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FY 1977 - 11/26/75 - FEA Background Book
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The original documents are located in Box 10, folder "FY 1977 - 11/26/75, FEA
Background Book" of the White House Special Files Unit Files at the Gerald R. Ford
Presidential Library.
Copyright Notice
The copyright law of the United States (Title 17, United States Code) governs the making of
photocopies or other reproductions of copyrighted material. Gerald Ford donated to the United
States of America his copyrights in all of his unpublished writings in National Archives collections.
Works prepared by U.S. Government employees as part of their official duties are in the public
domain. The copyrights to materials written by other individuals or organizations are presumed to
remain with them. If you think any of the information displayed in the PDF is subject to a valid
copyright claim, please contact the Gerald R. Ford Presidential Library.
Digitized from Box 10 of the White House Special Files Unit Files at the Gerald R. Ford Presidential Library
SUMMARY ur RESUURCES
FEA Outlays - Summary
3/23/76
(in $ millions)
1975
1976
1977
Cumulative
$923
Additional FEA
Request
$203 1/
720
Increase agreed
to by OMB
GERALD
h.
$594
FORD
LIBRARY
Cumulative
$219
Add'l FEA Req. 1/
$59
160
$13
Increase agreed
147
to by OMB
$121
Appropriation
126
Actual
President's
$121
$147
Budget
$126
1/ Most of this amount is for the Strategic Petroleum Reserve Program
FEA Budget Authority - Summary
(in $ millions)
1975
1976
1977
Cumulative
$1,062
Additional FEA
Request
$388 1/
675
Increase agreed
Cumulative
to by OMB
$441
Addi. FEA Req. 1/
$473
BERAND FORD
$57
384
Increase agreed
to by OMB
$241
201
143
$130
President's
Appropriation
Actual
Budget
$130
$143
$201
1/ Most of this amount is for the Strategic Petroleum Reserve Program
FEA Employment Summary
(end-of-year permanent positions)
1975
1976
1977
Cumulative
4736
Additional FEA
Cumulative
Request
+606 1/
4350
4130
Additional FEA
Request
Increase agreed
to by OMB
+606 1/
3744
+930
Increase agreed
3200
to by OMB
2978
Current Approved
+1953
Positions
Actual
3200
1791
GETALD 70Kg
President's
2978
Budget
1791
1/ All of the additional positions requested are for the petroleum industry audit and compliance
program, including necessary support.
3/23/76
Federal Energy Administration
1976 and 1977 Budget
Summary Data
(In Millions)
Employment, End-of-Year
Budget
Full-Time
Authority
Outlays
Permanent
Total
1975 actual
130.0
120.7
2978
3245
1976 Enacted
143.0
147.4
3200
3200
Supplemental requested (total)
441.3
219.3
4736
4736
OMB recommendation
383.9
160.1
4130
4130
TQ
Enacted
25.3
14.7
XX
XX
Supplemental requested (total)
44.1
133.1
XX
XX
OMB recommendation
44.1
43.4
XX
XX
1977 January budget
201.3
126.0
1791
1791
Amendment requested (total)
1062.1
922.9
4350
4350
OMB recommendation
674.6
720.1
3744
3744
GERALD
R.
FORD
LIGHTS
BUDGET ISSUES -
Tab I - State Grants
/
/
3/22/76
Issue Paper *
Federal Energy Administration
1976 Budget Supplemental and 1977 Budget Amendment
Issue I: State Energy Conservation Grants
Statement of Issue:
What approach should be followed for the State energy conservation grant program?
Background
- Energy Policy and Conservation Act (EPCA):
Assumes that higher energy prices and numerous new Federal regulations -- including automobile
fuel economy, appliance labeling, and industrial energy conservation -- will not conserve
enough energy.
Assumes that States can take actions to help solve the national energy problem, and encourages
GERALD
R.
States to implement programs to save energy. The goal is a 5% or more reduction in the
FORD
total energy consumption predicted for each participating State in 1980 to result from
the State grant program. If the goal is met in all States, energy consumption would
increase by about 6% from 1975 to 1980, rather than the 11% currently predicted.
Provides Federal financial and technical support through a new categorical grant program to
States to plan and implement energy conservation programs; authorizes $150 million ($50
million/year) over 3 years beginning in FY 1976 for these activities.
- This grant program was not part of the President's energy program, and the Administration
did not support this program during the legislative process.
- EPCA invites but does not require States to participate with energy conservation programs.
- EPCA requires that those States choosing to participate will plan to implement 5 mandatory
conservation programs to be eligible for Federal assistance; and authorizes other
discretionary conservation programs which the States may propose as part of their overall
State energy conservation plans.
*
Joint issue paper by OMB -- FEA
2
- To implement the 5 mandatory programs, a participating State would:
Promulgate mandatory standards for lighting in non-Federal public buildings.
Promulgate energy-related mandatory standards which State and local governments must
follow when making purchases of goods and services.
Promulgate mandatory insulation requirements for new and renovated buildings.
Enact a "right-turn-on-red-light" traffic law, consistent with safety.
Develop programs to promote the use of carpools, vanpools, and public transportation.
(Note that this overlaps EPA/DOT planning grant programs which encourage carpools, vanpools,
bus lanes, fringe parking to augment public transportation, etc. EPA grants $55 million/year,
UMTA $45 million/year, FHWA $125 million/year.)
- Discretionary programs are authorized by EPCA:
Restrictions governing the hours and conditions of operating public buildings;
OF
Restrictions on the use of decorative or nonessential lighting;
Transportation controls;
Public education programs;
Other appropriate programs to conserve energy.
-
FEA presented in their budget justification a list of illustrative programs of this type
eligible for Federal grant assistance which included:
Stricter enforcement of 55 mph speed limit by increasing number of police officers;
Mailing energy conservation questionnaires to every home;
Providing technical assistance to small businesses;
Promoting changes in State laws to increase the taxes on gasoline.
3
- Both FEA and OMB agree on funding level of $7.2 million (including $5 million planning grants)
in 1976 and $50 million (including $45 million implementation grants) in 1977. FEA and OMB
also agree to limit funds to the planning, coordination, and promotion of energy conservation
programs. There would be no funding of demonstration projects or equipment. Funds would
be appropriated on an annual basis, and would lapse at the end of the fiscal year if not
obligated.
- FEA and OMB disagree about the basic program approach that should be followed in implementing
the program.
Alternatives
#1. Allocate grants to States on basis of cost effectiveness of specific program measures,
energy saved, and people affected. Provide flexibility to FEA and States in
selecting either mandatory or discretionary programs. (FEA)
#2. Allocate grants to States by simple formula based on share of national population and/or
energy consumption. Place most emphasis on implementation of mandatory programs. (OMB)
GERALD
4
Comparison of Alternatives
Structuring
Implementation Grants
Alternative #1 (FEA)
Alternative #2 (OMB)
A. Treatment of EPCA
Allow funding of programs developed
Direct 80% of FY 1977 funds
mandatory and
by States with major energy savings
toward the 5 mandatory programs.
discretionary programs
potential. Do not mandate all re-
Funding for planning mandatory
quired programs to be implemented
programs can take place before
prior to funding of discretionary
State legislatures take action.
programs since passage of State
After all the mandatory programs
laws to implement all these programs
are satisfactorily implemented
prior to first year grant awards
and operational, the remaining 20%
would be very difficult to achieve.
plus any unused funds left from the
80% allotment for mandatory pro-
grams could be used for discretion-
ary programs.
B. Method of determining
Allotment based on the contribution
All funds allocated by formula
allocations to States
to energy conservation which can
using concrete measure based on
reasonably be expected and the
State population and/or State energy
number of people affected.
consumption. States required to
meet guidelines before funds are
released.
C. Flexibility to program
Allow unused funds from one State
Unused funds from one State could
available funds
to be reallotted to other States
not be reallotted to other States
before the end of the fiscal year
which already have their own allot-
to prevent lapsing.
ments. Unused funds would lapse.
GERALD
R.
FORD
LIBRARY
5
Analysis
Alternative #1. Allocate grants to States on basis of cost effectiveness of specific program
measures, energy saved, and people affected. Provide flexibility to
FEA and States in selecting either mandatory or discretionary programs. (FEA)
- Program structure is flexible; could maximize energy savings within authorized
fundings.
- Advantages are:
FEA and States allowed flexibility to select and approve, in their judgment,
more energy efficient programs.
Maximizes State participation.
Follows one aspect of Congressional intent, which is that FEA consider in determining
financial assistance "the contribution to energy conservation which can reasonably be
expected."
- Disadvantages are:
Emphasis on discretionary programs will lead to funding of numerous activities. This
could create State interest in expanding and perpetuating FEA grant program.
Flexibility could allow most funds to be granted to a few States with aggressive energy
offices, so that remaining States create pressure for expanding grant amounts by arguing
"equal sharing."
SALD
R.
FORD
6
Alternative #2. Allocate grants to States by simple formula using population. Place most
emphasis on implementation of mandatory programs. (OMB)
- Program structure is important and needs to be decided now -- it will drive future-year
funding and the scope of the type of programs funded at the State level. This is a new
categorical grant program with a broad charter that could be used to fund a broad range
of State needs. A flexible program would threaten to become permanent and expensive.
- Advantages are:
Focuses effort on Congressional EPCA priorities -- 5 mandatory programs.
Limits pressure for continuing/expanding this grant program in future years.
Minimizes complexity and cost of program administration because discretionary programs
limited. Large staff in FEA and States would not be required to develop, evaluate and
approve discretionary program proposals.
- Disadvantages are:
Some States may not participate because they don't want to implement the mandatory program.
May conflict with Congressional and State desires for more emphasis on flexible grant
program for energy conservation.
GERALD
R.
FORD
Tab II - Compliance
Issue Paper *
Federal Energy Administration
1976 Budget Supplemental and 1977 Budget Amendment
Issue II: Compliance Program (under EPCA)
Statement of Issue
What should be the staffing level of the FEA compliance program in 1976 and 1977 now that the
Energy Policy and Conservation Act has extended price controls?
Position Summary (by audit program area including support personnel)
1976 End-of-Year Positions
1977 End-of-Year Positions
Current
FEA
%
OMB
Current
FEA
OMB
Base
Request
incr.
Recom.
Base
1
Request
Recom.
