other support industries, and the comparatively small volume of oil involved.

As more oil is stored in the ground, it becomes doubtful that these measures will prove adequate. We believe that DOE should have plans for dealing with such nonembargo contingencies.

NEED FOR SECURITY PLANS

As to the question of security at the storage sites, we visited the three existing storage sites and observed that some security measures had been taken. For example, guards were posted at the entrances, and some lighting and fencing were installed. However, we found that DOE has not determined the specific security needs for each storage site.

According to a 1978 Sandia Laboratories study' and petroleum industry representatives, the most common security threats are tool and equipment theft during construction and, to a lesser extent, minor sabotage.

In addition, the Sandia study stated that the reserve's high visibility of the SPR program during an embargo could make it an attractive target for terrorist activity.

We believe that both the equipment and the oil must have adequate site-specific security, and that DOE should develop and implement a security plan at each of the three sites.

In summary, Mr. Chairman, we have raised questions concerning the size and management of the Strategic Petroleum Reserve.

In addition, we have had continuing dialogue with DOE concening the desirability of purchasing for the reserve, oil produced from the Outer Continental Shelf and onshore Federal leases on which royalities are paid. We continue to believe DOE should purchase all suitable royalty oil for the reserve. We estimate savings of $400 million during the 1980-85 time frame if this option were implemented. The subcommittee may wish to pursue this matter and, accordingly, we have included as attachments copies of our October 6, 1978, letter report and DOE's December 19, 1978, response. That concludes my written statement, Mr. Chairman. We would be happy to respond to questions.

[Testimony resumes on p. 588.]

[The attachments to Mr. Peach's prepared statement follow:]

"Security for the Strategic Petroleum Reserve" (SAND 78-0769, Sandia Laboratories, 1978).

ATTACHMENT I

Summary of

Advantages and Disadvantages of the IPR

Advantages

--Federal expenditures for the SPR would be reduced.

--Industry would be able to use existing storage capacity for some

of the stocks.

--The reserve would include some finished products.

--Some of the objectives of regional storage would be achieved. --Logistical requirements and distribution problems would be reduced. --A conservation benefit would result to the extent costs are passed

on to consumers.

--Additional reporting requirements would provide more detailed

information on industry inventories.

Disadvantages

--One industry alone would be forced to bear a share of the SPR costs. --Large amounts of industry capital would be diverted from other, more productive investments.

--Most firms would have difficulty recovering the cost of implementing an IPR in a competitive marketplace.

--The differing structures of various companies would result in unequal abilities to bear IPR costs and lead to competitive distortions. --Firms would seek exemptions or exceptions from an IPR requirement or use litigation to delay compliance.

--Another regulatory staff would be required, and additional funding

would be necessary to deal with compliance, exceptions, and appeals.

Our Office has studied and reported on various aspects of the oil purchase policy being followed for the strategic petroleum reserve (reserve). In February 1977 we issued a report 1/ to the Congress which stated that oil produced from Outer Continental Shelf and onshore Federal leases--on which royalties are paid--could be purchased for the reserve at substantial savings to the Government. The Federal Energy Administration, which was responsible at that time for developing the reserve, considered buying royalty oil for storage but concluded that it would adversely impact financially on small refiners that relied on royalty oil.

In a July 6, 1978, letter to the head of your Office of Strategic Petroleum Reserve, we asked for comments on the potential savings available if the Government purchased the royalty oil that is not sold to small refiners. The response of July 24, 1978, was that the difficulties of purchasing royalty oil for the reserve outweighed the potential savings. We would like, in this letter, to elaborate on this issue because we believe that the savings are very significant even in view of the difficulties that they may entail.

BACKGROUND

To diminish U.S. vulnerability to the effects of a severe interruption in energy supplies, the Energy Policy and Conservation Act (Public Law 94-163) required the creation of a strategic petroleum reserve. In December 1976 the Federal Energy

1/Issues Needing Attention In Developing The Strategic Petroleum Reserve," EMD-77-20, February 16, 1977.

EMD-79-1

(990593)

Administration submitted to the Congress a plan which stated that the reserve would contain 500 million barrels of oil by December 1982. The Department of Energy accelerated the reserve schedule by 2 years and undertook to store 500 million barrels of oil by the end of 1980. The Department now plans to store 1 billion barrels by the end of 1985. While the Department has not yet estimated the cost to store 1 billion barrels, it has estimated the cost to store 750 million barrels at $14.4 billion.

Oil for the reserve will be stored in salt caverns and in mines. Thus far, the Department has acquired four storage sites in Texas and Louisiana near the Gulf Coast.

The Department is required by the Energy Policy and Conservation Act to acquire crude oil for the reserve in a way which minimizes cost. The act also authorizes purchase of royalty oil for the reserve. But the Department's plan is to acquire, through its entitlements program 1/, all crude oil needed for the reserve on the open market at a price near the national average composite price.

THE POTENTIAL SAVINGS

The Department of the Interior collects royalties, in money and in kind, i.e., as oil and natural gas, from oil produced on leased Federal onshore lands and from the Outer Continental Shelf. Interior has been selling all of the royalty oil taken in kind to small refiners. According to Interior, in calendar year 1977 royalty oil production was 69.2 million barrels of which 40.4 million barrels or 58.4 percent was taken by the Federal Government and sold to small refiners. The Federal Government received cash for the remaining 28.8 million barrels or 41.6 percent. Interior expects very little change in these relative percentages in the near future.

Department officials calculated that based on May 1978 crude oil prices, royalty oil would be $3.01 a barrel less than the national average composite price. Total savings that could result from buying royalty oil for the reserve

1/Entitlements permit refiners to share the benefits associated with access to price controlled crude oil. The Department issues each refiner enough entitlements to permit it to process the national average ratio of price controlled oil to total crude oil purchased. In purchasing crude oil for the reserve, the Department considers itself a refiner.

could be very significant, especially if current price differences and price controls remain. For example, in our July 1978 letter, we calculated that 24 million barrels of royalty oil would not be sold to small refiners in the August 1978-July 1979 time frame. This amount could be acquired for the reserve at a $72 million savings to the Federal Government. Because DOE plans to purchase oil for the reserve through 1985, additional savings of over $400 million 1/ could be possible.

THE PERCEIVED PROBLEMS

In its July 24 letter to us, the Office of Strategic Petroleum Reserve listed the following three problems associated with purchasing royalty oil.

--Purchasing royalty oil would result in additional ad

ministrative burden to the Federal Government.

--Some royalty oil is not suitable for reserve storage. --Purchasing royalty oil would result in the Department having to pass on some of the cost of the reserve to oil users rather than taxpayers.

Additional administrative

barden

The Office of Strategic Petroleum Reserve letter states that additional administrative burden would result from handling numerous leases and transportation arrangements, and from arranging agreements whereby the royalty oil that is not suitable for storage would be exchanged for suitable oil. A Department official, however, told us that no attempt to quantify the additional burden had been made. This official stated that royalty oil production involved over 13,500 leases, which suggests to the Department a large quantity of administrative work.

We then asked Interior officials who administer the royalty oil program if they could estimate the additional administrative burden which would result if the royalty oil not sold to small refiners were acquired for the reserve. They

1/This figure is based on the assumption that there will be approximate annual savings of $72 million during the 1980 -1985 time frame.