Department of Energy: New Process to Review Financial Assistance for Research Projects Created Uncertainty

ARPA-E provides funding for research to overcome long-term and high-risk technological barriers in developing energy technologies. Since 2009, ARPA-E has awarded approximately $1.3 billion to universities, public and private companies, and national laboratories to fund energy research projects. Starting in May 2017, DOE began reviewing its financial assistance department-wide, including ARPA-E's, to determine if it met the administration's priorities.

GAO was asked to examine this review process as it pertained to ARPA-E. This report describes (1) how DOE implemented the financial assistance review process; and (2) the perspectives of ARPA-E selectees on the impacts of the review process.

GAO reviewed documents and interviewed officials at ARPA-E and DOE's Office of Management, which coordinated the review. GAO also interviewed a nonprobability sample of 10 of the 68 ARPA-E award selectees whose financial assistance was evaluated under the review. GAO identified selectees to interview based on representation across ARPA-E's recipient types, including universities, private companies, and national laboratories, among other criteria. While the views of selectees GAO interviewed cannot be generalized to all affected ARPA-E selectees, they provide illustrative examples of the effects of DOE's review.

The Department of Energy (DOE) developed and implemented a new process to review its financial assistance to ensure that all new work funded by the department—including by DOE's Advanced Research Projects Agency-Energy (ARPA-E)—was consistent with the current administration's priorities. The review process covered funding opportunity announcements as well as certain other types of financial assistance. New awards were delayed until the review of the underlying financial assistance opportunity was completed. DOE reviewed and approved ARPA-E's financial assistance on a rolling basis from May through September 2017, and nearly all ARPA-E financial assistance was approved. DOE Office of Management officials met with ARPA-E officials on several occasions to discuss their review of ARPA-E financial assistance. DOE officials GAO interviewed said they wanted to complete the review as quickly as possible to minimize effects on DOE programs. GAO determined that the delay was not reportable under the Impoundment Control Act. The Impoundment Control Act requires the President to notify Congress if an agency wants to withhold the obligation of funds. GAO has separately informed Congress of an impoundment of $91 million in funds that were not allocated to any financial assistance awards, and was not related to DOE's review process.

According to the 10 ARPA-E project selectees GAO interviewed, DOE's financial assistance review process created uncertainty, which led to a variety of project impacts. The impacts most commonly cited by selectees included potentially delayed project timelines, as well as difficulties in staffing their project teams, among other impacts as shown below.

DOE officials GAO interviewed said that they are reviewing DOE financial assistance in fiscal year 2018. DOE officials said that a key benefit of the fiscal year 2017 review process was an opportunity to better identify and coordinate future financial assistance department-wide on crosscutting issues. However, DOE plans to review fiscal year 2018 financial assistance prior to issuing funding opportunity announcements to the public, and thus before any recipients apply or are selected. As a result, DOE officials said, the uncertainty that ARPA-E selectees experienced during the fiscal year 2017 review process should be reduced.

GAO is not making any recommendations. DOE provided technical comments, which GAO incorporated as appropriate.

In 2007, the Advanced Research Projects Agency-Energy (ARPA-E) was  established within the Department of Energy (DOE) to overcome the long- term and high-risk technological barriers to developing energy  technologies, such as advanced biofuel crops and improved batteries for  plug-in hybrid vehicles, among others. As specified in statute, ARPA-E’s  program goals are to enhance the nation’s economic and energy security  through technological development and ensure that the United States  maintains a technological lead in developing and deploying advanced  energy technologies. From the time ARPA-E first received an  appropriation in the American Recovery and Reinvestment Act of 2009,  through December 2015, ARPA-E awarded approximately $1.3 billion to  universities, public and private companies, and national laboratories for  projects intended to make transformational—rather than incremental— advances to a variety of energy technologies.

Typically, ARPA-E develops funding opportunity announcements to  address an identified energy technology gap. After publishing a funding  opportunity announcement, ARPA-E follows a multi-stage application  review and award funding process that involves the selection of  applicants and an award negotiation period, among other steps.  Beginning in May 2017, DOE’s Chief of Staff initiated a review of all  financial assistance for new work across the department, including ARPA- E, to determine whether the financial assistance aligned with the new  administration’s priorities. The review was coordinated and facilitated by  DOE’s Office of Management. As part of the review process, DOE  delayed new award agreements, as well as other types of financial  assistance for new work until the review of the underlying financial  assistance opportunity was completed. While the review took place,  concerns were raised about the impact that the suspension might have on  the continued viability of research projects conducted by selected ARPA- E applicants—referred to in this report as ARPA-E selectees—as well as  applicants for other DOE financial assistance.

You asked us to examine issues related to DOE’s financial assistance  review process, specifically as it pertained to ARPA-E. This report  describes (1) how DOE implemented the financial assistance review  process; and (2) the perspectives of selected ARPA-E selectees  regarding the impacts of this review process.

To describe how DOE implemented its financial assistance review  process, we interviewed ARPA-E and DOE Office of Management  officials to obtain their views on the implementation of the review process.  We also examined documentation provided by these offices about DOE’s  financial assistance review process and, more broadly, the ARPA-E  financial assistance process. Additionally, we analyzed ARPA-E data to  describe the timeline of DOE’s review of ARPA-E financial assistance and  the amount of funding approved over the course of the review process.  We discussed how the data were compiled with DOE officials and found  that the data were sufficiently reliable for our purposes.