Crude Producers
186
451
142
336
0
451
336
Tab A
Major Refiners
209
374
79
337
0
374
337
Tab B
Small Refiners
107
107
--
52
0
107
52
Tab C
Natural Gas Liquid Plants
70
151
116
99
0
151
99
Tab D
Wholesalers
288
333
16
208
0
333
208
(propane only)
--
(161)
--
(36)
0
(161)
(36)
Tab E
(other than propane.)
--
(172)
--
(172)
0
(172)
(172)
Retailers
69
154
123
95
0
154
95
(propane only)
--
(122)
--
(63)
0
(122)
(63)
Tab F
(other than propane)
--
(32)
--
(32)
0
(32)
(32)
Importers
--
27
--
19
0
27
19
Tab G
Gatherers
--
26
--
18
0
26
18
Tab H
Headquarters Staff
134
226
69
162
0
226
162
Tab I
Total Direct Compliance
Positions
1063
1849
74
1326
0
1849
1326
GERALD
Indirect Support for
Compliance
326
587
80
517
0
587
517
FORO
Total Compliance-Related
Positions
1389
2436
75
1843
0
2436
1843
Total Increase over Current
Base
--
+1047
--
+454
-
+2436
+1843
1 assumed phaseout of price controls
* Joint issue paper by OMB -- FEA
2
Background
- FEA's current FY 1976 appropriation was based on the expiration of controls on November 15,
1975, and assumed that FEA would need a regional staff of auditors and investigators to
complete the backlog of audits of petroleum firms over 15½ months. FY 1976 staff level
approved for this wrap-up program was 929.
- FEA's FY 1976 budget supplemental and FY 1977 amendment request would increase the size of
the current regional compliance staff by 75%, from 929 to 1623, and the Washington, D.C.
headquarters regulatory staff by 69%, from 134 to 226.
- It is FEA's view that enactment of EPCA has fundamentally changed the nature of the compliance
effort, from one where the regulatory authority would expire completely on a certain date, to
one where an audit program would continue over a period of 40 months.
- OMB assessment of the EPCA is that it makes compliance audits somewhat more complex (because
of changed price rules and new base period production control levels), but that an increase
of 75% in the regional compliance staff overstates FEA's need for new auditors under EPCA.
OMB would recommend a regional staff increase of 25%.
- Key factors involved in determining FEA's regional audit staff requirements are:
(1) Audit Coverage -- the percentage of firms and petroleum production to be audited annually.
FEA proposes a new auditing strategy which would permit it to audit those firms accounting
for 80% of the annual production every two years and the remaining 20% every five years.
FEA's objective was to spend most time on large firms in which larger violations are
probable, while at the same time covering smaller firms sufficient to assure a reasonable
level of compliance.
OMB generally agrees that audit coverage should emphasize the larger firms accounting
for most production with sufficient coverage of smaller firms to promote compliance.
OMB disagrees with the extent of coverage proposed for audit by FEA when (1) FEA
3
coverages exceed those used by the Internal Revenue Service in tax audits, and (2) when
coverages are too high on smaller firms accounting for only a small portion of total pro-
duction and where the potential for uncovering significant price violations is limited.
FEA believes that comparisons with IRS coverages are misleading because FEA's program is
only two years old, expires in 40 months, and is not nearly as fully developed as IRS's
system. By comparison, IRS's program is over 50 years old and is a permanent program. OMB,
on the other hand, believes that IRS's long experience in maintaining the integrity of the
Nation's tax system in economic-type audits regarding targeting of violators, determining
audit coverage levels necessary to insure compliance, and use of self-reporting forms is a
valid indication of the level of coverage needed. The fact that IRS has only four full-time
auditors of Exxon is relevant to program credibility in OMB's view.
(2) Audit Times -- the number of work weeks or staff years required to conduct an audit of a firm.
FEA proposes to increase audit times by an average of 90% over 1976 approved levels. The
basis for these estimates takes into account: (1) EPCA requires more complex rules, (2) a
proposed switch from conducting limited wrap-up audits on the basis of complaints received
to normal full-scale audits, (3) newly developed audit guidelines which require more audit time,
and (4) adjustments for productivity increases resulting from management improvements.
It is OMB's view that new EPCA requirements will moderately, not dramatically, increase time
required per audit (20-30% on the average).
OMB has tended to rely on audit time estimates prepared by FEA's 10 regional offices in
January, 1976. These estimates were developed by FEA regions with specific national head-
quarters instructions to consider the impact of new EPCA requirements on staff and budget
resource needs for each audit sector.
FEA contends that the data provided by FEA's ten regional offices generally supported its
budget justification (except for small refiners and propane resellers); OMB disagrees.
In addition, OMB would apply a 10% productivity improvement factor to audit times because:
(1) FEA's audit program in many audit sectors is still at an early development stage,
(2) an increasing number of audits in 1976 and 1977 will be repeat audits of the same
firm which should reduce audit time, and (3) FEA will be able to streamline its auditing
approach over the next several months, e.g., through greater use of self-reporting forms,
and (4) the "learning curve" of auditors relatively inexperienced in new audit areas will
improve faster than normal. General OMB policy is to apply annual productivity adjust-
ments of up to 2.5% for stable, ongoing functions. However, in most of its petroleum
audits, FEA is in an early phase (with the exception of the wholesale and retail sectors).
4
FEA believes that its audit time estimates already consider expected management improvements
(e.g., use of sampling and improved audit guidelines) and that productivity improvements
(e.g., less time to do repeat audits and more experienced auditors) will not have an impact
until FY 1978. It is OMB's view that productivity gains will come during the remainder of
FY 1976 and in FY 1977.
- Because it is important that the FEA compliance effort be credible, it is OMB's view that the
following comparisons of employment in other Federal economic regulatory agencies are useful to
keep in mind:
Federal Power Commission (Natural gas, hydroelectric, and interstate wholesale power
regulation) -- total agency positions: 1320
Civil Aeronautics Board (Domestic and international air carrier regulation) -- total
agency positions: 720
Interstate Commerce Commission (Regulation of surface transportation) -- total agency
positions: 2050
Securities and Exchange Commission (Regulation of securities markets, holding companies,
and investment companies) -- total agency positions: 1935 positions
Federal Home Loan Bank Board (Regulation of savings and loan associations) -- total agency
positions: 1360
Cost of Living Council (Price and wage controls over U.S. economy) -- total agency positions
during FY 1974 and 1975: 950, plus an Internal Revenue Service compliance force of 2700
positions
- FEA believes that attempts to compare its staffing requirements with other regulatory agencies are
specious due to FEA's unique situation. In that connection, FEA cites examples of other agencies
that have larger regulatory staffs than FEA, e.g., Bureau of Mines with 5000 mines and 1500 mine
safety inspectors.
5
Analysis
- There is little disagreement between FEA and OMB on the extent to which audit resources should
be applied to audit coverage of "big oil, II i.e., major refiners, and major and large independent
crude producers. This part of the industry, which is most subject to public skepticism, accounts
for 90% of crude oil production and 85% of refinery output.
Refinery Output
Domestic Crude Production
FEA and OMB agree that
FEA and OMB agree that
21 "Major" Oil
72% of domestic crude
85% of refinery produc-
30 "Major"
Companies
production should have
tion should have 100%
85%
Refiners
100% annual audit
annual audit coverage
72%
coverage
(annual)
(annual)
FEA and OMB agree that
235 Large
18% of production should
Crude Producers
18%
have 50% audit coverage
FEA and OMB agree that
(once every 2 yrs)
110 Small
15% of refinery pro-
765 Small
T
15%
Refiners
FEA and OMB disagree over
duction should have 31%
Crude Producers
10%
(once every 3 yrs)
whether 10% of production
audit coverage
(once every 5-6 yrs)
1
should have 20% or 17%
coverage, respectively
-
OMB and FEA disagree over the time that would be required to complete audits in these sectors.
- TABS A through H that follow treat separately those audit sectors where FEA and OMB disagree
over audit times and audit coverage. In some cases, FEA and OMB disagree over only one of the
factors, while in others, both factors are still in dispute. The final TAB (TAB I) deals with
personnel requirements of the Headquarters compliance staff that supports and oversees the regional
compliance program.
TAB A -- Independent Crude Producers
Average Time
% Annual
No. of
No. of
Per Audit
Audit Coverage
X
Producers
=
Audits
x
(Work Weeks)
=
Total Staff Years
Current 1976 Appropriation*
18.0%
15,000
2700
3.1
186
FEA Request (Alt. #1)
23.45
15,000
3100
6.2
451
115 staff year
OMB Recormendation (Alt. #2)
18.0%
15,000
2700
5.3
336 difference
(IRS Coverage)
(16.5%)
*
consistent with Presidential decisions in FY 1977 budget
Areas of Difference
Annual audit coverage: 20.4% coverage (FEA), 18% coverage (OMB), 15.5% coverage (IRS)
Implications of difference: 49 end-of-year positions
$177,500 in FY 1976 and $1.42 million in FY 1977
Source of difference: FEA and OMB agree that the 235 largest crude producers should be audited every two years (50% coverage).
However, there is disagreement over the audit cycle to be applied to the remaining 14,765 smaller independent
procucers. FEA maintains a 5-year cycle (20% coverage annually) should be used because the program will last
only 40 months. OMB recommends a 6-year cycle in line with the IRS tax audit coverages applied to oil and gas
producers in the same asset range.
Average time per audit: 6.2 work weeks (FEA) vs. 5.3 work weeks (OMB)
Implications of difference: 66 end-of-year positions
$241,000 in FY 1976 and $1.93 million in FY 1977
Source of difference: FEA does not agree with OMB's application of 10% productivity factor to audit times, indicating that further
improvements are not possible in FY 1976 and FY 1977. Use of the factor reduces FEA's requested audit time from
6.2 to 5.3 work weeks. FEA contends that it already considered a productivity factor in earlier time estimates.
As indicated earlier, OMB review of the January, 1976 regional estimates and the supplemental/amendment budget
justification did not reveal use of such 2 factor. Further, it is OMB's view that since the crude producer
program is still in early stages of implementation, it is reasonable to expect a 10% improvement in productivity
time.
