Issues Affecting Shutdown or Continued Production of the Elk Hills Naval Petroleum Reserve

Gao ID: EMD-82-14 October 26, 1981

GAO examined the consequences of the continued production or shutdown of the Elk Hills, California, Naval Petroleum Reserve considering the impacts on national security, the local economy, and the budget.

Elk Hills, if used for reserve purposes, could help meet vital national security needs and supplement the Strategic Petroleum Reserve (SPR). If production continues at the current maximum efficiency rate, Elk Hills will decline quickly as an in-place reserve. Only a full or partial shut-in or allocation to the SPR would maintain the integrity of the reserve concept. Compared to a partial shut-in, a full shut-in would cut day-to-day maintenance costs, but would increase startup costs and delay full production in an emergency. Present law authorizes production only at the maximum efficiency rate or at a level sufficient to preserve ultimate reservoir recoverability. The Administration's present plans to allocate the Government's share of Elk Hills production to Department of Defense (DOD) requirements could result in the consumption of most Elk Hills oil in peacetime, nonemergency situations. The Administration's plans do not include a set-aside for small refiners and any degree of shut-in of Elk Hills would cost the Government substantial revenues. There are at least four options: near-total shut-in; partial shut-in; full or near-full production with DOD allocation and no small refiner set-aside; and full or near-full production with continued 100,000 barrel per day SPR exchange, and DOD emergency access, along with remaining Federal production available for small refiner allocation. No one option completely satisfies all concerns. The legal ramifications of some of the alternatives would have to be considered because some would require modification of existing legislation.

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