Petroleum Reserve Sale Described as Test of U.S. Readiness in Oil Crisis : Energy: Action will make sure that there are no glitches in the procedures.

The unprecedented sale of 5 million barrels of crude oil from the U.S. Strategic Petroleum Reserve will reveal, for the first time, the extent to which the nation is buffered from a severe disruption in oil supply, industry analysts and Bush Administration officials said Thursday.

In announcing the sale, to open today in New Orleans, Bush said the action is intended to curb “intensive and unwarranted speculation in oil futures.” But the White House on Thursday decidedly backed off on that claim even as spot-market oil prices continued to rise.

“The test sale is not intended to affect oil prices,” Energy Secretary James D. Watkins declared in testimony on Capitol Hill.

Rather, he and other Bush Administration officials insisted, and industry analysts agreed, Bush’s action sends a clear and much-welcomed signal that the United States stands prepared to tap its 15-year-old but virtually untested petroleum reserve. The 590 million barrels are stored in vast salt caverns along the Texas-Louisiana coast.

“It’s a prudent step in the face of oil market uncertainty,” Daniel Yergin, president of Cambridge Energy Research Associates, said of the impending sale.

“This is really a test drive to make sure that there are no glitches in either the physical or market operations of the Strategic Petroleum Reserve, and it’s better to do that now rather than under more severe circumstances,” he said.

On Capitol Hill, Watkins said the sale will serve as a crucial test of the reserve’s readiness under “real-life conditions”--even if the amount to be sold represents less than a third of the country’s daily consumption.

“We think this test shows resolve,” Watkins told Rep. Philip R. Sharp (D-Ind.), chairman of the energy and power subcommittee of the House Energy and Commerce Committee.

“It is a firm step toward opening the spigot,” Watkins said. “The psychological impact is significant, but we are not going into the test with the expectation it would bring the price of oil down” by any significant amount.

He promised that the sale “will clearly show that our procedures and hardware for withdrawing oil from the reserve is sound, efficient and effective.”

The Bush signal, one analyst said, appears intended for a broad audience, both foreign and domestic. “It should serve to dampen the American public’s concern about supplies over the next few months and to dampen the fears of participants in the oil markets who might be buying and selling futures contracts. And it also could be a signal (to Iraqi leader Saddam Hussein) that, hey, we do have this big stockpile and can use it,” he said.

Although Bush’s announcement has been widely hailed, some private analysts and consumer groups warned Thursday that the sale could backfire in a colossal way if it reveals any major flaws in the reserve system.

“I’m really delighted they’re going ahead to see how it will work,” said Harold B. Finger, chairman of the U.S. Council for Energy Awareness.

The American Petroleum Institute added in a statement: “We strongly support a physical test of the SPR such as the one the President has ordered to assure that supplies can be retrieved and transported in a timely and effective way.”

Over the years, skeptics have questioned whether the government’s equipment and related hardware are sufficiently sound to quickly pump large quantities of crude oil out of the caverns and move it into distribution. There also have been questions about whether the caverns might collapse after the crude oil is pumped out.

Hence, if the sale were to reveal some major flaw in any part of the system, that could be “a serious blow to the psychology of consumers and the international oil market,” said an industry analyst who asked to remain anonymous.

In addition to a test of the equipment, he added, “the test sale also will demonstrate whether DOE (Department of Energy) knows how to run the auctioning process, how to line up buyers, how to get the pumps goings and how to help arrange for the delivery.”

The President’s long-awaited action on the petroleum reserve comes as the International Energy Agency’s governing board meets today in Paris for the third time since Iraq invaded Kuwait on Aug. 2.

In light of Bush’s action, the IEA board members are likely to consider whether other member nations also should begin releasing their strategic stockpiles in a coordinated manner, Yergin said. Japan, West Germany and Sweden also maintain strategic stockpiles of oil and many other countries require their oil companies to keep excess inventories.

Watkins said it is the Administration’s intention to work toward a coordinated drawdown within the IEA framework of about 1 million barrels a day if further oil supply disruptions occur.

The U.S. Strategic Petroleum Reserve was created in late 1975 amid growing concern that a cutoff of Middle East oil supplies might threaten U.S. national security. The entire reserve could replace imports for as much as three months. Appropriations for the reserve from 1976 through 1990 total $19.7 billion.

Limited simulated and actual drawdown tests have been conducted regularly at the six different storage sites, plus a government-owned marine terminal on the Mississippi River at St. James, La. In 1985, an actual sale of 1 million barrels was conducted in a test that went smoothly.

But the impending test sale of 5 million barrels--and possibly three times that amount--is widely being regarded as the system’s first true test. It will involve “the actual drawdown, transport, delivery and refining,” Watkins said.

“How good their system is, as far as being in good shape and ready to deliver, remains to be seen,” said Robert E. Cunningham, vice president at Turner, Mason & Co., a Dallas-based refinery and fuel oil production consulting firm. “They have been using these facilities to put crude into the ground but not to take it out.”

W. Henson Moore, deputy energy secretary, agreed, saying: “We’ve never really tested this system since it started.”

The Energy Department’s reserve office in New Orleans today was to issue a formal “notice of sale,” specifying the individual quantities and types of oil to be sold. Prospective buyers will be given a week to submit bids. The Energy Department could award sales contracts by mid-October.

Times staff writers Oswald Johnston, in Washington, and Jesus Sanchez, in Los Angeles, contributed to this story.

THE U.S. STRATEGIC PETROLEUM RESERVE How it Works: The reserve is a complex of six huge, water-filled salt domes on the Texas-Louisiana Gulf Coast. The crude oil to be stored is pumped into a dome, displacing the water. The salt provides an impermeable layer, virtually like plastic, that can preserve the oil indefinitely. To tap the stored crude, the process is reversed: Seawater is pumped in, displacing the oil. Procedures: Before the reserve can actually be tapped, the President must declare a “severe” energy emergency. The oil is sold at auction in a process that takes three weeks. Would-be buyers must offer separate bids for each type of oil-light or heavy crude-and for one of three or four separate delivery cycles. The oil then is delivered by one of several pipelines. Capacity: The reserve currently contains 590 million barrels of oil. Its daily pumping capacity of 3.5 million barrels is considered adequate to make up the most likely shortfall of 1 million to 4 million barrels per day. The United States imports a total of 8 million barrels a day, but not all of this would be at risk if the Iraqi and Kuwaiti supplies were unavailable. Reserve Stocks of Crude Oil Major oil-consuming nations have been putting aside oil for use in a crisis since the oil shocks of the 1970s. The U.S. stockpile is by far the largest. Other government oil stocks: Japan: 208 mil. bbl. Sweden: 1 mil. bbl. W. Germany: 53 mil. bbl. Other Europe: 6 mil. bbl. U.S. figures plotted annually, except quarterly in 1989-1990; other figures for 1990.

Sources: U.S. Energy Information Admin.; International Energy Agency.