GERALD
14 of the 66 positions in dispute are related to an FEA-OMB difference over the audit times required for the
R.
largest 235 crude producers. FEA estimate for these audits is 18.5 work weeks and is based on a selected sample
of 20 recently completed crude producer Audits in 2 regions. FEA believes that the 18.5 work week figure based
FORD
on completed audits is more representative than OMB's estimate of 13.2 work weeks. OMB, however, points out that
the 13.2 work week estimate is not based on a valid sample of audits because: (1) they involved a higher than
normal percentage of violations (violations take more time to audit) and (2) the sample of 20 audits were among
LIBRARY
the first TO be completed in the crude producer sector (later audits should take less time).
TAB 8 -- Major Refiners
Average Time
% Annual
No. of
No. of
Per Audit
Audit Coverage
X
Refiners
=
Audits
X
(Staff Years)
II
Total Staff Years
Current 1976 Appropriation*
77%
30
23
9.00
209
FEA Request (Alt. #1)
100%
30
30
12.47
374
100%
30
30
11.22
337
me
37 staff year
OMB Recommendation (Alt. #2)
difference
*
consistent with Presidential decisions in FY 1977 budget
Area of Difference
- Average time per audit: 12.47 staff years (FEA) vs. 11.22 staff years (OMB)
Implications of difference: 37 and-of-year positions
$124,000 in FY 1976 and $.99 million in FY 1977
Source of difference: Only disagreement is over application of 10% productivity factor to FEA's audit time request (see earlier
remarks -- p. 3 and 4). By comparison, IRS has only four tax auditors at Exxon.
GERALD
S:
FORD
surner,
TAB C -- Small Refiners
Average Time
% Annual
No. of
No. of
Per Audit
Audit Coverage
IX
Refiners
II
Audits
X
(Staff Years)
=
Total Staff Years
Current 1976 Appropriation*
32%
110
35
3.05
107
FEA Request (Alt. #1)
31%
110
34
3.15
107
55 staff year
OMB Recommendation (Alt. #2)
31%
110
34
1.52
52
difference
* consistent with Presidential decisions in FY 1977 budget
Area of Difference
- Average time per audit: 3.15 of a staff year (FEA) VS. 1.52 of a staff year (OMB)
Implications of difference: 55 end-of-year positions
$184,000 in FY 1976 and $1.47 million in FY 1977
Source of difference: FEA's case time is based on the actual audit time of a small refiner (Husky -- one of the 5 largest small
refinars of the universe of 110). This refinery was used because the audit was recently completed, covered
a representative audit period, and included a review of all applicable regulations. FEA has very little
experience in full audits of small refiners. Using the Husky case time, FEA stratified its case time estimates
into 3 categories but contends that audit workloads do not decrease in proportion to volume. FEA feels its
use of an actual case time is more logical than using the January 1976 regional estimates.
ONE recommendation is based on a 1.52 staff year per audit weighted average estimate as submitted by all 10
FEA regions in January 1976. These estimates include all small refiners audited by FEA. It is OMB's view
that the use of a "first-time" audit rate for one refiner (Husky) is not a valid basis on which to develop
estimates for 110 refiners who are smaller in size. Stratified time estimates for the second and the
third categories of small refiners were not reduced proportionally by FEA to decreases in refinery volume
levels. Based upon this approach, FEA's estimate of average audit time is 3.15 staff years per audit. OMB
believes the regional estimates are more representative of audit times.
GERALD
FORD
LEVRUIT
TAB D -- Natural Gas Licuid Plants
Average Time
% Annual
No. of
No. of
Per Audit
Audit Coverage
X
Plants
=
Audits
(Work Weeks)
M
Total Staff Years
Current 1976 Appropriation*
29%
709
206
15.0
70
FEA Request (Alt. #1)
41%
709
289
23.3
151
29%
709
21.1
an
52 staff year
OMB Recommendation (Alt. /2)
206
99
difference
*
consistent with Presidential decisions in FY 1977 budget
Description: Natural gas as it comes from the ground contains significant volumes of natural gasoline, as well as natural gas liquids (NGL) including
butane and propane (bottled gas). These same products are also produced in refineries but are technically labelled liquefied petroleum
gases (LPG). NCL and LPG are in fact the same fuels. LPG from refineries makes up 25% of total liquefied gas production. The basic tech-
nology employed in separating out natural gas liquids is similar to refining, but the average liquids output of the NGL plants is smaller
than the typical small refinery.
Areas of Difference
- Audit Coverage: 41% coverage (FEA) VS. 29% coverage (OMB)
Implications of difference: 42 end-of-year positions
$141,000 in FY 1976 and $1.13 million in FY 1977
Source of difference: FEA maintains that 41% coverage of NGL plants is necessary to meet its internal target of auditing natural
gas processors producing 80% of NGL plant volume every two years. FEA excluded in its NGL plant staffing
estimate the 25% of liquefied petroleum gas produced in refineries.
CNB disagrees with this exclusion since the goal is to audit 80% of production (natural gas liquids in NGL
plants and liquefied petroleum gases in refineries). FEA's exclusion would have been appropriate if all
liquids were produced only by natural gas processors. In fact, however, 25% of liquefied petroleum gases
(propane, butane, and isobutane) are produced by oil refineries, which are audited at an 80% coverage rate.
Therefore, it is OMB's view that only 25% annual audit coverage is needed on the other 75% of production from
gas processing plants to satisfy FEA's internal goal of auditing 80% of production every two years, since 25%
of the liquids production is covered by refiner audits.
Audit Times: 23.3 work weeks (FEA) vs. 21.1 work weeks (OMB)
Implications of difference: 10 end-of-year positions
$33,500 in FY 1976 and $268,000 in FY 1977
Source of difference: Only difference is over OMB's application of a 10% productivity factor (see earlier remarks -- P. 3 and 4).
FEA has less experience auditing natural gas liquid plants than any other major sector in its auditing program.
GERALD
R.
FEA only began auditing in the area in late 1975 and has not completed its first audit.
:
FORD
FEA disagrees with OMB approach indicating it already considered a productivity factor in earlier estimates
and that productivity gains will not occur during the remaining months of FY 1976 or in FY 1977.
LIBRARY
TAB E -- Propane Wholesalers
Average Time
% Annual
No. of
No. of
Per Audit
Audit Coverage
X
Wholesalers
=
Audits
(Work Weeks)
=
Total Staff Years
Current 1976 Appropriation*
FEA Request (Alt. #1)
28%
2000
560
13.2
161
125 staff year
OMB Recommendation (Alt. #2)
20%
2000
400
4.0
36
difference
(IRS Coverage)
(18.5%)
*
propane wholesalers not previously treated as a separate audit sector
apart from the broader "wholesaler" category
Description: Propane wholesalers include both brokers and dealers which operate terminals. Many of these firms conduct wholesale and retail business
concurrently. In addition, many are brokerage-type operations whose physical facilities consist of a small office.
Areas of Difference
- Audit Coverage: 28% coverage (FEA), 20% coverage (OMB), 18.5% (IRS)
Implications of difference: 18 end-of-year positions
$60,000 in FY 1976 and $482,000 in FY 1977
Source of difference: FEA proposes that 28% of propane wholesalers be audited annually; this would permit auditing firms accounting
for 80% of sales every two years and those smaller firms having 20% of propane sales every 5 years. OMB
recommends 20% of propane wholesalers be audited annually, thereby allowing audits of 70% of sales every two
years and the other 30% of sales every 6 years. OMB's recommended coverage is consistent with IRS coverages
of wholesale businesses in comparable asset ranges. FEA contends that coverage recommended by OMB is totally
unacceptable from a public perception standpoint in this sensitive propane area.
Over the 40-month control period, it is FEA's view that the probability a propane wholesaler (in the universe
of 2000) would be audited under FEA's strategy is 75%; under OMB's recommended approach it is OMB's view that
the probability of audit would be 60%.
Audit Times: 13.2 work weeks (FEA) vs. 4.0 work weeks (OMB)
Implications of difference: 107 end-of-year positions
$358,000 in FY 1976 and $2.87 million in FY 1977
Source of difference:
FEA request of 13.2 work weeks based on a selected sample of audit times for completed wholesaler cases in the
Dallas, Kansas City, and Seattle regions.
ONB recomendation based on audit time estimates prepared in January, 1976 by FEA's Dallas and Kansas City
GERALD
regional offices, which handle 80% of all propane wholesalers. That same January, 1976 report showed that the
R.
weighted average for all 10 regions was 4.4 work weeks per audit. It is OMB's view that FEA's sample case times
on audits taken from the start-up phase of its propane audit program are not valid indicators of how long it will
FORD
take to do subsequent audits in FY 1976 and FY 1977 because they do not take account of time savings that would
occur in repeat audits or improvements from having more experienced FEA auditors.
LIBRARY
FEA contends that casos chosen for audit during the start-up phase of this program were not as complex as audits
to be performed later. They were, in effect, training audits that were easier to conduct. Further, it is FEA's
view that improvements in their targeting system (enabling better identification of probable violators), will
result in higher audit times, since it takes longer to audit a violator.
TAB F -- Propane Retailers
Average Time
% Annual
No. of
No. of
Per Audit
Audit Coverage
X
Retailers
il
Audits
X
(Work Weeks)
=
Total Staff Years
Current 1976 Appropriation*
--
--
:
FEA Request (Alt. #1)
28%
8000
2200
2.5
122
59 staff year
OMB Recommendation (Alt. #2)
14%
8000
1120
2.5
63 difference
(IRS Coverage)
(13.8%)
*
propane retailers not previously treated as a separate sector apart from
the broader "retailer" category
Description: The typical retailing installation is a small operation with a single office, a couple of storage tanks, and one to a half-dozen
trucks. There are some national chains with numerous retail outlets, but most firms operate a single outlet operation. 90% of
the firms do less than $500,000 in sales (annually), and have 5 employees or less.
Area of Difference
- Audit Coverage: 28% coverage (FEA), 14% coverage (OMB), 13.8% coverage (IRS)
Implications of difference: 59 end-of-year positions
$204,000 in FY 1976 and $1.63 million in FY 1977
Source of difference: FEA proposes that 28% of propane retailers be audited annually, permitting coverage of firms accounting for
80% of sales every two years and coverage of smaller retailers having 20% of propane sales every 5 years. OMB
recommends 14% coverage allowing audits of 70% of sales every two years and the other 30% of sales on a 10-year
cycle. CMB's recommended coverage is in line with IRS coverages of retail businesses in comparable asset ranges.
