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US Plan to Refill Oil Reserve Hits Snag as It Shuns Some Light Crudes

(Bloomberg) -- The formidable task of refilling the world’s largest government oil stockpile is like mixing oil and vinegar. Only in this case, the vinegar is actually just more oil — a super-thin crude from South Texas.

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While the US is under pressure to quickly inject American oil back into its depleted emergency reserves, the Energy Department is shunning some of the so-called light crude for which the nation is known. That’s because very thin oil, such as that produced in Texas’s Eagle Ford basin, doesn’t blend well with the denser, mostly imported varieties currently sitting in the stockpile.

The matter of too-light oil is just the latest hurdle in the US’s push to restock government supplies after releasing an historic 180 million barrels in the wake of Russia’s invasion of Ukraine. Higher crude prices and operational limitations have so far bedeviled the effort, with the US even canceling some purchase programs.

And although the refill plan is intended to support American crude, some suppliers are finding that their offerings don’t measure up. In September, the Energy Department canceled a $108 million contract with Macquarie Group Ltd. because its trading arm’s offer of more than 1 million barrels included an Eagle Ford grade, according to internal emails seen by Bloomberg. The cancellation was by mutual agreement.

Read More: Massive US Oil Caverns Sit Empty and Will Take Years to Refill

Eagle Ford oil comprises 12% of US production, and the grade in question — Eagle Ford 56 — is lighter than water. That means it “would present an incompatibility” with existing stocks, the agency said in the emails. The agency had initially accepted the bid, but later changed course, the emails show.

Macquarie declined to comment. An Energy Department spokesperson declined to comment on contract discussions.

Officially, the Energy Department maintains there is no ban on specific crudes. But after rejecting the September offer, the agency updated its purchase provisions to specify that no oil above a certain density would be considered — a standard that effectively blacklists a wide slate of light, US-produced oil.

Besides Eagle Ford, the provision would bar Grand Mesa Light, Saddlehorn Light, SCOOP, Whitecliffs condensate, and various oils pumped in the Rockies and Oklahoma.

While light US oil is coveted by overseas buyers — American exports reached an annual record in 2023 — it’s a logistical problem for the reserve. Currently the stockpile contains heavier oil from Mexico, Iran and elsewhere, much of which was purchased decades ago when the pill-shaped caverns were first filled. Ultra-light oil would likely sit on top of the existing volumes, posing issues when the oil needed to be resold.

The Biden administration has for a year been holding tenders to buy oil for the stockpile, which has the capacity to hold 714 million barrels. On Thursday, it issued another tender to buy 3 million barrels of sour crude for delivery to the caverns in July. Overall the energy department has bought 20.1 million barrels and received almost 4 million barrels as part of exchange with oil companies. The government has been buying from companies including Exxon Mobil Corp., Phillips 66 and Shell Plc.

Read More: US to Buy Oil for Strategic Reserve Monthly Through at Least May

--With assistance from Ari Natter.

(Updates to add that the contract cancellation was by mutual agreement in fourth paragraph; new tender in final paragraph.)

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