    [House Hearing, 115 Congress]
    [From the U.S. Government Publishing Office]

        DOE MODERNIZATION: LEGISLATION TO AUTHORIZE A PILOT PROJECT TO
                 COMMERCIALIZE THE STRATEGIC PETROLEUM RESERVE

    =======================================================================

                                    HEARING

                                   BEFORE THE

                             SUBCOMMITTEE ON ENERGY

                                     OF THE

                        COMMITTEE ON ENERGY AND COMMERCE
                            HOUSE OF REPRESENTATIVES

                         ONE HUNDRED FIFTEENTH CONGRESS

                                 SECOND SESSION

                                   __________

                                 JULY 24, 2018

                                   __________

                               Serial No. 115-156

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

          Printed for the use of the Committee on Energy and Commerce
                            energycommerce.house.gov

                                       ______

                         U.S. GOVERNMENT PUBLISHING OFFICE

    35-837                    WASHINGTON : 2019

                        COMMITTEE ON ENERGY AND COMMERCE

                              GREG WALDEN, Oregon
                                     Chairman
    JOE BARTON, Texas                    FRANK PALLONE, Jr., New Jersey
      Vice Chairman                        Ranking Member
    FRED UPTON, Michigan                 BOBBY L. RUSH, Illinois
    JOHN SHIMKUS, Illinois               ANNA G. ESHOO, California
    MICHAEL C. BURGESS, Texas            ELIOT L. ENGEL, New York
    MARSHA BLACKBURN, Tennessee          GENE GREEN, Texas
    STEVE SCALISE, Louisiana             DIANA DeGETTE, Colorado
    ROBERT E. LATTA, Ohio                MICHAEL F. DOYLE, Pennsylvania
    CATHY McMORRIS RODGERS, Washington   JANICE D. SCHAKOWSKY, Illinois
    GREGG HARPER, Mississippi            G.K. BUTTERFIELD, North Carolina
    LEONARD LANCE, New Jersey            DORIS O. MATSUI, California
    BRETT GUTHRIE, Kentucky              KATHY CASTOR, Florida
    PETE OLSON, Texas                    JOHN P. SARBANES, Maryland
    DAVID B. McKINLEY, West Virginia     JERRY McNERNEY, California
    ADAM KINZINGER, Illinois             PETER WELCH, Vermont
    H. MORGAN GRIFFITH, Virginia         BEN RAY LUJAN, New Mexico
    GUS M. BILIRAKIS, Florida            PAUL TONKO, New York
    BILL JOHNSON, Ohio                   YVETTE D. CLARKE, New York
    BILLY LONG, Missouri                 DAVID LOEBSACK, Iowa
    LARRY BUCSHON, Indiana               KURT SCHRADER, Oregon
    BILL FLORES, Texas                   JOSEPH P. KENNEDY, III,
    SUSAN W. BROOKS, Indiana                 Massachusetts
    MARKWAYNE MULLIN, Oklahoma           TONY CARDENAS, California
    RICHARD HUDSON, North Carolina       RAUL RUIZ, California
    CHRIS COLLINS, New York              SCOTT H. PETERS, California
    KEVIN CRAMER, North Dakota           DEBBIE DINGELL, Michigan
    TIM WALBERG, Michigan
    MIMI WALTERS, California
    RYAN A. COSTELLO, Pennsylvania
    EARL L. ``BUDDY'' CARTER, Georgia
    JEFF DUNCAN, South Carolina
                             Subcommittee on Energy

                              FRED UPTON, Michigan
                                     Chairman
    PETE OLSON, Texas                    BOBBY L. RUSH, Illinois
      Vice Chairman                        Ranking Member
    JOE BARTON, Texas                    JERRY McNERNEY, California
    JOHN SHIMKUS, Illinois               SCOTT H. PETERS, California
    ROBERT E. LATTA, Ohio                GENE GREEN, Texas
    GREGG HARPER, Mississippi            MICHAEL F. DOYLE, Pennsylvania
    DAVID B. McKINLEY, West Virginia     KATHY CASTOR, Florida
    ADAM KINZINGER, Illinois             JOHN P. SARBANES, Maryland
    H. MORGAN GRIFFITH, Virginia         PETER WELCH, Vermont
    BILL JOHNSON, Ohio                   PAUL TONKO, New York
    BILLY LONG, Missouri                 DAVID LOEBSACK, Iowa
    LARRY BUCSHON, Indiana               KURT SCHRADER, Oregon
    BILL FLORES, Texas                   JOSEPH P. KENNEDY, III,
    MARKWAYNE MULLIN, Oklahoma               Massachusetts
    RICHARD HUDSON, North Carolina       G.K. BUTTERFIELD, North Carolina
    KEVIN CRAMER, North Dakota           FRANK PALLONE, Jr., New Jersey (ex
    TIM WALBERG, Michigan                    officio)
    JEFF DUNCAN, South Carolina
    GREG WALDEN, Oregon (ex officio)

                                 C O N T E N T S

                                  ----------
                                                                       Page
    Hon. Fred Upton, a Representative in Congress from the State of
      Michigan, opening statement....................................     1
        Prepared statement...........................................     2
    Hon. Bobby L. Rush, a Representative in Congress from the State
      of Illinois, opening statement.................................     3
    Hon. Greg Walden, a Representative in Congress from the State of
      Oregon, opening statement......................................     4
        Prepared statement...........................................     6
    Hon. Frank Pallone, Jr., a Representative in Congress from the
      State of New Jersey, opening statement.........................     6

                                   Witnesses

    Steven Winberg, Assistant Secretary of Fossil Energy, U.S.
      Department of Energy...........................................     8
        Prepared statement...........................................    10
    Frank Rusco, Director, National Resources and Environment,
      Government Accountability Office...............................    33
        Prepared statement...........................................    35
    Daniel M. Evans, Project Manager, Fluor Federal Petroleum
      Operations.....................................................    50
        Prepared statement...........................................    52
    Kevin Book, Managing Director, Clearview Energy Partners, LLC....    61
        Prepared statement...........................................    63

                               Submitted Material

    GAO report.......................................................    82
    Center on Global Energy Policy report \1\

    ----------
    \1\ The information can be found at: https://docs.house.gov/
      meetings/IF/IF03/20180724/108593/HHRG-115-IF03-20180724-
      SD013.pdf.

        DOE MODERNIZATION: LEGISLATION TO AUTHORIZE A PILOT PROJECT TO
                 COMMERCIALIZE THE STRATEGIC PETROLEUM RESERVE

                                  ----------

                             TUESDAY, JULY 24, 2018

                      House of Representatives,
                                Subcommittee on Energy,
                              Committee on Energy and Commerce,
                                                        Washington, DC.
        The subcommittee met, pursuant to call, at 10:15 a.m., in
    room 2322 Rayburn House Office Building, Hon. Fred Upton
    (chairman of the subcommittee) presiding.
        Members present: Representatives Upton, Olson, Barton,
    Shimkus, Latta, McKinley, Kinzinger, Johnson, Bucshon, Flores,
    Hudson, Walberg, Duncan, Walden (ex officio), Rush, McNerney,
    Peters, Green, Doyle, Welch, Tonko, Loebsack, Kennedy, and
    Pallone (ex officio).
        Staff present: Samantha Bopp, Staff Assistant; Kelly
    Collins, Legislative Clerk, Energy/Environment; Jerry Couri,
    Chief Environmental Advisor; Wyatt Ellertson, Professional
    Staff, Energy/Environment; Margaret Tucker Fogarty, Staff
    Assistant; Jordan Haverly, Policy Coordinator, Environment;
    Mary Martin, Chief Counsel, Energy/Environment; Sarah Matthews,
    Press Secretary, Energy & Environment; Drew McDowell, Executive
    Assistant; Brandon Mooney, Deputy Chief Counsel, Energy;
    Brannon Rains, Staff Assistant; Mark Ratner, Policy
    Coordinator; Peter Spencer, Professional Staff Member, Energy;
    Austin Stonebraker, Press Assistant; Madeline Vey, Policy
    Coordinator, Digital Commerce and Consumer Protection; Hamlin
    Wade, Special Advisor, External Affairs; Everett Winnick,
    Director of Information Technology; Andy Zach, Senior
    Professional Staff Member, Environment; Tiffany Guarascio,
    Minority Deputy Staff Director and Chief Health Advisor; Rick
    Kessler, Minority Senior Advisor and Staff Director, Energy and
    Environment; John Marshall, Minority Policy Coordinator;
    Alexander Ratner, Minority Policy Analyst; Tuley Wright,
    Minority Energy and Environment Policy Advisor; and C.J. Young,
    Minority Press Secretary.

       OPENING STATEMENT OF HON. FRED UPTON, A REPRESENTATIVE IN
                  CONGRESS FROM THE STATE OF MICHIGAN

        Mr. Upton. I know there is a couple different subcommittee
    meetings today, but good morning.
        Good morning. Welcome to the Energy Subcommittee for a
    legislative hearing on a discussion draft that authorizes DOE
    to conduct a pilot program to lease spare capacity in the
    Strategic Petroleum Reserve. I want to thank Vice Chairman
    Barton and Ranking Member Rush for partnering on this draft as
    we continue our work to modernize the Department of Energy.
        The SPRO is the world's largest emergency stockpile of
    crude in the world. More than 40 years ago, Congress authorized
    the creation of the SPRO in response to the Arab oil embargo to
    mitigate the threat of an energy supply disruption. Back then,
    our domestic production was in the decline, energy costs were
    rising, and we were becoming increasingly reliant on imports.
    The oil embargo exposed our vulnerabilities and panic quickly
    spread. Some of us will remember those long lines at the gas
    pump for sure.
        So let's go to today. The U.S. is, arguably, more energy
    secure now than ever before. We are the number one world
    producer of oil and gas and our imports have declined by about
    70 percent since peaking in 2005. With the surge of domestic
    production, our private stocks of crude oil are at record
    levels, our pipelines are full, and our refineries are
    operating at near peak capacity.
        So I want to thank our witnesses on both panels for
    appearing before us today to provide their views on this
    legislation. I want to thank Vice Chair Barton and Ranking
    Member Rush for their work on this important piece of
    legislation.
        I look forward to working with both of them and all members
    of the subcommittee as we move this bill, hopefully, to the
    House floor in the coming months.
        And I now yield to the ranking member of the subcommittee,
    Mr. Rush, for an opening statement.
        [The prepared statement of Mr. Upton follows:]

                     Prepared statement of Hon. Fred Upton

        Good morning, and welcome to the Energy Subcommittee for a
    legislative hearing on a discussion draft that authorizes DOE
    to conduct a pilot program to lease spare capacity in the
    Strategic Petroleum Reserve. I want to thank Vice Chairman
    Barton and Ranking Member Rush for partnering on this draft as
    we continue our work to modernize the Department of Energy.
        The Strategic Petroleum Reserve is the world's largest
    emergency stockpile of crude oil in the world. More than 40
    years ago, Congress authorized the creation of the SPR in
    response to the Arab Oil Embargo to mitigate the threat of an
    energy supply disruption. Back then, our domestic production
    was in decline, energy costs were rising, and we were becoming
    increasingly reliant on imports. The oil embargo exposed our
    vulnerabilities and panic quickly spread--some of us will
    remember those long lines at the gas pump.
        Fast forward to today--the United States is arguably more
    energy secure now than ever before. We're the world's number
    one producer of oil and gas and our imports have declined by
    about seventy percent since peaking in 2005. With the surge of
    domestic production, our private stocks of crude oil are at
    record levels, our pipelines are full, and our refineries are
    operating at near peak capacity. In the very unlikely event of
    another embargo, the United States wouldn't be impacted in the
    same way.
        Even with America's energy abundance, the Strategic
    Petroleum Reserve will remain an important energy security
    asset, which is why I have prioritized its modernization. This
    Committee led the charge to right-size the SPR and increase the
    funding levels to clear the maintenance backlog. Over the next
    10 years, DOE will drawdown and sell approximately 300 million
    barrels of crude oil. Now, it's up to Congress to decide what
    to do with the spare capacity.
        The Discussion Draft before us today authorizes DOE to
    lease some of the underutilized space that will become
    available over the next several years. Commercializing the
    excess storage capacity through a leasing program is an
    innovative idea--and it could be a win-win for the federal
    government. At a minimum, DOE may be able to offset some of its
    maintenance costs and invest in new infrastructure.
        It's been over 40 years since Congress created the SPR, and
    a lot has changed. As we work to modernize this valuable energy
    security asset, we should bear in mind just how far we've come
    since the energy crisis of the 1970's. With the right policies
    in place, the United States is on track to become a net energy
    exporter in just a few short years.
        I'd like to thank our witnesses for appearing before us
    today to provide their views on the legislation. I also want to
    thank Vice Chairman Barton and Ranking Member Rush for their
    work on this important piece of legislation. I look forward to
    working with them to move it through Committee and the House
    floor in the coming months.
        Thanks, I yield back.