Over the 40-month control period, it is FEA's view that the probability that a propane retailer (in the universe
of audit would be 40%.
of 8000) would be audited under FEA's strategy is 75%; under OMB's approach, OMB's view is that the probability
GERALD
FORD
Anvuers
TAB G -- Importers
Average Time
% Annual
No. of
No. of
Per Audit
Audit Coverage
X
Importers
=
Audits
X
(Work Weeks)
=
Total Staff Years
Current 1976 Appropriation
--
--
--
FEA Request (Alt. #1)
28%
598
167
7
27
8 staff year
OMB Recommendation (Alt. #2)
20%
598
120
7
19
difference
Area of Difference
- Audit Coverage: 28% coverage (FEA) vs. 20% coverage (OMB)
Implications of difference: 8 positions
$27,000 in FY 1976 and $214,000 in FY 1977
Source of difference: OMB recommendation would maintain a 5-year audit cycle, in line with coverage allowed for propane wholesalers,
which have a similar broker function.
FEA contends that OMB approach would mean that the percentage of importers subject to audit is too low. Over
the 40-month control period, it is FEA's view that the probability that an importer (in the universe of 598)
would be audited under the FEA strategy would be 75%; under the OMB approach, OMB concludes the probability
would be 17%.
It is OMB's view that 47% probability of audit will be adequate to deter importer violations, and that as FEA
gains experience in this new audit sector, that time per audit will decrease below 7 work weeks per audit,
thereby allowing FEA greater than 20% coverage.
GERALD
rono
AUTHOIT
TAB H -- Gathere:
Average Time
% Annual
No. of
No. of
Per Audit
Aucit Coverage
X
Gatherers
=
Audits
X
(Work Weeks)
=
Total Staff Years
Current 1976 Appropriation
--
:
--
FEA Request (Alt. #1)
28%
200
56
20
26
8 staff year
OMB Recommendation (Alt. #2)
20%
200
40
20
18 difference
This sector consists of firms that collect crude oil by tank truck, barge tanker, or pipeline. Gatherers take title to the oil they transport,
and sell this oil to buyers.
Area of Difference
-
% Annual audit coverage: 28% coverage (FEA) VS. 20% coverage (OMB)
Implications of difference: 8 end-of-year positions
$27,000 in FY 1976 and $214,000. in FY 1977
Source of difference: FEA disagrees with the 0MB approach of 20% ceverage, contending that it thes not provide
sufficient resources for reaudits of fins. They contend some probability of re-audit
is needed to deter those firms audited at the beginning of the program from subsequently
violating FEA regulations.
Over the 40-month control period, the probability that a gatherer (in the universe of 200)
would be audited under FEA's proposed strategy is 77%; under OMB's approach the probability
would be 67%. In addition, under OMB's plan, 1/3 of the major gatherers could be targeted
for repeat audits.
OMB recomendation is consistent with audit coverage applied to the wholesaler/broker
functions for propane and importers. As FEA gains experience in this area, it will no
longer take twenty weeks to complete an audit, thus allowing broader audit coverage with
available staff.
GENALD
:
0003
LIVERSE
14
TAB I -- Headquarters Compliance Staff
(Staff Years)
Ratio of HQ Staff to
1976
1977
Regional Compliance Staff
Current Base
134
0
1:6.9 (FY 1976 only)
FEA Request
226
226
1:7.2
OMB Recommendation
162
162
1:7.2
-
FEA request of 226 headquarters positions is in addition to their request of 1623 positions for field compliance
auditing.
-
OMB believes there is a sufficient relationship between functions performed by headquarters and field
compliance activities to warrant using an overall constant headquarters: field ratio to determine the
staffing requirements for the headquarters.
-
FEA accepts the use of such ratios to determine that portion of its headquarters staffing that it believes to
be involved with the management and support of regional operations, but does not agree that the method can be
applied to a sizable portion of its headquarters compliance staff. FEA contends that this portion performs
functions (e.g. planning, policy development, development of training and audit guidelines, etc.) that are
not directly related to the size of its regional staff. Specifically, FEA identifies 115 positions in that
category. There are currently 44 employees assigned against this "fixed" requirement of 115 positions. FEA
contends that the only way it has performed these functions with 44 employees has been through greater use of
contractors and overtime--practices which they say cannot continue indefinitely.
-
FEA contends that the reason only 44 positions are now assigned to these functions is that current staffing
is inadequate. In FEA's opinion, this inadequate staffing has contributed substantially to the many criticisms
(from the public, the GAO, and the Congress) regarding FEA's management of its compliance program.
-
OMB recommends an increase of 21% in positions (from a current base of 134 to 162). In addition, it is OMB's
view that FEA will have sufficient contract funds through the end of FY 1976 to continue work identified as
fixed overhead. Specifically, OMB has recommended that an additional $.5 million in contract funds. be allowed
for development of computerized audit packages and targeting systems, for preparation of new sections of the
compliance manual, and for expanded compliance training. The peak for resource requirements in these activities
will be in the second half of FY 1976 (in the six months following the signing of the EPCA); after that period,
activity on development of targeting approaches or in writing new sections of the compliance manual will level
off. OMB notes that FEA's request for 115 positions in the fixed overhead category would involve an increase
of 161% over its current assigned strength of 44, and that an increase of this magnitude is difficult to justify
when the field compliance staff is increasing by only 25% under OMB's view, or 75% under FEA's view. In short,
15
OMB concludes that, while some of the functions identified by FEA in the fixed overhead category may not be
directly related to the size of the field compliance staff, in the aggregate, there is a definite relation-
ship between field size and headquarters staffing needs. Therefore, OMB recommends an overall 1:7.2 ratio
be applied to FEA's field compliance strength.
TAB 111 - Strategic
Petroleum Reserve
FEA Proposal
STATES
FEDERAL ENERGY ADMINISTRATION
WASHINGTON, D.C. 20461
ADMINISTRATION
OFFICE OF THE ADMINISTRATOR
MEMORANDUM FOR THE PRESIDENT
FROM:
FRANK G. ZARB
SUBJECT: Strategic Petroleum Reserve Issues
Although the energy debate of 1975 was marked by considerable
controversy, the one area of solid agreement with the Congress
was the need for a strategic reserve that could be used to
soften the impact of an embargo and act as a deterrent to the
possible imposition of an embargo. Differences with the
Congress in this area centered not around the desirability of
a strategic reserve, but around the structure and timing of
the reserve.
The Energy Policy and Conservation Act contains your strategic
storage program with several modifications:
The act authorizes the 1 billion barrel reserve contained
in your program, but places greater emphasis on a
reserve of only a half of billion barrels.
The emphasis on a smaller reserve in the early years
is balanced off by statutory requirements that the
one-half billion system be in place within seven years
and that 150 million barrels be in place in three years.
In short, the Congress opted for a smaller reserve
within a definite time frame as opposed to a larger
reserve with an open-ended schedule, while agreeing
to additional storage up to your 1 billion level if
the additional storage is judged to be necessary after
seven years.
As a result of pressure from the New England delegation,
the act also mandates the storage of product in different
regions of the country unless it can be demonstrated
that large scale crude storage systems in the Gulf (which
are dramatically cheaper than the steel tank storage
that would have to be constructed for the regional
reserves) can supply products in a timely manner in the
event of an embargo.
FORD
FORD
- 2 --
LIBRARY
Finally, the act provides the authority you requested
to require industry to shoulder the financial cost of
the oil placed in the reserve, but limits the obligation
to approximately 180 million barrels.
FEA has conducted comprehensive studies over the past 15 months
regarding implementation of the strategic reserve and has
reached the following conclusions regarding the above modifica-
tions to your current program:
The seven and three year system requirements not only
can be met, but also should be met. The latter judgment
is based on the fact that meeting the schedules (as
opposed to stretching out the system's development) will
be dramatically cheaper in budgetary terms, have less
environmental problems, and provides an opportunity to
begin near-term discussions with selected OPEC countries
regarding the possibility of bulk purchases of crude oil
at below market prices.
A strong case can be made that the more expensive
regional storage is both unnecessary vis-a-vis the
requirements of the Act and overly costly, even though
there will be considerable political opposition.
Steps should be taken to begin implementation of the
requirement to have industry absorb all of the oil costs
provided in the bill, even though there will be
considerable opposition from the industry.
OMB is not in agreement with FEA's position regarding the
schedule for meeting the three year statutory requirement of
150 million barrels. They would go for a stretched out schedule
on grounds that the longer schedule will enable FEA to save
$78 million in facilities costs, even though the OMB approach
will cost $265-400 million more than the FEA plan when the cost
of purchasing the oil is included in the budget calculation.
OMB does agree with FEA's position on the regional storage
system and the industrial reserve, but would defer announcing
these decisions until a later time. FEA is required to submit a
report to the Congress on the 150 million barrel program by
March 22, and believes that tentative decisions on these issues
must be included in the report.
Apart from these issues, which are addressed in the attachments,
FEA, OMB and Interior are not in agreement on the price FEA
ought to pay for oil for the strategic storage system:
- 3 -
OMB recommends that FEA allocate old oil ($5.25) to the
system as the lowest cost option;
FEA recommends a combination of royalty oil and oil
purchased at the domestic average price;
Interior objects to the use of royalty oil.
In FEA's view, its position is not only a valid compromise
between the extremes of old oil and world oil prices (it would
have the government paying slightly less than the price paid
for crude by the oil industry), but also roughly equivalent to
the price we would anticipate paying to OPEC producers if a
below market bulk purchase price can be arranged. The OMB
option would preclude any efforts to negotiate such arrangements.
The issue here, which is addressed in greater detail in the
attachments, is what price to pay for the oil, not how to
finance the purchase of oil. As you know, production from the
Naval Petroleum Reserves will finance the purchases over time.
I believe that FEA has carefully analyzed the strategic reserve
program and has developed a program that will not only meet the
time requirements in the Act, but also fully optimize the
system at the least cost. I am prepared to discuss these issues
with you and other advisors at your earliest possible convenience.
Attachments
ISSUE 1: SCHEDULE FOR ESTABLISHING THE RESERVE
Issue and Discussion
The Energy Policy and Conservation Act requires FEA to store
150 million barrels of petroleum within 3 years, and to submit
a report to Congress by March 21, 1976, describing plans for
construction and fill of the Early Storage Reserve (ESR).
Although all your advisors agreed with your program to
establish a strategic reserve, there is no longer unanimity on
scheduling because of perceived cost differences. Some favor
a slower program than that which FEA believes is required by
law and feasible to attain.