To ascertain ARPA-E selectees’ perspectives on the impacts of DOE’s  financial assistance review process on their projects, we conducted  interviews using a standard set of questions with a nonprobability sample  of 10 of the 68 ARPA-E selectees whose financial assistance was  evaluated under the review to obtain information on how they were  affected by the review, among other related topics. To identify selectees  for these interviews, we requested that ARPA-E provide us with a list of  projects that had received funds from or had been selected for award  negotiation from ARPA-E and whose financial assistance had been  evaluated by the review process, which included both competitively  selected awards and determinations of noncompetitive financial  assistance. We chose selectees to interview based on a variety of  characteristics, including (1) whether they were a university, a private  business, or a national laboratory; (2) whether the project was  competitively selected from a new funding announcement or was new  work funded on a noncompetitive basis; and (3) whether the project was  under review at the time of the interview, or its review had already been  completed. Wherever possible, we tried to choose selectees whose work  was funded under different ARPA-E funding opportunity announcements.  Because the ARPA-E selectees we chose to interview were based on a  nonprobability sample, the views we obtained are not generalizable to all  ARPA-E selectees affected by the review process. However, they provide  illustrative examples of the effects of DOE’s financial assistance review.

We conducted this performance audit from May 2017 to February 2018,  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.

ARPA-E’s typical funding announcement and award selection process  begins with the agency hiring a program director responsible for  identifying a gap in energy technology research and developing a  program to fill that gap. ARPA-E is required by statute to achieve its  goals through energy technology projects that, among other things,  accelerate transformational technological advances in areas that industry  on its own is not likely to undertake because of technical and financial  uncertainty, while also ensuring that its activities are coordinated with,  and do not duplicate the efforts of, programs and laboratories within DOE  and other relevant research agencies. ARPA-E’s efforts to identify  existing energy technology research gaps and to design a program to  address those gaps involve research; consultation with scientific experts,  including a workshop with outside experts; and internal discussions within  ARPA-E. From this process, program directors develop funding  opportunity announcements that describe the technical requirements  specific to each program’s technology area that applicants have to meet,  as well as the four standard criteria that ARPA-E uses to guide its merit  selection process. Following the issuance of a funding opportunity  announcement, ARPA-E employs the following multi-stage process to  merit review applications, make funding award decisions, and monitor  projects:

Concept paper. Applicants initially submit a 4- to 7-page abstract of  their projects. Scientific experts from government, industry, and  academia serve as reviewers.

Full application. After reviewing concept papers, ARPA-E  encourages some applicants to submit full applications. Full  applications are generally quite extensive, requesting information on  the technical and financial aspects of the proposed project, among  other things. ARPA-E officials we interviewed noted that these  applications are frequently more than 100 pages and can take 30 to  45 days for the applicant to develop. Full applications are reviewed  against the selection criteria by leading scientific experts in the  relevant field and assigned numerical scores.

Reply to reviewer comments. After reviewing a full application,  reviewers provide comments and questions to the applicants, who  then have the opportunity to respond.

Selection. A three- to four-person panel, chaired by the relevant  ARPA-E program director, considers the reviewers’ comments and  numerical scores and recommends applications for an award. The  final decisions on which applicants to select for award negotiations  are made by the selecting official, usually the Director of ARPA-E.

Award negotiations. Once selections are made, ARPA-E program  directors work closely with selectees to negotiate the terms and  conditions of their award. These negotiations include, among other  things, developing a project plan with technical milestones that are to  be met during the 2 to 3 years that the award is being funded, a  budget and management plan, and an intellectual property and data  management plan. Funds are awarded once negotiations regarding  the terms and conditions of the award are concluded. ARPA-E seeks  to complete negotiations regarding the terms and conditions of an  award within approximately 100 days of sending a letter notifying an  applicant that they have been selected for award negotiations.

Selectees may be allowed to begin spending money to start work on  their projects up to 90 days prior to the completion of award  negotiations. However, these expenditures are made with the risk that  applicants may not be reimbursed if award negotiations are  unsuccessful and ARPA-E does not fund the award.

Monitoring. ARPA-E monitors and supports the projects it funds  through quarterly reviews and site visits. At any point during the  award, ARPA-E may decide whether to continue or terminate the  project based on whether agreed-upon project milestones are being  met.

DOE Developed and Implemented a New Process to Assess the Department’s Financial Assistance against the Administration’s Priorities

In 2017, DOE developed and implemented a new review process to  assess DOE financial assistance for new work against the current  administration’s priorities, including financial assistance for which ARPA- E had already made award selections. DOE reviewed and approved  ARPA-E’s opportunities for financial assistance on a rolling basis from  May to September 2017, and nearly all were approved to proceed.

The formal review of DOE financial assistance officially began on May 4,  2017, when DOE’s Chief of Staff issued a memorandum stating that  funding opportunity announcements and determinations of non- competitive financial assistance would be reviewed to ensure consistency  with the administration’s priorities. According to the memorandum, DOE  agencies that award financial assistance—referred to in this report as  funding organizations—were to provide information about each  competitively selected funding announcement and determination of non- competitive financial assistance by May 15, 2017. This information  included, for example, a brief description of the financial assistance, the  number and amount of planned awards, and the technology readiness  level of the projects being funded. DOE Office of Management officials  told us that the agency’s financial assistance review lasted through  September 2017, as some DOE organizations continued to submit new  financial assistance for review, but that the review was largely completed  by August 10, 2017. However, while the formal review of DOE financial  assistance began in May, award negotiations for ARPA-E-funded projects  were suspended nearly 1 month earlier. Specifically, according to ARPA- E officials, DOE’s Deputy Chief of Staff verbally directed ARPA-E on April  6, 2017 to stop all ongoing award negotiations. Figure 1 shows the  timeline of DOE’s review of ARPA-E financial assistance.

