[Federal Register Volume 71, Number 78 (Monday, April 24, 2006)]
[Proposed Rules]
[Pages 20909-20915]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-6102]


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DEPARTMENT OF ENERGY

10 CFR Part 626

RIN 1901-AB16


Procedures for the Acquisition of Petroleum for the Strategic 
Petroleum Reserve

AGENCY: Office of Petroleum Reserves, Department of Energy.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Energy Policy Act of 2005 directs the Secretary of Energy 
to develop procedures for the acquisition of petroleum for the 
Strategic Petroleum Reserve (SPR) in appropriate circumstances. The 
Department of Energy (DOE) is today proposing procedures for the 
acquisition of petroleum for the SPR, including acquisition by direct 
purchase and transfer of royalty oil from the Department of the 
Interior. The proposed rule also has provisions concerning the deferral 
of scheduled deliveries of petroleum for the SPR.

DATES: Comments are due on May 24, 2006.

ADDRESSES: You may submit comments, identified by RIN Number 1901-AB16 
by any of the following methods:
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     E-Mail: [email protected]. Include RIN Number 1901-
AB16 in the subject line of the message.
     Mail: Office of Petroleum Reserves, FE-40, U.S. Department 
of Energy, 1000 Independence Avenue, SW., Washington, DC 20585.
    You may obtain electronic copies of this notice of proposed 
rulemaking and review comments received by DOE at the following Web 
sites: http://www.fe.doe.gov/programs/reserves and http://www.spr.doe.gov. Those without Internet access may access this 
information by visiting the DOE Freedom of Information Reading Room, 
Rm. 1E-190, 1000 Independence Avenue SW., Washington, DC, (202) 586-
3142, between the hours of 9 a.m and 4 p.m., Monday to Friday, except 
Federal holidays.

FOR FURTHER INFORMATION CONTACT: Lynnette le Mat, Director, Operations 
and Readiness, Office of Petroleum Reserves, FE-43, U.S. Department of 
Energy, 1000 Independence Ave., SW., Washington, DC 20585, (202) 586-
4398.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction
    A. Background
    B. Energy Policy Act of 2005
II. Proposed Acquisition Procedures
    A. Discussion of Acquisition Principles
    B. Vehicles for Petroleum Acquisition
    C. Description of the Proposed Rule
III. Regulatory Review
    A. Executive Order 12866
    B. National Environmental Policy Act
    C. Regulatory Flexibility Act
    D. Paperwork Reduction Act
    E. Unfunded Mandates Reform Act of 1995
    F. Treasury and General Government Appropriations Act, 1999
    G. Executive Order 13132
    H. Executive Order 12988
    I. Treasury and General Government Appropriations, 2001

I. Introduction

A. Background

    The Strategic Petroleum Reserve was established pursuant to the 
Energy Policy and Conservation Act (EPCA) (42 U.S.C. 6201 et seq.) to 
store petroleum to diminish the impact on the United States of 
disruptions in petroleum supplies and to carry out the obligations of 
the United States under the International Energy Program. EPCA 
authorizes the storage of up to one billion barrels of petroleum and 
permits the Secretary of Energy to acquire petroleum for storage in the 
SPR by a variety of methods.
    Since its authorization, the Federal Government has created six 
crude oil storage sites and subsequently decommissioned two of the six. 
The SPR currently consists of underground storage caverns located in 
the four Government-owned sites. The locations are Bryan Mound and Big 
Hill in Texas and West Hackberry and Bayou Choctaw in Louisiana. These 
four storage locations have salt dome caverns with 727 million barrels 
of useable storage capacity.
    Over the last thirty years, the Government has acquired 
approximately 800 million barrels of petroleum for the SPR. Over 100 
million barrels of oil have been withdrawn from the SPR for sale or 
exchange. The inventory reached its highest level of 700.7 million 
barrels in August 2005 before the drawdown, exchange and sale of 20.8 
million barrels in the aftermath of Hurricane Katrina.
    Crude oil was initially acquired for the SPR by direct purchases on 
the open market. Through an Interagency Agreement, the Department of 
Defense served as DOE's agent to acquire crude oil using appropriated 
funds to attempt to meet a series of target fill rates specified by 
Congress. Petroleum was acquired through a combination of spot market 
purchases and term contracts, including a matching purchase and sale 
involving the Government's share of production from the Naval Petroleum 
Reserve in California. Except for various pauses occasioned by 
geopolitical events, e.g., Desert Storm, the Defense Fuel Supply Center 
(currently the Defense Energy Support Center) continued to function as 
DOE's acquisition agent for direct purchases through 1994, at which 
time funds from direct appropriations and receipts from sales in 1990 
and 1991 were exhausted.
    In December 1981, DOE entered into the first of a series of four 
country-to-country contracts with Petroleos Mexicanos (PEMEX), the 
state-owned oil company of Mexico. These term contracts--under which 
deliveries of approximately 220 million barrels of petroleum were 
completed in 1990--employed commercial market terms and were priced 
according to a formula indexed to prices of globally-traded petroleum.
    In 1996, in a series of congressionally-mandated sales, an 
aggregate 28 million barrels of SPR inventory were sold to fund SPR 
programmatic requirements and for general deficit reduction purposes. 
Subsequently, pursuant to a 1999 Memorandum of Understanding (MOU) 
between the Department of the Interior (DOI) and DOE, DOE initiated a 
program to replace the 28 million barrels by the transfer to DOE of 
crude oil royalties collected in-kind on production from Federal leases 
in the Gulf of Mexico Outer Continental Shelf. Under this MOU, DOE 
contracted with commercial entities to receive the royalty oil at 
offshore production facilities and transfer it to the SPR, either 
directly or by exchange for other crude oil meeting SPR quality 
specifications.
    In 1998, in order to improve the efficiency of drawdown operations 
at the Bryan Mound site, DOE conducted a competition under the exchange 
authority in EPCA to trade crude oil of one type for another type of 
superior quality. Although this resulted in a net decrease in the 
number of barrels in inventory, the upgrade in oil quality maintained 
the value of the