OMB prefers a slower approach with slightly lower facilities
costs. Because FEA cost estimates show that acquisition of
existing mines would cost more than the construction of new
cavities in salt domes, OMB argues that FEA should:
0 Effectively exclude mines and new salt domes on the
basis of marginal costs; and
0 Utilize only four salt domes with existing caverns
and expand them by leaching new caverns.
FEA plans an early storage system using a mix of existing
mines and salt dome cavities. New caverns can be expanded
at these sites if technically feasible, or new salt domes
would be utilized to increase the storage capacity of the
total Reserve. FEA's plan is based on factors that FEA
considers to be decisive. FEA's plan:
0 Is the only way to meet the three-year schedule
(and thereby comply with Congressional intent as
expressed in the Act);
FORD LIBRARY &
0 Will, in fact, save $265 to $400 million compared
to OMB's "go slow" approach because oil purchased
during the period of price control will be
significantly less costly than after controls expire
and, further, oil purchased during the early control
period is less costly than oil purchased later in
the period;
O Will, by providing more storage capacity sooner,
give US more flexibility in discussions with OPEC
countries regarding bulk purchase of oil below
market prices, as we have recently discussed in
context of Iranian and Russian deals;
2
4. Allocate old oil to the Government and buy it at
$5.25 per barrel.
OMB prefers this option, but FEA opposes it. This
is the least costly option as it would cost $640,000,000.
This option would meet the greatest industry and congressional
opposition as it was not anticipated that FEA would use
regulatory programs to allocate cheap oil to itself.
FEA's Office of the General Counsel advises that
legal challenge to this approach would not be frivilous and
would pose a substantial risk of an adverse decision. This
option carries considerable risk in that if allocation of
cheap old oil to the Government is overturned in court (1)
the opportunity to take royalty oil may be lost if old
contracts are renewed, and (2) the opportunity to negotiate
a bulk purchase at reduced cost with a foreign country
would no longer be available because the appropriated
funds at $5.25 per barrel would be insufficient for such
a bulk purchase.
Decision
Option 1
Concur
Option 2
Concur
Option 3
Concur
(FEA recommended option)
FORD
Option 4
Concur
(OMB recommended option)
77839
THIS PAGE IS IN ERROR
*
NEW PAGE BEING REVISED BY FEA
ISSUE 2:
SOURCE AND PRICE OF STORED OIL
Issue and Discussion
The Government is required to purchase oil for the Early
Storage Reserve (ESR). Four options have been considered.
1. Buy imported oil at the world market price.
This option is the most costly of all the options.
It would require appropriatiation of $1,634,000,000*. It would
put the full social cost of the Government portion of the
petroleum in the Reserve on the Federal budget.
2. Buy domestic or imported oil at the national average
cost through participation in the Entitlements
Program.
This is the next highest cost alternatives to the
Federal Government and would cost $1,309,000,000. The
Government would be buying oil on the same basis as other
purchasers, and this option could be defended politically as
the most equitable. However, it misses the opportunity of
passing much of the cost of the program to the beneficiaries
of it.
3. Store the royalty oil now taken in kind by the
Government and sold to small refiners and obtain
QERALD 1040
the additional oil needed in the open market at
the national average price through participation in
the Entitlements Program.
This is the second least costly alternative and the
one preferred by FEA. It would cost $831,000,000. The
Department of the Interior (DOI) strongly opposes diversion of
royalty oil from the small refiners because they believe it
would create a financial burden for the small refiners. However,
according to DOI, royalty oil accounts for only 1/4 of the crude
supply of the 38 small refineries. In fact, DOI plans to reduce
individual refiners' benefits under this program by extending
eligibility from 38 to 69 refineries. This would lessen the
share of each participant in the current program. Denial of
royalty oil to these refineries would not eliminate their
source of supply as they presently exchange such oil for that
actually run in their refineries. If it is deemed necessary,
to subsidize some or all of these "small" refiners in the near-
term, FEA's regulatory program can be adjusted to reflect a
small industry bias.
*
Cost estimates assume Government purchase of 95 million
barrels, i.e., utilization of the Industrial Petroleum
Reserve for 55 million barrles of the ESR.
4.
Allocate old oil to the Government and buy it at
$5.25 per barrel.
OMB prefers this option, but FEA opposes it. This
is the least costly option as it would cost $640,000,000.
This option would meet the greatest industry and congressional
opposition as it was not anticipated that FEA would use
regulatory programs to allocate cheap oil to itself.
FEA's Office of the General Counsel advises that
legal challenge to this approach would not be frivilous and
would pose a substantial risk of an adverse decision. This
option carries considerable risk in that if allocation of cheap
old oil to the Government is overturned in court (1) the
opportunity to take royalty oil may be lost result in a cost
of $286 million more than FEA's prefered alternative, and (2)
the opportunity to negotiate a bulk purchase at reduced cost
with a foreign country would no longer be available because the
appropriated funds at $5.25 per barrel would be insufficient
for such a bulk purchase.
Decision
Option 1
Concur
Option 2
Concur
Option 3
Concur
(FEA recommended option)
Option 4
Concur
(OMB recommended option)
GERRLD FORD LIBRATT
ISSUE 3: INDUSTRIAL PETROLEUM RESERVE
Issue and Discussion
The Energy Policy and Conservation Act gives FEA discretion
to establish an Industrial Petroleum Reserve (IPR) as part
of the Early Storage Reserve (ESR) and/or the Strategic
Petroleum Reserve (SPR).
0 FEA may require industry to acquire and store,
in readily accessible inventories, oil equal to
3 percent of the total imported or refined in
the previous calendar year (approximately 180
million barrels). Industry's prorated share of
the 150 million barrel ESR, comparing 180 million
barrels to 500 million barrels for the full SPR,
would be 55 million barrels.
This provision was included in your proposals to Congress,
and we strongly supported it in a letter to Senator
Jackson, which he used to great effect in the Senate
debates.
The ESR Report must contain plans to store 150 million
barrels in 3 years. Therefore, the Report must describe:
0 Industry's portion of the Reserve, or
0
That funds for Government purchase or 150 million
barrels will be needed.
FEA plans to announce in the ESR Report to Congress that:
0
IPR will be implemented and industry will be allowed
to pass through the costs thereof;
0
Final decision on the IPR is subject to further
consideration under procedures listed in the ESR
GEBATO'S LEVERIT FORD
0 The Government will budget for the purchase of
95 million barrels;
0
No appropriations will be requested for the portion
of the Reserve to be provided by industry (55 million
barrels).
FEA's plan would:
0 Put the cost of the storage program on the users of
oil and the industry, i.e., those who will benefit
during supply interruption;
2
0 Reduce Federal outlays by $677 million for the
ESR; and
0
Increase our flexibility by discussing the IPR
in the current ESR Report (the ESR can be imple-
mented without congressional approval whereas the
SPR plan is subject to congressional review and
disapproval).
On the other hand, OMB seeks, to make no decision at this
time and delete the entire IPR discussion from the ESR
Report, and to delay decision until the December report
to Congress. This would require us to:
0
Budget for the Government to purchase the entire
150 million barrels for the ESR; and
0 Secure congressional approval before we can imple-
ment the IPR.
Comment
0
All line agencies, including Treasury, agreed with
FEA's proposal on the IPR or made no comment.
0
While industry can be expected to object to maximum
utilization of the IPR, its complaints should be
mitigated by pass through of costs and allowing
industry to use low-cost United States Government
storage facilities.
Decision
FEA Plan
OMB Plan
ISSUE 4: REGIONAL STORAGE
Issue and Discussion
The Energy Policy and Conservation Act requires that the
Early Storage Reserve (ESR) meet the needs for residual
fuel and refined products in regions which depend upon
imports for a substantial portion of their total energy
requirements. The Regional Petroleum Reserve section of
the Act allows FEA to substitute crude oil or other
petroleum products for amounts of residual or other refined
petroleum products stored in the region, if there is no
delay or other adverse effect on satisfying the regions
interruption. The only reasonable means to store in the
regions would be in steel tanks, however, storage costs
for tanks are $8 to $12 per barrel while underground storage
costs are $1.40 per barrel. By fully utilizing our option
to use substitutable central storage, we can hold costs for
a 500 million barrel program to $700 million; if we use
steel tank storage in the regions, program costs will rise
to $2 billion.
Initial analysis indicates that the import product require-
ments of the Regions can be met by a combination of the
measures listed below, at a significantly lower cost than
physical storage within regions while still providing the
level of regional protection required.
0 Substitution of crude for product, to supply
Caribbean and domestic refineries, which could
be stored underground in the Gulf Coast.
0 Conservation.
0 Emergency increase in refinery utilization.
0 Refinery yield shifts.
Since present analysis indicates that we can meet east coast
needs for products during an interruption by storing crude
oil in Gulf Coast salt domes and mines, we recommend not
planning at this time to store refired products locally to
meet the Regional Storage requirements. If further analysis
indicates that small quantities of local storage may be
needed, a recommendation will be made in the Strategic Reserve
Plan report in December 1976.
2
Senator Kennedy, and other members of the New England
delegations, have already voiced objections to our proposal
not to use tanks. They argue that:
0 They will not have a cushion to offset inaccuracy
in the analysis.
0 Seasonal peaks and contingencies are not provided
for.
0 Shipping may not be available and a waiver to the
Jones Act will be required.
We have examined the shipping requirements and, based on
information supplied by the Maritime Administration, have
concluded that, for embargoes of two million barrels a day
or less, a Jones Act waiver would not be required. However,
in the event of a severe embargo of four million barrels a
day, a carefully limited waiver to the Jones Act would
probably be needed whether or not we had total storage of
products in the New England region.
New England would probably be satisfied at this time by the
storage of a nominal amount of oil. Senator Kennedy's staff
has proposed using surplus Government tank farms on the
east coast for product storage pending completion of a
definitive analysis. We have three such tank farms totalling
about two million barrels. However, storage of products in
the United States Government facilities at this stage would
set a precedent that may be irreversible, even if subsequent
analysis shows it is not needed. Accordingly, our
recommendation is that we not plan for any tank storage at
this time.
Recommendation
Because of the costs involved FEA feels that regional storage
requirements can be met through the substitution of crude
which would be stored underground in the Gulf Coast for refined
products.
All agencies reviewing this issue either agreed with the FEA
position or had no comment. OMB concurred with FEA.