Pursuant to the DOE Chief of Staff’s May 4th memorandum, ARPA-E and  other DOE funding organizations submitted the requested information to  the DOE review team, which was coordinated and facilitated by the  Director of DOE’s Office of Management. Other members of the financial  assistance review team included DOE’s acting Chief Financial Officer;  deputy assistant secretaries, chiefs of staff, and senior advisors at several  DOE funding organizations; and members of the department’s  congressional affairs and public affairs staff.

According to DOE Office of Management officials we interviewed, the  review team assessed the department’s financial assistance against five  criteria:

Whether the financial assistance was statutorily mandated;

Whether the financial assistance was described in congressional

Whether the financial assistance was consistent with administration  priorities, as identified in budget documents and other statements  from the President and Secretary of Energy, among other things;

What technology readiness level the financial assistance was  intended to fund; and

Whether the technology encompassed by the project was already  being funded by the private sector or others.

DOE Office of Management officials stated that the review team did not  use the above criteria to assign quantitative scores to evaluate the  department’s financial assistance; instead, the team collaboratively  discussed each opportunity for assistance. In most cases, the review  team was able to reach consensus on whether the financial assistance  aligned with the administration’s priorities. DOE Office of Management  officials also noted that they met with ARPA-E leadership to obtain  additional information about ARPA-E financial assistance on three  occasions during the course of the review. ARPA-E officials said that, in  addition to those three meetings, they provided written information to  address questions received from the review team and to provide  additional context regarding ARPA-E financial assistance.

In total, DOE’s review team assessed 6 ARPA-E fiscal year 2017 or prior- year funding opportunity announcements for which applicants had been  selected for award negotiation, 7 fiscal year 2017 announcements in the  earlier stages of the merit review and selection process, 2 fiscal year  2017 announcements that had not yet been released, and 17  opportunities for financial assistance where ARPA-E funded renewals or  new work under a determination of noncompetitive financial assistance.  According to DOE Office of Management officials, the review team  worked as quickly as possible to review all of DOE’s financial assistance  to minimize potential disruptions for recipients and DOE’s funding  organizations. Once the review team approved an opportunity for financial  assistance, DOE funding organizations were allowed to resume work,  DOE Office of Management officials told us. Figure 2 shows the total  cumulative funds for ARPA-E financial assistance approved by the review  committee at various stages in the review. For example, as shown in  Figure 2, the review team approved roughly $158.3 million (55.6 percent)  of ARPA-E’s proposed financial assistance on May 18, 2017, 3 days after  the deadline for DOE funding organizations to submit information to the  review team. The remaining proposed financial assistance was approved  in several stages from June through August 2017. As of August 25, 2017,  all of ARPA-E’s competitively selected funding opportunity  announcements, renewals, and determinations for noncompetitive  financial assistance, where selectees had been selected for negotiation,  were approved by the review team, representing roughly $265 million, or  93.1 percent, of all ARPA-E funding reviewed by the team.

DOE Office of Management officials also stated that the financial  assistance review team made a decision early in the course of the review  to honor all existing DOE commitments to fund new work. These officials  said that this extended to commitments made to entities that had been  selected for award negotiations, even though the department does not  officially commit to providing funds until such negotiations are completed  and the award is finalized. However, according to ARPA-E selectees we  interviewed, this message was generally not communicated to them,  which led to uncertainty about whether their projects would be funded. In  contrast, the review team recommended that the DOE Chief of Staff  cancel ARPA-E’s Facsimile Appearance to Create Energy Savings  funding announcement, which had accepted full applications but had not  selected any applicants for award negotiation. This opportunity would  have funded the development of advanced information technology that  could allow for three-dimensional digital representation of a person in a  room nearly indistinguishable from the person being there in real life,  which might allow for increased telecommuting. DOE Office of  Management officials told us that the review team reached this  recommendation in part because this technology was already being  funded by the private sector. As of November 2017, DOE Office of  Management officials said the review team had cancelled 3 other DOE  funding announcements as a result of the review.

According to information we collected, DOE’s review of ARPA-E financial  assistance, as part of the DOE-wide review process, did not require the  President to send a special message under the Impoundment Control  Act. Specifically, the delay in obligating ARPA-E funds for financial  assistance examined through DOE’s review process was for  programmatic reasons. DOE officials explained that the purpose of the  review was to ensure that the agency’s financial assistance aligned with  the priorities of the current administration.

DOE’s Financial Assistance Review Created Uncertainty for ARPA-E Selectees, Which Led to Delayed Project Timelines and Staffing Difficulties, among Other Impacts

According to the 10 ARPA-E selectees we interviewed, DOE’s financial  assistance review process created uncertainty, which led to a variety of  impacts—the most frequently cited of which were potentially delayed  project timelines and difficulties staffing project teams. Selectees told us  that they received little communication from ARPA-E during the review  process, and they indicated that additional information about review  timelines and potential effects on their awards would have helped them  manage some of the uncertainty they experienced during the review  process. DOE Office of Management officials said the fiscal year 2017  review process helped to better identify and coordinate future financial  assistance department-wide on crosscutting issues. DOE is conducting  the fiscal year 2018 review process prior to publicly issuing funding  announcements. As a result, DOE Office of Management officials said,  the delays and uncertainty that selectees experienced in fiscal year 2017  should be reduced.

