Records provided by the operating con- Standards tractor indicate that the rectifiers on four of the six pipelines requiring inspection had been inspected in accordance with the required stan- dards. The rectifiers on the oil pipelines from the Bayou Choctaw and Weeks Island sites to the St. James terminal, however, were inspected only four of the required six times during 1989. In our October 1990 meeting, SPRcontractor officials also stated that they believed they had made the required inspections. They could not, however, provide the inspection reports. 2Cathodic protectionis a technique to preventthe corrosion of a pipelinecausedby a reaction between the pipelineandthesurrounding soilandwater. Page 30 GAO/RCED-91-16Oil Reserve:SomeConcerns Remain Better Overright Needed of Contractor Compliance With Pipeline Safety Stan- Pipeline Repair Records Paragraph 196.404(c)( 1) of the DOTstandards requires operators to Not Maintained as maintain, for the useful life of each pipeline, records showing the dates, locations, and descriptions of each pipeline repair. SPRoil pipelines are Required designed for a ZO-year useful life. The operating contractor’s mainte- nance director/told us they keep such repair records for only 7 years. He also said that the pipeline repair records were commingled with repair records for all other SPRequipment and were not readily identifiable as pipeline repairs. In our October 1990 meeting, SPRcontractor officials claimed that repair records were kept permanently. Further discussion, however, revealed that this applied only to the computer records, not the source documents which contained detailed information on the repair. Further, work done by subcontractors was not consistently included in the computer records. Because of the discovery of pipeline corrosion that raised questions DOE Efforts to Ensure about the structural integrity of some SPRpipelines, since the mid-1980s Integrity of SPR DOEhas required the operating contractor to report periodically on the Pipelines condition of the pipelines and recommend corrective actions when needed. These efforts, however, do not address the question of whether SPRoperations are in compliance with the uor standards. Beginning in 1986 DOEdirected the operating contractor to prepare Pipe- line Integrity Reports describing each pipeline and any events, such as repairs and inspections, that occurred during the reporting period. The reports describe the condition of each line, including any operating limi- tations; discuss major repairs; and discuss the pigging3 and corrosion control monitoring program for each pipeline. In July 1986 DOEalso directed the operating contractor to develop a Pipeline and Piping Assurance Program to (1) identify the existing con- ditions of the pipeline system, (2) identify pipeline deficiencies that war- rant correction, (3) make recommendations regarding required corrective actions, and (4) prepare a corrective action plan. The oper- ating contractor inspected 635 field-site piping locations and identified 20 locations (3 percent) that it believed required either repair, definite replacement, or possible replacement. In March 1989 the operating con- tractor reported to DOEthat the SPRsite piping was in good condition 3Pigging meanssendinginstruments (the“pigs”)throughthepipelinesto checkthe pipelineelectroni- callyandidentifytheextentof corrosion. Page 31 GAO/RCED-91-MOil Reserve:SomeConcerneRemain Chapter 3 Better Oversight Needed of Ckmtractor Compliance With Pipeline Safety Standards with the exception of some brine and raw water lines. The report identi- fied numerous repairs that must be made to give immediate and long- term assurance on the SPR piping, but it concluded that the pipelines would support required drawdown and fill rates in their current condition. attempts to comply voluntarily with the federal pipeline safety Conclusions DOE standards, and DOE and contractor officials believe they are in compli- ance. However, our review indicated that they have not always fully complied with some of the operations and maintenance requirements. DOE has taken action to require the contractor to periodically report on the condition of the SPR pipelines, but this does not address the issue of compliance with the DOTstandards. Although DOE is responsible for overseeing contractor activities and ensuring compliance with these standards, at the time of our review DOE did not have a focal point to collect and review such information. The October 1990 memorandum appointing the SPR pipeline manager did not specifically include responsibility for overseeing contractor compliance with federal pipeline safety standards, and detailed procedures for the position have not yet been developed. As a result, M)E lacks certainty that SPR pipelines will be properly maintained and protected from corro- sion so that they can be relied on to function according to design stan- dards during drawdown. The serious environmental and economic impacts that could result from pipeline failures increase the level of confidence needed about the safety and reliability of the SPR pipelines. At a minimum, holding the SPR to the same standards required of commercial pipeline operators would increase that level of confidence. To increase the certainty that SPR pipelines will operate safely and reli- Recommendation ably as designed, we recommend that the Secretary of Energy direct the manager of the Oak Ridge Operations Office to assign specific responsi- bility