3
Decision
Concur
Non-concur
& FORD
GERALD
LIBRARY
TAB III - Strategic
Petroleum Reserve
OMB Proposal
3/22/76
Issue Paper
Federal Energy Administration
1976 Budget Supplemental and 1977 Budget Amendment
Issue III: Strategic Petroleum Storage
Statement of General Issue
How should the Federal Government proceed to implement the Strategic Petroleum Storage System?
Background
- The President's strategic petroleum storage proposal provided for:
up to 1 billion barrels of stored oil, assuming low cost bulk storage facilities
development over a flexible time frame of 10-15 years
funded from the proceeds ($ & oil) of production from Naval Petroleum Reserves 1,
2, 3 and 4
flexible authority to require the private sector to store oil
- The Energy Policy and Conservation Act (EPCA), while similar in concept to the President's
proposal, differs in that EPCA:
Requires the storage of 150 million barrels of petroleum in 3-year "Early Storage
Program"
The EPCA provides little flexibility on this requirement. Legal counsel advises that
an attempt should be made to meet the requirement. If factors beyond the control of
the Administrator occur, such as regulatory delays, strikes, adverse weather, law suits,
etc., then a reasonable, legal basis for missing the target would exist.
GERALD R.FORD FORD LIGRARY
Sets targets for the storage of 500 million barrels of petroleum in 7 years "Strategic
Petroleum Reserve" with interim targets of:
18 months (June, 1977)
50 million barrels
36 months*
100 million barrels*
60 months
325 million barrels
72 months
500 million barrels
Flexibility is provided by EPCA on the targets. The Administrator is authorized to
propose and justify changes to the time frames and volumes on the basis of all relevant
factors, including "cost effectiveness, need to construct related facilities, and the
ability to obtain sufficient quantities of petroleum to fill the facilities."
The Administration strongly opposed both the requirement for 150 million barrels of
storage in 3 years and the 7-year and interim targets which were included in the EPCA
by Congress.
Requires the FEA Administrator to:
- submit an implementation plan to Congress for the Early Storage Program by
March 21. The plan, including any changes thereto, is not subject to congressional
approval.
- submit a plan to Congress by December 21, 1976, for the Strategic Petroleum
Reserve, which is subject to congressional disapproval. All changes to the
plan are subject to congressional disapproval.
Authorizes FEA to require petroleum importers and refiners to store petroleum equal to
GERALD R.
3% of the amount imported or refined by them in the preceding calendar year. At current
levels up to 180 million barrels of petroleum could be required.
FORD
A strategic petroleum storage program:
LIBRARY
will tend to boost the Nation's morale and self confidence, could serve as a deterrent
to an embargo, could reduce pressure for more costly energy programs;
*The early storage program requirement of 3 years and 150 million barrels supersedes this target.
2
will increase imports, may reduce pressure on the cartel to cut prices, may not be
used during an embargo. (Storage which existed in Europe was used to only a limited
extent during the 1973/74 embargo.)
Economic analyses indicates the benefits of storage range from benefits about equal to its
costs to significant net benefits.
- Legislation authorizing production from the Naval Petroleum Reserves:
has been agreed to by House/Senate conferees
will generate less oil and receipts than the President's original proposal since it:
-- authorizes production at Elk Hills for 6 years but not at NPR-4 in Alaska.
(NPR-4 is transferred to Interior with a requirement to study NPR-4 development.)
-- contains a provision requiring purchasers using privately owned pipelines to make
them available on a common carrier basis. This may complicate distribution of pro-
duction, probably reducing deliverable crude in the 1976, 1977 time frame.
Shown below are estimates of receipts from NPR production available for storage after
NPR production and development costs, and the amounts required for FEA's storage
proposal designed to achieve the accelerated requirements of EPCA.
($ millions)
1976
1977
1978-80
5-Year Total
NPR receipts (available for storage)
$ 29
$126
$2900
$3055
- Issues pending Presidential decision include:
A. Time frame for implementing the storage program
What level of effort at what rate of development is necessary to attempt to meet:
3
- the 3-year requirement of 150 million barrels,
- the interim targets (see page 2), and
- the 7-year goal of 500 million barrels?
B. Cost, type, and number of storage facilities
What number and type of storage facilities (salt domes, mines) are necessary to implement
the program in a cost effective manner in accordance with legislative requirements?
C. Industrial storage
Should the Administration propose on a tentative basis at this time to require importers
and refiners to store up to 180 million barrels?
D. Price of oil for storage
What price should the government plan to pay for oil for storage?
E. Regional storage
Should quantities of petroleum be stored in regions of the country that are heavily
dependent on imports? Both FEA and OMB agree that regional storage is not necessary
because regional requirements can be met by storing crude much more cheaply in the
Gulf Coast area and having it refined to meet any regional needs.
- FEA and OMB disagree on the first four issues (A-D).
The effect of these differences on outlays for FY 76 and TQ/77 is shown graphically on page 4a.
4
STRATEGIC PETROLEUM RESERVE FUNDING - 1976 & TQ/1977
(outlays in $ millions)
FEA REQUEST
Total $866
Crude Oil
$449
OMB (based on
FEA schedule)
Total $541
($8.80 per bb1)
Crude Oil
OMB (realistic)
$268
Total $278
Storage
+
($5.25 per bbl)
->
Crude Oil
Facilities
$417
Storage
Storage
Facilities
Facilities
$273
$273
($1.33 per bb1) *
($0.85 per bbl) *
($0.85 per bbl) *
*
average cost to design, purchase, and construct 500 million bbls of storage
4a
COMPARISON - FEA AND OMB RECOMMENDATIONS
STRATEGIC STORAGE
ISSUES
ALTERNATIVE 1 (FEA)
ALTERNATIVE 2 (OMB)
A. Implementation Schedule
Meet all requirements, make a
Make a solid effort but no firm
firm commitment to meet:
commitment that the 18-month
- 18-month target of 50 million
target of 50 million barrels and
barrels.
3-year requirement for 150
- 3-year requirement for 150 million
million barrels can be met. 1/
barrels of storage.
B. Storage Facilities/Costs
Use existing domes, mines (9 sites)
Use smaller number of existing or
for early program, expand domes
new dome sites (5-7 sites), plan to
and use new sites to achieve 500
expand sites for 500 million
million barrels.
barrels. Mines would not be
Budget at $1.33 per barrel or
excluded if they can meet average
$667 million for 1976 and 1977.
per barrel cost of existing domes.
Budget at $0.85 per barrel or $425
million for 1976 and 1977.
Review in late 1976 once cost
estimates are available and initial
implementation is under way.
C. Industrial Storage
Make tentative commitment on 180
Make no commitment at this time.
million barrels including 55
Indicate study is needed and
million for early storage program.
subsequent determination will
be made.
D. Oil Pricing
Use royalty and mix of new/old
Use old domestic oil at $5.25;
domstic and imported oil at a
don't specify source. Budget
cost of $8.80 or $450 million for
at $290 million for 1976/1977.
1976/1977.
1/ If more complete information shows that the target cannot be met in time without excessive
expenditures, then legislative reTief should be sought on the 3-year requirement.
5
SSUE A Time frame for implementing the storage program
- The central problem with FEA's proposal is the philosophy that drives the program. FEA's philosophy
is that 150 million barrels must be placed in storage within three years regardless of feasibility,
risk or impairment to other sectors of the economy, because the EPCA requires a best effort to do SO.
-
OMB believes that:
At the time that Congress included the 3-year, 150 million barrel requirement in EPCA,
little engineering, economic or budgetary analysis had been done for the program.
Information now available indicates that the requirement may not be feasible.
Even if it is feasible at increased cost, we think it is in the interest of the nation
as a whole to adopt an achievable schedule to reduce the program's cost and other adverse impacts.
as FEA argues that if the program can be implemented before price controls expire in May, 1979, then
increased facility costs are offset by using cheap controlled oil which more than compensates for
any extra cost for facilities.
- OMB disagrees and notes the following:
Using FEA's schedule and the OMB recommendations, substantially the same results can be achieved in
three years and four months, before price controls expire (May 1979), at lower overall cost than
FEA's proposal.
FEA estimates that $667 million will be needed for facilities. This is $242 million greater
than OMB's estimate of $425 which can achieve 150 million in an additional four months assuming
FEA's schedule.
FEA's proposed program results in outlays in excess of NPR receipts of $738 million in 1976 and
1977, placing greater pressure on an already tight budget. (See graph, p. 6a.)
FEA fails to include in its cost calculation costs incurred and impairment done elsewhere in
the economy in its effort to accelerate the program.
GERALD R. FORD
6
millions)
Comparison - NPR Receipts VS. Outlays of Alternative
1300 e
Storage Programs
200
100
Naval Petroleum Reserve
000
Receipts
900
800
700
.
500
FEA Proposal
500
-
400
OMB (based on
FEA schedule)
300
GERALD
OMB (realistic)
R.
200
FORD
LISARAY
100
0
+
+
+
+
+
1976 & TQ
1977
1978
1979
1980
6a
- Therefore OMB recommends the Administration take a pragmatic posture in making promises
to the Nation on what can be achieved by:
clearly stating to the Congress the early program targets will be extremely
difficult to attain.
indicating an accelerated schedule will be attempted but that it is more important
to achieve implementation of a workable storage system at reasonable cost.
stating that a firm commitment cannot be made to meet the 150 million barrels in 3 years
because of the uncertainty and complexity of the program.
- A more detailed discussion of the specific concerns with FEA's schedule follows and
is keyed to the numbers shown on Exhibit A.
cision:
- Firm commitment to meet 150 million in 3 years (FEA)
- Make a solid attempt, but no firm commitment (OMB)
7
Best Possible Scan from Poor Quality Original
it A
EARLY S AGE RESERVE
Prepared L. LA
Major Milestone Chart
1976
1977
1978
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 1st Qt 2nd Qt 3rd Qt 4th Qt 1st half 2nd hal
charge Reserve Plan
draft final
SERVENTE Petrolech Reserve
Plan
begin
draft
final
STUDIES
Salt Dodes
final
Mines
interim
final
Tanks
final
Control Systems
final
Insurary Storage
draft
final
Design
begin
IMPACT STUDIES
1
Programatic
draft
EIS
Salt Dates
begin
draft
EIS
Mines
begin
draft
EIS
Tanks
begin
draft
EIS
2
3
4
5
Enrosing Sizes
plan
negotiations
complete
011
plan
complete
MCCAVERSION
6
begin
REQUIATIONS
notice
propose
issue
Industry Storage
regulations
final
FILL
7
Domes/Mines/Tanks
begin
50 mmbbl
150 mmbb
GERALD
R.