     OPENING STATEMENT OF HON. BOBBY L. RUSH, A REPRESENTATIVE IN
                  CONGRESS FROM THE STATE OF ILLINOIS

        Mr. Rush. I want to thank you, Mr. Chairman, for holding
    this important hearing this morning examining legislation to
    authorize a pilot project to commercialize SPRO.
        As you know, Mr. Chairman, subcommittee staff from the
    minority and the majority side worked together on this
    bipartisan bill and I am pleased to co-sponsor this legislation
    with my good friend and colleague, Mr. Barton of Texas.
        Mr. Chairman, since the inception of the SPRO, which was,
    as you indicated, established as a result of the oil shortages
    of the 1970. The energy portfolio of the United States has
    changed dramatically. In fact, the U.S. is expected to go from
    a heavy importer of foreign oil to become the global leader in
    oil exports by as early as next year, according to the IEA.
        As a result of these shifting dynamics, Mr. Chairman, it is
    important for policy makers including members of this
    subcommittee to examine important questions including if there
    is still a need for the SPRO. If so, how large should it be and
    how should it be completed?
        It is my hope, Mr. Chairman, that the pilot program
    outlined in this bill will help inform our decision regarding
    the feasibility of leasing all or part of the SPRO to the
    private sector or to foreign governments, even those that do
    not pose a national security risk.
        As we will discuss today, congressionally-mandated sales of
    SPRO oil has provided an opportunity to potentially lease the
    subsequent unused space to private companies and/or foreign
    governments as a way to maximize taxpayers' return on
    investment.
        Mr. Chairman, I am also pleased that we have with us today
    representatives from both the Department of Energy and the GAO,
    among other witnesses, as both agencies have issued reports to
    help guide our decision making on matters regarding the SPRO.
        Unfortunately, Mr. Chairman, there appears to be some
    discretion between the two agencies over the final
    recommendations that GAO made in its May report entitled
    ``Strategic Petroleum Reserve: DOE Needs to Strengthen Its
    Approach to Planning the Future of the Emergency Stockpile.''
        First, Mr. Chairman, DOE appears to concur with the GAO's
    recommendation to supplement its 2016 review by conducting
    additional analysis regarding the objective and purpose of the
    SPRO, taking into account additional factors such as market
    projections and private sector response.
        DOE also agreed with the GAO's recommendation to
    periodically reexamine the size of the SPRO with analysis
    looking at the cost and benefits of the SPRO for a variety of
    different sizes.
        DOE also appears to concur with the GAO's findings as the
    agency considers options for the long-term continuation of the
    SPRO after the impact of congressionally-mandated sales of SPRO
    oil are taken into account.
        Mr. Upton. That's not my wife either.
        [Laughter.]
        Mr. Rush. Maybe it's my new wife.
        Mr. Upton. Your new wife. Yes, sir.
        [Laughter.]
        Mr. Upton. Better answer it.
        Mr. Rush. Yes.
        Mr. Upton. You want to keep being married another 60 years.
        Mr. Rush. All right, Mr. Chairman.
        Hold on, dear.
        [Laughter.]
        Based on the testimony, it appears that some of these
    recommendations will be included as a part of GAO's small post-
    sale configuration study expected to be completed in October of
    this year.
        Mr. Chairman, the largest area of disagreement appears to
    be over GAO's recommendation that DOE--Department of Energy--
    conduct a cost benefit analysis of establishing regional
    product reserves around the country at areas that have been
    identified as vulnerable to fuel supply disruption.
        Mr. Chairman, I hope that we can get to the bottom of this
    and I look forward to the testimony provided by our witnesses
    today.
        And finally, I want to tell our witnesses that we
    appreciate them appearing before us today.
        Thank you, Mr. Chairman. I yield back.
        Mr. Upton. The gentleman yields back.
        The chair will recognize the chairman of the full committee
    from the good state of Oregon, Mr. Walden, for an opening
    statement.

      OPENING STATEMENT OF HON. GREG WALDEN, A REPRESENTATIVE IN
                   CONGRESS FROM THE STATE OF OREGON

        Mr. Walden. Thank you, Mr. Chairman.
        Over the course of the past year, the Energy and Commerce
    Committee has been hard at work identifying what's necessary to
    modernize the Department of Energy's national and energy
    security functions.
        The urgency of our focus has been driven by domestic and
    international challenges that will be confronting the nation in
    the decades ahead. These challenges, which range from
    maintaining our nuclear security to protecting the reliable
    supply and delivery of energy, require a Department of Energy
    that has appropriate organization, management focus, and
    authorities to succeed in its missions.
        In recent months, the committee has moved legislation that
    will establish enduring leadership within the DOE for
    addressing all energy emergencies, including cybersecurity
    threats. It has moved legislation that will ensure there is
    sufficient coordination for secure and reliable delivery of
    fuels we rely upon for our energy needs, including bulk
    electric power.
        And just over the past few weeks, we moved legislation that
    will strengthen DOE's support for next-generation nuclear
    energy. We've also moved reforms that streamline DOE's
    cumbersome regulatory approval process for foreign nuclear
    commerce, which has inhibited American businesses from
    competing effectively in global nuclear energy markets.
        So with today's draft legislation that Vice Chairman Barton
    and Ranking Member Rush have put together offers a similar
    forward-looking path--this one, toward ensuring the Nation's
    Strategic Petroleum Reserve, managed by DOE, will be more
    capable of responding to oil supply emergencies for decades to
    come.
        Congress, under this committee's leadership, established
    the SPRO in the wake of the 1973-1974 Arab oil embargo. That
    incident and the gasoline shortages and price spikes of ensuing
    years really underscored the growing vulnerability of the
    United States to international oil supply shocks, especially as
    reliance on imported oil was rapidly increasing.
        Well, times have changed, of course, and dramatically. The
    resurgence in American oil and gas production over the past
    decade has placed the United States into a dominant role when
    it comes to global oil and gas supplies and has begun to shift
    how we should view our SPRO assets.
        While the role of the SPRO may be shifting, it remains
    important for energy security. It will continue to help us meet
    our treaty-level obligations to international partners in the
    event of major supply disruptions. It will also help maintain
    our international energy diplomacy, inhibiting adversaries from
    attempting to use oil as an economic weapon, which ultimately
    benefits our own and our allies' energy security.
        Yet, we know that SPRO facilities require considerable
    upgrades to be responsive when called upon, and as Congress has
    mandated sales of some 290 million barrels, there is risk that
    without serious reforms much of the reserves' capacity to serve
    as a strategic stockpile will degrade further as those stocks
    decline.
        So against this backdrop arrives the draft legislation,
    which offers an innovative way to accelerate reforms to the
    SPRO by leasing underutilized space created as the reserve is
    drawn down over the next decade.
        A successful leasing program would attract investment into
    improving facilities' operations that would be responsive to
    commercial needs. This in turn would enable more responsive use
    of Federal oil stocks during those emergencies and by
    preserving the existing capacity of the reserve's caverns, the
    pilot program also ensures this asset will remain available for
    DOE's security missions well into the future.
        So I appreciate the testimony of those who are testifying
    today and we will continue to work on this legislation. I don't
    know if anybody else wants the balance of my time.
        But if not, I will yield back.
        [The prepared statement of Mr. Walden follows:]

                     Prepared statement of Hon. Greg Walden

        Over the course of the past year, the Energy and Commerce
    Committee has been hard at work identifying what is necessary
    to modernize the Department of Energy's national and energy
    security functions.
        The urgency of our focus has been driven by domestic and
    international challenges that will be confronting the nation in
    the decades ahead. These challenges-which range from
    maintaining our nuclear security to protecting the reliable
    supply and delivery of energy-require a DOE that has the
    appropriate organization, management focus, and authorities to
    succeed in its missions.
        In recent months, the committee has moved legislation that
    will establish enduring leadership within the DOE for
    addressing all energy emergencies, including cybersecurity
    threats. It has moved legislation that will ensure there is
    sufficient coordination for secure and reliable delivery of the
    fuels we rely upon for our energy needs, including bulk
    electric power.
        And just over the past few weeks, we moved legislation that
    will strengthen DOE's support for next generation nuclear
    energy. We've also moved reforms that streamline DOE's
    cumbersome regulatory approval process for foreign nuclear
    commerce, which has inhibited American businesses from
    competing effectively in global nuclear markets.
        Today's draft legislation that Vice Chairman Barton and
    Ranking Member Rush have put together offers a similar forward-
    looking path--this one toward ensuring the Nation's Strategic
    Petroleum Reserve, managed by DOE, will be more capable of
    responding to oil supply emergencies for decades to come.
    Congress, under this committee's leadership, established the
    SPR in the wake of 1973-1974 Arab oil embargo. That incident
    and the gasoline shortages and price spikes of ensuing years
    underscored the growing vulnerability of the United States to
    international oil supply shocks, especially as reliance on
    imported oil was rapidly increasing.
        Times have changed, of course--and dramatically. The
    resurgence in American oil and gas production over the past
    decade has placed the United States into a dominant role when
    it comes to global oil and gas supplies--and has begun to shift
    how we should view our SPR assets.
        While the role of the SPR may be shifting, it remains
    important for energy security. It will continue to help us meet
    our treaty-level obligations to international partners in the
    event of major supply disruptions. It will also help maintain
    our international energy diplomacy-inhibiting adversaries from
    attempting to use oil as an economic weapon, which ultimately
    benefits our own and our allies' energy security.
        Yet we know that SPR facilities require considerable
    upgrades to be responsive when called upon. And as Congress has
    mandated sales of some 290 million barrels, there is risk that
    without serious reforms much of the reserves' capacity to serve
    as a strategic stockpile will degrade further as its stocks
    decline.
        Against this backdrop, this draft legislation offers an
    innovative way to accelerate reforms to the SPR, by leasing
    underutilized space created as the reserve is drawn down over
    the next decade.
        A successful leasing program would attract investment into
    improving facility operations to be responsive to commercial
    needs. This in turn would enable more responsive use of federal
    oil stocks during emergencies. By preserving the existing
    capacity of the reserve's caverns, the pilot program also
    ensures this asset will remain available for DOE's security
    missions well into the future.
        I look forward to the expert testimony from DOE and others
    this morning, and to continue work on the legislative details
    going forward.

        Mr. Upton. The gentleman yields back.
        The chair would recognize the ranking member of the full
    committee, Mr. Pallone, for an opening statement.

    OPENING STATEMENT OF HON. FRANK PALLONE, JR., A REPRESENTATIVE
                IN CONGRESS FROM THE STATE OF NEW JERSEY

        Mr. Pallone. Thank you, Mr. Chairman.
        Today we will be discussing bipartisan draft legislation on
    the future of the Strategic Petroleum Reserve. In December
    2016, then Chairman Upton and I wrote the Government
    Accountability Office requesting that GAO review the Strategic
    Petroleum Reserve as it is currently configured.
        We asked whether there might be more cost-effective options
    for protecting against supply shocks and for meeting our
    international obligations.
        Most other countries have used contracts with private
    companies to address these matters. So it's fair to ask whether
    there might be more efficient and effective ways for us to
    address our energy security needs in this area.
        There were a number of reasons why I thought this request
    of GAO was particularly important in 2016. First, former Energy
    Secretary Moniz had laid out one vision for modernization of
    the SPR in the Quadrennial Energy Review that the Obama
    administration released in 2015. As part of that vision,
    Secretary Moniz suggested the establishment of more regional
    refined product reserves, like the Northeast home heating oil
    and gasoline supply reserves.
        Second, at the end of 2015, Congress lifted the 40-year-old
    ban on crude oil exports and this was done at a time when we
    were seeing a radical alteration of the transportation fuels
    landscape. Supply was increasing, demand was decreasing, and we
    were seeing a rise in electric vehicles.
        Third, beginning in 2015, Congress had turned to the SPR
    repeatedly as an offset for deficits, highways, and other
    items. In fact, it has been used far more in recent years for
    those purposes than for energy security. And recently, the
    Trump administration has even been sending signals that it's
    seriously considering releasing oil from the reserve for the
    express purpose of lowering gas prices, in my opinion to help
    Republicans heading into the midterm elections. When you get to
    the point where an administration is publicly discussing using
    the SPR for blatantly political purposes, then it is certainly
    a good time to discuss the future of the reserve. And this
    discussion is also timely now since we are already requiring
    the sale of so much oil for nonenergy reasons, which will free
    up a great deal of physical space in the reserve.
        We need to consider ways to ensure taxpayers continue to
    receive value for the salt dome storage caverns and associated
    facilities that comprise the crude reserve if they are not
    being used to store oil.
        The draft legislation that Vice Chairman Barton and Ranking
    Member Rush are championing is an important first step in
    realizing that goal. The draft bill would facilitate the
    leasing of unused storage space in the reserve while attempting
    to ensure that government and taxpayers benefit from those
    leases, and that's important no matter what the future has in
    store.
        If we elect to keep the SPR in its current form, the Energy
    Department will need to repair and upgrade facilities to keep
    them useful and if we elect to create regional reserves either
    in addition to or in place of the SPR, we will still need to
    fund those regional reserves, and this bill will help bring in
    the revenue we need to do that.
        There are still questions that need to be answered about
    this proposal. I want to make sure that the taxpayers see
    meaningful return on the investment that we made in the SPR and
    I want to ensure that the government isn't left holding the bag
    for environmental liability costs while private industry gets
    all the benefits of the leasing arrangement.
        So as long as we can get assurances on these two key
    points, I think moving forward with this pilot project makes a
    lot of sense.
        And unless someone else wants the time, I'll yield back,
    Mr. Chairman.
        Mr. Upton. The gentleman yields back. Thank you.
        We are joined, again, by two panels. We will start with
    Steven Winberg, Assistant Secretary of Fossil Energy from the
    Department of Energy. We welcome you here.
        We appreciate you submitting your testimony in advance and
    if you wouldn't mind taking no more than 5 minutes to summarize
    that, at which point we will go into questions, that would be
    terrific.
        The time is yours. Thank you.