for ensuring compliance with federal safety standards to the recently designated SPR Pipeline Manager and ensure that needed proce- dures and information systems are developed to monitor contractor operations. Page 32 GAO/RCRD-91-16Oil Reserve:SomeConcerns Remain Chapter ---~-4 ’ Shtus of DOE’s Actions on Previous GAO Recommendations Our 1986 drawdown report, More Assurance Is Needed That Strategic Petroleum Reserve Oil Can Be Withdrawn As Designed, recommended four actions MDE could take to help ensure that the SPR system has the capability to provide a readily availab1.e supply of oil. We recommended (1) further testing of site drawdown capabilities, (2) testing water- system adequacy at two sites to support drawdown rates, (3) resolving piping integrity and corrosion control concerns, and (4) satisfactorily completing ongoing work on the automated control systems and inte- grated logistics support system. DOE'S implementation of our recommen- dations provides greater assurance the SPR oil can be successfully withdrawn during an emergency. Our previous report questioned drawdown capabilities in part because Drawdown and Water DOE had not conducted comprehensive oil drawdown tests at each System Tests Usually storage site or completed water system modifications necessary to move Met Ob,jectivesbut the amount of water required for drawdown. We recommended that DOE (1) conduct further tests to allow an assessment of drawdown capability Identified Some and (2) after completing modifications underway, test water systems to Problems ensure that drawdown capability was not limited by inadequate water supplies. Additional Tests Provide DOE has taken some action to respond to our 1986 recommendation that Better Basis for DOE’s it conduct further tests of the SPR to allow an assessment of its capa- bility to meet design drawdown goals. From 1986 through 1989 DOE con- Estimated Drawdown ducted 20 oil movement, water flow, and other system tests to assure Rates, but Concerns itself oil could be withdrawn as designed from SPR sites. Eleven tests Remain involved oil movements, and at least one maximum rate drawdown test was conducted at each site, other than Big Hill. Although some of the 20 tests encountered problems, they usually met most of the test objectives that DOE established. We also pointed out that the limited duration of these tests left a degree of uncertainty as to whether DOE will be able to sustain these rates over the extended periods required during an energy emergency. In the 1985 report, we pointed out that while the l-day tests conducted by DOE showed that oil can be withdrawn from the SPR, they provided only lim- ited confidence that the SPR will be able to achieve its drawdown goals. We noted that, although the duration of a test that would stress the system has not been defined, engineers familiar with the SPR or compa- rable oil industry equipment have indicated that a 5- to 7-day test would be reasonable. The tests conducted by DOE after 1986 were still of short Page 33 GAO/RCED-91-MOil Reserve:SomeConcerns Remain . chapter 4 Status of DOE’@Actlona on Previous GAO Recommendations duration, with most lasting less than a day. For example, one of the objectives of an April 1989 test at Bayou Choctaw was to demonstrate that the site could draw down at a rate of 605,000 barrels per day. During the test the 605,000-barrels-per-day rate was achieved and sus- tained for 20 minutes. The test as a whole lasted about 6-l/2 hours and moved just over 78,000 barrels of oil. The Director of DoE's SPR office does not believe longer tests are war- ranted because engineering and scientific analysis of the tests provide adequate assurance that drawdown goals will be met. He also said that there would be no place to move the quantity of oil involved in an extended drawdown test without affecting the market and disrupting ongoing commercial oil movement operations. Further, full-scale drawdown causes wear and tear on equipment. While we understand the Director’s concerns, more extensive testing will decrease the uncertainty regarding the SPR'S drawdown capabilities. On September 27, 1990, DOE announced a sale of 5 million barrels of oil (as authorized by the Energy Policy and Conservation Act Amendments of 1990) to test the SPR and allow the private sector to increase its famil- iarity with the SPR distribution process. DOE expects to deliver the entire 6 million barrels over a 30-to-45-day period. Table 4.1: Type of SPR Drawdown Teats Conducted Between 1986 and 1989 and Extent Stated Objectives Were Achieved Number of Number of Number which “_..~..__--- - ..__ ----.-... -._-..-_-.--- .-_____-_-__ tests .- Time frame objectives met -- met all objectives --- Oil movement tests Apr. 1986 to -- 11 Oct. 1989 54 of 63 (86%) 8 of 11 (73%) System tests Oct. 1986 to ---“- .-__.-. ._...