[[Page 20910]]

Government's assets and enhanced emergency response capabilities.
    In the fall of 2000, again under the EPCA exchange authority, DOE 
conducted a time exchange of oil from the SPR. Through open 
competition, DOE entered into agreements with nine companies to 
exchange 30 million barrels of oil. Under these agreements, oil 
delivered to companies from SPR sites was to be repaid the following 
year with oil of comparable quality and quantity plus additional 
premium barrels paid as interest.
    In November 2001, the Administration announced it would extend the 
royalty-in-kind program to fill the SPR to a level of 700 million 
barrels. To accomplish this, a new MOU was signed with the Department 
of Interior and DOE issued a series of competitive solicitations for 
six-month terms, similar to those used to acquire the previous 28 
million barrels.
    At various times since 1999, when the market moved into steep 
backwardation (prices for future barrels remained consistently low 
relative to near term prices), suppliers under both the time exchange 
and royalty-in-kind transfer programs requested that contractually 
scheduled deliveries to the SPR be delayed. DOE granted these deferral 
requests through individual negotiations for the future return of the 
originally scheduled barrels plus additional premium barrels.
    In addition, there have been periods when catastrophic events, most 
recently severe weather, have prompted requests for loans of oil from 
the SPR. These loans have been conducted as time exchanges in a manner 
similar to deferred deliveries, in that the loaned oil is returned plus 
additional barrels as interest.

B. Energy Policy Act of 2005

    The acquisition authority in section 160 of EPCA requires that the 
Secretary of Energy, to the greatest extent practicable, acquire 
petroleum products for the SPR in a manner consonant with the following 
objectives:
     Minimization of the cost of the SPR;
     Minimization of the Nation's vulnerability to a severe 
energy supply interruption;
     Minimization of the impact of such acquisition upon supply 
levels and market forces; and
     Encouragement of competition in the petroleum industry.

(42 U.S.C. 6240).

    The recently enacted Energy Policy Act of 2005 (Pub. L. 109-58) 
generally directs the Secretary of Energy to acquire petroleum to fill 
the SPR to the one billion barrel capacity authorized by section 154(a) 
of EPCA (42 U.S.C. 6234(a)) as expeditiously as practicable, without 
incurring excessive cost or appreciably affecting the price of 
petroleum products to consumers. DOE estimates that the acquisition of 
the approximately 300 million barrel difference between the current and 
authorized SPR inventory would likely take approximately 15 years. The 
rate of acquisition depends on the availability of capacity to receive 
and hold the oil and by the availability of oil either through transfer 
from the Department of the Interior to DOE or through purchases, which 
will be affected by the availability of funds.
    In addition, section 301(e)(2) of the Energy Policy Act of 2005 
amends EPCA by adding a new subsection (c) to section 160. Subsection 
(c) directs the Secretary of Energy to develop, with public notice and 
opportunity for comment, procedures consistent with the objectives of 
section 160 to acquire petroleum for the SPR. Such procedures must take 
into account the need to--
    (1) Maximize overall domestic supply of crude oil (including 
quantities stored in private sector inventories);
    (2) Avoid incurring excessive cost or appreciably affecting the 
price of petroleum products to consumers;
    (3) Minimize the costs to the Department of the Interior and DOE in 
acquiring such petroleum products (including foregone revenues to the 
Treasury when petroleum products for the SPR are obtained through the 
royalty-in-kind program);
    (4) Protect national security;
    (5) Avoid adversely affecting current and futures prices, supplies, 
and inventories of oil; and
    (6) Address other factors that the Secretary determines to be 
appropriate.
    The Energy Policy Act of 2005 further provides that the procedures 
developed under section 160(c) shall include procedures and criteria 
for the review of requests for the deferrals of scheduled deliveries.
    Along with the direction to expand the SPR to one billion barrels, 
section 303 of the Energy Policy Act of 2005 requires the Secretary of 
Energy to complete a proceeding to select sites ``necessary to enable 
acquisition by the Secretary of the full authorized volume of the 
Strategic Petroleum Reserve.'' (42 U.S.C. 6201 note.) This activity is 
currently underway.
    Consistent with the principles set forth in EPCA and the objectives 
of the Energy Policy Act of 2005, DOE now proposes procedures for oil 
acquisition by direct purchase and by royalty oil transfers from the 
Department of the Interior. Additionally, the procedures address 
deferrals of deliveries.

