Naval Petroleum Reserve:

Opportunities Exist to Enhance Its Profitability

RCED-95-65: Published: Jan 12, 1995. Publicly Released: Feb 13, 1995.

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Pursuant to a congressional request, GAO reviewed the Naval Petroleum Reserve (NPR-1), focusing on actions the U.S. government could take to increase its profitability.

GAO found that: (1) there are three standard industry practices that could enhance the profitability of NPR-1; (2) the Department of Energy (DOE) could be allowed to set the rate of production in a way that maximizes profits rather than following a legislatively required rate; (3) more profitable gas resources are sacrificed to maximize oil recovery; (4) finalizing how ownership shares in NPR-1 are distributed between DOE and the commercial co-owner could increase NPR-1 profitability by allowing the owners to focus on investments that enhance the venture as a whole; (5) the open-ended NPR-1 contract undermines trust and cooperation between the owners, who spend a significant amount of resources assessing the likely impact of proposed investments on their equity shares before committing to new projects; and (6) modifying the NPR-1 contract to include a nonconsent clause to promote risk-sharing between the two owners would help encourage investments and enhance profits.

Matter for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: Legislation was passed in the 104th Congress and signed by the President on February 10, 1996 authorizing the sale of the government's portion of NPR-1 no later than February 10, 1998. Language in this legislation also specifically eliminates the maximum efficient rate (MER) requirement and requires equity to be finalized before sale of NPR-1. Changing the MER requirement is particularly important in the unlikely event that NPR-1 is not sold. Equity settlement is important in either case. The legislation does not address the retroactivity requirement, but this requirement will no longer be relevant once the equity issue is settled.

    Matter: In the context of reconsidering the purposes of NPR-1 to enhance its profitability, Congress may wish to consider amending the Naval Petroleum Reserve Production Act of 1976 by: (1) eliminating the maximum efficient rate requirement; (2) requiring that the equity shares be finalized; and (3) eliminating the requirement that adjustments in the equity shares be retroactive.

Recommendation for Executive Action

  1. Status: Closed - Not Implemented

    Comments: This issue should be moot once the NPR-1 is sold. Once sold, NPR-1 will presumably be operated according to standard industry practice. A nonconsent clause is in accordance with standard industry practice.

    Recommendation: To help enhance the profitability of NPR-1, the Secretary of Energy should, in consultation with the Senate and House Committees on Armed Services, amend the unit plan contract to require the addition of a nonconsent clause.

    Agency Affected: Department of Energy

 

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