      STATEMENT OF STEVEN WINBERG, ASSISTANT SECRETARY OF FOSSIL
                   ENERGY, U.S. DEPARTMENT OF ENERGY

        Mr. Winberg. Thank you, Chairman Upton, Ranking Member
    Rush, and distinguished members of this committee. It's my
    pleasure to appear before you to discuss the Department of
    Energy's Strategic Petroleum Reserve and the related use of
    underutilized SPRO facilities resulting from congressionally-
    legislated crude oil sales.
        The mission of the SPRO, as has been discussed, is to
    protect the United States' economy from severe petroleum supply
    interruptions and to carry out U.S. obligations under the
    international energy program.
        As a member of the International Energy Agency, the United
    States has two primary objectives. First, as a net importer,
    the United States must maintain crude oil and/or refined
    product inventories whether held by industry or government
    equal to at least 90 days of net petroleum imports. As of June
    30th of this year, the United States held about twice that
    amount.
        Second, the United States must be able to contribute a
    proportionate share of an IEA collective action response based
    on its share of IEA oil consumption, which is currently at 41.4
    percent. The U.S. government relies on use of SPRO to meet this
    requirement, although commercial stocks may also contribute,
    albeit voluntarily.
        In the event of an international oil supply disruption
    large enough for the President to authorize the release of the
    SPRO, U.S. crude oil production alone would not be able to ramp
    up quickly enough to make up for the lost barrels in a crisis.
    The SPRO can be ready to deliver crude oil within 13 days of a
    presidential finding while domestic production would take
    months to substantially expand.
        Turning to the proposed legislation, it is expected that
    the SPRO will have approximately 300 million barrels of unused
    storage capacity by the end of fiscal year 2027 or, roughly, 45
    percent of the current design capacity. To that end, DOE is
    currently conducting the SPRO post-sale configuration study
    that will recommend the configuration of the SPRO post-2027.
    This study should be completed within the next 6 months and
    understanding the best configuration for the SPRO will guide us
    as we continue to sell barrels over the next several years.
        It will also guide us in identifying the SPRO storage
    caverns or related facilities likely to become underutilized or
    operationally inefficient, therefore, informing possible
    decisions concerning site decommissioning. Further, determining
    the optimum configuration for the SPRO to meet domestic needs
    will be critical in developing and executing this proposed
    pilot program.
        The department is supportive of maximizing the value of
    this taxpayer-funded asset and there are a number of issues
    that need to be considered related to the configuration of the
    SPRO post-2027. Therefore, we believe it is premature to
    comment on the operational feasibility of commercially leasing
    underutilized storage. But I can discuss with you some of the
    challenges. Further, it is important for both Congress and the
    department to consider the impact of using government
    facilities to compete with commercially available petroleum
    storage capacity.
        Finally, we need to review the logistical and
    infrastructure challenges associated with the likely commercial
    requirement for increased inflow and outflow activities.
    Accommodating this requirement may require large up-front
    capital expenditures to enable commercial leasing.
        I would also like to take this opportunity to discuss the
    recently released GAO report titled ``Strategic Petroleum
    Reserve.'' I would like to focus on the one recommendation the
    department did not concur with. Specifically, we did not concur
    with the recommendation to conduct or complete studies on
    regional refined product reserves.
        It's important to understand that while hurricanes and
    other natural disasters may create severe short-term logistical
    constraints for gasoline supplies that therefore impact
    gasoline prices, these constraints and price increases are
    quickly overcome when a hurricane passes.
        This was evidenced by Hurricane Irma in 2017. Even if more
    gasoline was available in Florida during Hurricane Irma, there
    would not have been enough trucks or other transportation
    infrastructure to get the supplies to the retail gasoline
    stations where they were needed due to, first, increased
    evacuation traffic and then, later, flooded roads.
        So given the cost of above-ground gasoline storage, it
    would be inappropriate to use taxpayer funds to conduct any
    additional studies on the use of federally-owned storage of
    refined petroleum products.
        While there is certainly more information about the SPRO
    that I could discuss, I will refer the committee to my written
    testimony submitted to the record.
        Mr. Chairman and members of the committee, this completes
    my prepared statement and I am happy to answer any questions.
        Thank you.
        [The prepared statement of Mr. Winberg follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Mr. Upton. Well, thank you very much for coming up this
    morning. I have a couple of questions.
        My first couple relate to the GAO study that I know that
    you're familiar with. It was published in May, 2 months ago. On
    Page 27, it talks about the DOE could close at least one SPRO
    site based on the analysis by CBO of projected excess storage
    capacity.
        For example, if DOE were to close the smallest SPRO site--
    Bayou Choctaw--the agency could also explore selling the
    connected pipeline and marine terminal, which is currently
    being leased to a private company.
        The DOE could consider leasing excess storage capacity to
    other countries so that they could store oil at SPRO. DOE has
    not entered into any such leases with other countries. It has
    not considered such leases because, according to DOE, the SPRO
    has historically lacked capacity to store additional oil.
        DOE has not proposed any of these options or explored the
    revenue the agency could generate by selling or leasing these
    assets. According to DOE officials, the agency would examine
    the feasibility of such options in the ongoing SPRO pool sale
    configuration study.
        Does that sound like a potential that DOE would support?
        Mr. Winberg. Yes. Yes, we would. The first requirement we
    have under SPRO is to make sure that we are meeting our
    domestic requirements as well as our IEA requirements.
        And so, based on the math and reducing the SPRO by some 300
    million barrels, I think it's quite possible that we may end up
    deciding we can close one of the sites. Which site? We don't
    know yet, and that's the purpose of the SPRO post-sale
    configuration study. Completing that study they then will
    inform us on which caverns we need to keep open, which
    facilities we need to keep open, so that we can meet those
    requirements.
        Not all caverns are alike, and so various of our caverns
    can discharge oil at faster rates. And so we need to do that
    study so that we clearly understand what our options are and
    then also, sir, our options with respect to using these
    facilities in a commercial nature.
        Mr. Upton. Now, as you know, we have the author of the EPCA
    bill--Mr. Barton--down at the end of the dais here.
        Officials said that under EPCA--the Energy Policy and
    Conservation Act--it gave DOE authority to lease underutilized
    storage to other countries but not to the private sector.
        DOE doesn't currently have the authority to pursue that,
    according to the agency officials. What is the department's
    view on making that change to allow the DOE the authority to
    sell to the private sector as well? Are they supportive of
    that? Would they----
        Mr. Winberg. Yes. Yes, we are supportive. But if I might,
    there are some technical challenges with doing that. So let me
    start off with other IEA member companies that also have a
    reserve requirement. That would be generally for long-term
    storage. We wouldn't expect to be moving that product in and
    out of the caverns. In a commercial situation, that may not be
    the case and the commercial suppliers of oil use the storage
    and then discharge and then want to inject and discharge.
        So there is a cycling mechanism, and the challenge with
    this particular geography or geology is that these were soft
    caverns and the way we discharge oil out of these caverns is we
    inject freshwater and that starts to erode the walls of the
    cavern in the lower part of the cavern. And so if you do that
    numerous times, you may affect the integrity of the salt
    cavern.
        So what we would need to do to go to a commercial operation
    where we are going to inject and discharge on a very regular
    basis we would have to go with what we call a brine drive
    system, meaning we would use saturated brine water and we'd
    have to store that and then inject that down into the caverns
    so that we weren't dissolving the walls of the cavern, and we
    have not yet come up with a cost for doing that.
        But we know that it is not going to be inexpensive and
    that's part of the post-sale configuration studies to begin to
    look at those costs.
        Mr. Upton. Great. Thank you. My time has expired.
        Mr. Rush.
        Mr. Rush. Assistant Secretary Winberg, will the DOE's SPRO
    post-sale configuration study, which will be released in
    October, examine issues that would help to determine a future
    optimal size of the SPRO.
        Will that study make recommendations regarding opportunity
    to release SPRO storage space to the private sector or to other
    countries that are now a part of the IEA's collective action?
    And if not, when can we expect information from DOE on those
    specific topics of interest?
        Mr. Winberg. The post-sale configuration study, sir, will
    indeed address the optimal size for the SPRO to meet U.S. needs
    and also our IEA requirements.
        It will help inform us on what caverns we might be able to
    use for leasing purposes. As I mentioned earlier, if we are
    going to lease those caverns to other IEA member countries,
    it's considerably easier in terms of the mechanics of utilizing
    that storage.
        The post-configuration study will not be able to give us
    complete guidance on what we might be able to do in terms of
    leasing to the commercial sector. That's going to take some
    more work beyond the configuration study.
        And what I would propose we could and should do for the
    commercial market is to send out a request for information--an
    RFI--and we'd be looking for two, maybe three, basic bits of
    information: Number one, does the commercial marketplace value
    this asset; number two, in what manner would they like to use
    the asset, meaning would they want to inject oil and then
    extract oil on a very frequent basis because then that will
    help inform us on what upgrades we need to make; and then
    number three, how does the private sector view the Federal
    Government stepping into oil storage leasing business, which
    has been the domain of the private sector for many, many years.
        And so those are the three pieces of information that we
    would want to glean from this RFI. With that information, I
    think that would help inform us on what type of a leasing
    program we would want to develop, whether we would want to have
    the entity leasing the facility to make the investment
    necessary so that they can inject and extract or whether we
    make that investment, which would take appropriations, and then
    factor that into the cost of the lease.
        So a lot of moving parts there.
        Mr. Rush. All right. I am going to move on to another area.
        Can you briefly discuss the disagreement between GAO and
    DOE regarding the recommendation that the department conduct a
    cost-benefit analysis for establishing regional product
    reserves in areas around the country that may be vulnerable to
    fuel supply disruptions.
        Why does DOE disagree with this recommendation and is this
    disagreement only due to funding issues?
        Mr. Winberg. It's in part due to the cost but it's in part
    due to the viability of refined petroleum reserves--gasoline
    storage.
        So let me start with the logistics, and I talked about this
    in my testimony a little bit. Having regional or even state
    gasoline storage reserves above ground doesn't necessarily
    solve the problem because you need to get that stored gasoline
    to the retail outlets--the gasoline stations.
        The problem is when you're in an evacuation situation along
    the coast--Florida, I think, is probably a good example of what
    happened during the Hurricane Irma--you couldn't get the
    gasoline from the storage to the retail outlets because the
    roads were being used for evacuation.
        Right after the hurricane passed through then the roads
    were flooded and so having that storage wouldn't have done
    Florida much good at all--perhaps none at all.
        And so we'd be incurring quite a cost in order to maintain
    regional or state gas reserves around the country. We spend
    about somewhere between $10 and $30 million per year on the
    Northeast gasoline supply reserve.
        It currently has about a million barrels of gasoline. And
    so multiply that by whatever number a regional refined
    petroleum facilities we might contemplate.
        The costs get pretty expensive pretty quickly and we may
    not be able to use it because of the logistics of getting it to
    the retail stations.
        Mr. Upton. Thank you. The gentleman yields back.
        Mr. Barton.
        Mr. Barton. Thank you, Mr. Chairman and Ranking Member Rush
    for scheduling this hearing. I'd like to make a few comments
    and then I have a few questions.
        First, I want to thank Congressman Rush for working with me
    as one of the two lead bipartisan sponsors. Legislation, I
    think, always is better if it is bipartisan and certainly we,
    on the majority side, want to make every effort to make this
    bipartisan.
        I was very heartened by the opening comments of Mr. Rush
    and Mr. Pallone. I think we have got a chance to help the
    country if this draft becomes, in fact, a bill and is passed.
    It doesn't change the basic mission statement. It doesn't
    change the authorized level of the Strategic Petroleum Reserve.
    It doesn't change the presidential authority. What it does do
    is add to the mission statement. It gives the secretary of
    energy the authority so long as it doesn't impact the basic
    existing mission statement the ability to lease and utilize
    underutilized capacity of the existing SPR to the private
    sector for storage and, hopefully, utilization of crude oil.
        I think that's an important point, that we are not trying
    to change the basic statement that became law in the 1970s. We
    are just trying to adopt the SPR to the modern situation.
        A couple of questions for our friend from DOE. What is the
    authorized capacity currently of the SPR in terms of millions
    of barrels?
        Mr. Winberg. The design capacity is 712 million barrels. In
    2018 right now we have 660 million barrels and in 2027 we will
    be down to 405.
        Mr. Barton. What did Congress authorize the capacity to go
    up to? I thought we were about 900 million barrels. Is that not
    true?
        Well, I can find out. I just thought you might know.
        Mr. Winberg. I'll get back to you on that.
        Mr. Barton. OK. Whatever the authorized capacity is, if I
    understand you correctly, the existing physical capacity is a
    little over 700 million barrels. Is that correct?
        Mr. Winberg. Yes, sir.
        Mr. Barton. And of that, how much oil is actually stored
    right now?
        Mr. Winberg. We have 660 million barrels stored right now.
        Mr. Barton. OK. So we are not quite at 100 percent of
    existing physical capacity?
        Mr. Winberg. That's correct.
        Mr. Barton. OK.
        If this draft legislation becomes law, whatever the
    authorized capacity is--and let's assume that it is 900 million
    because I think that's right--under this pilot program would it
    authorize the secretary of energy if it meets all the other
    requirements under the draft legislation to actually add
    capacity to the SPR so long as it doesn't go above the
    authorized level?
        Mr. Winberg. In order to add capacity above the 712, it
    would take some additional capital investment in the facility
    to get----
        Mr. Barton. But there is nothing in the law that would
    prevent going above what's physically available today. Is that
    not correct?
        Mr. Winberg. I believe that's correct.
        Mr. Barton. OK. I have one more question. I think I'll
    yield back.
        One final comment--we don't claim--Mr. Rush and I--that
    this draft is perfect. If we go through the hearing and there
    are things that we need to change, I think I speak for
    everybody on the majority side that we are very open.
        But I also think I speak for the majority and the minority
    that we hope that this is something that can move reasonably
    expeditiously and that means actually end up in a bill the
    President signs in this Congress.
        And with that, Mr. Chairman, thank you for your leadership
    and Mr. Rush's and Mr. Pallone's, and I yield back.
        Mr. Upton. The chair would just say that I am delighted
    that the two of you are working on this. It's something that
    needs to be done and we look forward to getting this to the
    President's desk before the year is out, if we can.
        Mr. Pallone is recognized for an opening statement.
        Mr. Pallone. Thank you, Mr. Chairman.
        Mr. Secretary, the idea of establishing regional refined
    product reserves came out of the first Quadrennial Energy
    Review and was strongly supported by former Secretary Moniz.
        And now GAO is also saying we need to look at regional
    reserves, particularly in the Southeast and the West and I,
    too, think that regional refined product reserves needs to be a
    part of any SPR modernization effort.
        Now, you can correct me if I am wrong. But you mentioned, I
    believe, that the Trump administration seems hostile to the
    concept. In fact, President Trump had proposed doing away with
    the Northeast gasoline supply reserve, which had been created
    administratively by President Obama in response to the
    dangerous shortages that occurred in the wake of Superstorm
    Sandy, including in my area of New Jersey. And, frankly, I
    think this administration's attempt to undo the Northeast
    reserve is reckless and that's why I introduced legislation to
    establish that reserve in statute.
        But it seems like everybody but the Trump administration
    sees the benefit in establishing regional reserves and
    particularly one in the Southeast, where states like Florida,
    Georgia, South and North Carolina are extremely supply
    constrained, and those states are really vulnerable in the face
    of an extreme weather event. Yet, this administration and you,
    I think, said don't want to take any action on that.
        So can I just ask you, Mr. Assistant Secretary, you said
    that the price of gasoline I think--you can correct me--goes
    back to normal soon after a storm like Sandy or Irma.
        What is that based on? That wasn't true in New Jersey after
    Sandy. Did I misunderstand you? I thought that's what you said,
    as one of the reasons why it wasn't necessary to have these
    regional reserves.
        Mr. Winberg. The first point, I wouldn't characterize the
    administration's position as hostile against the gas reserves.
        What I talked about in my testimony is, A, the cost of
    these gasoline reserves, and I used----
        Mr. Pallone. Yes. You said they would cost the government