II. Proposed Acquisition Procedures

A. Discussion of Acquisition Principles

    DOE will consider a wide range of factors consonant with the 
objectives set forth in section 160 (b) of EPCA and the new section 160 
(c) added by the Energy Policy Act of 2005. Careful and deliberative 
consideration of these factors will occur prior to acquisition of 
petroleum for the SPR or deferral of scheduled deliveries.
    While the mission of the SPR is to provide energy security by 
storing substantial quantities of petroleum, the acquisition of 
petroleum to meet this long term objective must be conducted using the 
criteria set forth in EPCA, as amended by the Energy Policy Act of 
2005. When acquiring petroleum, whether by purchase or royalty 
transfer, DOE will seek to balance the objectives of assuring adequate 
security and minimizing market stress. To this end, DOE will consider 
various factors that may be affecting market fundamentals, current and 
projected SPR and commercial receipt capabilities, and the geopolitical 
climate. Consistent with the SPR mission, however, energy security will 
be the overriding objective as long as it does not result in undue 
impact on markets.
    Whether acquiring by purchase or royalty transfer, DOE will seek to 
maximize the overall domestic supply of crude oil. Assuming the 
necessary authorizations and appropriations have been made, DOE 
decisions on crude oil acquisition will take into consideration the 
current level of the SPR and private inventories, national and regional 
import dependency, the outlook for international and domestic 
production levels, oil acquisition by other stockpiling entities, the 
added security value of the marginal barrel in storage, incipient 
disruptions of supply or refining capability, the level of market 
volatility, the demand and supply elasticity to price changes, 
logistics and economics of petroleum movement, and any other 
considerations that may be pertinent to the balance of petroleum supply 
and demand. More indirect considerations, such as monetary policy, the 
current and projected rate of economic growth, and impacts on specific 
domestic market segments, as well as foreign policy considerations may 
also be pertinent to near-term acquisition strategy. All of these 
factors are recognized as having an impact, at some level, on U.S. 
energy security.
    The timing of DOE entry into the market, its sustained presence, 
and the

[[Page 20911]]

quantities sought will all be sensitive to these factors. DOE will 
remain aware of the extent to which the SPR fill rate and prices paid 
for its own acquisitions will impact supply availability and prices for 
other market participants. DOE will strive to avoid incurring excessive 
cost or appreciably affecting the price of petroleum products to 
consumers by analyzing market activity for crude oil and related 
commodities and prices of oil for delivery in future months as well as 
the perceived availability of near term and forward supplies.
    For purchases or exchanges, DOE will ensure the use of commercially 
reasonable terms and conditions.

B. Vehicles for Petroleum Acquisition

    DOE may acquire oil for the SPR through direct purchase, the 
transfer of royalty-in-kind oil, through deferrals and exchanges, or 
other means authorized in EPCA (42 U.S.C. 6239, 6240). In order to 
acquire oil, DOE may enter into agreements with other Federal agencies 
with relevant expertise and resources to acquire oil for the SPR 
consistent with the provisions of part 626.
1. Direct Purchases
    Use of the direct purchase method for oil acquisition is contingent 
on the availability of funds. If funds are made available, DOE proposes 
to provide public notice of its intent to issue a solicitation for the 
acquisition of crude oil. The quantity and quality of oil to be 
purchased would be identified in the solicitation. When acquiring by 
direct purchase, DOE would use competitive solicitations to assure that 
prices paid are fair and reasonable in a global market, and in line 
with contemporaneous commercial transactions for comparable quality 
crude oils. The use of open, continuous solicitations that allow entry 
into price and delivery negotiations would enable DOE to increase the 
rate of purchases if price volatility reduces prices below trend and 
offers the opportunity to reduce the average cost of oil acquisition. 
Under the proposed procedures, DOE also may decrease the rate of 
purchase if volatility or future price projections indicate a delay 
would result in better economy and less stress on seasonal markets. 
DOE's decision to enter the market, delay purchases or defer deliveries 
would follow the careful analysis of the effect of such a decision on 
current and futures prices, supplies and inventories of oil.
2. Royalty-in-Kind Transfers
    Oil acquisition by royalty-in-kind transfer is conducted in 
coordination with the Minerals Management Service of the Department of 
the Interior. The Department of the Interior is responsible for 
collecting royalties on production from leases on Federally-owned 
properties. The Federal Government receives royalties of a defined 
percentage of the amount or value of the oil produced from the leases. 
Under the royalty-in-kind acquisition method, the royalties are paid 
``in kind'', in the oil itself, and transferred to the SPR. In most 
cases, the royalty oil is provided to private companies under exchange 
agreements. In turn, these companies are bound by contract to provide 
oil of suitable quality to the SPR. If the royalty oil is of suitable 
quality and transportation logistics are amenable, it may be directly 
transferred to the SPR. DOE expects this would be a small proportion of 
the total oil transferred.
    When using royalty production to fill the SPR, DOE would minimize 
the cost to the Department of the Interior and DOE through its analysis 
of royalty values, as well as a comparative analysis of the relative 
market values of crude oil offered in exchange. Both agencies will 
encourage the direct transfer of royalty oil to the SPR when in the 
Government's interest.
3. Deferrals
    Secretary of Energy may defer scheduled deliveries to the SPR for 
the purpose of obtaining additional crude oil. Under the proposed rule, 
DOE could defer scheduled crude oil deliveries to the SPR to a later 
date in exchange for a premium, which would be paid to DOE in oil.
    The precise amount of that premium would be negotiated with the 
contractor by a DOE contracting officer. The determination of an 
appropriate premium would take into consideration the length of 
deferral as well as prevailing market conditions.