In our structured interviews with ARPA-E selectees, the most frequently  cited impact of the uncertainty caused by DOE’s financial assistance  review was the potential need to delay project timelines. All of the ARPA- E selectees we interviewed told us that they might need to extend their  project timelines because of uncertainty caused by DOE’s review. Four of  these selectees noted that the delay caused by DOE’s review could  cause additional, cascading delays in their timelines. For example, 1  selectee we interviewed said that it would need to re-issue a hiring  announcement it had publicized prior to the review because the review  prevented it from hiring someone. In addition, the selectee would need to  resubmit the hiring announcement to the university and state human  resources departments for approval, which could take months to process.  Another selectee said that it missed 2 months of a 3-month planting  season because it could not start project work, and had the delay lasted  any longer, the selectee would have missed an entire year of data  collection on the project.

Selectees also cited challenges to staffing project teams as a result of the  uncertainty caused by the review. Selectees stated that delays caused by  the review affected their ability to hire team members they had planned to  hire based on their original schedule, as potential members moved on to  other projects or took different jobs. For example, 9 selectees told us that  they delayed hiring new project team members while DOE’s review was  occurring. Four selectees we interviewed said that they had difficulty  retaining staff during the review process. For example, 1 selectee had to  lay off 2 of the company’s 15 staff members because of the delay in  receiving funding, and several other staff members left voluntarily.  Furthermore, the selectee said laying off these staff members resulted in  an increase in the company’s unemployment taxes, which was expensive  for a small-sized company. Four other selectees that we interviewed said  they had to assign existing project team members to other funded work or  general activities because they could not begin work on their ARPA-E  project until they received funding.

Selectees we interviewed cited additional impacts associated with the  uncertainty caused by DOE’s financial assistance review. These impacts  included:

Delaying equipment purchases. Four selectees reported that they  had to delay purchasing important equipment needed to execute their  project. One selectee noted that the delay caused by the review was  long enough that price quotes it had received from equipment sellers  expired, and that prices could increase in later quotes.

Changes to project scope. Two selectees told us that they might  need to limit the planned scope of their projects to be able to complete  them in the proposed timeline. For example, 1 selectee said its project  involves helping to scale up three to four different technologies a year,  which it might not be able to do if it has to adhere to its initial  timeframes.

Loss of advantage against potential competitors. Four of the  selectees we interviewed said that the delay may have caused their  technology to fall behind their potential competitors in some way. For  example, 1 selectee noted that it was working in a competitive  environment for its technology, with ongoing efforts in multiple  countries, and reported that its project might have fallen behind  others’ efforts as a result of delays associated with DOE’s review.  However, 4 other selectees said that the review was not likely to  cause any loss of competitiveness.

Impacts on external project partners. Three selectees noted that  DOE’s review caused uncertainty for partners on their projects,  including partners that provide external funding. For example, 1  selectee told us that private investors in its technology area are most  active in the fall and that its project team might not be able to seek a  second round of funding if it could not demonstrate the necessary  technical results of the project by then.

Impacts on pre-award spending reimbursements. One selectee  reported that it had to cease certain pre-award spending. The  selectee said that it spent roughly $10,000 on equipment and 150  hours of labor prior to DOE’s financial assistance review, but it could  not submit invoices for these expenditures to ARPA-E while the  review was ongoing and would not be able to if its project was  ultimately not approved. Furthermore, the selectee said that even if  the award was approved, the delay might result in expenditures falling  outside the 90-day window of allowable pre-award expenditures,  which would require obtaining approval from ARPA-E to be  reimbursed.

Selectees we interviewed also stated that they received little  communication from ARPA-E during the review, which contributed to the  uncertainty about the status of their projects. Specifically, 6 of the  selectees said that they would have liked additional information from  ARPA-E on a variety of topics related to the review. For example, 4  selectees said they would have liked additional information about the  review timeline and when it was planned to be completed. One of these  selectees told us that a written document from ARPA-E indicating a rough  time frame and next steps would have helped facilitate better planning for  their project team. Two selectees we interviewed wanted additional  information about whether they could renegotiate their timelines once the  review was completed. Three selectees told us that they would have liked  additional information about whether the review would cause them to lose  their funding. ARPA-E officials we interviewed told us that they made  three separate requests to DOE’s Deputy Chief of Staff to learn what they  could communicate to selectees about the April 6, 2017, verbal order and  the review process. ARPA-E officials told us that they were directed by  the Deputy Chief of Staff not to communicate with selectees about the  verbal order until receiving guidance from his office. ARPA-E developed  proposed language to share with selectees but did not receive approval  from the Deputy Chief of Staff to distribute it. DOE Office of Management  officials we interviewed told us that they did not issue guidance to ARPA- E or other DOE funding organizations about how the organizations should  communicate with selectees during the review.

In contrast to its fiscal year 2017 review, DOE began its 2018 financial  assistance review in August 2017, prior to publicly issuing funding  announcements. On August 10, 2017, DOE’s Office of Management sent  an email to DOE funding organizations directing them to submit  descriptions of their proposed financial assistance by September 8, 2017.  Because the review will occur prior to publicly issuing funding opportunity  announcements, and thus before any recipients apply or are selected,  DOE Office of Management officials said the delays and uncertainty that  selectees experienced in fiscal year 2017 should be reduced.

