293. Paper Prepared by the Deputy Assistant Secretary of Energy for
International Affairs (Treat) and
Rutherford Poats of the
National Security Council Staff1
Contingency Planning for Energy Emergencies: Agenda for
International Action
Background
Through the IEA, we have improved our
capability to deal with oil supply emergencies. As a result of the 1979
experience, the IEA has begun to
develop a graduated response capacity, which offers three levels of
policy options:
(1) Stock Management—Use of stocks is the first
line of defense. The October 1 IEA
decision,2 as amplified by the
December 9 Ministerial decision, exercises this option, which is most
appropriate for an interruption of 100–200 million barrels.
(2) Import Ceilings—The transformation of oil
import “yardsticks” into binding oil import ceilings is the second level
of response, most appropriate for a somewhat larger and/or longer
interruption in the range of 200–400 million barrels. In such a
situation, stocks would be increasingly difficult to draw down; demand
restraint measures should be initiated as early as the limitations of
stock management can be foreseen and intensified as may be required,
using prepared authorities and procedures. An informal
reallocation/balancing of world supplies by oil companies would be an
important supporting action, if anti-trust concerns could be
appropriately handled.
(3) Emergency Sharing System—Triggering the formal
IEA sharing system at the 7% or
higher shortfall level would be the third level of response. It would
probably require parallel national allocation measures, as well as tax
measures to balance demand with supply. This response probably will be
appropriate only for shortfalls of 400 million barrels or more. The
system has now been tested three times, but the lack of agreement on
pricing could prove to be extremely contentious.
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Discussion
The IEA response capacity has been
improved in the past year by the partial development of stock management
and import ceiling options to deal with supply interruptions which fall
short of the 7% level necessary to trigger the IEA agreement. However, additional measures to improve each
of these options is essential. In addition, the growing dependence of
Western Europe on gas imports, particularly from the Soviet Union,
constitutes a political/security vulnerability which should be addressed
by the EC and NATO. Finally, the US
Government itself should organize better its own response
capabilities.
In support of these objectives, the following actions should be
initiated:
• International Energy Agency—The IEA should remain the focus of our
international response efforts. Additional pressure should be brought to
bear on the French, after the spring 1981 French Presidential elections,
to bring the French into IEA.
Within the IEA, we should concentrate on
two issues:
(1) Increase IEA
national stocks susceptible of government control, so as to
strengthen their reliability in both minor and major shortages and
develop an emergency stock-sharing system (see Tab A for
further discussion).
(2) Elaborate the IEA
import ceiling option (2 above) to provide for oil company
participation through international allocation.
•
NATO and EC:
(1) Continue to push for development of Western European natural gas
contingency plans, including serious analysis of a strategic gas reserve
using spare capacity in the Netherlands and/or North Sea and enhanced
readiness for fuel-switching.
(2) Try to overcome European resistance to joint contingency planning for
military action in the Middle East, including heightened readiness to
deter/respond to attacks on major oil facilities.
•
USG—Two areas deserve
increased attention:
(1) Better coordination of energy security policy
through the establishment of an NSC
energy security committee.
(2) Development of “snap back” plans to restore
major oil facilities in the event of attack, with the cooperation of
host governments and private companies. Evaluate need for USG stockpiling of critical equipment.
Timetable
US initiatives on the IEA actions should be prepared for
presentation early in the new Administration. An EC study of an enhanced Western European gas reserve system
should be urged now; a NATO staff
study already has been proposed by the USG. The USG actions
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should be pursued in the light
of the new Administration’s organizational decisions. International
objectives requiring additional political impetus may be pursued in
preparations for the Ottawa Economic Summit.
Tab A3
Coordinated Stock Policy Issues
Background
If a coordinated stock policy is to become a more effective option
for dealing with supply interruptions, a number of crucial issues
should be resolved. Some of these issues must be decided to
implement the IEA Ministerial
decision of December 9; others should be decided in 1981 to improve
IEA response capability to
future supply crises. Broadly speaking, the issues are:
• Optimum level of stock requirements,
including at least three subsidiary issues:
—Should IEA mandatory stock levels
be increased above 90 days? By how much?
—Should IEA stocks be defined in
terms of consumption versus imports?
—Should minimum IEA stock
requirements be adjusted to reflect actual availability, i.e.,
excluding pipeline fill, tank bottoms, etc.?
• Coordinated stock drawdowns—How/when should
stocks be drawn down and how should imbalances be corrected, e.g.,
Giraud plan.
• Government control over private
stocks—should the US expand its
control over private stocks.
Discussion
The principal objective of US policy
in this area should be to encouage other countries to follow our
lead to build up stocks, under government control, which can be used
to offset the loss of supplies. Specific issues are discussed
below:
• Level of Reserves. The United States is
building a Strategic Reserve which, depending on its eventual size,
will increase aggregate US stocks to
well over twice the 90 day minimum agreed by the IEA. Increasing the IEA minimum level of stocks would
exert pressure on our allies to match our efforts. While more
analysis needs to be done on the optimum level, an increase of
minimum levels in annual increments of
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5–10 days to at least 120 days of imports
seems highly desirable. This would increase IEA minimum stocks by more than 600 million barrels.