    too much and--my understanding is you said that you were not
    supportive of it or the administration wasn't because the price
    of gasoline goes back quickly after a storm like Sandy--I think
    you said Irma.
        And then you also said that the regional reserves would
    cost the government too much. I am just asking you what those
    two things are based upon because I am wondering--wouldn't the
    same argument be used against the existing SPR? Why are you
    saying--I don't believe it's true that the price goes up
    quickly right after and I don't believe that this is going to
    cost the government too much--certainly, less than it costs to
    maintain the SPR.
        I am just challenging those two statements. That's all.
        Mr. Winberg. I can address the pricing issue with respect
    to Hurricane Irma. The prices came back down to relatively
    normal levels.
        I can't speak to every gasoline station around Florida. But
    as the product moved back into the state and retail stations
    were opening back up again, there was competition and prices
    reflected that.
        I think that the bigger issue is that if we set up reserves
    and we have these fairly sizeable storage areas and we can't
    get the gasoline to the retail outlets because of congested
    roads due to evacuation and then flooded roads, then it is an
    expense that's not really serving the public good.
        Mr. Pallone. But what I was arguing--see, look, I
    understand what you're saying in all these cases. But I just
    would like to know what that's based on.
        In other words, my experience in Sandy which, admittedly,
    is only one hurricane, is that the price--it does take a while
    before the price goes back to normal and that I don't know why
    it would cost more to have these regional reserves
    significantly more than it does to maintain the SPR.
        I am not saying we shouldn't have an SPR but I think the
    costs of the regional ones would actually be less. And it seems
    like everybody's suggesting that this is a good idea.
        There is going to be some cost to the government, but I'd
    just like to know--if you get back to me, tell me, what's the
    evidence that the price goes back quickly?
        Why are you saying it's going to cost so much and now
    you're saying that they can't bring it to the gas stations.
    That's not my experience.
        So I just want you to get back to us and--either now or get
    back to us and explain what this is based on because it seems
    to be contrary to everything I've heard.
        Mr. Winberg. We will be happy to get back to you with some
    specific cost numbers on utilization.
        Mr. Pallone. All right. I'd appreciate it.
        Thank you, Mr. Chairman.
        Mr. Upton. Mr. Olson.
        Mr. Olson. I thank the chair and welcome, Mr. Winberg, and
    please give your boss, Secretary Rick Perry, my best. It's not
    very good, but it's my best.
        Mr. Winberg. I will do so.
        Mr. Olson. He will know where that comes from.
        The SPR is important back home in Texas-22 in southeast
    Texas. You mentioned the status of your modernization program.
    Could you please talk about the most important steps DOE can
    take in this next year to continue to improve the readiness of
    the SPR?
        Mr. Winberg. Yes, sir, I can. Thank you.
        One of the steps that I mentioned already is the post-sale
    configuration study and then the second one is we are
    developing the Life Extension program.
        We are in the process of pulling that together and the Life
    Extension program is going to allow us to continue to meet our
    needs under IEA, number one.
        And then, number two, the Life Extension program will focus
    on those assets that we are going to continue to need post-
    2027. That's the primary role of the Life Extension program.
        Mr. Olson. The second question, sir--as you know, Texas oil
    production is booming. The Permian Basin itself is projected in
    a few years to produce more oil than every country in the world
    except for Saudi Arabia.
        One oil plain in Texas takes over all the world except for
    one country--Saudi Arabia. A lot of that crude has to go to
    export--go to the Gulf Coast ports--goes to either Corpus
    Christi, Houston, Port Arthur, Beaumont--all those ports--
    Brownsville--goes there for refining and export.
        If we pass this discussion draft before us, do you think
    the oil industry will view the SPR sites on the Texas Gulf
    Coast as a good holding site for their oil and are their needs
    looking more shorter term than what the SPR is designed for?
        Mr. Winberg. The answer to your first question, we are not
    yet sure how the commercial market is going to view this
    government asset--the SPRO and our ability to potentially store
    oil for the commercial sector.
        That's part of the RFI--the request for information that we
    are going to send out so that we can better understand what the
    commercial industry needs and wants and whether the SPRO will
    fulfill that requirement.
        So as we get that information I'll be happy to meet with
    the committee or meet with you individually----
        Mr. Olson. Thank you.
        Mr. Winberg. And give you the results of the study.
        Mr. Olson. Thank you.
        My final question--as we had these SPR drawdowns over and
    over and over--June of 2011, 30 million barrels of oil; August
    of 2012, 1 million barrels of oil; November of 2015, 58 million
    barrels; December 2015, 66 million barrels; January 2017, 8
    million barrels--over and over.
        I am curious to hear how about the state of the SPR is with
    all these draw downs. Specifically, we have a lot of light
    crude here at home.
        Are you happy about the balance between light crude and
    heavy crude in the SPR and the balance between sweet and sour
    oil? I know there is lots of people concerned especially about
    heavier crude with a supply disruption because of this wave of
    sweet crude and light crude. Any concerns about the SPR's
    makeup with those issues, sir?
        Mr. Winberg. Well, we are going to--I don't have any
    particular concerns about them. But that is part of the post-
    sale configuration study to evaluate sweet crude versus sour
    crude and what percentage we should have of both of those,
    given the changing dynamics of oil production here in the
    United States. But I don't have any particular concerns about
    them right now.
        Mr. Olson. My time is about to expire. I yield back. Thank
    you.
        Mr. Upton. Mr. McNerney.
        Mr. McNerney. Well, I thank the chairman for holding the
    hearing and I thank Mr. Barton for your work on it. I thank the
    witnesses for your thoughtful answers so far.
        Similar to the Northeastern gasoline supply reserve, what
    do you think about establishing a reserve in the West for
    hurricane preparedness and other sorts of emergencies that we
    have out there, as opposed to hurricanes, which we won't have?
    Earthquakes.
        Mr. Winberg. I think the same issues that we have--our
    concerns about our ability to develop a surface reserve and
    then get that product in that surface reserve to the market
    where it's needed or----
        Mr. McNerney. Well, you don't have a lot of warning for
    earthquakes so you don't have an evacuation problem.
        Mr. Winberg. Well----
        Mr. McNerney. You have some roads disrupted but, I think
    it's a better case to be made in the West where we could have
    those different sorts of emergencies.
        Mr. Winberg. That's true. But if we have an immediate
    earthquake situation, there is some road damage----
        Mr. McNerney. Right.
        Mr. Winberg [continuing]. That means that the gasoline can
    still move in through the normal infrastructure and
    transportation mechanisms that it would. There may be some that
    would be cut off, depending on where the earthquake----
        Mr. McNerney. Right.
        Mr. Winberg [continuing]. Happened and the effect of it and
    how many roads or rails might be damaged. But, generally, there
    are multiple routes into an urban area or a suburban area where
    there is----
        Mr. McNerney. So we have a pretty good case to be made for
    establishing the product reserves in the West?
        Mr. Winberg. I am sorry. Say that again.
        Mr. McNerney. We have a pretty good case to be made then
    for establishing those reserves in the West?
        Mr. Winberg. Well, I think if you had limited damage to
    road or railroad infrastructure then you'd have to look at the
    cost of establishing that reserve and maintaining it and
    whether it would provide a lot of value in this example of an
    earthquake situation.
        Mr. McNerney. OK. Changing the subject a little bit, what
    about the challenges with respect to the infrastructure of the
    existing SPRO facilities?
        My understanding is that the extraction network
    infrastructure was aging and not in very good shape. We have
    the degradation of the caverns when you put in that water to
    push out the oil and so on.
        Can you talk a little bit more about that existing
    infrastructure?
        Mr. Winberg. Sure, and I think there are two parts to the
    infrastructure. One is the subsurface and then the other is the
    surface.
        And on our Life Extension program, that we are involved in
    right now, mostly that is surface infrastructure. So we are
    talking about pipes, pumps, and motors and that type of
    infrastructure. And so we have got a program in place to
    upgrade that because, as was mentioned earlier, the SPRO has
    celebrated its 40-year anniversary last year.
        The subsurface infrastructure, while we have had a number
    of withdrawals, the caverns are generally good for about five
    withdrawals and then refills before you start to see a lot of
    degradation.
        And so part of the assessment that we are looking at in the
    configuration study is the stability of the caverns, how much
    erosion--well, it's not erosion. It's really----
        Mr. McNerney. Well, five cycles doesn't sound like a lot if
    we are going to be leasing out space.
        Mr. Winberg. Well, those are the cycles given--that's what
    the caverns were designed for. If we leased it out under
    commercial operation, we might see considerably more than that
    because people store oil and they use it as a hedge.
        The price goes up, they are going to want to withdraw, and
    then they are going to want to reinfect. So it could happen
    many, many times, which is our concern about the integrity of
    the caverns.
        Mr. McNerney. What happens to the water when you inject
    water to pressurize release? What happens to that excess water?
    Does it just get absorbed into the landscape?
        Mr. Winberg. The water stays down in the cavern and if we
    refill it then we would extract the water.
        Mr. McNerney. So it's----
        Mr. Winberg. Then we have to treat the water.
        Mr. McNerney. Is it better to be at 100 percent capacity or
    is it better to be 90 percent capacity or some lower value?
        Mr. Winberg. Operationally, it's probably always better to
    be somewhere in the 90 to 100 percent. But there is a cost
    associated with being at that capacity level. You're storing
    oil in a lot of facilities.
        Mr. McNerney. All right. I thank the chairman. I yield
    back.
        Mr. Upton. The gentleman yields back.
        And before we move to Mr. Shimkus, Mr. Barton will have a
    brief announcement here.
        Mr. Barton. I have a point of personal privilege. In the
    back of the room, two of my granddaughters and my two daughters
    and their significant others are watching the hearing and, in
    typical millennial fashion, they are sitting on the minority
    side of the room.
        [Laughter.]
        If they would stand up and let us acknowledge their
    presence.
        [Applause.]
        Mr. Upton. Maybe we will let Mrs. Rush give them a call as
    well.
        [Laughter.]
        Mr. Shimkus.
        Mr. Shimkus. Thank you, Mr. Chairman.
        Mr. McNerney's just leaving but I wanted to follow up on
    some of his comments because they had raised maintenance as an
    issue and this was going to be my third question. But I am
    going to bring it up just in the timely manner that he
    addressed it.
        The GAO reported that the SPRO had experienced at least
    five major equipment failures since 2013 including a major
    pipeline failure that shut down the Big Hill site for 5 years.
        Could leasing underlie SPRO capacity help offset the cost
    of operations and maintenance?
        Mr. Winberg. Yes, and under two different scenarios. One,
    we might make the upgrades and then roll that in to the price
    of the lease but that would require appropriations.
        Another option, of course, is to have the entity leasing
    the space to make those upgrades.
        Mr. Shimkus. Yes. Based on my experience with the
    appropriation committees, I wouldn't encourage the first course
    of action. I would think that maybe in the leasing agreement of
    upgrades that would be a more straightforward process. But
    that's me.
        It was also talked about a little bit earlier in the
    question and answers about spare caverns and I think being able
    to, in essence, lease those out and there was some interest in
    that.
        Did I understand that question and answer process? Another
    member mentioned about excess space in other caverns and the
    ability to lease that out to private entities.
        Mr. Winberg. Yes. Congressman, we have not yet tested the
    market, if you will, on commercial interest in leasing the
    space. That would be the subject of the request for information
    that we will be sending out.
        Mr. Shimkus. Let me also talk about there has been some
    debate about the refined product reserves that are established
    and I think there is a cost to doing this, right? A financial
    cost of setting these things up.
        Mr. Winberg. Yes.
        Mr. Shimkus. Do you know what it is for the East coast
    refined product?
        Mr. Winberg. Yes. We spend between $10 and $30 million a
    year for, roughly, a million barrels of gasoline.
        Mr. Shimkus. That's per year?
        Mr. Winberg. Yes, sir.
        Mr. Shimkus. So I think it's credible for us to have the
    debate of a cost benefit analysis. If we are spending $25
    million a year for $1 million of refined product versus the
    timeliness of transportation and the access, I think that's
    where the debate is. Everybody would like to have a refined
    reserve available next door for disruption.
        In the Midwest, we have tornadoes and things go down and
    power goes off. But the question is, is $25 million for 1
    million--I don't think that makes financial sense.
        I wanted to raise that. The last thing I want to address is
    U.S. will become a net energy exporter by 2022. That's the
    expectation. Do you agree with that?
        Mr. Winberg. Yes, sir. I do.
        Mr. Shimkus. Do you think there is a need for a strategic
    petroleum reserve? I was a big supporter of this years ago when
    we were worried about our enemies around the world shutting off
    the sea lanes because we were importing our crude oil.
        But if we are a net exporter does that even lend to the
    question of whether we need a SPRO?
        Mr. Winberg. I think it's difficult to forecast what kind
    of geopolitical challenges we might have----
        Mr. Shimkus. Well, if we listen to Olson, Texas is going to
    supply the whole world. So I----
        Mr. Winberg. But there is also the hurricanes and other----
        Mr. Shimkus. And I would think that more speaks to
    pipelines and diversification of a refinery basis and I think
    that's occurring as we speak right now, too, with North Dakota
    and some other places where we are having that occurring.
        So those are just questions I pose. It's great to have you
    here. We live in some exciting times. Whoever thought that we'd
    be exporting crude oil and exporting liquefied natural gas, and
    we all know the benefits for that just for our balance and our
    income or the trade balance but also for our allies who, in
    some places around the world, are being held hostage by foreign
    powers who really don't like us that much.
        So I appreciate it. Send my regards to the department and
    with that, Mr. Chairman, I yield back.
        Mr. Upton. Mr. Green.
        Mr. Green. Thank you, Mr. Chairman. Thank you for being
    here.
        You have a couple Texans on the committee, both Republican
    and one Democrat. But I have a district in east Harris County
    and so the salt domes that are created are there in Chambers
    County all the way through southeast Texas.
        This Congress and previous Congresses have chosen to sell
    oil from the SPRO since 2015. The cumulative sale of these
    barrels--250 million barrels--could occur about 2027. Is that
    correct?
        Mr. Winberg. Yes, sir.
        Mr. Green. OK. And leave us with the expected inventory of
    410 million barrels?
        Mr. Winberg. Four hundred and five.
        Mr. Green. Four hundred and five. OK. I know we talked
    about it one time. Over the years the SPRO had as much as 725
    million barrels. Is that correct?
        Mr. Winberg. Yes. Well, I think the capacity is 712 million
    barrels.
        Mr. Green. OK. Although the authorization or the intent was
    to have a billion barrels?
        Mr. Winberg. Yes, I believe that's correct.
        Mr. Green. Back when it was created. With what's happening
    today in the energy market I can't imagine us--are we buying
    crude oil into the SPRO now?
        Mr. Winberg. No, we are not.
        Mr. Green. OK. And because as a Texan, you want to buy it
    at $30 and sell it for $70 and so I would hope we would not be
    buying $70 a barrel oil.
        One of the concerns I have is that during the Hurricane
    Harvey that was last year, Hurricane Ike that was 2008, even
    Katrina, because part of the SPRO goes into southwest
    Louisiana, has the storage facilities been damaged because of
    these hurricanes?
        Mr. Winberg. I think there was some surface damage but that
    damage has been repaired and the SPRO is fully capable of
    meeting its withdrawal requirements.
        Mr. Green. OK.
        This crude oil is selling from SPRO on the open market, do
    you have any idea who's buying it? Because I have five
    refineries in east Harris County that typically uses the
    heavier crude still, although they are retooling now because of
    the lighter sweet coming.
        Is it typically local refineries that are buying that or
    are they other countries or anything else that you know of--
    anyone who sells oil from the SPRO?
        Mr. Winberg. We do know who's buying the crude and I don't
    have the specifics here with me but I am happy to get that
    information to your office with respect to whether it was
    domestic or international purchases.
        Mr. Green. At one time, I think people would be concerned
    about someone from another country that's not an ally buying
    our crude oil.
        But since we are exporting crude oil now from everywhere I
    can imagine on the Gulf Coast in Texas and Louisiana, that's
    probably not a big issue.
        Does U.S. or the DOE SPRO post-sale configuration study--
    has it been completed?
        Mr. Winberg. No, sir. It's underway right now. We expect we
    will complete it this autumn.
        Mr. Green. OK. The SPRO is a lot of different sites in the
    salt dome because some of that salt dome underneath southeast
    Texas and Louisiana may have to be qualified or--if we wanted
    to get to a billion barrels, how could we do that? Is it
    engineeringly possible?
        Mr. Winberg. Yes. Yes, we could develop more storage
    capacity. If we ended up selling into the commercial market and
    we needed to develop the brine drive system so that we could
    plug the caverns and then reinject oil, we would need some
    additional caverns for the brine storage system.
        Mr. Green. We are currently required to maintain a 90-day