DOE Office of Management officials told us that—aside from changing  the timing of its 2018 financial assistance review—the review team’s  membership and evaluation criteria will be largely the same as for the  fiscal year 2017 review. The officials said that they discussed the review  process with senior leaders in DOE’s funding organizations to help  ensure that they understood the priorities, expectations, and steps of the  review process. The officials also told us that the review team developed  additional guidance to clarify certain issues that arose during the fiscal  year 2017 review. This additional guidance included:

On August 17, 2017, funding organization managers were informed  that continuation awards—those where the activity is presently being  funded—would be exempt from submission to the review team and  can continue to move forward.

On August 29, 2017, funding organizations were informed that they  should identify financial assistance that falls under one of seven  crosscutting research issue areas. According to DOE Office of  Management officials we interviewed, a key benefit of the fiscal year  2017 review process was that the review team noticed that DOE had  several funding announcements at multiple funding organizations  related to these areas. DOE’s funding organizations may be able to  coordinate to issue a consolidated funding announcement in these  crosscutting research issue areas, to ensure efforts are  complementary and not duplicative. Furthermore, DOE Office of  Management officials we interviewed said that knowing which funding  organizations are funding work in these areas will support DOE  meetings on crosscutting issues.

We provided a draft of this report for review and comment to the  Secretary of Energy. DOE provided technical comments, which we  incorporated as appropriate.

We are sending copies of this report to the appropriate congressional  committees, the Secretary of Energy, and other interested parties. In  addition, the report is available at no charge on the GAO website at  http://www.gao.gov.

If you or your staff members have any questions about this report, please  contact me at (202) 512-3841 or neumannj@gao.gov. Contact points for  our Offices of Congressional Relations and Public Affairs may be found  on the last page of this report. GAO staff who made key contributions to  this report are listed in appendix I.

Appendix I: GAO Contact and Staff Acknowledgments

In addition to the individual named above, Chris Murray (Assistant  Director), Perry Lusk (Analyst-in-Charge), Antoinette C. Capaccio, John  Delicath, Justin Fisher, Kimberly McGatlin, Dan Royer, Tind Shepper  Ryen, Lauren G. Sherman, and McKenna Storey made key contributions  to the report.

Since 2009, DOE's Advanced Research Projects Agency-Energy (ARPA-E) has awarded about $1.3 billion to universities, companies, and national laboratories to fund energy research.

In May 2017, DOE began a review of all its new financial assistance awards—including those from ARPA-E. During the review, DOE delayed new ARPA-E awards and provided limited information to those who had been selected but were still negotiating the terms of their awards.

While nearly all ARPA-E financial assistance was eventually approved, the delay created uncertainty for 10 project teams we interviewed, which affected their project timelines and hiring.


Strategic Petroleum Reserve: Observations on the Emergency Stockpile

Over 4 decades ago, Congress authorized the SPR—the world's largest government-owned stockpile of emergency crude oil—to reduce the impact of disruptions in supplies of petroleum products. Since 2015, Congress has also mandated sales of SPR oil to fund the modernization of SPR facilities and other national priorities. DOE manages the SPR, whose storage and related infrastructure is aging, and has plans to modernize its facilities. As a member of the International Energy Agency, the United States is obligated to maintain reserves equivalent to at least 90 days of the previous year's net imports (imports minus exports). As of March 2018, the SPR held about 665 million barrels of crude oil, about 138 days of net imports.

This testimony highlights GAO's May 2018 report on the SPR, including the extent to which (1) DOE has identified the optimal size of the SPR, and (2) DOE's plans for modernizing the SPR take into account the effects of congressionally mandated crude oil sales. GAO reviewed DOE's documents and studies and interviewed agency officials.

The Department of Energy (DOE) has not identified the optimal size of the Strategic Petroleum Reserve (SPR). In 2016, DOE completed a long-term strategic review of the SPR after its last comprehensive examination was conducted in 2005. The 2016 review examined the benefits of several SPR sizes, but it did not identify an optimal size and was limited in several ways. In particular, in the review, DOE did not fully consider recent and expected future changes in market conditions, such as the implications of projected fluctuations in net imports or the role of the private sector in responding to supply disruptions. These changes have contributed to SPR and private reserves reaching historically high levels on a net imports basis. These changes are expected to continue to evolve, and according to government projections, the United States will become a net exporter in the late 2020s before again becoming a net importer between 2040 and 2050. GAO has found that agencies should reexamine their programs if conditions change. GAO recommended that DOE supplement its 2016 review by conducting an additional analysis, and take actions to ensure the agency periodically conducts a strategic review of the SPR. DOE generally agreed with these recommendations.

DOE has taken steps to account for congressionally mandated sales of SPR crude oil in its $1.4 billion modernization plans for SPR's infrastructure and facilities. However, DOE's current plans, developed in 2016, are based on information largely developed prior to recent congressionally mandated sales of an additional 117 million barrels of oil. According to DOE officials, the agency began a study in March 2018 to assess the effects of these sales on the SPR's modernization. However, GAO reported that this study was not examining a full range of options for handling any excess SPR assets that may be created by currently mandated sales or any additional sales that may be mandated in the future, inconsistent with an agency order on real property asset management that calls for identifying excess assets. For example, according to officials, DOE does not currently have the authority to lease unused storage capacity to the private sector, and DOE was not planning to examine this option. If authorized, leasing unused SPR storage capacity could generate revenues that could help offset the costs of modernization. GAO recommended that DOE should consider a full range of options for handling potentially excess assets and, if needed, request congressional authority for the disposition of these assets. DOE agreed with this recommendation.

