[Federal Register Volume 71, Number 216 (Wednesday, November 8, 2006)]
[Rules and Regulations]
[Pages 65376-65383]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-18786]


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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: Final rule.

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SUMMARY: The Energy Policy Act of 2005 (EPAct 2005) directs the 
Secretary of Energy (Secretary) to develop procedures for the 
acquisition of petroleum for the Strategic Petroleum Reserve (SPR) in 
appropriate circumstances. On April 24, 2006, the Department of Energy 
(DOE) published proposed procedures in the Federal Register for public 
comment. Today DOE is issuing the final rule governing 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 (DOI). The final rule also has provisions concerning the 
deferral of scheduled deliveries of petroleum for the SPR. With the 
exception of some minor clarification changes and definitional and 
editorial adjustments, these final procedures are substantially the 
same as those proposed.

[[Page 65377]]


DATES: Effective Date: This final rule is effective December 8, 2006.

FOR FURTHER INFORMATION CONTACT: Lynnette le Mat, Director, Operations 
and Readiness, Office of Petroleum Reserves, Office of Fossil Energy, 
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. The Energy Policy Act of 2005
II. Discussion of the Comments and Changes to Proposed Procedures
III. Final Acquisition Procedures
    A. Discussion of Acquisition Principles
    B. Vehicles for Petroleum Acquisition
IV. Regulatory Review

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 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 has 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 a 1977 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, such as Desert Storm in 1991, direct purchases 
continued with the Defense Fuel Supply Center (currently the Defense 
Energy Support Center) functioning as DOE's acquisition agent 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 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 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 DOI, and DOE 
issued a series of competitive solicitations for six-month terms, 
similar to those used previously to acquire 28 million barrels.
    At various times since 1999, when the market moved into steep 
backwardation (prices are progressively lower in succeeding delivery 
months than in earlier months), 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 emergency time 
exchanges of oil from the SPR. These emergency time exchanges have been 
conducted in a manner similar to deferred deliveries, in that the 
exchanged oil is returned plus additional barrels as a premium.

B. EPAct 2005

    Section 159 of EPCA (42 U.S.C. 6239) authorizes the Secretary to 
acquire petroleum products for storage in the SPR by purchase, 
exchange, or otherwise, subject to the provisions of section 160. The 
acquisition authority in section 160(b) of EPCA requires that the 
Secretary, to the greatest extent practicable, acquire petroleum 
products for the SPR in a manner consistent 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.
    In addition, section 301(e)(2)(A) of EPAct 2005 amends EPCA by 
adding a new subsection (c) to section 160. Subsection (c) directs the 
Secretary 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;

[[Page 65378]]

    (3) Minimize the costs to DOI 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.
    Section 301(e)(2)(B) of EPAct 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.
    Consistent with the principles set forth in EPCA and the 
requirements and objectives of EPAct 2005, DOE is issuing this final 
rule establishing procedures for oil acquisition by direct purchase and 
by royalty oil transfers from DOI, including procedures to address 
deferrals of scheduled deliveries.
    These acquisition procedures will be effective thirty (30) days 
after the publication of this final rule in the Federal Register. 
However, the President has directed DOE to defer filling the SPR for 
the summer of 2006. Therefore, DOE has no current plans to utilize 
these procedures to enter into the market to acquire additional oil 
supplies for the SPR.

