Naval Petroleum Reserve:

Limited Opportunities Exist to Increase Revenues From Oil Sales in California

RCED-94-126: Published: May 24, 1994. Publicly Released: May 25, 1994.

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Pursuant to a congressional request, GAO provided information on Naval Petroleum Reserve (NPR) oil sales, focusing on whether: (1) NPR oil sales to Gulf Coast and mid-continent refiners would increase government revenues and result in higher prices for the remaining NPR oil in California; (2) there are barriers that impede the shipment of NPR oil to refiners; (3) the Department of Energy (DOE) can sufficiently determine the adequacy of NPR oil prices; and (4) alternatives exist to enhance government revenues.

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.

Status Legend:

More Info
  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: In order to maximize opportunities to enhance revenues to the government from the sale of NPR oil, the Secretary of Energy should direct DOE to seek an alternative to the index it currently uses to establish and adjust prices for NPR oil that reflects enough transactions to yield a reliable price and is not subject to manipulation.

    Agency Affected: Department of Energy

    Status: Closed - Implemented

    Comments: DOE has abandoned the thin Line 66/ANS index and has adopted a dual-index approach--WTI and Posting--which it used for the first time during the September 1995 sales. 10,000 barrels per day were sold using WTI under a 2-month contract, while the remaining was sold using Posting under a 6-month contract. It plans to compare revenue results under both methods and select one with the greater potential.

    Recommendation: In order to maximize opportunities to enhance revenues to the government from the sale of NPR oil, the Secretary of Energy should direct DOE to conduct the required analysis to ascertain whether small refiners have adequate alternative sources of crude oil before granting them preference in the purchase of NPR oil.

    Agency Affected: Department of Energy

    Status: Closed - Not Implemented

    Comments: The U.S. Government sold the Naval Petroleum Reserve at Elk Hills on February 5, 1998, to Occidental Petroleum Corporation for $3.65 billion. As a result, this oil and gas field is no longer owned by the federal government or managed by the Department of Energy. Consequently, this recommendation is no longer relevant.

    Recommendation: In order to maximize opportunities to enhance revenues to the government from the sale of NPR oil, the Secretary of Energy should direct DOE to consider changing its billing practice to conform to standard industry practice, which requires payment on the 20th day of the month following delivery and performance guarantees from buyers that pose a credit risk.

    Agency Affected: Department of Energy

    Status: Closed - Implemented

    Comments: DOE has changed its billing practices from weekly to a monthly billing cycle.

    Recommendation: In order to maximize opportunities to enhance revenues to the government from the sale of NPR oil, the Secretary of Energy should direct DOE to take steps to market NPR oil more aggressively, such as establishing a marketing presence in California and contracting prospective buyers regularly to educate them on the NPR sales process and the logistics of transporting NPR oil.

    Agency Affected: Department of Energy

    Status: Closed - Implemented

    Comments: DOE has hired two marketing specialists to help market NPR oil in California, and is making significant revisions to marketing procedures and documents.

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