An SPR release: an unexpected blast raises a question

The 1 million b/d Baku-Tbilisi-Ceyhan crude pipeline is still burning after an explosion early Wednesday, and it is too early to say how long it may take to repair damage to the line, according to its operator, the Turkish pipeline company Botas. But reports in the industry are hinting that the line could be out for several weeks. A spokesman for BP, which owns the line, said that if the damage was confined to a section of BTC, it could be repaired fairly quickly by installing a bypass section, but he could not estimate how much longer repair work might take if the valve needs replacing as well. (View a map of the BTC pipeline explosion area.)

The pipeline is used to export the bulk of Azerbaijan's crude output from a terminal at the Mediterranean port Ceyhan, and is one of the biggest single crude streams in the world. Rebels of the Kurdistan Workers Party (PKK) have claimed responsibility for the explosion on the pipeline, which had been carrying around 850,000 b/d of crude before the attack.

The International Energy Agency said Thursday it was monitoring the loss of Azeri crude exports but that it was too early to predict whether it might be necessary to release oil from strategic stockpiles.

It is true that in a situation like this, the US probably would not release stocks unilaterally if the IEA determined that such a release isn't necessary. If the repairs can take place quickly, such a release probably isn't needed.

But we can't help but think back to the Venezuelan strike of 2002 that all but cut off exports from that country. It occured at a time when the supply/demand balance was not as strained as it is now. But still, the Venezuelan cutoff always appeared to fit the precise definition of what the SPR was established for: filling in a gap in the supply chain created by an unforeseen incident, be it natural (a hurricane) or man-made (a bombing, a closing of a key waterway, etc). Yet, there was no release.

This market is not in any position to shrug off a loss of 850,000 b/d of light sweet Azeri crude. Note that on September 7, 2005, more than a week after Katrina roared through the Gulf of Mexico, the Minerals Management Service reported offshore outages of 860,568 b/d. Add to that losses in state waters not covered by MMS, and you can see the magnitude of that loss. Loans of SPR crude by that date totaled 12.6 million barrels.

An extended shutdown of BTC is likely to be not as big, but certainly of that magnitude. If oil is not released for this, there's really only two questions: why, and if not now, when?

This is not a politically-driven plea to open up the salt domes because prices are hurting consumers; Chuck Schumer was calling for that when oil was less than $50. This is different: a big, temporary loss of supply because of a politically-inspired act of terrorism.

Maybe it will be repaired rapidly and won't matter. But if it's not, it's going to be interesting to see what the IEA and the US Department of Energy choose to do.