FORD
LIBRARY
8
Issue A - Implementation Schedule
- OMB's assessment of the EPCA requirement is that the 150 million barrels in 3 years is
highly optimistic. While it is clear the Congress intended a best effort, it would be
hard pressed to criticize the Administration if the target was not met because it is not
possible. Environmental standards must be adhered to, costs must be held at a reasonable
level and impacts on the private sector must be minimized.
OMB has the following basic problems with the FEA schedule which proposes a three-
year implementation. (Refer to Exhibit A).
1
Environmental Impact Statements (EIS)
- The preparation of a storage program environmental impact statement (EIS) is required as
well as EISs for individual storage sites. At this time FEA is in the process of completing
the draft programmatic EIS and plans to have it in final form by July 1976. Individual site
EISs preparation has begun and is planned to be completed in August-November 1976 (5-8
months from now).
- FEA has not completed the draft programmatic EIS. CEQ advises that average time between
release of a draft EIS and a final EIS in 1974 was as follows:
Agency
Average Time Required
Fores+ Service
9 months
Corps of Engineers
10 months
Bureau of Land Management
6 months
Federal Highway Administration
12 months
Environmental Protection Agency
7 months
For particularly complex projects las this one is) the time required may be longer.
Assuming the draft statement is completed by April 1, and an average of the above
times experienced by other agencies of 9 months, FEA is likely to have a final EIA
in January 1977 or six months later than the planned date of July 1976 (Exhibit A) as shown
in the plan. The site EIS's would follow after the programmatic statement.
9
FEA's plan is based on sites selected through prefeasibility studies done for them.
The studies to date indicate each site has various uncertainties associated with it,
including ownership, availability, and environmental uncertainties. Significant
additional technical work must be completed at each site before sites are judged
technically sound.
At least three to four months are required for this work. Results must be positive
for FEA to proceed at each site. If they are not, then the site would be dropped.
2
Selection of Sites
After candidate sites are evaluated, a system of storage facilities must be selected which
fit into a coherent storage system, consistent with the Nation's existing and expected
petroleum distribution systems. Time required 1-3 months. This selection can be done on
the basis of limited candidate sites, as planned by FEA, but the result will likely be more
expensive and less desirable than a well considered program because better sites may be
available but can't be used to meet time requirements.
3
Engineering and Design
Facilities must be designed for each site selected (both on site and off site, such as
port expansion). This ordinarily follows EIS's, site feasibility studies, system
design, site selection and acquisition. Naval Facilities Command advises that detailed
design takes 12 months for a typical construction project. This task is not shown in FEA's plan (ExhibitA).
0801
10
4
Obtaining Other Needed Regulatory Clearances
- The number and type of permits needed for a site have not yet been adequately identified by FEA.
It is known that many will be required before construction can be undertaken. OMB
analysis shows that Federal, state and local permits are likely to be needed for:
Water use permits, necessary leaching and filling of salt dome/mines.
Water disposal permits to permit leaching of cavities.
Site use permits.
Health and safety permits.
Pipeline rights of way and safety.
Numerous site easements for roadways, power, communications, security.
A given sitecannot be used without necessary permits and considerable time will
be necessary to acquire them.
FEA's plan (Exhibit A) does not identify this task in the plan nor does it provide a
reasonable period of time for obtaining clearances. Experience by other Federal
agencies for significant energy projects in obtaining permits prior to construction shows:
Average Time (in months)
Agriculture-REA Electric Generating Plants
6-12
NRC Nuclear Powerplants
8-18
EPA Sewerage Treatment
5-12
FPC - Pipelines
2-48
GERALD
R.
FORD
11
Procurement of sites
FEA has initiated preliminary negotiations for site procurement in January 1976 prior to:
completion of the program EIS
completion of the site specific EIS
obtaining necessary regulatory permits.
Completing EISs, detailed feasibility studies, and negotiations on a concurrent basis will be difficult
especially since some sites involve multiple owners. There is risk of acquiring sites and not being able
to secure permits or encountering litigation on EISs.
Construction
FEA proposes to begin construction as early as September 1976. This appears impossible since EISs are
planned for completion in August and the time for regulatory clearances is not shown. Further land has
to be acquired and construction contracts bid and negotiated in a month according to this schedule. Also,
until regulatory clearances are obtained, it would be unwise to commit the government to purchase a site
or proceed with construction since denial of a single permit could mean the site can't be used.
Filling the facilities
A major constraint on successful achievement of the storage requirement is the rate at which petroleum
can be loaded into storage. Crude must be loaded at a rate of 10 million barrels per month. There is
little analysis to show that offloading facilities would be adequate to meet this rate.
Summary
In its effort to condense time required, FEA plans to do work on all sites simultaneously. This has
been done for certain high priority projects but greatly complicates management problems. It is taxing
for a seasoned agency and especially so for one without a project management team in place. Further,
FEA has included in the schedule very little time for delays encountered on the EIS, permits, construction,
etc.
In sum, the FEA schedule designed to meet the 3-year, 150 million barrel requirement is not realistic.
A more likely schedule appears to be 4 years consistent with FEA's original consultant estimates and those
of the National Petroleum Council. Considerably more analysis is needed on EISs, regulatory permits, site
design, construction times before a realistic, complete schedule could be prepared.
12
ISSUE B Storage facilities and costs
Summary
OMB Proposed
Reference
FEA Proposal
Alternative
Assessment
Number of storage
Probably more than 9
5-7 sites
OMB believes fewer sites can
sites
sites.
provide needed capacity at lower
cost per barrel with slightly less
of a chance of meeting time frames
in EPCA.
Type of storage
4 existing salt domes
mainly salt
OMB would rely on existing
sites
5 existing mines
domes, mines not
domes because they are lower
other new sites (not
excluded, but
in cost and involve fewer un-
specified).
unlikely due to
knowns than mines. OMB would
unknowns and
not exclude mines if it is sub-
higher costs.
sequently determined they are
cost competitive with domes
and risks can be minimized.
Estimated average
$1.33 per barrel
$0.85 per barrel
OMB cost is based on salt domes
cost per barrel
including expansion of capacity.
of storage
They are derived from FEA con-
sultant estimates and increased
by 20% for contingencies.
Total estimated
$667 million
$425 million
OMB approach is $242 million
cost of storage
lower than FEA for 1976/1977
facilities for
for facilities.
500 million
barrels
GERALD
R.
FORD
Arryall
13
Background
- At present, there is a good deal of uncertainty about site availability, feasibility,
suitability, and costs. Both FEA and OMB are using preliminary feasibility data to
estimate costs. FEA's estimates include:
Millions of
Cost per
Funding for
barrels
barrel
FY 76/77 (in millions)
Existing cavities in salt domes (4 sites)
207
$0.88
$182
New cavities in salt domes (not specified)
124
1.39
172
Converted mines (5 sites)
169
1.85
313
Total
500
$667
OMB basically agrees with FEA's proposed cost facility estimates for existing salt domes.
- The basis for disagreement is:
FEA estimated costs for mines indicate they are much more expensive than domes.
Use of a larger number of sites (9 or more) than are needed.
FEA estimated costs for new salt dome cavities are much higher than their consultant
cost estimates.
DERALD
R.
FORD
14
1. Use of mines at $1.85 per barrel
- FEA bases its budget request on the use of some 12 existing mines, five of which are listed
in its prototype program. Its reasons for including these sites are three:
Mines may prove feasible and if they do, they may be available more quickly than domes.
Mines enhance the government's bargaining position for domes by, in effect, providing
a price ceiling on domes.
By including mines in the appropriation request, FEA insures that it will be immune
from challenge under NEPA that alternatives other than domes were excluded.
- OMB does not exclude the use of mines ($1.85 per barrel) if they prove to be competitive with
domes, i.e., can be developed at not more than $.88 per barrel:
Available data indicate that proposed mines may involve safety and environmental problems.
Mines lose much of their relative time advantage over domes if, as is reasonable, the
program experiences any delay. The proposed mines are working mines and would have to
be shut down or relocated. FEA does not expect any delay in doing this but was unable
to furnish data on current employment at the mines, relocation expenses, or anticipated
resistance by current miners.
Mines have limited economies of scale compared to domes. Cost of mines are at this point
uncertain but considerably in excess of domes ($1.85 versus $0.88).
The government's bargaining position is enhanced by increased flexibility on timing and
a credible interest in the alternative to domes with existing cavities, namely the dozen
or so more suitable sites which FEA maintains could be prepared within 5 years at a cost
below that estimated for mines.
- OMB's recommendation does not preclude the use of mines if they are competitive with domes at
$0.88 per barrel and are consistent with NEPA.
Decision
$1.85 per barrel (FEA)
/
/
$0.88 per barrel (OMB)
/
/
15
2. Use of larger number of sites than are needed thereby increasing costs
-
FEA budget request is based on a tentative storage system containing about nine storage
sites to meet the need for 150 million barrels in 3 years and to provide additional facilities
for subsequent expansion of the storage system.
- OMB agrees that sites with existing caverns provide an advantage in any attempt to meet the
expedited time frames of EPCA. OMB disagrees with FEA that nine or more sites are needed
because:
Salt dome sites have been identified with an existing capacity of 207 million barrels.
In addition, over 12 new salt domes have been identified with desirable characteristics.
The potential capacity of four of the sites with existing capacity is as follows:
(millions of barrels)
Existing
Potential
*
Total
Bryan Mound
36
200
250
Bayou Choctaw
88
70
160
West Hackberry
58
440
500
Sulfur Mines
25
N/A
N/A
Grand Total
207
710
910
*
Additional cavities may be leached at each site to expand capacity
Using FEA's schedule and FEA's cost estimates, EPCA's 150 million barrel requirement would
be achieved in 3 years and four months at a total cost of $182 million, with some reduced
chance of meeting the 3 years because fewer existing sites could be selected at the lower
cost of $.88 per barrel than the average of $1.33 proposed by FEA.
- It is important to be able to deliver oil at a sufficient rate during an embargo within the
Nation's existing and future distribution system. Doing so, however, does not appear to require
the use of more than 5-7 storage sites. The National Petroleum Council recommended 2 or more
dome sites in conjunction with superports or 3 or more sites without the superport facilities.