    supply of crude oil and, currently, we have a supply of about
    170 days. Is that correct?
        Mr. Winberg. Yes, sir. I think that's correct.
        Mr. Green. In DOE's opinion, are the current level of
    reserves adequate for future potential disruptions?
        Mr. Winberg. Yes, sir.
        Mr. Green. OK. And, again, the market has changed so much
    because, literally, just down the road we are seeing a lot of
    crude oil produced. Although, again, it's typically lighter
    sweet than compared to the heavier crude.
        Mr. Chairman, I appreciate you having this hearing on the
    oversight. This is kind of in the neighborhood for those of us
    in southeast Texas. So we have a big interest in it.
        Thank you for being here.
        Mr. Winberg. Thank you.
        Mr. Upton. Mr. McKinley.
        Mr. McKinley. Thank you, Mr. Chairman, and thank you for
    the sponsors of this legislation to consider that.
        Mr. Winberg, some of your testimony has just raised more
    questions for me as a result. The one was your testimony--you
    talked about the annual cost for this--the gasoline reserve we
    have in the Northeast at about $25 to $30 million a year.
        But I remember a few years ago we were having that
    discussion about this because it was done not by legislation
    but through the administration, that as one of the discussions
    we have to replenish that--gasoline does not have a very long
    shelf life.
        So is it physically emptied and restored? How is the
    mixture so that we know the age of that gasoline there?
        Mr. Winberg. We do roll the gasoline, Congressman. I don't
    know specifically how many turns we do. But I can find out for
    you.
        Mr. McKinley. I am just curious because if crude is selling
    for $70 a barrel but you're selling refined product at only $30
    a barrel, something's wrong with the math here. You must not be
    emptying it entirely and using it.
        So we can have more of a conversation. I am just curious to
    see how that's functioning there. Also, you talked about the
    five--perhaps you can cycle about five uses or draw down about
    five times out of the salt dome.
        But if we go to this process--this is what I am having a
    little concern with--by leasing it out to other entities and
    then you indicated that perhaps they might want to draw down
    more often than five.
        Do you see a possibility that you will have them posting
    bonds or some kind of verifications that they pay for the
    repairs to the salt dome if that--other security so that
    someone with an outside interest could cause us to lose the
    integrity of our salt storage?
        Mr. Winberg. We believe we have a technical solution for
    the problem and that technical solution would be what we are
    calling the brine drive system.
        So rather than injecting fresh water into the salt cavern
    to lift the oil, we would inject a saturated brine solution.
        Mr. McKinley. I'd like to know a little bit more about
    that. I heard you talk about some additional brine that you had
    put back into that. That was interesting.
        How do you verify--because we got the problem with the
    ethane storage hub up in the Appalachian area--how do you
    verify the thickness of the walls of the salt dome in an
    existing while it's in operation.
        How are you doing that so that you could make a
    determination maybe 5 years it could reach its life? How do you
    verify that?
        Mr. Winberg. That's a great----
        Mr. McKinley. The extent of their degradation.
        Mr. Winberg. That's a great question and, Congressman, I
    don't know the answer. But I will get back to you and let you
    know specifically what testing mechanisms we use to determine--
    --
        Mr. McKinley. Just one engineer to another engineer. I am
    just curious how you're going to do that.
        And the last is more about security. I've never really
    actually seen a map that showed where our salt domes are
    located until today. I didn't want to know where they were.
        But if I know now, hostile actors can know where those salt
    domes are, and if they are that important to our national
    security why would we ever put it on a map where those things
    are?
        Mr. Winberg. Well, these are pretty large facilities and so
    people know where they are. They are very secure----
        Mr. McKinley. My point, again--how secure are they? At the
    Greenbriar we used to have a bunker there for congressmen to go
    hide until someone revealed where it was and then we had to do
    away with that.
        Now we are revealing our strategic reserve is--600 million
    barrels of gas or crude oil. The bad actors know exactly where
    that is. So if we had to abandon the Greenbriar what are we
    doing here?
        Mr. Winberg. Well----
        Mr. McKinley. How secure is it?
        Mr. Winberg. Yes. We have an ongoing security program and
    so we are updating it, both physical security as well as
    cybersecurity. You know, we are opening up a new office in DOE,
    the CESER, which is going to address the cyber issues.
        The physical security issues that----
        Mr. McKinley. It's not the cyber. I am talking about
    something a bad actor--I don't know that we have an Iron Dome
    outside these things. So I am just curious how we are going to
    protect them.
        Mr. Winberg. Well, they are fenced in. We have guards,
    guns, and gates.
        Mr. McKinley. I yield back. Thank you.
        Mr. Olson [presiding]. The gentleman yields back.
        The chair notes for the record that the Greenbriar is doing
    just fine because this week the Houston Texans started their
    practice for the football season at the Greenbriar.
        The chair now calls upon Dr. Bucshon for five minutes.
        Mr. Bucshon. Thank you, Mr. Chairman.
        Mr. Winberg, we spend more than $200 million per year on
    SPRO management and operations, yet most of the equipment is
    beyond its serviceable life and there is a growing backlog of
    deferred maintenance.
        For example, GAO reported that the SPRO has experienced at
    least five major equipment failures since 2013, including a
    major pipeline failure that shut down the Big Hill site for 5
    weeks.
        You're talking about changing to a brine-related way to
    extract oil. It seems like we need to catch up on this
    maintenance first.
        What's been the reason why there is a backlog of deferred
    maintenance and all the equipment is beyond its serviceable
    life and what can we do about it?
        Mr. Winberg. I think the backlog is because we didn't have
    appropriations sufficient to keep the facility in optimal
    operating condition. We now have our----
        Mr. Bucshon. OK. I am just going to interrupt you there for
    a second because I think that's the answer we get from every
    Federal agency any time we ask this question.
        But were there requested appropriations that didn't get
    appropriated? Were there no appropriations or, there is more to
    it than that, I would imagine.
        Mr. Barton. Would the gentleman yield?
        Mr. Bucshon. I will yield.
        Mr. Barton. I don't want to speak for the Department of
    Energy, but the draft legislation allows, without going through
    the appropriation process, funds generated by using this
    facility for private purposes to be used for maintenance of the
    facility. So we have tried to solve that problem in the
    legislation before us.
        Mr. Bucshon. Thank you, Mr. Barton, because that's going to
    be one of my next questions.
        So it sounds like we have probably had an appropriations
    issue over the years. I get that, and it seems like we need to
    address that.
        So the question, and is a follow-up to what Mr. Barton just
    said, could leasing underutilized space, capacity, help offset
    the cost of operations and maintenance?
        Mr. Winberg. Yes, I think it could. Again, we need to query
    the market and find out what value they place on this storage
    and what they are willing to pay for it.
        Mr. Bucshon. Yes. So potentially this draft legislation
    could help us solve what appears to be probably a long-standing
    issue with our maintenance and serviceable life of our
    equipment being at the end of its serviceable life if we find
    more money and put that into operation and maintenance.
        Also, most of the time it sits idle, could some of the
    spare caverns--and I think you went over this and the answer is
    yes--be commercialized in such a way to improve its overall
    operational readiness?
        Mr. Winberg. Absolutely. Yes, sir.
        Mr. Bucshon. And you described some of that--I was
    interested in the fact that on a commercial basis you'd have to
    have more going in and out all the time, right? Could you
    isolate that to the commercial space versus the noncommercial
    space?
        So you're not talking about the entire reserve being
    accessed all the time. Were you talking about a way to cordon
    off, so to speak, what we could utilize and in that way the
    caverns of the whole reserve wouldn't be at risk.
        Mr. Winberg. That's correct. We would utilize the brine
    drive system in those caverns where we were discharging and
    refilling on a frequent basis for commercial purposes.
        Also, I spoke earlier about leasing some of the space to
    other countries that are members of the IEA activity and in
    that case then those countries would not be withdrawing and
    injecting on a routine basis, and by having that capacity our
    overall costs likely would go down because we would have more
    oil stored so you'd spread the cost out over----
        Mr. Bucshon. Right. So we would do that on a build-out
    basis or they would pay for it or we'd build out what they need
    or they'd pay for that?
        Mr. Winberg. Well, I think we would utilize the excess
    capacity we have and if there was a big enough market I think
    we could look at building out additional. But we are going to
    have 300 million barrels of capacity when we finish the draw
    down in 2027.
        Mr. Bucshon. Understood.
        Thank you, Mr. Chairman. I yield back.
        Mr. Olson. Thank you.
        Mr. Duncan, 5 minutes for questions, sir.
        Mr. Duncan. Thank you, Mr. Chairman.
        There is no doubt that demand for oil is much greater now
    than when the SPR was originally developed, and I wonder is the
    SPR big enough to have an impact in the case of a real crisis
    in the 21st century. Is it big enough?
        Mr. Winberg. I think it probably is big enough.
        Mr. Duncan. Is it storing enough?
        Mr. Winberg. I think it is storing enough right now. As we
    move into 2027, we are going to be very close to meeting our
    IEA requirements. In fact, we----
        Mr. Duncan. Have you all looked at the demand as it applies
    in the 21st century here and 2018, right, or----
        Mr. Winberg. Yes, we have. But a balancing factor for that,
    of course, is that we have much more domestic production and
    that domestic production, while it takes several months to come
    online, it's much quicker than it was before the unconventional
    oil plays became commercial in the United States.
        So we are down to 4 or 5 or 6 months to get wells online as
    opposed to----
        Mr. Duncan. Well, just let me ask you this. In your
    opinion, has SPR been used effectively over the past four
    decades to respond to oil price volatility?
        Mr. Winberg. I believe it has, yes.
        Mr. Duncan. Has been used effectively? OK.
        Has it been appropriately used as a tool to balance supply
    and demand?
        Mr. Winberg. That's not its purpose to balance----
        Mr. Duncan. I remember the oil shortage in the 1970s and
    since then we really haven't had a true oil shortage. We have
    had price volatility, right.
        So given the change in landscape, the fact that the United
    States is now a net exporter, do you see the SPR being able to
    balance the supply and demand or even necessary to balance the
    supply and demand when we have an abundant supply?
        Mr. Winberg. Well, the purpose of the SPRO was never to
    balance supply and demand but, rather, its purpose was to be
    there in the event that there was more of a crisis situation
    rather than short-term supply and demand imbalances.
        And so that was its purpose. That still is its purpose, and
    I think where we are right now, even with the draw downs, given
    the fact that we have much more domestic production and that
    production can come on much quicker, I think that we have
    sufficient reserves and sufficient capacity with the SPRO.
        However, getting to an earlier question, we do need to
    upgrade it and maintain mostly the surface facilities but also
    subsurface facilities to make sure that we can meet the----
        Mr. Duncan. Let me ask your opinion about--Congress has
    sold off some of the SPR in order to cover deficits and when we
    have had some of these crises since I've been in Congress--8
    years--it also seems like we always sell it for a lot less than
    we paid for it, and that's kind of opposite of buy low sell
    high, right?
        That's the first thing. Who manages what price point we
    purchase or replenish? If you've got a high-value asset that
    you paid less for, do you all play the market in that regard
    and sell it at a higher price and buy it again at a lower price
    to help the American taxpayer?
        Mr. Winberg. When we have a release we do it under an
    auction mechanism. So we get the highest price that the
    market's willing to pay.
        Under some releases, where we have a test sale, for
    example, then whoever buys that oil has to replenish that oil
    plus an additional amount of oil.
        So in that manner, we are paying for the cost of extracting
    oil from the facility. But the SPRO and the operation of the
    SPRO does not play the market, per se. We do it through an
    auction mechanism.
        Mr. Duncan. Mr. Chairman, 30 seconds I've got left.
        Since I've been in Congress, we have used the SPR as an
    opportunity to offset spending with cut-go or whatever, and
    that's wrong. This is a strategic petroleum reserve to help us
    in the time of a crisis and oil shortage or restriction of the
    flow of oil by OPEC like we saw in the late 1970s.
        And I am always going to argue that this Congress and this
    government should not use this as a pay for. It should be used
    as it's designed.
        But we also ought to manage it--if you've got a bulk asset
    that you've got a high basis on sell it--buy it low and help
    the American taxpayer.
        With that, I yield back.
        Mr. Olson. Thank you.
        Mr. Tonko, are you ready, sir? Are you ready? Five minutes
    for questions.
        Mr. Tonko. Thank you, Mr. Chair.
        Mr. Winberg, can you provide us with an update of DOE's
    current modernization plan and how great is the need to invest
    in the infrastructure in order to keep it operating
    effectively?
        Mr. Winberg. Yes. To answer the second part of your
    question, I think the need is pretty great. This facility, as
    we have talked about, is over 40 years old. The last major
    upgrade was about 25 years ago. So we have piping, pumps, and
    valves that need to be replaced on the surface.
        So the need is pretty great. We have got a Life Extension
    program and we are developing that program so that, A, we can
    best handle the legislatively mandated sales, and then, B, the
    Life Extension program is being designed so that we can upgrade
    our systems to allow the SPRO to operate post-2027 for an
    additional 25 years.
        Having said that, the Life Extension program on the way
    it's been designed has enough flexibility so that if we decide
    we are going to lease space to other countries or commercial
    leases, we have got enough flexibility in the program so that
    we can adjust it so that we are not using taxpayer dollars to
    upgrade systems that perhaps someone leasing would pay for.
        Mr. Tonko. Thank you.
        And do you believe there is private sector demand for SPRO
    capacity?
        Mr. Winberg. That's a great question, and we don't know the
    answer to that yet. What we are planning to do is send out a
    request for information, an RFI, out into the marketplace and
    what we want to find out is, A, is there a need for government-
    owned storage in the commercial market; B, how would they
    utilize that storage space if we leased it to them; and then,
    C, are there concerns or issues with the government leasing
    space in a market that has mostly been done by commercial
    entities.
        Mr. Tonko. So and how would it compare to existing storage
    options--for example, a tank storage or----
        Mr. Winberg. Right. We don't yet know the answer to that
    question either. That will be informed by the RFI. Once we know
    how private industry might want to utilize this storage, then
    we can put a cost, because there will be some capital needed in
    order to facilitate commercial storage activities.
        Mr. Tonko. And do you believe there is an opportunity to
    use the revenues raised by commercial leases to invest in
    modernization to benefit the public's use of SPRO?
        Mr. Winberg. I think there might be. But, again, we are a
    little bit early in the process to know that right now.
        But that's certainly the hope, and I think if there wasn't
    value to the taxpayer I would question whether or not we want
    to enter into this type of arrangement.
        Mr. Tonko. OK. And SPRO is able to draw down and deliver
    crude oil within 13 days?
        Mr. Winberg. Yes, sir.
        Mr. Tonko. Are you confident that space can be leased
    without slowing down the Federal Government's ability to
    utilize SPRO?
        Mr. Winberg. That would be one of the key issues or key
    elements of any leasing program that we entered into with
    commercial clients but also with other countries, if we chose
    to go that route.
        The American taxpayers bought and paid for this thing. They
    have maintained it for the last 40 years. So our responsibility
    is to the U.S. taxpayers to make sure that, A, we are meeting
    our domestic oil requirements and, B, that we are meeting our
    international requirements as well.
        Mr. Tonko. And I appreciate that.
        In the Northeast, we are particularly vulnerable to supply
    disruptions, which can be caused by natural disasters such as a
    hurricane like Superstorm Sandy.
        The Northeast gasoline supply reserve was created to
    mitigate those risks and, thankfully, it hasn't been needed
    yet. But that doesn't mean it won't be needed in the future.
        So I would really caution the administration against trying
    to dissolve this reserve. I think, again, for our region of the
    country it's of great concern.
        And with that, I thank the chair and yield back.
        Mr. Olson. Thank you.
        And seeing no further witnesses, members seeking to ask
    questions, I'd like to thank you, Mr. Winberg, for coming
    today.
        All members should know they have 5 days to submit
    questions for the--10 days--another panel. OK. I'll back off.
        Thank you, Mr. Winberg. Before you leave, as Vice Chairman
    Barton will confirm with your boss, you have to say gig 'em
    over and over. Thumbs up. Gig 'em, Aggies.
        Mr. Winberg. Thank you.
        Mr. Olson. Uh-oh. Is your mic? You sure? One more time.
        Thank you, Mr. Winberg.
        Mr. Winberg. Thank you.
        Mr. Olson. Second panel, please come up.
        It looks like we are ready so let's kick off the second
    panel.
        Our witnesses for the second panel today include Mr. Frank
    Rusco, Director of Natural Resources and Environment at the
    GAO; Mr. Daniel Evans, Project Manager for Fluor Federal
    Petroleum Operations; and Mr. Kevin Book, Managing Director for
    ClearView Energy.
        We are so thankful for you all being here today. We will
    begin this panel with Mr. Frank Rusco. You are recognized for 5
    minutes to give an opening statement.

