Haynes and Boone, LLP
  March 15, 2002 - Dallas, Texas

ALERT: Petroleum and Energy Product Sales to the U.S. Government
  by Tim Powers

There is a multi-million dollar market segment that petroleum and energy product companies may not have considered previously -- namely sales to the U.S. Government. The principal federal government agency for the purchase and management of energy products is the Defense Energy Support Center (DESC), a part of the Defense Logistics Agency, with headquarters at Ft. Belvoir, Virginia. DESC is the petroleum materiel manager for the military services and federal agencies at over four thousand locations worldwide. The Center has an annual budget of $3.5 billion and purchases nearly 110 million barrels of refined petroleum products each year. In February 1998, the Secretary of Defense increased DESC’s mission to include the purchase and management of electricity and other energy-related products and services. DESC is divided into four Commodity Business Units (or “CBU’s”) relevant to the petroleum and energy industries: Bulk Fuels: provides contracting, distribution, transportation, inventory control, and quality support for bulk fuels worldwide, accounting for about 75% of all fuel purchased by DESC. Commodities managed include JP-5 and JP-8 kesosene-based jet fuels, F-76 naval diesel fuel, motor gasoline, jet fuel additives, and bulk lubricants for domestic and overseas uses. Bulk Fuels also procures and solicits for the sale of crude oil (sweet and sour crude) for the Department of Energy, which manages the Strategic Petroleum Reserve Program. Alternative Fuels: procures natural gas, electricity and coal, and assists DoD and federal civilian agencies with utility privitization and energy demand management. Alternative Fuels is the single manager for the Direct Supply Natural Gas Program, which purchases natural gas from sources other than the local utility company. Gas is purchased for FOB delivery to the local distribution company (“citygate”) and then transported under a separate contract to destination installations. Alternative Fuels has also entered the restructured electricity market by contracting with suppliers in the regions where restructuring has occurred to date. As additional states deregulate, Alternative Fuels is preparing to competitively procure electricity on behalf of DESC’s customers. Direct Delivery Fuels: provides worldwide acquisition and management for ground, aviation, and ship propulsion fuels delivered directly to the customer from commercial vendors. Customers include the military services, the National Guard and Reserves, the U.S. Postal Service, the General Services Administration, AMTRAK, and the U.S. Department of Transportation. The Ground Fuels Division awards Posts, Camps, and Stations contracts on a regional basis. These contracts cover fuel for ground operations, such as diesel, gasoline, and heating oil. The Specialty Fuels Division is responsible for management of the Ships’ Bunkers Fuel Program, which provides various grades of ship propulsion fuels for combatant ships, Coast Guard vessels, and various classes of U.S. Government-owned and chartered ships at 91 U.S. and 85 overseas locations. Delivery of product is specified FOB destination to the ship by pipeline, barge, tank truck, or tank wagon. Facilities and Distribution Management: manages worldwide fuel terminal operations and bulk petroleum storage programs. Facilities and Distribution Management awards contracts for the operation and maintenance of Government-owned, contractor-operated and contractor-owned and operated facilities. They also award contracts for transportation and transportation management as well as services required for other areas of fuel operations, including environmental protection. (DESC spends over $300 million annually to transport fuel to its worldwide customer base, by pipeline, ocean tanker, barge, truck, and rail car.) To learn more about sales to DESC, please contact the Government Contracts Group in our Dallas office or the author listed at the top of the page. The Group routinely assists large and small businesses in their dealings with that agency and can help a company determine whether its products are a good fit for a specific DESC program and guide the company through the myriad of contract formation, pricing, and performance issues unique to doing business with the federal government.


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