Five to seven sites appear adequate for the 500 million barrel system.
16
- On the basis of current information, the use of the smaller number of salt dome sites (5-7) results
in significantly lower cost per barrel of storage because:
there are fixed costs associated with each site that must be incurred regardless of
size. These costs include land acquisition, pipelines in and out, pumps, docking
facilities.
significant economies of scale may be achieved when a given site is expanded because fixed
costs are spread over a greater number of barrels of storage and they do not increase in
direct proportion to increased volume. For example, FEA consultants estimate that costs
drop from $1.70 per barrel to $0.80 per barrel when a new dome facility is expanded from
20 to 70 million barrels.
Building three separate 20 million facilities costs $102 million.
Building one 70 million barrel facility costs $56 million.
Once a site is acquired, expansion may be accomplished by leaching new cavities on that
site. The cost of leaching new capacity is significantly lower on a per barrel basis
than acquiring a new site according to FEA consultants and FEA's draft report to Congress.
- A recent National Petroleum Council study on strategic storage recommends the use of 2-3 new
salt dome sites for 500 million barrels of storage. The report indicated significant savings
in construction costs could be achieved as the amount of storage is expanded at a given site.
-
A smaller number of salt domes sites with greater capacity at each site should result in lower
facility costs ($242 less than proposed by FEA) and can still result in 150 million barrels of
storage in 3 years and four months according to FEA's schedule but with a lesser degree of
assurance.
- Decision
More than 9 sites (FEA)
/
5-7 sites (OMB)
17
3. FEA's estimated costs for new or expanded salt domes.
- FEA's budget request estimates the cost of storage either at new salt dome sites or by
expanding existing sites with new cavities at $1.39 per barrel or $.51 per barrel more than
acquiring existing sites.
- FEA's consultant estimates the range of cost for new salt dome sites at $0.50 per barrel
to $0.80 per barrel.
- According to FEA, the difference is that the consultant failed to include certain costs for
docks, storage tanks, that will be needed for new sites.
- OMB disagrees with FEA's estimate because:
FEA's estimate includes 4 existing dome sites of 207 million barrels capacity which may
be expanded at a lower cost than acquiring new sites since many of the items which FEA
is concerned about will have been installed, and they can be built at the appropriate
scale.
While the consultants' estimates may fail to include certain costs, the FEA estimate
of $1.39 is about twice the consultants' estimate of $0.50 - $0.80 per barrel.
Complete cost estimates for new sites and expansion of existing sites will not be
available until June.
Existing dome sites are estimated at $0.88 per barrel indicating an approximate cost for
salt dome facilities.
- OMB recommends using $0.88 per barrel for budget purposes at this time.
Decision
BERALD
Use $1.39 per barrel for new or expanded salt domes (FEA)
/
Use $0.88 per barrel for new or expanded salt domes (OMB)
/
18
ISSUE C - Industrial Storage
- In the Early Storage Reserve plan (required to be submitted to Congress by March 21), FEA
proposes to include a tentative proposal that the Administration may ultimately require
importers and refiners to store up to 180 million barrels of petroleum with 55 million
of the total to be included in the early program.
- OMB does not oppose the use of industrial storage at this time but believes that before
proposing it, a study is needed to determine:
the impact on refiners/importers, e.g., will they be able to raise the $2.7 billion
needed?
how best to implement the approach, e.g., is it feasible to provide government owned
facilities?
the political consequences, e.g., will the small refiners/importers be exempted?
FEA now has a study under way but it will not be completed until September 1976.
- FEA argues that they need to propose industrial storage now in order to show how they will
meet the early storage requirement of 150 million barrels in 3 years. If this is not done,
then the government would have to budget for an additional 55 million barrels of oil at a
cost of $440 million in 1978. They further maintain that if industrial storage is not
included in the plan now, it becomes subject to Congressional approval subsequently if the
plan is amended to include it. As noted above, however, amendments to the Early Storage
Plan are not subject to Congressional disapproval.
- OMB recommends:
the decision be postponed,
the study be expedited and completed by June 1976 and at that time a decision on whether
GERALD
and when to require industrial storage can be made.
F.
FORD
19
- There is no need to budget now for 55 million barrels of storage in 1978 because the decision
on industrial storage can be made this summer once the study is complete. If the decision
is in favor of industrial storage, then the Early Storage Plan can be amended by transmittal
to Congress. Such an amendment to the Early Storage Plan is not subject to Congressional
disapproval.
Decision
Include Industrial Storage in plan (FEA)
/
/
Postpone decision, expedite the study (OMB)
/
/
19a
GENALU
FORD
ISSUE D - Price of Oil for Storage
- The Energy Policy and Conservation Act authorizes the following sources of crude for the storage
system.
crude oil produced from Federal lands, including crude oil produced from the Naval Petroleum
Reserves.
crude oil which the United States is entitled to receive in kind as royalties from produc-
tion on Federal lands; and
petroleum products acquired by purchase, exchange or otherwise.
- Both FEA and OMB agree that it is best to sell NPR oil until price controls expire and use the proceeds to
purchase needed oil for storage because:
NPR oil can be sold at uncontrolled oil prices which are likely to be $13-$14 per barrel
This revenue will be needed to offset NPR development and production costs and the cost of
the accelerated storage program as required by EPCA, which could total $8 billion.
Due to the continuation of price controls until early 1979, other sources of oil for storage
are available at a cost that will be lower than the $13-$14 per barrel which NPR oil will
realize. For example, the current price of old domestic crude oil is $5.25 per barrel. Use
of lower cost oil will lower the cost of oil to the government. However, the cost to the
Nation would be the same.
It is less expensive to sell NPR oil on the West Coast and buy crude for delivery in the
Gulf Coast than to transport NPR oil to the Gulf Coast.
- FEA proposes to use a combination of Federal royalty oil and oil purchased at the national
average price. Royalty oil is produced from Federally leased lands and owed to the government
by the lessee. The government has rights to 1/8th the oil produced from on shore lands and
1/6th the oil produced off shore. This oil is currently sold to small refineries at an
GERALD
R.
average price of $6.44 per barrel for annual receipts of $260 million (both old and new oil).
FORD
Approximately 110,000 barrels per day or 40 million barrels per year are available from this
source. To the extent royalty oil is not available to meet the needs of the storage program,
FEA proposes to purchase remaining needs at the national average price (now $9.80 per barrel).
This would be accomplished by purchase of old and new domestic oil and imported oil in a mix
designed to achieve the average.
20
The different costs of the alternatives that a - authorized by EPCA are summarized for the
Early Storage Reserve (150 million barrels). The amounts are for 95 million barrels and
assume the remaining 55 million barrels will be industrial storage at no cost to the govern-
ment.
Dollars (in millions)
Cum
FY 1976
FY 1977
FY 1978
BBls.
Total
1. Old domestic crude
$ 5
$263
$231
95
$499
2. Royalty/national average
10
439
326
95
775
3. Imported oil
15
739
704
95
1,458
Each alternative will require subsequent (after 1979) government expenditures of about $5 billion to
complete the 500 million barrel program called for by EPCA assuming decontrol of domestic oil prices.
Costs are the same in each case since price controls are assumed to expire in early 1979.
- OMB disagrees with FEA on committing to the use of $8.80 per barrel oil including royalty oil because:
an evaluation has not been made on what the impact would be on small refiners who now realize
a considerable subsidy as a result of being able to purchase royalty oil.
there is likely to be considerable negative reaction by small refiners resulting in political
pressure against this action.
the Secretary of Interior strongly objects to the use of royalty for storage since it would
adversely impact small refiners.
other possible sources such as old domestic crude ($5.25 per barrel) are cheaper, available, and
can be used without adversely impacting a single group such as small refiners.
EPCA explicitly states that petroleum acquisition should be consistent with encouraging competition
in the petroleum industry.
-
GERALD
OMB recommends that old domestic crude at $5.25 per barrel be used for storage because:
Federal budget will be reduced by $150 million in FY 77 and a total of $220 for 95 million
barrels needed for the early program.
The beneficiaries of the program, the general C Insuming public, would help pay for the
program. The cost (1/20¢ per gallon) would be small.
The use of low cost domestic crude would have only a small and insignificant increase in
overall petroleum prices (1/20 of a cent per gallon).
21
Nearly 4.5 million barrels of old domestic crude are produced in the U.S. each day. The
amount needed for storage purposes is only 200,000 barrels per day.
There are a number of ways that FEA can secure the old oil including:
1. Acquire old OCS oil by using the provision of the OCS Act that gives the government
the right of first refusal to purchase at the market price. OCS oil "in time of war,
or when the President shall prescribe."
2. Solicit bids for oil, and take the lowest ones. These should turn out to be for old oil.
3. Allocate old oil to the government.
4. Use the entitlements program to obtain old oil.
- OMB believes that one cr a combination of these policies will permit the government to acquire old
oil for the storage program. A decision on the exact mechanism can be deferred for several months
until the most desirable approach is worked out. Thereafter, changes can be made.
Decision
Use royalty/national average price for oil ($8.80) (FEA)
/
/
Use old oil ($5.25) (OMB)
/
/
GENALI
22
Comparison of Oil Production for
Old Domestic, Royalty and NPR (Elk Hills)
ons of
als of
action/Day
Old Domestic Oil
Price Controls
Expire
Old Oil
GERALD
R.FORD
1948817
NPR (Eik Hills) Oil
Royalty Oil
Royalty Oil
1976
1977
1978
1979
page 23
ISSUE E - Regional Storage
OMB and FEA agree that we do not need "regional storage," that is storage of petroleum in
locations such as the Northeast, to comply with EPCA's requirements.
- Regional storage could add substantially to the cost of the program (up to $600
million).
- It would involve additional delays and environmental problems and could result in a
pork barrel program.
You should be aware, however, that the following people may disagree with this decision.
- Interests in the Northeast, who may assert there will be a shortage of residual
oil and home heating oil in the event of an embargo.
- Interests in Hawaii who may claim that their crude supplies could be shut off.
Both FEA and OMB agree that these objectives can be answered as follows:
- EPCA requires that their needs be protected, not that petroleum be stored in their
area, and the Administration plan protects them.
- Crude would be provided to New England and Caribbean refineries, which supply the
needs of the Northeast.
- Centralized storage saves taxpayers and consumers up to $600 million and prevents
unnecessary environmental damage.
DERALD
24