C. Description of the Proposed Rule

    This portion of the supplementary information discusses certain 
provisions of the proposed rule.

Section 626.03 (Applicability)

    This section limits the applicability of these procedures to the 
acquisition of petroleum for the SPR through direct purchase or 
transfer of royalty-in-kind oil, as well as to deferrals of 
contractually scheduled deliveries. The procedures do not apply to the 
following transactions during which oil may be acquired: (1) Country-
to-country oil purchases; (2) facility leases with payments in oil; and 
(3) contracts for oil not owned by the United States as provided for by 
section 171 of the Energy Policy and Conservation Act. These 
transactions generally are not conducted primarily for the acquisition 
of oil by DOE.

Section 626.04 (General Acquisition Strategy)

    This proposed section addresses the indicators which will be 
reviewed by DOE for likely market impacts prior to acquisition of 
petroleum for the SPR.

Section 626.05 (Notice of Acquisition)

    This section describes the contents of the acquisition solicitation 
and issuance activities. The proposed section also discusses the 
duration of the solicitation, definition of quality specifications, 
quantity determination, offer procedures and delivery.

Section 626.06 (Acquiring Oil by Direct Purchase)

    This proposed section addresses in more detail the development of 
an acquisition strategy taking into account specific SPR quantitative 
and qualitative requirements. This proposed section also addresses the 
method by which solicitations are issued and offers evaluated.

Section 626.07 (Royalty Transfer and Exchange)

    This proposed section describes how DOE, in coordination with the 
Department of the Interior, would proceed to fill the SPR with the 
Government's share of U.S. Gulf of Mexico offshore royalty production, 
either by direct transport to SPR facilities or through a competitive 
exchange with industry. Successful exchange offers generally would be 
those which provide the greatest value of exchange oil to the 
Government relative to the value of the royalty oil delivered to the 
contractor.

Section 626.08 (Deferrals of Contractually Scheduled Deliveries)

    This proposed section addresses the conditions in which DOE would 
consider and the process by which it would delay deliveries scheduled 
under existing contracts to the mutual benefit of the Government and 
other market participants.

III. Regulatory Review

A. Executive Order 12866

    Today's proposed rule has been determined to be a ``significant 
regulatory action'' under Executive Order 12866, ``Regulatory Planning 
and Review,'' 58 FR 51735 (October 4, 1993). Accordingly, this action 
was subject to review under that Executive Order by the Office of 
Information and Regulatory

[[Page 20912]]

Affairs of the Office of Management and Budget.

B. National Environmental Policy Act

    DOE has determined that this proposed rule is covered under the 
Categorical Exclusion found in the Department's National Environmental 
Policy Act regulations at paragraph A.6 of Appendix A to Subpart D, 10 
CFR part 1021, which applies to rulemakings that are strictly 
procedural. Accordingly, neither an environmental assessment nor an 
environmental impact statement is required.

C. Regulatory Flexibility Act

    The Regulatory Flexibility Act (5 U.S.C. 601 et seq.) requires 
preparation of an initial regulatory flexibility analysis for any rule 
that by law must be proposed for public comment, unless the agency 
certifies that the rule, if promulgated, will not have a significant 
economic impact on a substantial number of small entities. As required 
by Executive Order 13272, ``Proper Consideration of Small Entities in 
Agency Rulemaking,'' 67 FR 53461 (August 16, 2002), DOE published 
procedures and policies on February 19, 2003, to ensure that the 
potential impacts of its rules on small entities are properly 
considered during the rulemaking process (68 FR 7990). DOE has made its 
procedures and policies available on the Office of General Counsel's 
Web site: http://www.gc.doe.gov.
    DOE has reviewed today's proposed procedures under the provisions 
of the Regulatory Flexibility Act and the procedures and policies 
published on February 19, 2003. These proposed procedures would not 
directly affect small businesses or other small entities. The proposed 
procedures would apply only to individuals who are engaged in the 
acquisition of petroleum products for the Strategic Petroleum Reserve. 
On the basis of the foregoing, DOE certifies that the proposed 
procedures, if implemented would not have a significant economic impact 
on a substantial number of small entities. Accordingly, DOE has not 
prepared a regulatory flexibility analysis for this rulemaking. DOE's 
certification and supporting statement of factual basis will be 
provided to the Chief Counsel for Advocacy of the Small Business 
Administration pursuant to 5 U.S.C. 605(b).

D. Paperwork Reduction Act

    This proposed rule would not impose any new collection of 
information subject to review and approval by the Office of Management 
and Budget (OMB) under the Paperwork Reduction Act (PRA), 44 U.S.C. 
3501 et seq.