II. Discussion of the Comments and Changes to Proposed Procedures

    As previously mentioned, DOE published a notice of proposed 
rulemaking in the Federal Register on April 24, 2006 (78 FR 20909) and 
requested public comments on the proposed procedures. In response to 
the request for comments, three comments were received, one from an 
anonymous member of the general public, one from a trade association 
and one from a refiner.
    The general public comment was not directed specifically at the 
proposed SPR acquisition regulations. It simply encouraged DOE to look 
for more effective measures to deter disruptions in the U.S oil supply.
    The trade association comment recommended that DOE should establish 
procedures to acquire oil for the SPR when prices are low in order to 
minimize the effect on present and future market conditions and 
petroleum product prices. It suggested that the proposed procedures be 
modified to provide that DOE would not acquire oil for the SPR or would 
delay acquisition transactions when prices exceed a fixed percentage 
from the median monthly average for a specified period. Spec- ifically, 
it recommended setting this trigger at a 40 percent differential using 
the prior ten year period. Generally, DOE does not support tying the 
acquisition of oil for the SPR or deferral of transactions to a 
specific pricing trigger. DOE believes that such trigger mechanisms do 
not always reflect the true state of petroleum markets or necessitate 
activities related to petroleum stockpiles. Use of a predetermined 
calculation raises definitional issues and questions as to accuracy and 
timeliness of data, questions as to whether the market is experiencing 
sustained trends versus anomalies, and questions as to what would be 
the appropriate action when calculations no longer exceed thresholds. 
DOE prefers to retain the flexibility to achieve the statutory 
objectives through the management of acquisition activities only after 
a careful review of a number of market indicators. For these reasons, 
DOE has not accepted this recommendation.
    Finally, the refiner comment suggested that the wording for 
termination of contracts in proposed section 626.5(d)(2) be clarified. 
The comment wanted clarification that the Government would be liable 
for any reasonable costs incurred by suppliers in the performance of 
valid contracts for the delivery of SPR oil prior to termination or 
deferral of such contracts. The comment suggested using language 
modified from the termination provisions of the SPR price competitive 
sales regulations in 10 CFR Part 625. DOE agrees with the intent of 
this recommendation and has modified the language of sections 
626.5(d)(2) and 626.8(c)(1) accordingly.
    The procedures adopted in section 626.1 do not represent actual 
terms and conditions to be contained in contracts for the acquisition 
of SPR petroleum.
    The definition of Contracting Officer in section 626.2 was modified 
to more clearly define the responsibilities of the Contracting Officer.

III. Final 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 EPAct 2005. DOE will give careful and deliberative 
consideration of these factors 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 EPAct 2005. When 
acquiring petroleum, whether by purchase or royalty transfer, DOE will 
seek to balance the objectives of assuring adequate security and 
minimizing impact to the petroleum market. 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.
    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 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

[[Page 65379]]

and exchanges, or other means authorized in sections 159 and 160 of 
EPCA. 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 10 CFR Part 626.
1. Direct Purchases
    Use of the direct purchase method for oil acquisition is contingent 
upon the availability of funds. If funds are made available, DOE would 
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 these procedures, DOE also may decrease the rate of purchase if 
volatility or future price projections indicate a delay would result in 
better acquisition prices and less stress on seasonal petroleum 
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
    DOI is responsible for collecting royalties on production from 
leases on Federally-owned properties. DOI, on behalf of the Federal 
Government, receives royalties of a defined percentage of the amount or 
value of the oil produced from the leases. Royalties taken ``in kind'', 
in the oil itself, may be transferred to the SPR pursuant to agreement 
between DOE and DOI for the transfer of royalty oil. Such transfers are 
conducted in coordination with the Minerals Management Service of DOI. 
Under the royalty-in-kind acquisition method in this rule, DOE may take 
the royalty oil directly from DOI and place it in the SPR if it is of 
suitable quality and transportation logistics are amenable for direct 
transfer. DOE expects this would be a small proportion of the total oil 
transferred. However, in most cases, DOE will competitively solicit 
suppliers to deliver oil of comparable value to the SPR in exchange for 
the receipt of royalty-in-kind oil. In these competitive exchange 
agreements, the suppliers are bound by contract to provide oil of 
suitable quality to the SPR.
    When using royalty production to fill the SPR, DOE would minimize 
the cost to the DOI and DOE through its analysis of royalty values, as 
well as a comparative analysis of the relative market values of crude 
oil offered in a competitive exchange. Both agencies will encourage the 
direct transfer of royalty oil to the SPR when in the Government's 
interest.
3. Deferrals
    DOE may defer scheduled deliveries to the SPR for the purpose of 
obtaining additional crude oil. Under the 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.
4. Exceptions to Applicability
    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 EPCA. 
These excluded transactions generally are not conducted primarily for 
the acquisition of oil by DOE.

IV. Regulatory Review

A. Executive Order 12866

    Today's 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 Affairs of the Office of Management and 
Budget.

B. National Environmental Policy Act

    DOE has determined that this 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 procedures under the provisions of the 
Regulatory Flexibility Act and the procedures and policies published on 
February 19, 2003. These procedures would not directly affect small 
businesses or other small entities. The 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 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 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

[[Page 65380]]

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 procedures would not impose a Federal mandate on State, local 
or tribal governments. The 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 rule that may affect family well being. 
These 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 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, ``Federalism,'' 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 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 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.

J. Executive Order 13211

    Executive Order 13211, ``Actions Concerning Regulations That 
Significantly Affect Energy Supply, Distribution, or Use,'' 66 FR 28355 
(May 22, 2001) requires Federal agencies to prepare and submit to the 
Office of Information and Regulatory Affairs (OIRA), Office of 
Management and Budget, a Statement of Energy Effects for any proposed 
significant energy action. A ``significant energy action'' is defined 
as any action by an agency that promulgated or is expected to lead to 
promulgation of a final rule, and that: (1) Is a significant regulatory 
action under Executive Order 12866, or any successor order; and (2) is 
likely to have a significant adverse effect on the supply, 
distribution, or use of energy, or (3) is designated by the 
Administrator of OIRA as a significant energy action. For any proposed 
significant energy action, the agency must give a detailed statement of 
any adverse effects on energy supply, distribution, or use should the 
proposal be implemented, and of reasonable alternatives to the action 
and their expected benefits on energy supply, distribution, and use. 
Today's regulatory action would not have an adverse effect on the 
supply, distribution, or use of energy and, therefore, is not a 
significant energy action. Accordingly, DOE has not prepared a 
Statement of Energy Effects.

K. Congressional Notification

    As required by 5 U.S.C. 801, DOE will submit to Congress a report 
regarding the issuance of today's final rule prior to the effective 
date set forth at the outset of this notice. The report will state that 
it has been determined that the rule is not a ``major rule'' as defined 
by 5 U.S.C. 801(2).

L. Approval by the Office of the Secretary

    The Secretary has approved the issuance of this notice of final 
rulemaking.

List of Subjects in 10 CFR Part 626

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

    Issued in Washington, DC on November 1, 2006.
Jeffrey D. Jarrett,
Assistant Secretary for Fossil Energy.

0
For the reasons stated in the preamble, DOE hereby amends chapter II of 
title 10 of the Code of Federal Regulations by adding a new part 626 as 
set forth below:

[[Page 65381]]

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

Sec.
626.1 Purpose.
626.2 Definitions.
626.3 Applicability.
626.4 General acquisition strategy.
626.5 Acquisition procedures-general.
626.6 Acquiring oil by direct purchase.
626.7 Royalty transfer and exchange.
626.8 Deferrals of contractually scheduled deliveries.

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


Sec.  626.1  Purpose.

    This part establishes the procedures for acquiring petroleum for, 
and deferring contractually scheduled deliveries to, the Strategic 
Petroleum Reserve. The procedures do not represent actual terms and 
conditions to be contained in the contracts for the acquisition of SPR 
petroleum.


Sec.  626.2  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 a person with the authority to enter 
into, administer, and/or terminate contracts and make related 
determinations and findings, including entering into sales contracts on 
behalf of the Government. The term includes certain authorized 
representatives of the Contracting Officer acting within the limits of 
their authority as delegated by the Contracting Officer.
    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.
    DOI means the Department of the Interior.
    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, and includes DOE as 
its representative.
    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.  626.3  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.  626.4  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.  626.5  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.
    (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

[[Page 65382]]

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 costs for oil delivered to the SPR and for 
reasonable, customary, and applicable costs incurred by the supplier in 
the performance of a valid contract for delivery before the effective 
date of termination of such contract. In no event shall the Government 
be liable for consequential damages or the contractor's lost profits as 
a result of such termination.
    (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 (h)(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 (h)(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.  626.6  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 refuse offers or suspend the acquisition process 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 refuse offers, decrease the rate of purchase, or 
suspend the acquisition process 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 may also 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 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, in the 
form of a letter of credit or equivalent financial assurance.


Sec.  626.7  Royalty transfer and exchange.

    (a) General.
    DOE shall conduct royalty transfers pursuant to an agreement 
between DOE and DOI for the transfer of royalty oil.

[[Page 65383]]

    (b) Acquisition strategy.
    (1) DOE and DOI shall select a royalty volume from specified leases 
for transfer usually over six-month periods.
    (2) If logistics and crude oil quality are compatible with SPR 
receipt capabilities and requirements respectively, DOE may take the 
royalty oil directly from DOI 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 DOI, 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 may also 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 in the 
form of a letter of credit or equivalent financial assurance.


Sec.  626.8  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 under paragraph (c) of this section if it determines that 
DOE can receive a premium for the deferral paid in additional barrels 
of oil and, based on DOE's deferral analysis, that at least one of the 
following conditions exists:
    (1) DOE 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) DOE 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. During these negotiations, if the 
deferral request was initiated by DOE, DOE may consider any reasonable, 
customary, and applicable costs already incurred by the supplier in the 
performance of a valid contract for delivery. In no event shall such 
consideration account for any consequential damages or lost profits 
suffered by the supplier as a result of such deferral.
    (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. E6-18786 Filed 11-7-06; 8:45 am]
BILLING CODE 6450-01-P