U.S. Strategic Petroleum Reserve at a Turning Point--Management of Cost, Oil Supply Problems, and Future Site Development

The Strategic Petroleum Reserve, established to provide a cushion of as much as 1 billion barrels of oil against interruptions in imported oil supplies, has not met its initial goal of having at least 150 million barrels of petroleum products by December 1978. The reserve has been plagued by problems: low initial cost estimates, resulting in cost overruns; an inability to meet oil storage goals; and the failure of four oil supply contractors to deliver their quotas. As a result the reserve is at a turning point in its management of facility costs, future oil supply, and future site development. Major changes being made in these three areas may significantly affect timely completion of the reserve at a reasonable cost.

The Department of Energy (DOE) was overly conservative in its original estimates of how much the storage facilities for the reserve would cost. Between December 1976 and February 1979, the estimated cost for constructing and operating facilities for the first 500 million barrels of oil jumped from $765 million to $1.5 billion, an increase of almost 100 percent. Since October 1978, four contractors have failed to deliver 10 million barrels of crude oil, about 9 percent of current purchases. The contractors claim that the tight oil market made it impossible to obtain and deliver crude oil and claim that they should be excused from delivery at the original price. If the failures are not excused, contractors would probably have to absorb some of the $92 million cost increases. To meet its 1981 goals, DOE is considering using noncompetitive "turnkey" procurement to purchase 80 million barrels worth of storage capacity. However, there are several potential problems with noncompetitive procurement. DOE may not get the lowest price or best terms. Due to the tight crude oil market DOE may not be able to fill this capacity in 1981 and may be unnecessarily committing itself to long-term noncompetitive contracts. It appears that DOE is instituting the systems and reviews that could help management control costs.