Planned increases in the US
SPR would more than account for our
configuration. Scheduled increases in the Japanese and German
reserves would also make a contribution, but other IEA countries would have to take new
action. Some consideration could be given to considering surge
production capacity and gas reserves as substitutes for oil
stocks.
• Definition of Reserves. Since disruptions
are most likely to affect imports, we should continue to define
reserve levels in terms of imports, not consumption. An import basis
also serves US national interests by
multiplying the size of our reserves. Since a somewhat larger
percentage of US commercial stocks
are not usable in an emergency (i.e., pipeline fill, tank bottoms,
working inventories), we should also resist efforts to redefine
stocks.
• Coordinated Stock Drawdown. Stock drawdowns
offer an appropriate policy response to supply disruptions which are
of longer and/or deeper duration, stock drawdowns also offer an
initial response measure to “buy time” for demand restraint action.
Since supply disruptions will not necessarily hit all countries
equally, however, there needs to be an agreed formula/procedure for
ensuring that countries which have to draw down their national
stocks more rapidly will be compensated by the less affected
countries.
The IEA should develop urgently such
a procedure. Several options are available:
(1) Coordination of national stock draws by an agreed formula,
similar to the IEP formula; or
(2) Establishment of a stock “pool” with drawing rights and
obligations on a dedicated volume of oil held separately from
national reserves.
Option 1—Coordination of National Stocks
This approach would parallel the allocation formula of IEA Emergency Sharing system,
assigning stock rights and obligations to individual countries on
the basis of consumption shares. This difference between such an
approach and the full-scale allocation program would be:
(1) lower trigger level—perhaps 1–2%, and
(2) periodic reallocations (perhaps every 60–90 days) would be
required, rather than attempting a daily reallocation effort, as
attempted [called for?] by the IEP.
Option 2—Stock Pool
A more formal approach to the issue would be a stock “pool” as
proposed by French Energy Minister Giraud, to provide an “intermediate” response option
short of full-scale international allocation
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through the IEA and EC. His
proposal remains ill-defined, but seems to include the following
elements:
—Size: About 160 million barrels, although
could range from 140–200 million barrels (20–50 million tons). Pool
would not be counted as part of “national” stocks.
—Contribution: Each country would contribute
stocks equivalent to 4 days’ consumption, implying that the US would provide about 45%, Europe
about 30% and Japan, 15%.
—Drawing Rights: Each country could draw in
excess of its own contribution, up to 50% of the total. If two
countries simultaneously drew, the limit would be 67% (2/3 of the
total). If three countries drew, the limit would be 75%. Drawing on
the stock pool beyond the national contribution would be approved by
a “qualified majority” of the participating countries.
—Stock Ownership:
Giraud is flexible on who
owns the stocks, as long as government retains effective
control.
The Giraud proposal has
conceptual merit but would have to be modified considerably to gain
our support. The limitation of drawing rights to 50% of the total
pool would severely limit the attractiveness of the proposal to the
U.S., which would be contributing about 45% of the entire pool. It
would be more appropriate to define drawing rights in terms of
multiples of national contributions.
Both these options should be further developed with the participation
of the IEA Secretariat, which
should be asked to prepare a recommendation for further action
within 90 days. In particular, the IEA should be asked to address:
(1) The appropriate size of the pool;
(2) The appropriate “trigger” for its activation;
(3) The size/distribution of national drawing rights;
(4) The mechanism by which such rights could be exercised;
(5) Period and method for payback;
(6) Legal authorities necessary to establish such a pool; and
(7) Proposed timetable for establishing such a pool.
Government Control Over Private Stocks
An important implementation issue, particularly in the United States,
is how government can induce private stockholders to act in support
of an IEA decision, particularly if
U.S. stocks must be drawn down to offset a shortfall which has
little or no direct impact on the U.S. market. DOE should urgently address the US issue, including regulatory
authorities and possible anti-trust implications. A number of
options are available:
(1) Mandatory Private Stock Levels—as required
in many European countries, large consumers can be required to hold
a certain level of stocks; this is the concept of the Industrial
Strategic Reserve (ISR).
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(2) Public Private Corporation either to hold
mandatory stocks or, on a voluntary basis, to reduce costs of stocks
through economies of scale. The corporation could be financed either
by the companies or privately (through bonds) or publicly.
(3) Tax Incentives to encourage appropriate
stock management consistent with USG policy goals.
(4) Voluntary Targets (Jawboning), backed up
by the threat of mandatory allocations, as used in 1979 to build up
distillate stocks.
Concurrently the IEA should review
the issue in all IEA countries.