GAO made four recommendations, including that DOE (1) supplement the 2016 review by conducting an additional analysis, (2) ensure it periodically reexamines the SPR, and (3) consider a full range of options for handling potentially excess assets. DOE partially agreed with the first recommendation and agreed with the other two recommendations.

I am pleased to be here today to discuss our recent report on the  Department of Energy’s (DOE) Strategic Petroleum Reserve (SPR).  More than 4 decades ago, Congress authorized the creation of the  SPR—currently the world’s largest government-owned stockpile of  emergency crude oil—to reduce the impact of disruptions in supplies of  petroleum products. DOE manages the SPR. As of March 2018, the  SPR held 665.5 million barrels of crude oil, worth about $42 billion. In the  decades since its creation, the structure of the SPR generally has not  changed—it has always held crude oil in salt caverns along the Gulf  Coast—though markets for crude oil and petroleum products—products  such as gasoline and diesel that are refined from crude oil for final  consumption—have changed in important ways.

Throughout most of the SPR’s history, domestic crude oil production was  generally in decline, while consumption of petroleum products was  generally increasing, causing the United States to rely increasingly on  imported crude oil and petroleum products. However, the SPR now  operates in a context of increasing U.S. crude oil production (the United  States is now one of the world’s largest crude oil producers), relatively  stable consumption, and shrinking net crude oil and petroleum product  imports. Moreover, whereas the Arab oil embargo of 1973 to1974 led to  shortages and long lines at gas pumps around the country, prices now  change to accommodate supply and demand, so that physical crude oil  shortages are less of a concern than they were in the 1970s when the  SPR was created.

The SPR also helps the United States meet its obligations as a member  of the International Energy Agency (IEA)—an international energy forum  of 30 member countries established in 1974 to help members respond  collectively to major energy supply disruptions. To become a member of  the IEA, a country must have, among other things, crude oil or petroleum  product reserves equivalent to 90 days of the previous year’s net imports,  and measures in place to ensure that it is able to contribute its share of a  collective action initiated in response to a significant global oil supply  disruption. As of March 2018, according to IEA data, the SPR held the  equivalent of 138 days of net imports. The IEA counts both public and  private reserves toward meeting the 90-day reserve obligation, although  the United States has recently met this obligation solely through publicly  owned reserves in the SPR, as shown in figure 1.

Since 2015, six laws mandated sales of crude oil from the SPR to fund  the modernization of SPR facilities and other national priorities. Total  planned sales are projected to reduce the amount of crude oil held in the  SPR from 665.5 million barrels in March 2018 to 405 million barrels by the  end of fiscal year 2027. These sales have an estimated value of almost  $16 billion, according to Congressional Budget Office documents. Of the  total estimated value, sales of up to $2 billion were specifically authorized  for the SPR’s modernization program. The SPR’s infrastructure of  facilities, pipelines, pumps, and other equipment is aging and much of it  needs replacement, according to DOE documents. Since 2014, DOE has  developed plans for modernizing the SPR to address these needs,  among other things.

My testimony today discusses findings from our May 2018 report on the  SPR and focuses on (1) how the United States and other IEA members  meet their IEA obligations, (2) the extent to which DOE has identified the  optimal size and the potential need for additional petroleum product  reserves for the SPR, and (3) the extent to which DOE’s plans for  modernizing the SPR take into account the effects of current and potential  future congressionally mandated oil sales.

To conduct this work, we reviewed documents, reports, and studies that  we identified through DOE officials, recommendations from experts and  stakeholders, and sources referenced in DOE publications as well as our  prior work on the SPR. We also interviewed DOE officials and  representatives of energy consulting groups and a state agency, among  others. Our May 2018 report includes a detailed discussion of the  objectives, scope, and methodology used to conduct this work. We  conducted the work on which this testimony is based in accordance with  generally accepted government auditing standards. Those standards  require that we plan and perform audits to obtain sufficient, appropriate  evidence to provide a reasonable basis for our findings and conclusions.  We believe that the evidence obtained provided a reasonable basis for  our findings and conclusions based on our audit objectives.

Unlike the United States, Most IEA Members Rely on Private Reserves to Meet Reserve Obligations and Hold Significant Proportions of Their Reserves as Petroleum Products

As we found in our May 2018 report, in terms of how they meet their IEA  90-day reserve obligations, most other IEA members differ from the  United States in two basic ways. First, as of December 2017, most other  IEA members rely at least in part on private rather than public reserves to  meet their obligations. As of December 2017, 18 of the 25 IEA members  that met their 90-day reserve obligation and had a formal process for  holding and releasing reserves relied entirely or in part on private  reserves to meet their obligations. Specifically, based on IEA data as of  December 2017, these 18 countries met their 90-day reserve obligations  through private reserves and either had no public reserves or had public  reserves of less than 90 days. Unlike the 18 countries that rely at least in  part on private reserves, as of December 2017, the United States and 6  other IEA members met the 90-day reserve obligation exclusively through  public reserves. The second way other IEA members differ from the  United States is that most hold at least a third of their reserves as  petroleum products, according to a 2014 IEA report. Holding petroleum  products can be advantageous during certain disruptions because such  reserves can be directly distributed to consumers, whereas crude oil must  first be refined and turned into products, adding response time. In  contrast, more than 99 percent of the SPR (665.5 million barrels as of  March 2018) is held as crude oil. Because of the large U.S. refining  sector, crude oil from the SPR can be domestically refined into petroleum  products to meet demand.

DOE Has Not Identified the Optimal Size for the SPR or the Potential Need for Regional Product Reserves

As we found in our May 2018 report, DOE has not identified the optimal  size or the potential need for additional petroleum product reserves for  the SPR. In 2016, DOE completed a long-term strategic review of the  SPR after its last comprehensive examination had been conducted in  2005. The 2016 review examined the expected benefits of several SPR  sizes, but it did not identify an optimal size and was limited in several  ways. In particular, in the review, DOE did not fully consider recent and  expected future changes in market conditions, such as the implications of  projected fluctuations in net imports or the role of the private sector in  responding to supply disruptions. Recent changes have contributed to  SPR and private reserves reaching historically high levels on a net  imports basis. These changes are expected to continue to evolve— according to government projections, the United States will become a net  exporter in the late 2020s before again becoming a net importer between  2040 and 2050. In February 2005, we found that agencies should  reexamine their programs if conditions change. Without addressing the  limitations of its 2016 review and periodically performing reexaminations  in the future, DOE cannot be assured that the SPR will be sized  appropriately into the future. In May 2018, we recommended that DOE (1)  supplement its 2016 review by conducting an additional analysis that  takes into account, among other things, the costs and benefits of a wide  range of different SPR sizes and (2) take actions to ensure that it  periodically conducts and provides to Congress a strategic review of the  SPR. DOE partially agreed with the first recommendation and stated that  it will conduct an additional analysis to assess the purpose, goals, and  objectives of the SPR, taking into account private sector response, oil  market projections, and any other relevant factors, that will lead to an  evaluation of possible optimal sizes of the SPR in the future. DOE agreed  with the second recommendation.

DOE has also not fully identified whether additional regional petroleum  product reserves should be part of the SPR. The Quadrennial Energy  Review of 2015 recommended that DOE analyze the need for additional  or expanded regional product reserves by undertaking updated cost- benefit analyses for all of the regions of the United States that have been  identified as vulnerable to fuel supply disruptions. In response, DOE  studied the costs and benefits of regional petroleum product reserves in  the West Coast and Southeast Coast, though it did not finalize or publicly  release these studies. Nevertheless, the draft studies concluded that a  product reserve in the Southeast would provide significant net economic  benefits to the region and the United States, particularly in the event of a  major hurricane, while further analyses are needed to determine the  potential benefits of a reserve on the West Coast. According to DOE  officials, the agency has no plans to conduct additional studies. Without  completing studies on the costs and benefits of regional petroleum  product reserves, DOE cannot ensure that it and Congress have the  information they need to make decisions about whether additional  regional product reserves are needed. In our May 2018 report, we  recommended that DOE conduct or complete such studies. DOE  disagreed with this recommendation, though we continue to believe that  conducting these analyses will provide Congress with needed  information.

DOE Has Taken Steps to Update Its Modernization Plans but Is Hindered by Uncertainty Regarding the SPR’s Long-term Size

As we found in our May 2018 report, DOE has taken steps to account  for the effects of congressionally mandated oil sales in its plans for  modernizing the SPR, though DOE’s current plans, developed in 2016,  are based on information largely developed prior to recent  congressionally mandated sales of an additional 117 million barrels of oil.  According to DOE documents, the SPR modernization program is  focused on a life extension project to modernize aging infrastructure to  ensure that the SPR will be able to meet its mission requirements for the  next several decades. The project’s scope of work has undergone several  revisions since its inception in response to changing conditions and  requirements, according to the agency. DOE has estimated that the  SPR’s modernization will cost up to $1.4 billion, and according to officials,  the agency had spent $22 million as of the end of February 2018.  According to DOE officials, in March 2018, DOE commenced a study— the SPR post-sale configuration study targeted for completion in October  2018—to examine potential future reserve configurations and to account  for the effects of congressionally mandated sales on the reserve and its  modernization. Information from the study will inform DOE’s updates to  the SPR’s modernization plans, according to DOE officials.

Although the SPR had a design capacity to hold 713.5 million barrels of  oil, in January 2017, the SPR held 695 million barrels. As shown in figure  2, congressionally mandated sales will cause excess storage capacity to  grow to 308 million barrels or more by the end of fiscal year 2027— meaning that about 43 percent of the SPR’s total design capacity to store  oil would be unused.

In its ongoing SPR post-sale configuration study, DOE plans to explore  some options to use potentially excess SPR assets, such as spare  storage capacity. In withdrawing oil to meet congressionally mandated oil  sales currently in place (290 million barrels through fiscal year 2027),  DOE could close at least one SPR site based on our analysis of projected  excess storage capacity. For example, if DOE were to close the smallest  SPR site, Bayou Choctaw in Louisiana, the agency could also explore  selling the connected pipeline and marine terminal, which are currently  being leased to a private company. DOE could also consider leasing  excess storage capacity to other countries so that they could store oil at  the SPR. DOE had not entered into any such leases with other  countries and had not considered such leases as of May 2018 because,  according to DOE, the SPR has historically lacked capacity to store  additional oil. DOE had not proposed any of these options or explored the  revenue the agency could generate by selling or leasing these assets.  However, according to DOE officials, the agency will examine the  feasibility of such options in the ongoing SPR post-sale configuration  study.