E. Unfunded Mandates Reform Act of 1995

    The Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4) generally 
requires Federal agencies to examine closely the impacts of regulatory 
actions on State, local, and tribal governments. Subsection 101(5) of 
title I of that law defines a Federal intergovernmental mandate to 
include any regulation that would impose upon State, local, or tribal 
governments an enforceable duty, except a condition of Federal 
assistance or a duty arising from participating in a voluntary federal 
program. Title II of that law requires each Federal agency to assess 
the effects of Federal regulatory actions on State, local, and tribal 
governments, in the aggregate, or to the private sector, other than to 
the extent such actions merely incorporate requirements specifically 
set forth in a statute. Section 202 of that title requires a Federal 
agency to perform a detailed assessment of the anticipated costs and 
benefits of any rule that includes a Federal mandate which may result 
in costs to State, local, or tribal governments, or to the private 
sector, of $100 million or more. Section 204 of that title requires 
each agency that proposes a rule containing a significant Federal 
intergovernmental mandate to develop an effective process for obtaining 
meaningful and timely input from elected officers of State, local, and 
tribal governments.
    These proposed procedures would not impose a Federal mandate on 
State, local or tribal governments. The proposed rule would not result 
in the expenditure by State, local, and tribal governments in the 
aggregate, or by the private sector, of $100 million or more in any one 
year. Accordingly, no assessment or analysis is required under the 
Unfunded Mandates Reform Act of 1995.

F. Treasury and General Government Appropriations Act, 1999

    Section 654 of the Treasury and General Government Appropriations 
Act, 1999 (Pub. L. 105-277) requires Federal agencies to issue a Family 
Policymaking Assessment for any proposed rule that may affect family 
well being. These proposed procedures apply only to Federal employees 
involved in the acquisition of petroleum products for the SPR. While 
some of these individuals may be members of a family, the proposed rule 
would not have any impact on the autonomy or integrity of the family as 
an institution. Accordingly, DOE has concluded that it is not necessary 
to prepare a Family Policymaking Assessment.

G. Executive Order 13132

    Executive Order 13132 (64 FR 43255, August 4, 1999) imposes certain 
requirements on agencies formulating and implementing policies or 
regulations that preempt State law or that have federalism 
implications. Agencies are required to examine the constitutional and 
statutory authority supporting any action that would limit the 
policymaking discretion of the States and carefully assess the 
necessity for such actions. DOE has examined this proposed rule and has 
determined that it would not preempt State law and would not have a 
substantial direct effect on the States, on the relationship between 
the National Government and the States, or on the distribution of power 
and responsibilities among the various levels of government. No further 
action is required by Executive Order 13132.

H. Executive Order 12988

    With respect to the review of existing regulations and the 
promulgation of new regulations, section 3(a) of Executive Order 12988, 
Civil Justice Reform, 61 FR 4729 (February 7, 1996), imposes on 
Executive agencies the general duty to adhere to the following 
requirements: (1) Eliminate drafting errors and ambiguity; (2) write 
regulations to minimize litigation; and (3) provide a clear legal 
standard for affected conduct rather than a general standard and 
promote simplification and burden reduction. With regard to the review 
required by section 3(a), section 3(b) of Executive Order 12988 
specifically requires that Executive agencies make every reasonable 
effort to ensure that the regulation: (1) Clearly specifies the 
preemptive effect, if any; (2) clearly specifies any effect on existing 
Federal law or regulation; (3) provides a clear legal standard for 
affected conduct while promoting simplification and burden reduction; 
(4) specifies the retroactive effect, if any; (5) adequately defines 
key terms; and (6) addresses other important issues affecting clarity 
and general draftsmanship under any guidelines issued by the Attorney 
General. Section 3(c) of Executive Order 12988 requires Executive 
agencies to review regulations in light of applicable standards in 
section 3(a) and section 3(b) to determine whether they are met or it 
is unreasonable to meet one or more of them. DOE has completed the 
required review and determined that, to the extent permitted by law, 
the proposed

[[Page 20913]]

procedures meet the relevant standards of Executive Order 12988.

I. Treasury and General Government Appropriations Act, 2001

    The Treasury and General Government Appropriations Act, 2001 (44 
U.S.C. 3516, note) provides for agencies to review most disseminations 
of information to the public under guidelines established by each 
agency pursuant to general guidelines issued by OMB.
    OMB's guidelines were published at 67 FR 8452 (February 22, 2002), 
and DOE's guidelines were published at 67 FR 62446 (October 7, 2002). 
DOE has reviewed today's notice under the OMB and DOE guidelines and 
has concluded that it is consistent with applicable policies in those 
guidelines.

List of Subjects in 10 CFR Part 626

    Government contracts, Oil and gas reserves, Strategic and critical 
materials.

    Issued in Washington, DC, on April 6, 2006.
Thomas D. Shope,
Acting Assistant Secretary for Fossil Energy.

    For the reasons stated in the preamble, DOE hereby proposes to 
amend chapter II of title 10 of the Code of Federal Regulations by 
adding a new part 626 as set forth below:

PART 626--PROCEDURES FOR ACQUISITION OF PETROLEUM FOR THE STRATEGIC 
PETROLEUM RESERVE

Sec.
626.01 Purpose.
626.02 Definitions.
626.03 Applicability.
626.04 General Acquisition Strategy.
626.05 Acquisition Proce--General.
626.06 Acquiring Oil by Direct Purchase.
626.07 Royalty Transfer and Exchange.
626.08 Deferrals of Contractually Scheduled Deliveries.

