Naval Petroleum Reserve

The government-owned and operated Naval Petroleum Reserve (NPR) in Elk Hills, California--the seventh largest oil field in the lower 48 states--generated oil sales revenues of $327 million in 1992. The Energy Department (DOE) sells most of this oil to California refiners through competitive bids. The prices received by the government for this oil have been lower than prices for crude oil in other parts of the country. GAO concludes that it will be difficult for DOE to boost revenues from NPR oil sales by selling oil to Gulf Coast or midcontinent oil refineries because this oil is of lower quality than other available crudes and shipping costs are high. This report explores other ways that DOE may be able to increase revenues. For example, DOE bills its customers more often than private oil producers do, resulting in buyers making lower bids to compensate for the higher administrative costs. DOE also does not market its oil as aggressively as private producers do. In testimony before Congress, GAO summarized this report and also discussed (1) the relative priority that should be given to several options for improving the readiness and expansion of the Strategic Petroleum Reserve and (2) the evolving mission of the International Energy Agency; see: Energy Policy: Energy Policy and Conservation Act Reauthorization, by Victor S. Rezendes, Director of Energy and Science Issues, before the Subcommittee on Energy and Power, House Committee on Energy and Commerce. GAO/T-RCED-94-214, May 25, 1994 (15 pages).

GAO found that: (1) although crude oil prices are generally higher in Gulf Coast regions, the government will have difficulties in increasing its revenues by selling NPR oil to Gulf Coast and mid-continent refiners; (2) refiners lack incentives to bid on NPR oil, since the quality of NPR oil is less than other comparable crude oils and the cost of transporting NPR oil is high; (3) selling NPR oil outside of California would reduce California's oil supply and slightly increase California's internal oil prices, since transportation costs and quality differences would offset any price gains; (4) there are no significant barriers to shipping large portions of NPR oil to Gulf Coast or mid-continent refiners; (5) the capacity of California's pipelines can adequately transport nearly one-half of its current NPR oil production and can be increased through further investment; (6) DOE does not include the additional shipping costs associated with foreign oil importing in determining whether the prices bid for NPR oil are adequate; (7) DOE price determinations adequately reflect market prices; (8) DOE could enhance government revenues from NPR oil by adjusting market prices, reviewing its preferences for small refiners, changing the billing procedures in its oil sales program, and aggressively marketing its oil; and (9) DOE may need to adopt private industry sales practices and fundamentally change NPR operations to achieve and maintain the efficiencies and profitability of private oil producers.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

Director: Team: Phone: