The US Department of Energy is considering retaking operational control of the St. James marine terminal in Louisiana once a 20-year lease with Shell expires at the end of 2017, an agency official said this week.
Future control of the terminal, which is located on the Mississippi River and roughly 30 miles southeast of Baton Rouge, is being weighed by DOE officials as they look to spend $2 billion to upgrade and modernize the infrastructure used to distribute government-owned crude oil during potential supply shocks.
The fate of the terminal has added significance since St. James is the pricing hub for Light Louisiana Sweet, a benchmark for Gulf of Mexico refiners that has gained prestige since long-standing limits on US crude exports were eliminated late last year.
St. James has also become a destination for Bakken crude, and the terminal currently operated by Shell has pipeline distribution connections to neighboring Capline, LOCAP and Plains terminals and their pipeline networks.
Essentially, DOE believes that it cannot effectively distribute government-owned crude from one of its nearby Strategic Petroleum Reserve storage sites during a supply shock without displacing commercial crude flows at the St. James terminal while Shell operates it.
In a long-term review of the SPR which DOE sent to Congress last week, the agency said that there is "virtually no capacity to provide incremental barrels of SPR crude by marine vessel at the St. James terminal without disrupting Shell's commercial business."
Displacing that non-government crude would largely defeat the purpose of the SPR's mission: to get more domestic and imported Canadian crude on the market to counter the economic damage of a price shock, the report states.
The DOE official, who was authorized to only speak without attribution, said in an interview the agency was still weighing the "pros and cons" of either taking back operational control of the St. James terminal facilities, which they would then modernize, or continue to lease the terminal out while "possibly constructing a new dedicated marine terminal and facilities to address distribution capability issues."
The DOE official would not say whether the terminal would again be leased to Shell if the DOE chose to continue leasing the terminal out.
Ray Fisher, a Shell spokesman, declined to comment in detail and deferred questions on a future lease for the St. James terminal to DOE.
"Shell continually reviews its positions on leases and other long-term contracts and will work closely with DOE concerning the future of this lease," Fisher said in an emailed statement.
Shell's agreement to operate the St. James terminal began in 1997 and expires on December 31, 2017. DOE declined a request for a copy of the lease, claiming it was a business confidential document.
The St. James terminal currently has six crude storage tanks, with a total capacity of 2 million barrels, two marine docks, two pump stations, two metering stations and a crude oil laboratory, according to DOE.
The terminal was initially built in 1978 to provide marine services needed when filling and drawing down nearby government crude oil storage facilities at Bayou Choctaw and Weeks Island, Louisiana.
DOE decommissioned the Weeks Island storage site in 1996, but in its report to Congress last week, it recommended keeping Bayou Choctaw open.
The report recommends that the US SPR, the largest government oil stockpile in the world, should shrink from its current inventory of 695.1 million barrels to between 530 million barrels and 600 million barrels.
The report also recommends that DOE maintain the current four-site configuration, which includes the Bayou Choctaw and West Hackberry sites in Louisiana and the Bryan Mound and Big Hill sites in Texas.
Bayou Choctaw, which has six operational caverns, is the smallest of the four sites and currently holds 73.6 million barrels and has a capacity of 76 million barrels.
The other three sites currently hold between 162.7 million and 245 million barrels and have capacity to hold between 170 million and 247.1 million barrels.
In the report, DOE said closing Bayou Choctaw would likely cause government crude stocks to fall to "an unacceptably low capacity cushion" and would likely force the government to build more storage caverns, at an estimated cost of as much as $140 million per cavern, to store more crude.
"Because five of the [Bayou Choctaw's] six caverns are single-cycle drawdown, closing this site would also constitute a permanent reduction in SPR capacity, barring investment in new caverns," DOE said.
While it said the storage site needed to remain open, it pointed to constraints in the Capline system SPR crude from the Bayou Choctaw site would face if crude needed to be sent through it.
Under a 1974 treaty with 29 International Energy Agency countries, the US agreed to hold inventories equal to at least 90 days of net crude and petroleum product imports.
In addition, the US must contribute crude supplies in an IEA collective action based on its share of consumption.
The US is currently accountable for about 44% of the barrels released in an IEA coordinated response, according to DOE.
The US has participated in three such coordinated responses: releasing 17.3 million barrels in response to Operation Desert Storm in 1991; 11 million barrels in 2005 after Hurricane Katrina; and 30.6 million barrels in 2011 following hostilities in Libya.