    Authority: 42 U.S.C. 6240(c); 42 U.S.C. 7101, et seq.


Sec.  626.01  Purpose.

    This part establishes the procedures for acquiring petroleum for, 
and deferring contractually scheduled deliveries to, the Strategic 
Petroleum Reserve.


Sec.  626.02  Definitions.

    Backwardation means a market situation in which prices are 
progressively lower in succeeding delivery months than in earlier 
months.
    Contango means a market situation in which prices are progressively 
higher in the succeeding delivery months than in earlier months.
    Contract means the agreement under which DOE acquires SPR 
petroleum, consisting of the solicitation, the contract form signed by 
both parties, the successful offer, and any subsequent modifications, 
including those granting requests for deferrals.
    Contracting Officer means the person executing acquisition 
contracts on behalf of the Government, including the authorized 
representative of a Contracting Officer acting within the limits of his 
or her authority.
    DEAR means the Department of Energy Acquisition Regulation.
    Deferral means a process whereby petroleum scheduled for delivery 
to the SPR in a specific contract period is rescheduled for later 
delivery, outside of that period and encompasses the future delivery of 
the originally scheduled quantity plus an in-kind premium.
    DOE means the Department of Energy.
    Exchange means a process whereby petroleum owned by or due to the 
SPR is provided to a person or contractor in return for petroleum of 
comparable quality plus a premium quantity of petroleum delivered to 
the SPR in the future, or when SPR petroleum is traded for petroleum of 
a different quality for operational reasons based on the relative 
values of the quantities traded.
    FAR means the Federal Acquisition Regulation.
    Government means the United States Government.
    International Energy Program means the program established by the 
Agreement on an International Energy Program, signed by the United 
States on November 18, 1974, including any subsequent amendments and 
additions to that Agreement.
    OPR means the Office of Petroleum Reserves within the DOE Office of 
Fossil Energy whose responsibilities include the operation of the 
Strategic Petroleum Reserve.
    Petroleum means crude oil, residual fuel oil, or any refined 
product (including any natural gas liquid, and any natural gas liquid 
product) owned, or contracted for, by DOE and in storage in any 
permanent SPR facility, or temporarily stored in other storage 
facilities.
    Secretary means the Secretary of Energy.
    Strategic Petroleum Reserve or SPR means the DOE program 
established by Title I, Part B, of the Energy Policy and Conservation 
Act, 42 U.S.C. 6201 et seq.


Sec.  626.03  Applicability.

    The procedures in this part apply to the acquisition of petroleum 
by DOE for the Strategic Petroleum Reserve through direct purchase or 
transfer of royalty-in-kind oil, as well as to deferrals of 
contractually scheduled deliveries.


Sec.  626.04  General acquisition strategy.

    (a) Criteria for commencing acquisition. To reduce the potential 
for negative impacts from market participation, DOE shall review the 
following factors prior to commencing acquisition of petroleum for the 
SPR:
    (1) The current inventory of the SPR;
    (2) The current level of private inventories;
    (3) Days of net import protection;
    (4) Current price levels for crude oil and related commodities;
    (5) The outlook for international and domestic production levels;
    (6) Existing or potential disruptions in supply or refining 
capability;
    (7) The level of market volatility;
    (8) Futures market price differentials for crude oil and related 
commodities; and
    (9) Any other factor the consideration of which the Secretary deems 
to be necessary or appropriate.
    (b) Review of rate of acquisition. DOE shall review the appropriate 
rate of oil acquisition each time an open market acquisition has been 
suspended for more than three months, and every six months in the case 
of ongoing or suspended royalty-in-kind transfers.
    (c) Acquisition through other Federal agencies. DOE may enter into 
arrangements with another Federal agency for that agency to acquire oil 
for the SPR on behalf of DOE.


Sec.  626.05  Acquisition procedures--general.

    (a) Notice of acquisition.
    (1) Except when DOE has determined there is good cause to do 
otherwise, DOE shall provide advance public notice of its intent to 
acquire petroleum for the SPR. The notice of acquisition is usually in 
the form of a solicitation. DOE shall state in the notice of 
acquisition the general terms and details of DOE's crude oil 
acquisition and, to the extent feasible, shall inform the public of its 
overall fill goals, so that they may be factored into market 
participants' plans and activities.
    (2) The notice of acquisition generally states:
    (i) The method of acquisition to be employed;
    (ii) The time that the solicitations will be open;
    (iii) The quantity of oil that is sought;
    (iv) The minimum crude oil quality requirements;
    (v) The acceptable delivery locations; and
    (vi) The necessary instructions for the offer process.
    (b) Method of acquisition.