In the course of our work, we also identified other options for handling  potentially excess SPR assets that DOE was not planning on examining  as of May 2018, largely because DOE did not have the authority to  pursue them, according to agency officials. First, DOE could explore  leasing storage capacity to private industry. U.S. oil production has  generally increased over the last decade. As a result, the private sector  may want to lease excess SPR capacity, which may be cheaper than  above-ground storage, according to a representative of a private  company we interviewed. Fees for doing so could help defray SPR  storage or maintenance costs. However, agency officials told us that the  Energy Policy and Conservation Act gave DOE authority to lease  underutilized storage to other countries but not to the private sector.  Second, if Congress determines that the SPR holds oil in excess of that  needed domestically, DOE could explore selling contingent contracts for  the excess oil rather than selling the oil outright. Australian and New  Zealand officials told us that such contracts would help their countries  meet their IEA 90-day reserve obligations.

Australian officials told us that they have discussed this option with DOE.  Currently the United States and Australia have agreed, through an  arrangement, to allow Australia to contract for petroleum stocks located in  the United States and controlled by commercial entities. While the  arrangement does not cover government-owned oil in the SPR, if it did,  based on our analysis, DOE could generate up to approximately $15  million if Australia purchased the maximum allowable amount of oil  specified in an arrangement through contracts for excess SPR oil in  2018. However, although the Energy Policy and Conservation Act  allows DOE to lease underutilized storage to other countries, DOE lacks  the authority to sell contracts for the oil and does not plan to seek this  authority, according to DOE officials. DOE officials told us that they did  not plan to examine these options.

According to DOE’s real property asset management order, the agency is  to identify real property assets that are no longer needed to meet the  program’s mission needs and that may be candidates for reuse or  disposal. Once identified, the agency is to undertake certain actions,  including determining whether to dispose of these assets by sale or lease.  As part of its SPR post-sale configuration study, DOE plans to determine  whether it is appropriate to close SPR facilities, and the relative benefit of  any closures would be informed by potential lease revenues from  maintaining sites so they could be leased, according to agency officials.  However, as mentioned previously, we identified other options for  handling potentially excess SPR assets that DOE was not planning to  examine in its study. Although DOE does not currently have the authority  to implement these options, according to officials, examining their  potential use, including possible revenue enhancement, could inform  Congress as it examines whether it should grant such authority. Without  examining a full range of options in the SPR post-sale configuration  study, DOE risks missing beneficial ways to modernize the SPR while  saving taxpayer resources. In May 2018, we recommended that in  completing its ongoing SPR post-sale configuration study, DOE should  consider a full range of options for handling potentially excess assets and,  if needed, request congressional authority for the disposition of these  assets. DOE agreed with this recommendation.

Finally, as DOE takes steps to plan for the SPR’s modernization, ongoing  uncertainty regarding the SPR’s long-term size and configuration have  complicated DOE’s efforts. Congress has generally set the SPR’s size by  mandating purchases or sales of oil. DOE officials told us they do not  know whether Congress will mandate additional sales over the next 10  years or whether other changes may be required to the configuration of  the reserve. Any additional congressionally mandated sales would require  DOE to again revisit its modernization plans and assessments of the  potential uses of any excess SPR assets. Oil market projections also  have implications for the future of the SPR. The United States is projected  to become a net exporter by the late 2020s and would then no longer  have a 90-day reserve obligation, but it is projected to return to being a  net importer between 2040 and 2050. These projected fluctuations could  affect the desired size of the SPR in the future. Such uncertainties create  risks for DOE’s modernization plans, as DOE may end up spending funds  on facilities that later turn out to be unnecessary should Congress  ultimately decide on a larger- or smaller-sized SPR than DOE anticipates.  In May 2018, we suggested that Congress may wish to consider setting a  long-range target for the size and configuration of the SPR that takes into  account projections for future oil production, oil consumption, the efficacy  of the existing SPR to respond to domestic supply disruptions, and U.S.  IEA obligations.

In conclusion, we found that given the constrained budget environment  and the evolving nature of energy markets and their vulnerabilities, it is  important that DOE endeavor to ensure that the SPR is an efficient and  effective use of federal resources.

Chairman Upton, Ranking Member Rush, and Members of the  Subcommittee, this concludes my prepared statement. I would be  pleased to answer any questions that you may have at this time.

If you or your staff members have any questions about this testimony,  please contact Frank Rusco, Director, Natural Resources and  Environment, at (202) 512-3841 or ruscof@gao.gov. Contact points for  our Offices of Congressional Relations and Public Affairs may be found  on the last page of this statement. Key contributors to this testimony  included Quindi Franco (Assistant Director), Nkenge Gibson (Analyst-in- Charge), Philip Farah, Ellen Fried, Cindy Gilbert, Gregory Marchand,  Celia Mendive, Patricia Moye, Camille Pease, Oliver Richard, Dan Royer,  Rachel Stoiko, and Marie Suding.

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The Strategic Petroleum Reserve, managed by the Department of Energy, is the nation's stockpile of emergency oil stored in salt caverns along the Gulf Coast.

This testimony covers our May 2018 report, which found that DOE may need less of the reserve's storage space by 2027, after congressionally mandated oil sales.

While DOE planned to explore some options for the excess capacity—i.e., closing sites or leasing them to other countries—we identified other options. For example, DOE could consider leasing storage facilities to private industry.

In the report, we recommended that DOE examine a full range of options, among other things.