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1 Click to edit Master title style Northeast Home Heating Oil Reserve (NEHHOR) June 16, 2011 Nancy Marland/Lindsay Partusch Operations and Readiness Office Petroleum Reserves 1

2 Northeast Click to edit Home Master Heating title Oil Market style Winter Supplies - Colonial Pipeline - Local Inventories Created in Summer and Winter - Barge Shipments From New Jersey, Delaware and Pennsylvania Refineries - Imports From Caribbean and Canada - Imports From Europe Harbors and Transportation Easily Disrupted - European Imports - North Atlantic Storms - Barges From New York Harbor to Northeast - High Winds and Seas

3 Click to NEHHOR edit Master Creation title style Motivated by near exhaustion of supply in 1999 winter, and record low inventories summer/ fall 2000 July 10, 2000 President Clinton Directs the Establishment of a Northeast Home Heating Oil Reserve Energy Policy and Conservation Act (EPCA), Sections 154 and 157 Regional Product Reserve as part of the Strategic Petroleum Reserve In Place NLT November 1, 2000 November 9, 2000 President Clinton signed Energy Act of 2000 authorizing a Northeast Home Heating Oil Reserve Specifies Heating Oil Reserve is not part of SPR Mar. 6, 2001-Secretary Abraham announces permanent Reserve establishment

4 Northeast Home Heating Oil Reserve Click to edit Master title style Mission Goals: To ensure U.S. Energy Security. To provide an Emergency Stockpile of heating oil to protect the Northeast against high vulnerability of winter-related supply shortages. To protect the safety and health of N.E. Residents. Recent Status: No. 2 Fuel Oil stored in commercial terminals in NYH & CT Maximum capacity 2,000,000 barrels (Equivalent to 3-4 days of N.E. consumption) Annual Operating Costs ~ $11.3 Million/Year (Storage Costs ~ $4.90/barrel/year) New contracts to be awarded for September 2011 start 4

5 Click to edit Master title style Northeast Home Heating Oil Reserve

6 Click NEHHOR to edit Storage Master Contracts title style Terminal Storage Services Contracts - 1 Year With 3 Options Terminal Responsibilities - Inventory Assurance - Quality Assurance - Delivery < 10 Days - Distribution Marine and Trucks, Pipeline

7 Click NEHHOR to edit Contract Master Practices title style Product Commingled with Commercial Stocks for rotation Follow Best Commercial Practices API MPMS for Inventory Control ASTM/ISO for Quality Control Quality Surveillance Provided by DESC QSR s NYMEX Rules for Heating Oil Contractor Quality Control Plan Distribution Plan Sales Plan

8 Click Heating to edit Oil Reserve Master Security title style Ground Access to Terminals-Restricted & Pre- Approved Security Level Consistent With Industry Practices Homeland Security Levels Followed Maritime Transportation Security Act of 2002 requirement for port security and response plans

9 Release of Heating Oil Reserve Click to edit Master title style U.S. Presidential Finding Required Severe Energy Supply Interruption Regional Supply Shortage Market Dislocation (Trigger) Sales Process (1 Day) On-Line System Registration, Bidding, and Procedural Documents Anonymous Competitive Auction heatingoil/online_bidding_system.html Physical Distribution: Marine (Tanker & Barge) Truck Pipeline (if available) All deliveries must be completed in 10 days 9

10 NEHHOR Guidelines for Release Click to edit Master title style The Energy Policy and Conservation Act, as amended, sets conditions for the release of the Northeast Home Heating Oil Reserve (NEHHOR) at the discretion of the President. The President may make the requisite finding of a "severe energy supply interruption" for the sale of product under two conditions: if there is "a dislocation in the heating oil market, OR a circumstance exists (other than the defined dislocation) that is a regional supply shortage of significant scope and duration and the Reserve's release would significantly reduce its adverse impact. The law deems a "dislocation" to have occurred only when "The price differential between crude oil...and No. 2 heating oil...increases by more than 60% over its five year rolling average for the months of mid-october through March, and continues for 7 consecutive days; AND The price differential continues to increase during the most recent week for which price information is available."