[[Page 20914]]

    (1) DOE shall define the method of crude oil acquisition, direct 
purchase or royalty-in-kind transfer and exchange, in the notice of 
acquisition.
    (2) DOE shall determine the method of crude oil acquisition after 
taking into account the availability of appropriated funds, current 
market conditions, the availability of oil from the Department of the 
Interior, and other considerations DOE deems to be relevant.
    (c) Solicitation.
    (1) To secure the economic benefit and security of a diversified 
base of potential suppliers of petroleum to the SPR, DOE shall maintain 
a listing, developed through on-line registration and personal contact, 
of interested suppliers. Upon the issuance of a solicitation, DOE shall 
notify potential suppliers via their registered e-mail addresses.
    (2) DOE shall make the solicitation publicly available on the Web 
sites of the DOE Office of Fossil Energy http://www.fe.doe.gov/programs/reserves and the OPR http://www.spr.doe.gov.
    (d) Timing and duration of solicitation.
    (1) DOE shall determine crude oil requirements on nominal six-month 
cycles, and shall review and update these requirements prior to each 
solicitation cycle.
    (2) DOE may terminate all solicitations and contracts pertaining to 
the acquisition of crude oil at the convenience of the Government, and 
in such event shall not be responsible for any costs incurred by 
suppliers, other than for oil delivered to the SPR.
    (e) Quality.
    (1) DOE shall define minimum crude oil quality specifications for 
the SPR. DOE shall include such specifications in acquisition 
solicitations, and shall make them available on the Web sites of the 
DOE Office of Fossil Energy http://www.fe.doe.gov/programs/reserves and 
the OPR http://www.spr.doe.gov.
    (2) DOE shall periodically review the quality specifications to 
ensure, to the greatest extent practicable, the crude oil mix in 
storage matches the demand of the United States refining system.
    (f) Quantity. In determining the quantities of oil to be delivered 
to the SPR, DOE shall:
    (1) Take into consideration market conditions and the availability 
of transportation systems; and
    (2) Seek to avoid adversely affecting other market participants or 
crude oil market fundamentals.
    (g) Offer and evaluation procedures.
    (1) Each solicitation shall provide necessary instructions on offer 
format and submission procedures. The details of the offer, evaluation 
and award procedures may vary depending on the method of acquisition.
    (2) DOE shall use relative crude values and time differentials to 
the maximum extent practicable to manage acquisition and delivery 
schedules to reduce acquisition costs.
    (3) DOE shall evaluate offers based on prevailing market prices of 
specific crude oils, and shall award contracts on a competitive basis.
    (4) Whether acquisition is by direct purchase or royalty transfer 
and exchange on a term contract basis, DOE shall use a price index to 
account for fluctuations in absolute and relative market prices at the 
time of delivery to reduce market risk to all parties throughout the 
contract term.
    (h) Scheduling and delivery.
    (1) Except as provided in paragraph (4) of this section, DOE shall 
accept offers for crude oil delivered to specified SPR storage sites 
via pipeline or as waterborne cargos delivered to the terminals serving 
those sites.
    (2) Except as provided in paragraph (4) of this section, DOE shall 
generally establish schedules that allow for evenly spaced deliveries 
of economically-sized marine and pipeline shipments within the 
constraints of SPR site and commercial facilities receipt capabilities.
    (3) DOE shall strive to maximize U.S. flag carrier utilization 
through the terms of its supply contracts.
    (4) DOE reserves the right to accept offers for other methods of 
delivery if, in DOE's sole judgment, market conditions and logistical 
constraints require such other methods.


Sec.  626.06  Acquiring oil by direct purchase.

    (a) General. For the direct purchase of crude oil, DOE shall, 
through certified contracting officers, conduct crude oil acquisitions 
in accordance with the FAR and the DEAR.
    (b) Acquisition strategy.
    (1) DOE solicitations:
    (i) May be either continuously open or fixed for a period of time 
(usually no longer than 6 months); and
    (ii) May provide either for prompt delivery or for delivery at 
future dates.
    (2) DOE may alter the acquisition plan to take advantage of 
differentials in prices for different qualities of oil, based on a 
consideration of the availability of storage capacity in the SPR sites, 
the logistics of changing delivery streams, and the availability of 
ships, pipelines and terminals to move and receive the oil.
    (3) Based on the market analysis described in paragraph (d) of this 
section, DOE may suspend competition or reject offers on the basis of 
Government estimates that project substantially lower oil prices in the 
future than those contained in offers. If DOE determines there is a 
high probability that the cost to the Government can be reduced without 
significantly affecting national energy security goals, DOE may either 
contract for delivery at a future date or delay purchases to take 
advantage of projected future lower prices. Conversely, DOE may 
increase the rate of purchases if prices fall below recent price trends 
or futures markets present a significant contango and prices offer the 
opportunity to reduce the average cost of oil acquisitions in 
anticipation of higher prices.
    (4) Based on the market analysis described in paragraph (d) of this 
section, DOE may suspend the solicitation or refuse offers or decrease 
the rate of purchase if DOE determines acquisition will add significant 
upward pressure to prices either regionally or on a world-wide basis. 
DOE may consider recent price changes, private inventory levels, oil 
acquisition by other stockpiling entities, the outlook for world oil 
production, incipient disruptions of supply or refining capability, 
logistical problems for moving petroleum products, macroeconomic 
factors, and any other considerations that may be pertinent to the 
balance of petroleum supply and demand.
    (c) Fill requirements determination.
    DOE shall develop SPR fill requirements for each solicitation based 
on an assessment of national energy security goals, the availability of 
storage capacity, and the need for specific grades and quantities of 
crude oil.
    (d) Market analysis.
    (1) DOE shall establish a market value for each crude type to be 
acquired based on a market analysis at the time of contract award.
    (2) In conducting the market analysis, DOE may use prices on 
futures markets, spot markets, recent price movements, current and 
projected shipping rates, forecasts by the DOE Energy Information 
Administration, and any other analytic tools available to DOE to 
determine the most desirable purchase profile.
    (3) A market analysis supporting a suspension decision may consider 
recent price changes, private inventory levels, oil acquisition by 
other stockpiling entities, the outlook for world oil production, 
incipient disruptions of supply or refining capability, logistical 
problems for moving petroleum products, macroeconomic factors, and any 
other considerations that may be pertinent to