- ---__--__-__ ______-__ ~9 Oct. 1989 40 of 42 (95%) --7 of 9 (78%) Total 20 94 of 105 (90%) 15 of 20 (75%) Drawdown Enhancements Results of the drawdown tests led DOE to conclude that four of the five Should Ensure Ability to present sites-Weeks Island, Bayou Choctaw, West Hackberry, and Sulphur Mines -could meet their designed drawdown rates, but that the Achieve Overall remaining site-Bryan Mound-had problems meeting its planned rate. Drawdown Rate As discussed in chapter 2, DoE initiated enhancements to correct this shortfall and allow them to increase Bryan Mound’s drawdown * capacity. Page 34 GAO/RCEDBl-16 Oil Reserve:SomeConcerns Remain Chapter 4 Status of DOE’s Actione on Previous GAO Recommendationa Our previous report discussed corrosion problems identified at some DOE Initiated a sites and raised questions about the integrity of the piping and pipeline Program to Identify systems if the problems were not corrected. We recommended that DOE and Correct Pipeline (1) assess the integrity of its piping/pipelines to withstand pressures needed to move the oil at maximum drawdown rates and (2) protect Corrosion Problems piping/pipelines from future corrosion. As discussed in chapter 3, DOE directed its operating contractor to pre- pare a periodic Pipeline Integrity Report and initiate a Pipeline and Piping Assurance Program to assess piping conditions and ensure that the pipelines would meet drawdown and fill requirements. Our 1985 drawdown report discussed the numerous delays DOE experi- Installation of enced in completing the automated instrumentation and control systems Automated at each site. These automated controls, which are designed to open and Instrumentation and close valves, start and stop pumps in the proper sequence, and monitor and control sensory devices on field equipment from a central control Control Systems room, were not fully operational at all sites when we issued our report. Completed Late Although these systems are not essential for drawdown, we believed their completion would increase confidence that a drawdown could be safely sustained. We recommended that DOE ensure that ongoing work on these systems was satisfactorily completed and that the systems functioned as designed. According to the DOE Project Office engineer overseeing installation, the automated systems in process at the time we reported have been com- pleted and work acceptably. He added that DOE installed additional auto- mated control systems to accommodate additional caverns constructed after our report at West Hackberry, Bryan Mound, and Bayou Choctaw and all caverns at Big Hill. These systems also suffered installation problems and considerable delays, but they were completed and accepted by DOE in early 1990. Our previous report discussed delays that DOE experienced with the con- Basic Integrated tractor in trying to develop an integrated logistics support system for Logistics Support the SPR to ensure an adequate supply of spare parts for a sustained System Now in Place drawdown. Logistics support is the system of procuring, maintaining, storing, and controlling materials and equipment needed to keep a pro- u ject such as the SPR operational. Such a system ensures that spare and Page 35 GAO/RCED-91-MOil Reserve:Some Ckmcernalbnah Chapter 4 Statue of DOE%Actions on Previous GAO Recommendations repair parts, support equipment, tools, warehousing, technical documen- tation, computerized inventory control systems, and associated per- sonnel are in place when needed. We concluded that DOE needed to complete the support system as soon as possible and recommended that DOE ensure that the ongoing work on the system was completed and that the system functioned as designed. According to DOE officials, an accept- able support system is in place and functioning. In addition, the oper- ating contractor and a subcontractor have studied the support system and identified refinements to improve it. Page 36 GAO/IUXDBl-16 Oil Reserve:Some Chwerna Remain Page 37 GAO/RCED-91-MOil Reserve:Some ConcerxwRemain Appendix I Major Contributors to This Report Judy A. England-Joseph, Associate Director Resources, Richard A. Hale, Assistant Director Community, and Joanne E. Weaver, Assignment Manager Nicholas C. D’Amico, Senior Evaluator Economic Development Division, Washington, D.C. . -. r;valuator-in-Charge Dallas Regional Office ~~~~~~~~;, PttVU) WI-.-Y* Scminr I. -euy--- Flvah~nt.nr (New Orleans Sublocation) Page 38 GAO/RCED-91-16Oil Reserve:Some Concerns Bemain Page 39 GAO/RCEDBl-16 Oil Reserve:Some ConcernaRemain . ~ Related GAO Products Oil Reserve: DOE'S Management of the Strategic Petroleum Reserve (GAO/RCED-87-171BR,July 17, 1987). The Strategic Petroleum Reserve: An Overview of Its Development and Use in the Event of an Oil Supply Disruption (GAo/RCED-86-134, Sept. 30, 1986). More Assurance is Needed That Strategic Petroleum Reserve Oil Can Be Withdrawn as Designed (GAO/RCED-86-104, Sept. 27, 1986). Evaluation of the Department of Energy’s Plan to Sell Oil from the Stra- tegic Petroleum Reserve (GAO/RCED-86-80, June 6, 19%). Analysis of Oil Withdrawal and Distribution Tests for the Strategic Petroleum Reserve (GAO/RCED-86-116, May 8, 1986). (001812) Page40 GAO/RCEDBl-10 Oil i&serve: Some ConcerxwRemain Ortl~rittg Ittforttt:rt.iott ‘I’ttv first fivtb copit of c~clt GAO report art’ free. Additional copies art’ $2 taach. Ortlt~rs slioulcI be sent. to t.htb following address, accottt- I)attitvI by at check or money order made out to Lhe SnI~~rirtt~ettcit~ttl of Docutttc~tt t.s, when necessary. Ordt*rs for 100 or more copies t 0 he ttr;tiltd t 0 a sittglv address are ciiscouttted 25 pc*rcmt.. li.S. Gc~ttvral Accounting Office I’.(). Box 6015 Gait hersburg, MI) 20877 Orders tttay also be placed by calling (202) 275-6241. -_,I ._.. “_ I “.~“-_l-.. “.“. .l”.l_ _ --.... _--_-.““-_ _._. .” Itll”l_ . “._._...~ ..-.l------- Firs t-Class Mail Post,age 82 Fees Paid GAO Permit No. G lO O
Oil Reserve: Some Concerns Remain About SPR Drawdown and Distribution
Published by the Government Accountability Office on 1990-11-28.
Below is a raw (and likely hideous) rendition of the original report. (PDF)