SPR class presentation

SPR class presentation - Managing Risk through Option...

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Managing Risk through Option Contracts on the Strategic Petroleum Reserve Frederic Murphy fmurphy@Temple.edu Fernando Oliveira oliveira@essec.fr A Presentation at the Informs Annual Meeting Washington DC October 2008
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Managing Risk Though Option Contracts on the SPR INTRODUCTION – SPR As part of the 1973-1974 oil embargo, the nations of the Persian Gulf and North Africa nationalized their oil resources. However, the US government saw a need for protection against an import cut off in the form of government held stocks of crude oil. Early in 1975, the US Congress authorized the development of a strategic petroleum reserve (SPR) in response to the 1973-74 embargo. Other OECD countries have as well. The SPR currently consists of underground storage caverns located in the four Government-owned sites. The locations are Bryan Mound and Big Hill in Texas and West Hackberry and Bayou Choctaw in Louisiana. 2
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Managing Risk Though Option Contracts on the SPR SPR – BUILDUP Rules Direct purchases on the open market, including spot market purchases and term contracts. Country-to-country contracts: these contracts employed commercial market terms and were priced according to a formula indexed to prices of globally-traded petroleum. DOE contracted with commercial entities to receive the royalty oil at offshore production facilities and transfer it to the SPR. Replacement Agreements. Under these agreements, oil delivered to companies from SPR sites was to be repaid the following year with oil of comparable quality and quantity plus additional premium barrels paid as interest. 3
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Managing Risk Though Option Contracts on the SPR B. Energy Policy Act of 2005 Objectives of the acquisitions policy: Minimization of the cost of the SPR; Minimization of the Nation's vulnerability to a severe energy supply interruption; Minimization of the impact of such acquisition upon supply levels and market forces; Encouragement of competition in the petroleum industry. 4
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Managing Risk Though Option Contracts on the SPR SPR – Drawdown Drawdown of the SPR may not be made unless … required by a severe energy supply interruption or by obligations of the United States under the international energy program. We have a severe energy supply interruption if: (A) an emergency situation exists and there is a significant reduction in supply which is of significant scope and duration; (B) a severe increase in the price of petroleum products has resulted from such emergency situation; and (C) such a price increase is likely to cause a major adverse impact on the national economy." 5
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Managing Risk Though Option Contracts on the SPR Management of the SPR in Practice The Bush Administration has been periodically criticized for continuing to fill the SPR as crude prices have continued to rise and be volatile. An amendment was accepted …. and included in the bill passed by the
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This note was uploaded on 11/23/2009 for the course FIN 5208 taught by Professor Murphy during the Spring '09 term at Temple.

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SPR class presentation - Managing Risk through Option...

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