Strategic Petroleum Reserve: Early Problems (Part III)

By Robert Bradley Jr. -- July 29, 2015

Government does not only buy high and sell low (be sure and compare the purchase prices and the selling prices, adjusted for inflation to see the taxpayer loss, not to mention the high-cost of the whole storage operation). Government projects, particularly rushed, politicized ones, are extremely inefficient.

Consider this litany of problems plaguing the federal crude-oil storage program.

1. The rush to fill leached salt domes led to design problems, cost overruns, and poor planning “worthy of a defense contractor.” [1]
2. Expensive “ad hoc” barge transportation was chosen over cheaper term pipeline transport. [2]
3. Fixed-price oil contracts in a declining market left middlemen with handsome arbitrage pro­fits at taxpayer expense. [3]
4. Misestimated sched­ules overcommitted oil to storage sites; by the end of 1978, demurrage costs had reached $7 mil­lion. [4]
5. Quality control problems allowed as much as 9 million barrels of lower grade crude to be substituted for higher grade contracted crude. [5]
6. Nonstandard equipment led to breakdowns and delay. Land acquisition and leaching costs were underestimated by 50 percent. [6]
7. The failure to in­stall withdrawal equipment or even formulate a drawdown plan prompted one critic to label the program “a useless boondoggle.” [7]
8. Environ­mental dis­putes concerning salt water brine disposal led to delays that in­creased construction costs by as much as $28 million. Crude acquisition costs were $400 million higher because of rising crude prices during the delay. [8]
9. A 5-day fire at one site from a low pressure blowout in September 1978, which claimed one life and caused a serious injury and $12 million in damages, resulted from “inadequate attention to critical safety prob­lems, procedures, and emergency response capability,” according to a DOE study. [9]
10. Overpayments to con­tractors and subcontractors resulted from poor audit­ing and other manage­ment procedures, according to De­fense Department audi­tors and the General Accounting Office. [10]
11. Thefts by employees, including one incident where the prime contractor stole $400,000 worth of equipment, added to problems. [11]

Disruptive reorganizations compounded the problems for the infant program. In late 1977, the FEA was merged with several other agencies to form the De­partment of Energy. The realigned bureaucratic hierarchy slowed decision-making. The Deputy Director of the SPR program estimated that 25 percent of their key personnel were lost to DOE appointments. [12]

The relocation of the Project Office from Washington, D.C. to New Orleans in May 1979, created large turnover and a six-month work stoppage on new planning and design. [13]

By the end of 1979, the program had gone through five managers, hardly encouraging to the rest of work force and a contributing factor to general instability and inefficiency. [14] The accumulation of such problems, manifested in cost overruns and a failure to meet fillage goals, led to Congressional inquiries and formal hearings beginning in 1981.

Compliance with Congressional requests and audit requests further burdened the Project Office, which by this time was streamlining its operations to eliminate some of the blatant errors of the past. [15] Complained Program Deputy Director Carlyle Hystad: “We have more reviewers than we had people working on the program.” [16]

Despite heavy oversight, new problems and new controversy have continued to surface in the early-to-mid 1980s–and beyond.

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[1] Peter Kovler, “The Strategic Petroleum Rathole,” Inquiry, April 16, 1979, p. 10.

[2] Ibid., pp. 40-41.

[3] Business Week, December 5, 1977, p. 36.

[4] Kovler, “The Strategic Petroleum Rathole,” p. 41.

[5] Ibid.

[6] Ibid., pp. 46-47.

[7] Oil & Gas Journal, August 6, 1979, p. 49.

[8] Weimer, The Strategic Petroleum Reserve, pp. 52-53.

[9] Ibid., pp. 61-62. Business Week, October 23, 1978, p. 51.

[10] Wall Street Journal, September 28, 1982, p. 35.

[11] Newsweek, July 2, 1979, p. 62.

[12] Carlyle Hystad, “Lessons of the Strategic Petroleum Reserve,” in California and World Oil: The Strategic Horizon (California Energy Commission, 1981), p. 255.

[13] Weimer, The Strategic Petroleum Reserve, p. 44.

[14] Congressional Quarterly, Inc., Energy Policy 2nd Edition, March 1981), p. 100.

[15] Weimer, The Strategic Petroleum Reserve, p. 55.

[16] Hystad, “Lessons of the Strategic Petroleum Reserve,” p. 256. Between February 1977 and October 1981, the Government Accounting Office released 22 reports evaluating the program.

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NOTE: This week, MasterResource reviews the history of state and federal oil (and natural gas) storage regulation and ownership. Part I examined early (pre-SPR) regulation. Part II reviewed the prehistory and beginnings of the SPR. Part IV tomorrow examines the early fill and financing controversies. Part V concludes with an overall critical examination of the SPR from the vantage point of its first decade (mid-1980s).