      STATEMENTS OF FRANK RUSCO, DIRECTOR, NATIONAL RESOURCES AND
    ENVIRONMENT, GOVERNMENT ACCOUNTABILITY OFFICE; DANIEL M. EVANS,
      PROJECT MANAGER, FLUOR FEDERAL PETROLEUM OPERATIONS; KEVIN
        BOOK, MANAGING DIRECTOR, CLEARVIEW ENERGY PARTNERS, LLC

                        STATEMENT OF FRANK RUSCO

        Mr. Rusco. Thank you, Mr. Chairman, Ranking Member, and
    members of the subcommittee.
        I am pleased to be here today to discuss our recent report
    on DOE's management of the SPR. The SPR is an important energy
    security asset capable of mitigating negative effects of global
    oil supply disruptions in concert with other IEA member
    countries. In several collective actions of IEA members, the
    SPR has been effective at adding oil supply during actual or
    expected supply disruptions.
        To date, however, the SPR has most often been used in
    response to domestic supply disruptions caused by extreme
    weather. In such events, the SPR has been less effective
    because SPR infrastructure has not been able to deliver
    reserves when, where, and in the form they are needed.
        In particular, when severe weather has battered Gulf Coast
    states, damaging refineries or electricity grids needed to run
    pipelines, SPR oil reserves in the Gulf Coast have not been
    effective in mitigating what have generally been shortages in
    finished petroleum products such as gas line and diesel fuel.
        Most IEA member countries hold significant parts of their
    strategic reserves as petroleum products. DOE has studied such
    product reserves and the conclusions of its studies point to
    net benefits in some regions. Yet, DOE has disagreed with our
    recommendation to complete these studies and advise Congress of
    its findings.
        In addition, we found that DOE's most recent strategic
    analysis of the SPR, which was mandated by Congress, was
    deficient in several key ways. These deficiencies denied
    Congress better information to make decisions about the size,
    disposition, and configuration of the SPR.
        For example, DOE did not do adequate risk-based scenario
    analyses of when the SPR may be called upon to deliver oil or
    petroleum products and, as a result, DOE cannot advise Congress
    on even a credible range of sizes, composition, or disposition
    of reserves that would best enhance energy security across a
    range of potential future events.
        Further, in part, because of the way in which the SPR has
    been used over the years and in part just because needed
    maintenance has been deferred for many years, the SPR storage
    and delivery infrastructure is in serious disrepair.
        DOE's current plan is to rebuild the existing SPR
    infrastructure in its historical configuration and capacity. If
    this is done and, given planned future sales of SPR oil, the
    SPR will have excess storage capacity in the future. However,
    DOE made its plan to rebuild and repair SPR infrastructure
    without adequately studying alternatives, including selling or
    leasing such excess capacity.
        The discussion draft that is the focus of this hearing goes
    a long way toward requiring DOE to rectify some of the
    deficiencies in its strategic study and its SPR modernization
    plan. Specifically, the discussion draft requires DOE to take
    actions to evaluate and test the market for leasing its excess
    capacity by, one, authorizing the leasing of storage and
    related facilities to private sector and foreign entities; two,
    directing revenue earned from such leases to the general fund
    and to cover costs associated with leasing; and three,
    requiring a pilot program to lease 200 million barrels of
    excess capacity.
        To make fiscally prudent decisions about how to implement
    such a pilot, DOE will have to conduct additional analyses. For
    example, DOE's decision to use fresh water to displace oil
    during releases has caused the SPR's salt caverns to
    deteriorate over time with use.
        Fresh water absorbs salt, which increases the size and
    alters the shape of caverns and damages their integrity.
    Alternatively, there are salt cavern facilities operated by the
    private sector that use brine to displace that oil during
    release, which does not have these effects.
        Brine ponds add operation and maintenance costs but
    increase the life of caverns. Ideally, GAO should evaluate this
    and many other factors we have identified before finalizing its
    modernization plans to ensure the SPR is run in an effective
    and fiscally prudent manner.
        Thank you. This ends my oral remarks. I'll be happy to
    answer questions.
        [The prepared statement of Mr. Rusco follows:]

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        Mr. Olson. Thank you, Mr. Rusco.
        Mr. Evans, 5 minutes for an opening statement, sir.
        Microphone, please. Hit the right button here.
        Mr. Evans. I am here. There we go. Start again.

                       STATEMENT OF DANIEL EVANS

        Mr. Evans. Good morning, Vice Chairman Olson, Ranking
    Member Rush, and members of the Subcommittee on Energy.
        I am the Project Manager for Fluor Federal Petroleum
    Operations, Dan Evans. We are the maintenance and operation
    contractor for the Department of Energy at the Strategic
    Petroleum Reserve since 2004.
        Fluor's partnerships with DOE date back to the Manhattan
    Project. Today, in addition to the SPR, we are currently active
    in roles with DOE facilities that are part of the Environmental
    Management and National Nuclear Security Administration
    missions.
        The congressionally-mandated sales have changed the day-to-
    day operations of the SPR dramatically. The sites have gone
    from a 4.4 million barrel per day draw down and readiness
    posture to maintaining draw down readiness while at the same
    time conducting intermediate variable rate deliveries from the
    reserves.
        Working with DOE, Fluor has met this challenge. One example
    is the response to the impacts to Hurricane Harvey. We were
    able to maintain mission draw down readiness throughout the
    event and deliver approximately 5 million barrels of crude oil
    to refineries in need.
        I would like to note that to support this need, certain
    employees volunteered to leave their own homes at peril, their
    whole families, and endure the hurricane at the Texas sites.
    They provided day-to-day monitored conditions and real time
    updates on the readiness for us to fill the Nation's mission.
    The dedication of SPR employees to the mission is American
    exceptionalism at its finest.
        The sales have and continue to put a significant level of
    stress on aging SPR infrastructure. In some cases, we have
    postponed planned maintenance and diverted funding to address
    emergency repairs.
        As we continue the draw down over the next 9 years,
    Congress should not lose sight of the importance of the SPR's
    annual maintenance funding to be able to address the needs of
    the sites and make necessary repairs to execute the current
    contemplated draw down schedule.
        Next, I would like to address the ideas raised by the
    subcommittee's discussion draft. Fluor, of course, stands ready
    to support the leasing and operation of underutilized cavern
    capacity.
        We anticipate in the particular draft legislation the
    committee has provided the authorization without further
    appropriation to use a portion of leased revenue cost related
    to storage and removal incurred by the SPR as a result of
    releases.
        Commercially-leased petroleum storage currently presently
    operates under one of two models: segregated or co-mingled. In
    segregated storage, the product accepted for storage is the
    same product that is ultimately delivered. Under the co-mingled
    model, a limited range of products are accepted for storage.
        When a withdrawal is made, a product of agreed to
    specification is then provided to the owner of the equivalent
    product that was accepted into storage.
        Either model presents challenges for leasing at SPR
    facilities while maintaining government inventories. Presently,
    the government practices intensive inventory management--
    segregating crude oil by two specifications and tracking the
    volumes down to the very barrel not only across caverns but
    also with piping, pipelines, and crude oil storage tanks.
        If the SPR designates specific caverns to be leased for
    storage under the segregated model, the cavern is nonetheless
    integrated into the site infrastructure.
        The operation of a storage cavern requires routine ability
    to convey crude oil, water, and salt brine in and out of the
    cavern for purpose of preventative and corrective maintenance.
        The cycling of fluids in and out of leased caverns with
    equipment in common with the SPR storage caverns will,
    inevitably, lead to co-mingling of government and commercial
    assets which will, in our opinion, require additional capital
    investments. The co-mingled model shares the same challenges of
    the segregated model and also adds additional complexities in
    terms of product quality matters and tracking thereof.
        In conclusion, two policy issues require resolution prior
    to implementing a lease storage concept. The first, it's a
    target inventory of the SPR.
        Congress should also carefully consider the overall leasing
    concept to be adopted. We strongly recommend that should
    Congress move forward with a leasing regime, it allows
    sufficient time to make this determination and to develop and
    physically implement the necessary SPR enhancements.
        Mr. Vice Chairman, thank you again for the opportunity to
    appear here today. I stand by to answer any questions that you
    might have.
        [The prepared statement of Mr. Evans follows:]

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        Mr. Olson. Thank you, Mr. Evans.
        Mr. Book, 5 minutes for an opening statement, sir.