[[Page 20915]]

the balance of petroleum supply and demand.
    (e) Evaluation of offers.
    (1) DOE shall evaluate offers using:
    (i) The criteria and requirements stated in the solicitation; and
    (ii) The market analysis under paragraph (d) of this section.
    (2) DOE shall require financial guarantees from contractors.


Sec.  626.07  Royalty transfer and exchange.

    (a) General.
    DOE shall conduct royalty transfers pursuant to an agreement 
between DOE and the Department of the Interior for the transfer of 
royalty oil.
    (b) Acquisition strategy.
    (1) DOE and the Department of the Interior shall select a royalty 
volume from specified leases for transfer usually over six-month 
periods, beginning April 1 and October 1.
    (2) If logistics and crude oil quality are compatible with SPR 
receipt capabilities and requirements respectively, DOE may take the 
royalty oil directly from the Department of the Interior and place it 
in SPR storage sites. Otherwise, DOE may competitively solicit 
suppliers to deliver oil of comparable value to the SPR in exchange for 
the receipt of royalty-in-kind oil.
    (3) If, based on the market analysis described in paragraph (d) of 
this section, DOE determines there is a high probability that the cost 
to the Government can be reduced without significantly affecting 
national energy security goals, DOE may contract for delivery at a 
future date in expectation of lower prices and a higher quantity of oil 
in exchange. Conversely, it may schedule deliveries at an earlier date 
under the contract in anticipation of higher prices at later dates.
    (4) Based on the market analysis in paragraph (d) of this section, 
DOE may, after consultation with the Department of the Interior, 
suspend the transfer of royalty oil to DOE if it appears the added 
demand for oil will add significant upward pressure to prices either 
regionally or on a world-wide basis.
    (c) Fill requirements determination.
    DOE shall develop SPR fill requirements for each solicitation based 
on an assessment of national energy security goals, the availability of 
royalty oil and storage capacity, and need for specific grades and 
quantities of crude oil.
    (d) Market analysis.
    (1) DOE may use prices on futures markets, spot markets, recent 
price movements, current and projected shipping rates, forecasts by the 
DOE Energy Information Administration, and any other analytic tools to 
determine the most desirable acquisition profile.
    (2) A market analysis supporting a suspension decision may consider 
recent price changes, private inventory levels, oil acquisition by 
other stockpiling entities, the outlook for world oil production, 
incipient disruptions of supply or refining capability, logistical 
problems for moving petroleum products, macroeconomic factors, and any 
other considerations that may be pertinent to the balance of petroleum 
supply and demand.
    (e) Evaluation of royalty exchange offers.
    (1) DOE shall evaluate offers using:
    (i) The criteria and requirements stated in the solicitation; and
    (ii) The market analysis under paragraph (d) of this section.
    (2) DOE shall require financial guarantees from contractors prior 
to evaluation.


Sec.  626.08  Deferrals of contractually scheduled deliveries.

    (a) General.
    (1) DOE prefers to take deliveries of petroleum for the SPR at 
times scheduled under applicable contracts. However, in the event the 
market is distorted by disruption to supply or other factors, DOE may 
defer scheduled deliveries or request or entertain deferral requests 
from contractors.
    (2) A contractor seeking to defer scheduled deliveries of oil to 
the SPR may submit a deferral request to DOE.
    (b) Deferral criteria. DOE shall only grant a deferral request for 
negotiation if the Government can increase the volume of oil in the SPR 
and, if DOE determines, based on DOE's deferral analysis, that at least 
one of the following conditions exists:
    (1) The Government can reduce the cost of its oil acquisition per 
barrel and increase the volume of oil being delivered to the SPR by 
means of the premium barrels required by the deferral process.
    (2) The Government anticipates private inventories are approaching 
a point where unscheduled outages may occur.
    (3) There is evidence that refineries are reducing their run rates 
for lack of feedstock.
    (4) There is an unanticipated disruption to crude oil supply.
    (c) Negotiating terms.
    (1) If DOE decides to negotiate a deferral of deliveries, DOE shall 
estimate the market value of the deferral and establish a strategy for 
negotiating with suppliers the minimum percentage of the market value 
to be taken by the Government.
    (2) DOE shall only agree to amend the contract if the negotiation 
results in an agreement to give the Government a fair and reasonable 
share of the market value.

 [FR Doc. E6-6102 Filed 4-21-06; 8:45 am]
BILLING CODE 6450-01-P