11 Revision of Legislated Market Dislocation Indicator for the NEHHOR Click to edit Master title style Current Legislation: Requires DOE monitoring of Market Dislocation Indicator for potential need for Heating Oil Reserve use Price spread between crude oil and retail heating oil increases more than 60% over its 5-year rolling average and continues increasing over 7 days Indicator is not reliable - Based on crude price in Cushing and No. 2 heating oil price in New England different markets and price drivers have triggered indicator when no problem. Indicator is lagging based on prior week data and requires 2 successive observations. Proposed Change: NEW Indicator - Heating oil daily closing NYH spot price minus the NYMEX near-month closing price If price range is $0.25 or more per gallon, investigate activating the NEHHOR. (Note: $0.25 is the range used by NYMEX to determine when trading of futures should be temporarily halted during the trading day.) Indicator is immediately responsive and has historical validation. 11

12 Comparison of Current Legislated and Proposed Triggers Click to edit Master title style

13 Heating Oil Reserve Sale Click to edit Master title style Online auction hours after Presidential finding Bid-Premium to near month NYMEX closing price $250,000 Bid Guarantee Prepay for award amount Purchase limit 40% in each area Buyer arranges transportation Must take delivery within 10 days

14 Click Heating to Oil edit Sales Master System title Tests style Refresh Bidder awareness and skills Demo screen always available Get user feedback on overall system and newly implemented features Performed annually at in late nov/early Dec Sales provisions modified to reflect system evolution

15 FY Click 2011 to Conversion edit Master to ULS title Distillate style Northeast State legislation/regulations requiring ultra low sulfur (ULS) heating oil starting in NEHHOR is being converted from high sulfur (2000 ppm) to ULS distillate (15 ppm) during 2011 Gov t MUST convert to 15ppm to maintain market compatibility. Gov t MUST convert prior to Industry to assure maximum market value. The Reserve s heating oil inventory of 1,984,253 barrels was sold* in February 2011 at average price of $114.61/barrel. (DOE acquired the current heating oil stocks for $39.65/barrel in 2000.) New storage contract requirement is for ULSD storage services. The sale receipts will be used to purchase ULS distillate stocks in September Cost for conversion will depend on the ULSD market price when purchasing * (Under EPCA the Secretary may sell, exchange or otherwise dispose of petroleum distillate from the Reserve to maintain the quality or quantity of the petroleum distillate in the Reserve or to maintain the operational capability of the Reserve ) 15

16 Northeast State Initiatives Click for Conversion to edit Master to ULS Heating title style Oil State Legislation for Conversion Required Date New York New Jersey 06/09 Introduced Legislation for conversion to 15ppm 07/10 Governor signed Legislation for conversion to 15ppm Jul /09 Introduced Legislation for conversion to 15ppm by July 2011 Maine 08/10 NJ Dept of Environmental Protection Rule Making for phased conversion, signed by Governor 01/10 - Introduced Legislation for phased conversion 04/10 - Governor signed Legislation 2014 for 500 ppm 2016 for 15 ppm Jul ppm Jul ppm Pennsylvania 02/10 Introduced Legislation to convert to 15ppm by July Failed to pass. Connecticut 07/10 PA Dept of Environmental Protection Rule Making for conversion to 15ppm. May follow New Jersey 06/10 - Governor signed legislation for a phased conversion contingent on NY, MA, and RI passing similar legislation Jul ppm Jul ppm Rhode Island Massachusetts New Hampshire 02/10 - Introduced legislation for conversion to 15ppm by July Will reintroduce next year. Department of Environmental Protection proposed rule for phased conversion None - All heating oil is imported from neighboring states MANE-VU/NEWCAUM ppm ppm Vermont 05/11 Governor signed legislation for phased conversion ppm ppm

17 Northeast Home Heating Oil Reserve Click to edit Future Master Optionstitle style Environmental Policy and Conservation Act states the Heating Oil Reserve is authorized up to 2,000,000 barrels High prices, conservation, and increased efficiencies have created a long term downward trend in consumption in PADD 1A and 1B, the largest consumers in the US Conversion to Ultra Low Sulfur Heating Oil (ULSHO) will continue the downward trend Competition with the transportation industry for scarce barrels, and lack of imported ULSHO will force consumers to switch from heating oil to other heating methods

18 Billion Gallons Trends in Northeast Click Heating to edit Oil Master Consumption title style 3,000,000 New England Midatlantic 2,500,000 2,000,000 1,500,000 1,000, , Year 18

19 Click Northeast to Home edit Master Heating Oil title Reserve style NEHHOR Downsizing Plan: Current 2011 Funding insufficient to award new storage contracts for 2 MMB Maintain 1 Million Barrels of stocks in New England Eliminate 1 Million barrels of storage in NY Harbor (NY Harbor is less of a vulnerability). DoD, acting as agent, negotiating current offers received NEHHOR Downsizing Poses Little Risk: The consumption of heating oil in the Northeast has been declining, with increasing use of natural gas, NY Harbor vulnerability is low: NY Harbor has numerous terminals and abundant commercial stocks. NY Harbor has connections to both local refineries and Colonial Pipeline for resupply The conversion to ULS heating oil (which is essentially identical to ULS Diesel stocks) will create a large emergency stock base.

20 Click to edit Master title style Refineries, Terminals, and Pipelines Supplying New York Harbor Area

21 Click to edit Master title style Northeast Home Heating Oil Reserve