                        STATEMENT OF KEVIN BOOK

        Mr. Book. Thank you.
        Good morning, Vice Chairman Olson, Ranking Member Rush,
    Vice Chairman Barton, distinguished members of this committee.
        My name is Kevin Book. I lead the research team at
    ClearView Energy Partners, an independent firm that analyzes
    macro energy issues for institutional investors and corporate
    strategists.
        Thank you for inviting me to contribute to your discussion
    regarding modernization of the SPR. I would like to begin by
    offering my admiration for the foresight the U.S. Congress
    showed in creating the SPR.
        In my view it remains one of the greatest energy security
    achievements in modern history. It still matters, too. Even
    with U.S. crude production averaging 11 million barrels per day
    during the week ending July 13, that surge is good news. But
    those barrels already have customers.
        As a government-controlled stockpile, the SPR can provide
    emergency supply that comes from outside the market. That said,
    ensuring against worldwide economic fallout and sheltering U.S.
    consumers may require a robust and well-functioning reserve
    capable of delivering its full design capability.
        Today's discussion reflects that Congress has passed six
    major laws in the last 4 years that mandate, roughly, 300
    million barrels of oil sales from the SPR. Those sales could
    leave the SPR with approximately 400 million barrels at the
    start of fiscal 2028. It, therefore, seems prudent to ask
    whether and how the resulting surplus storage capacity might be
    put to productive use.
        Today's legislative draft would expand storage leasing
    currently available to foreign governments so that private
    commercial entities could lease SPR space too. In my opinion, a
    pilot leasing program of this sort could potentially benefit
    U.S. producers and refiners in need of additional storage.
        If that program also helped to preserve or expand SPR
    capabilities at the same time, it could enhance petroleum
    supply insurance for U.S. consumers, too.
        My testimony offers several additional considerations. From
    a feasibility perspective, DOE might wish to evaluate the costs
    of restoring, rehabilitating, or improving spare capacity to
    support the requirements of commercial lessees. Those
    requirements can differ in many cases from current long-term
    strategic storage requirements.
        DOE might also wish to evaluate availability of takeaway
    capacity from leased storage sites, especially in the absence
    of incremental SPR marine distribution capacity. Storage with
    faster deliverability can command a higher market price also.
    From a competitiveness perspective, it may be useful for DOE to
    evaluate the market impact of introducing up to 2 million
    barrels of crude storage into the Gulf Coast, also known as PAD
    3.
        In March 2018, the Energy Information Administration, or
    EIA, counted 341.2 million barrels of working storage capacity
    at refineries, tank farms, and underground facilities in PAD 3.
    The agency assessed that about 49 percent of that capacity was
    in use of that time. That was a big change from 2 years
    earlier. Storage volumes grew by 29.7 million barrels since the
    EIA's March 2016 report and did not report the agency-assessed
    PAD's restorage capacity at a much higher 68 percent capacity
    utilization.
        It could be undesirable if additional low-cost government-
    run SPR storage were to crowd out existing privately operated
    facilities. Likewise, salt cavern storage tends to be
    significantly cheaper than thank storage and so-called floating
    storage in leased tankers. But draw down constraints and take-
    away bottlenecks could limit commercial demand compared to tank
    farms and ships.
        Finally, from a strategic perspective, capacity leasing
    should probably also reflect the vision Congress and the
    department have for the reserve. For example, today's draft
    would allocate net balances to the general fund. It might be
    worth considering whether proceeds could also pay for expanded
    modernization.
        To this point, the U.S. has dramatically reduced its net
    petroleum imports. But U.S. refiners still import gross volumes
    of about 6.3 million barrels per day. When they do, they pay
    global prices that reflect global supply demand balances.
    Today's oil prices remain high, relative to historical norms.
        Partly, this is because global oil production is itself
    running at relatively high capacity utilization. Crude prices
    are also high because global inventories have thinned out.
        Currently, OPEC producers are drawing on spare capacity to
    offset losses from collapsing Venezuelan production. They soon
    could lean even harder on spare production capacity to replace
    Iranian crude oil barrels.
        That, by the way, set off my Siri. I apologize. I am not
    sure why.
        And what happens when the production system is stressed and
    inventories are lean and a big supply disruption occurs
    somewhere in the world?
        In that situation, without strategic reserves, the oil
    market must balance and painfully so on the backs of consumers.
    Preventing that result, in short, is the nature of the
    insurance the SPR provides.
        Mr. Chairman, this concludes my prepared testimony. I will
    be happy to answer any questions at the appropriate time.
        [The prepared statement of Mr. Book follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Mr. Olson. Thank you, Mr. Book, and thank you, all our
    witnesses.
        I will now move into the Q and A portion of the hearing. I
    will begin the questioning. I recognize myself for 5 minutes.
        First of all, again, welcome to our three experts. A
    special welcome to Mr. Evans. Fluor Enterprise--big tall
    building, one street light up from my official office area--
    Sugarland, Texas. So welcome, welcome, welcome, dear friend.
        My first question is for you, Mr. Book. As a point on the
    first panel, Texas oil production is booming. I won't brag, but
    right now we are moving a lot of light crude to the coast about
    as fast as we possibly can.
        If the SPR were open to lease by the industry, do you
    think, first of all, number one, there would be interest?
    Number two, would there be value as a holding location for more
    oil or would the benefits be in the uncertainties going forward
    with leasing this great asset we have, the SPR?
        Mr. Book. Congressman, I think bragging is appropriate and
    you should be proud. That crude is going to keep going to
    coast, as you say, and exported to global markets that can use
    it for value.
        I think Secretary Winberg was wise to suggest that an
    inquiry of commercial interest would be a good place to start.
    One of the issues that you have right now is that you do have
    storage building at export and transit sites in the Gulf Coast
    and its building quite rapidly.
        The SPR could serve a different purpose for long-term
    storage today. But as the other witnesses have mentioned, it
    would require adaptation to be potentially useful for the kinds
    of commercial applications that different kinds of customers
    might use.
        But definitely there's going to need to be more storage if
    you in Texas keep producing more crude.
        Mr. Olson. Count on it, guaranteed.
        Second question is for you, Mr. Rusco. As you know, the DOE
    has taken some steps in modernizing the SPR. However, much work
    still remains and at the moment the SPR seems to lack a clear
    end goal.
        Can you talk about the most important steps DOE has taken--
    what you think the best pathway forward to them to get this
    thing up and running to modernize?
        Mr. Rusco. I am encouraged that the Assistant Secretary was
    talking about testing the market and going out and trying to
    figure out what the market is and also that is cognizant of the
    differences in a way that different entities might use excess
    capacity.
        So it's our cost of storing fuel--oil in the ground is much
    lower than most IEA members' costs and there are members that
    would like to store oil in our reserves. So that may be
    ultimately the best way. But you got to test the market to
    know. I am encouraged about that.
        What I am concerned about is DOE has not done a good job of
    periodically assessing how the market has changed, how energy
    security issues have changed, and doing complex risk-based
    analysis involving scenarios of possible use. That's what they
    need to do.
        Mr. Olson. Thank you. Mr. Winberg is right over your left
    shoulder. So message accepted and sent. Thank you so much.
        Final questions for you, Mr. Evans, of Fluor. The SPR sites
    are made for long-term storage. But we certainly have a lot of
    maintenance issues.
        Fluor has been maintained as this asset for over almost two
    decades, as you said. Can you please tell me about the most
    common cause of maintenance issues and whether the DOE or the
    private sector can be better suited to fix these problems as
    quickly as possible?
        Mr. Evans. So the most common maintenance issues that we
    face today are with regards to the equipment that was not
    placed during Life Extension One. That was the '91 to '95
    timeframe.
        We have a lot of piping valves, actuators, and those kinds
    of pieces of equipment that are 40 years old. We did have a
    rupture in a low-pressure fresh water system at the Big Hill
    that was a dramatic one and that's our second significant
    rupture there.
        We find more and more common leaks and we are able to deal
    with them very quickly. But Life Extension Two, and if it's
    smartly coupled with a concept to commercialize could replace
    and deal with, those highest level of common kinds of
    maintenance risks.
        We also have a very old degasification plant that's on its
    last legs at the West Hackberry Louisiana site. Part of LE2
    then is to recycle that and come in with a new much more
    modular modern design that will be more efficient to make sure
    that we can deliver crude oil even during difficult hot
    months--the end of the pipeline system.
        Mr. Olson. Thank you, Mr. Evans.
        My time has expired.
        Now the chair calls on the ranking member of the
    subcommittee, Mr. Rush, for 5 minutes.
        Mr. Rush. I want to thank you, Mr. Chairman.
        I want to ask each witness if you would give me feedback on
    this draft legislation.
        Do you feel that there is a need for the draft or do you
    find it helpful or are you concerned about any of the
    unintentional consequences? And I would like to just ask each
    one of you if you would respond to the question, and beginning
    with you, Mr. Rusco.
        Mr. Rusco. I think that the draft legislation addresses an
    important issue that DOE had not been thinking about when they
    planned their modernization and that is that there is going to
    be excess capacity.
        And it makes good sense to try to use that capacity in a
    way that can help pay for the modernization and pay for the
    routine operations and maintenance so that we don't end up 10,
    20 years later with a bunch of deferred maintenance and
    depreciated usefulness of the assets.
         Mr. Evans. Mr. Rush, we at Fluor are here to implement
    these at the pleasure of the Congress and the department. We
    certainly would be responsive in the near term to integrating
    immediate team needs to, as I mentioned earlier, go the market
    to understand what market demands are, to perform engineering
    and operations analysis studies that would take a look at what
    we needed to do to operate under market conditions.
        Number three, see how to fully integrate those with Life
    Extension Two so we can take advantage of the significant
    change in investment that Congress is making in the SPR, and
    then do all the environmental studies necessary as well to make
    sure that that operates as integrate smart hole.
        I do think that, with the addition of things like brine
    caverns that were mentioned earlier by Secretary Winberg, those
    would be very beneficial for overall operation in the long run
    for the SPR for the government as well as for commercial
    customers.
        Mr. Rush. Mr. Book.
        Mr. Book. Congressman Rush, I think it's a good idea to
    make best use of what you have, particularly if you have a way
    of making money for the taxpayer using an asset owned by the
    taxpayer. That's always a good idea.
        You asked about unintended consequences and I think that
    Secretary Winberg has already suggested that he wants to take a
    look at the implications of this. Part of understanding the
    role of government is understanding the way in which government
    actions can impact private investment.
        It's always a bad idea to lean too heavy with the
    government on something that where private industries put
    capital to work. And so if I had any concern it would be that
    there would be a risk potentially of commercially undercutting
    existing investments.
        But until one looks at it, there's no reason to not proceed
    with looking into it.
        Mr. Rush. I want to thank each and every one of you.
        Mr. Rusco, in your testimony you state that if DOE is
    authorized to lease unused small storage capacity to the
    private sector, as this bill would do, this leasing capacity
    could generate revenue that could help offset the costs of
    modernization.
        Are you confident that DOE will indeed look at this issue
    and, if not, what are some of the missing opportunities of not
    examining this particular topic or subject?
        Mr. Rusco. I am confident that DOE will pay attention to
    what you all do and my concerns are sort of where the bill
    doesn't specify what to do and DOE has not been very proactive
    in evaluating the strategic purpose and future on an ongoing
    basis of the strategic petroleum reserve and, hence, we got to
    a point where we, clearly, according to a lot of folks in
    Congress had more oil than we ought to have.
        There's going to be a lot of drawdowns. But that was done
    without a really quality strategic look at the pros and cons of
    that from DOE.
        Mr. Rush. Well, thank you, Mr. Chairman. I yield back.
        Mr. Olson. Thank you.
        The chair now calls upon the one man who knows more about
    this topic than any single human being in Congress, vice
    chairman of the full committee, Chairman Joe Barton.
        Five minutes, sir.
        Mr. Barton. Well, I am not sure that's true, Mr. Chairman.
    But if it is true that still doesn't say much.
        So well, but it does point out a fact is that there really
    hasn't been a strategic look at the SPR in a long time and the
    last three or four Congresses, as our oil production has ramped
    up in the United States, especially since the repeal of the
    crude oil export ban and our ability to lessen our imports, the
    Congress is using this as a piggy bank and it's not being
    evaluated.
        Let's take oil out of the SPR. This committee--we did it
    the last Congress--21st Century Cures. We needed some money,
    we've got jurisdiction over the SPR so we just said we are
    going to sell some oil and use it. The Budget Committee is
    using it. The omnibus is and the appropriation process is.
        Long story short, under current law, even though it says
    only the President can make a decision to use the reserve and
    he has to declare that it's a national emergency, Congress says
    not withstanding any other law we are going to sell oil for
    this or that or bacon fat.
        And so this draft bill before us says we don't want to
    change the basic mission statement but we want to add a mission
    statement. Under current law, you can't use the SPR for storage
    for private purposes. It's illegal.
        And so we decided let's see if maybe the private sector
    wants to use it. Now, Mr. Book's concerns, we don't want the
    private sector to be crowded out on storage capacity. I think
    that's valid. But it's not mandatory. If we don't sell another
    barrel of oil other than what we've already authorized, we are
    going to have over 100 million barrels of existing capacity
    that could be utilized--maybe two--we were authorized up to a
    billion barrels. But we don't have the current physical
    capacity but about a little over 700 million.
        Let's see if the private sector might want to use that, and
    this problem of being able to maintain the reserve because it
    has to be appropriated--we've got to ask the appropriators to
    appropriate it--and some years they do, some years they don't.
        We changed that. We give the specific authority to the
    secretary. All the money goes into the general fund. But we
    allow money from rentals fees, so to be used to maintain and
    improve the reserve without appropriate--and go through the
    appropriation process. That puts control in this committee in
    the Energy and Commerce.
        So we are trying to fix that problem. I guess I will ask
    Mr. Book, given the existing market dynamic, would the private
    sector decide to utilize the reserve to store their own crude
    oil? What's your bet on that?
        Mr. Book. Well, if you ask an analyst to take a bet you're
    probably going to get an analyst answer. It could be right or
    wrong and I will come up with a new one for you when it's
    wrong.
        But the private sector breaks down into different sets of
    customers. So you do have folks who are trading oil, and when
    the future price of oil is higher than the current price of
    oil, there's an incentive to store.
        They're going to want to move oil out of their storage
    pretty quickly when the market turns around, as it sometimes
    does. And then you have the government customers that we
    mentioned and other potential long-term storage customers or
    longer-term storage customers and we have different needs.
        And I think until you ask and see what's on offer out
    there, it's hard to know. Right now, what you have are mid-
    stream companies that are building out storage as they're
    developing transit capabilities, leasing that storage, and
    coming up with innovative new ways.
        Mr. Barton. But they're having to pay capital costs to
    build and operate it.
        Mr. Book. Well, that's right. They do have----
        Mr. Barton. And under this case, you have existing capacity
    that it's a lease or a rental--I am not sure how we would do
    it. But there's no upfront cost, except a commitment--probably
    a time certain commitment.
        Mr. Book. Yes. The costs of salt cavern storage are
    generally cheaper than tank storage and certainly cheaper than
    leasing a ship to store it and then floating storage when
    things get tight.
        So it could be very competitive.
        Mr. Barton. Well, what we are trying to do--Mr. Rush and
    I--we have an asset that's underutilized. We are going to have
    excess capacity.
        Why not have a new mission statement that allows the
    private sector but doesn't mandate the private sector? Maybe
    it'll work. Maybe it won't.
        But we are not going to be any worse off than we are and we
    will probably be better off if the private sector makes a
    decision to utilize it because it's going to give some funding
    that's at the discretion of the secretary of energy to improve
    the facility and I think it's worth a shot.
        But there may be other ideas. Anyway, my time has expired.
        Mr. Olson. Thank you. The chair now calls upon the
    gentleman from California, Mr. McNerney, for 5 minutes, sir.
        Mr. McNerney. Well, thank you, Mr. Chairman.
        I appreciate Mr. Barton's remarks about this. But I have a
    question. Sort of a philosophical question. Is leasing capacity
    to foreign governments or private entities is that going to
    degrade the capacity--the long-term capacity of the caverns?
        Mr. Evans.
        Mr. Evans. I am not an expert in the interests of foreign
    governments. I think that if appropriately handled that the
    caverns themselves can remain integral, if we use brine drive
    to be able to handle those issues and do multiple small
    drawdowns that we could continue to operate those in the
    interests of the government, should we wish to terminate
    agreements with either commercial or foreign countries.
        Mr. McNerney. Well, Mr. Rusco, do you believe that the
    current proposed legislation will give us enough information to
    provide that guidance to the operating SPRO effectively and not
    degrading its capability?
        Mr. Rusco. I think that the implementation of this
    legislation by DOE matters a lot. They would have to implement
    this in a way where there are controls.
        So, for example, if they were to lease this to other IEA
    members, lease the access capacity to store long-term oil,
    which I want to say we have the cheapest storage of anybody in
    the world and we know of at least two countries that have
    actually contacted DOE about leasing space like this.
        If you did that, then you're really enhancing global energy
    security because you have larger storage of crude oil in
    exactly the same place that it would be if we owned it all.
        Now, if the private sector owns it, then we have smaller
    capacity here. Other countries have to have their storage
    capacity somewhere else.
        Mr. McNerney. So my question is does the proposed
    legislation give us and you and the operators the capability to
    operate it in a way that would be beneficial rather than
    detrimental to the long-term capacity? Or does it need to be
    enhanced or improved?
        Mr. Rusco. I think that what I have read, which is just the
    discussion draft, that there--you could implement this in a way
    that would give you flexibility to say OK, we want more--if we
    want more of that capacity for our own storage, then when a
    contract is terminated you could take it back and use it as
    U.S. storage. So I believe it would have that flexibility.
        Mr. McNerney. OK. Thank you.
        Again, Mr. Rusco, do you think there's a good enough case
    for product reserve capacity in the western part of the
    country--on the West coast where we have earthquakes?
        Mr. Rusco. We looked at studies that were done by DOE and
    those studies came to the conclusion that in the case of the
    Southeast and the West Coast there were net positive benefits
    to these things.
        DOE chose not to release those reports. They say they're
    not complete. They've chosen not to complete those reports. But
    everything that is in those reports indicates that there are
    net positive benefits to that.
        Mr. McNerney. Thank you.
        Mr. Evans, you talked a little bit about co-mingling and
    the inevitability of co-mingling, and refineries are
    specialized in terms of the kind of oil they take.
        How is the co-mingling going to impact the refineries'
    ability to produce gasoline and other products?
        Mr. Evans. It's a great question. Each particular demand
    would be somewhat different, Congressman.
        But, however, if we were to lease to a, say, a shell or a
    commercial entity, the crude oil that would be stored there in
    their own cavern, if you would, you would think that it would
    make sense for them to store the material that they would
    utilize most effectively in terms of a turnaround of a refinery
    without product.
        So I think the market handles that piece. We'd have to be
    very careful about co-mingling the crude oil with the
    government oil, and those are practices that are commonly
    done--this is not an impossibility.
        But we are, for example, very sensitive to a high gas
    content oil in our reserves. We believe that's very detrimental
    to the overall safety and quality of the reserves.
        So we have to manage that extremely carefully. We think our
    current regime is a good one in terms of being able to respond
    to refinery needs on an instant basis and if we were able to
    add, similarly, to that mix within the right blend level, that
    that ought to be utilized well as well.
        Mr. McNerney. Thank you.
        Mr. Chairman, I yield back.
        Mr. Olson. Thank you.
        Mr. Doyle, 5 minutes for questions, sir.
        Mr. Doyle. And I thank you to the witnesses today.
        Let me just ask all the witnesses--it's been noted I think
    in Mr. Rusco's testimony that the U.S. will become a net
    exporter in the late 2020s but then become a net importer again
    in 2040, 2050s.
        So in your opinion, how should the U.S. be prepared for
    this long-term outlook for the SPRO?
        Mr. Rusco. Our most recent report is not the first time
    we've recommended to DOE that they do periodic strategic
    studies of conditions and report to Congress about what they
    see coming down the pike.
        So if we see a situation where our net imports are going to
    be increasing over the next few decades at some point, DOE
    should be up here talking to you all and saying we need to
    rethink our capacity.
        Similarly, if they think that risks have either reduced or
    increased of global supply disruptions or if there's big
    changes to demand or supply in any other way, all of that stuff
    needs to be modeled on a regular basis so that they can give
    you really quality information so you can make good decisions.
        Mr. Doyle. Do you agree with that, Mr. Evans?
        Mr. Evans. I do. I think the market volatility is very
    significant right now. I am not an expert in global markets.
    But reading the newspaper leads me to believe that there are a
    number of scenarios that could be invoked over time and,
    certainly, a value in having reserves.
        Mr. Doyle. Mr. Book.
        Mr. Book. I think humility would be the minimum requirement
    for anyone looking at the global oil market, given how much
    things have changed over the last 10 years.
        Mr. Doyle. Yes. Thank you.
        Mr. Rusco, you mentioned that $2 billion from the sale of
    crude oil from the SPRO is authorized for the modernization
    program.
        Has this been implemented, in your opinion, effectively so
    far and do you have a status update on the use of these funds?
        Mr. Rusco. I don't. I don't have an up to date status. I
    know that there have been some sales. I think it's $700
    million. But I don't think most of that money or much of that
    money has actually been spent.
        I think that DOE is doing some further analysis before they
    actually spend that money. But I can't give you much more of an
    answer. I could give you something for the record.
        Mr. Doyle. OK. Thank you.
        Mr. Evans, how safe is the current infrastructure and how
    is your company prioritizing and planning for long-term safety?
        Mr. Evans. So we are very safety conscious. You will note
    our last 3 years on the SPR are the safest years that we have
    seen in the 40-year operation. It's one of Fluor's core values.
        We are very sensitive to the infrastructure and the quality
    of the infrastructure. We run routine programs and
    investigations that will allow us to take a look at the
    quality, for example, of the piping and those kinds of things.
        In the short term, it's manageable with, for example, the
    degasification unit it's on its last legs. We are not going to
    extend that unit. It simply is not feasible and impossible to
    do that.
        When we invest in Life Extension Two, we'll specifically
    look at those old and perhaps more risky components that need
    to be removed and to see how we can possibly configure those to
    be in a more safe and operating environment in the future.
        For example, old pipelines that are 40 years old that are
    underground that are not possible to send a ``smart'' pig
    through perhaps we want to reroute those and have a different
    method to be able to track the quality of what we've done.
        So those are all a part of the department's plans in moving
    forward.
        Mr. Doyle. So tell me, what type of financial investment
    does Congress as well as the DOE need to make to update and
    secure the SPRO's infrastructure?
        Mr. Evans. Well, I think the current, roughly, $1.4 billion
    is a terrific start in getting the infrastructure where it
    needs to go. It certainly attacks the high-profile things that
    we've got in our infrastructure.
        However, it will not replace all of the issues. We'll need
    to have a continual authorization and appropriation for major
    maintenance projects as they come around because by no means
    are we able to use the current funding to replace everything
    that we know that will be coming along in the next 5 to 10
    years.
        Mr. Doyle. Do you have any idea what that number looks
    like, down the road?
        Mr. Evans. I am sorry. I do not, sir. We can take a look at
    that and get back to you.
        Mr. Doyle. OK.
        Thank you, Mr. Chairman. Thank you.
        Mr. Olson. Thank you, Mr. Doyle.
        Mr. Tonko, 5 minutes for questions, sir.
        Mr. Tonko. Thank you, Mr. Chair, and welcome, gentlemen.
        Mr. Rusco, as we have heard this morning, there have been a
    number of legislative requirements to sell SPRO oil in recent
    years.
        Do you believe that the frequent changes to SPRO's long-
    term size target have impacted DOE's ability to develop and
    maintain a modernization plan?
        Mr. Rusco. Well, I think that DOE's modernization plan was
    made largely without consideration for those sales and now
    they're adjusting to those sales and doing further analyses.
        So I think the modernization plan will also be affected by
    any legislation that comes out of this Congress about leasing
    excess capacity. But even if Congress does not mandate that
    they look into leasing excess capacity, DOE should do something
    with its excess capacity. They should either tell you that they
    need to shrink capacity or sell some, for example.
        But they need to do something because just leaving that
    excess capacity there is just throwing money away.
        Mr. Tonko. Thank you.
        And Mr. Evans, depending on how the leases are structured,
    might they result in additional stress on aging SPRO
    infrastructure, requiring greater investments in modernization
    and improvements that then might otherwise be required?
        Mr. Evans. It is certainly hopeful that--with decisions
    made on a timely basis to go forward from Congress that we'll
    be able to integrate many of the needs for commercialization
    within the current LE2 environment since there are significant
    upgrades to pipelines and those kinds of things.
        Certainly, we are not currently intending to build brine
    drive caverns. That's an additional cost that we would incur.
    There may be other costs associated as well with piping
    interlinking and valving and control room modifications. Right
    now, we are not aware of those.
        However, I would venture that in the long term those would
    also benefit the longevity and utilization of the reserve.
        Mr. Tonko. Thank you very much.
        And this question, I guess, could go to any of the three of
    you. It's my understanding that the proposed pilot program
    would allow DOE to recover additional costs from the leases.
        How much of the proposed pilot program's revenue should be
    dedicated to investing in the SPRO modernization?
        Mr. Evans. I don't have a number figure. That's probably
    better answered to you when we have some more detailed
    engineering studies and can get back to you on that topic.
        Mr. Tonko. Anyone else? Mr. Book, anything?
        Mr. Book. I am just an analyst, sir.
        [Laughter.]
        Mr. Tonko. Mr. Rusco, currently, is DOE able to enter into
    an agreement with a foreign nation to store oil at the SPRO
    without a change to the statute?
        Mr. Rusco. We believe that's correct, yes.
        Mr. Tonko. Thank you.
        And Mr. Book, I noticed in your testimony that there are
    other nations that meet their IEA requirements by holding oil
    abroad. Are there any reasons why entering into a contract with
    a foreign government may be preferable?
        Mr. Book. Well, the long-term nature of government
    strategic reserves comports with the existing infrastructure
    capabilities of the SPRO today.
        So the customer of first resort would be the customer that
    requires the least incremental maintenance. For that reason, it
    might make sense.
        Mr. Tonko. Yes. And do you believe that there would be
    demand from the private sector to lease this space?
        Mr. Book. Well, it depends an awful lot on what a market
    test shows--that there is going to be demand for more storage
    for crude oil in PAD 3 because there's going to be more crude
    oil production that will need to be stored.
        Mr. Tonko. OK. Anyone else have ideas on that?
        Mr. Rusco. I am sure there's going to be private interest
    in this capacity. It's the cheapest way to store oil.
        Now, you have to make changes in the way that you put it
    in, take it out. You have to use the brine drive to do that.
    But it's still going to be cheaper.
        Mr. Tonko. Right.
        Mr. Evans, did you want to comment on that?
        Mr. Evans. We would also agree with Mr. Book that it would
    be simplest, most efficacious and, perhaps, quickest to be able
    to lease whole caverns to foreign governments as an
    instantaneous benefit to them and to the U.S. government as
    well.
        Mr. Tonko. Thank you. Thank you, gentlemen, and thank you,
    Mr. Chair.
        I yield back.
        Mr. Olson. Thank you, and the chair now calls upon the
    ranking member, Mr. Rush, for one additional question.
        Mr. Rush. Mr. Tonko opened up some thoughts and I just want
    to ask--we've been talking a lot this morning about private
    interests and I don't think we've been hearing enough thought
    and consideration to foreign governments.
        Are any of you aware of any interests by foreign
    governments in leasing the underutilized storage space here in
    the U.S. and if you want to--what's the potential for----
        Mr. Rusco. We spoke with representatives from Australia and
    New Zealand, both of whom have an interest in leasing oil and
    space in the SPRO, and they have actually spoken with DOE about
    this in the past.
        Mr. Rush. Just those two nations?
        Mr. Rusco. Yes, but I----
        Mr. Rush. Do you see any potential for other similarly
    situated foreign governments?
        Mr. Rusco. I would be surprised if there are no other
    governments that are interested because of the differential
    cost. A lot of countries are storing oil and product in tanks
    and if you can store oil in a salt dome it's much cheaper, and
    so I would assume that there would be additional interest.
        Mr. Rush. Thank you, Mr. Chairman. I yield back.
        Mr. Olson. Thank you, and seeing no further members wishing
    to ask questions, I would like to thank our witnesses for
    coming today, and before you leave, Mr. Evans, one special tie
    we have together, we have the Fluor tie but I just found out my
    dad was a Fighting Siwash. Knox College played football there
    '56 through '60.
        Mr. Evans. Are you kidding me? That is absolutely amazing,
    Mr. Olson.
        Mr. Olson. No prairie fire. Siwash, Siwash, Siwash.
        Mr. Evans. When I was at Knox, which is a terrific
    institution, we were the Fighting Siwash and I've never,
    fortunately, given that up. That's so amazing.
        Mr. Olson. Mr. Rush knows that's in Galesburg, Illinois--
    Knox College.
        Mr. Evans. Galesburg. Grew up in Illinois and went to
    school there and my family has lived there since the 1850s. So
    Knox is a terrific institution. Thank you for that.
        Mr. Olson. Yes, sir. Yes, sir.
        And before we conclude, I ask unanimous consent to submit
    the following documents to the record: a report by GAO and a
    report from the Center on Global Energy Policy \*\.
        [The information appears at the conclusion of the hearing.]
    ---------------------------------------------------------------------------
        \*\ The information has been retained in committee files and can be
    found at: https://docs.house.gov/meetings/IF/IF03/20180724/108593/HHRG-
    115-IF03-20180724-SD013.pdf.
    ---------------------------------------------------------------------------
        And pursuant to committee rules, I remind members that they
    have 10 business days to submit additional questions for the
    record and I ask that the witnesses submit their responses
    within 10 business days upon receipt.
        Without objection, this subcommittee is adjourned.
        Go Siwash.
        [Whereupon, at 12:35 p.m., the committee was adjourned.]
        [Material submitted for inclusion in the record follows:]

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