API study sees significant upstream, refining impacts from Lieberman-Warner

A climate change bill headed for the Senate floor in early June could significantly reduce domestic natural gas production and send refining production and jobs overseas, a new report commissioned by the American Petroleum Institute says.

A climate change bill headed for the Senate floor in early June could significantly reduce domestic natural gas production and send refining production and jobs overseas, a new report commissioned by the American Petroleum Institute says.

The report by ICF International, which API released on May 5, says that S. 2191, which Sens. Joseph I. Lieberman (I-Conn.) and John W. Warner (R-Va.) introduced on Oct. 18, 2007, would raise the $25,000 estimated annual cost of operating a domestic gas well by some $12,500/year by 2012 and $25,600/year by 2030 because producers would be required to buy greenhouse gas emission allowances.

Even though methane emissions from upstream oil and gas operations represent only about 1% of the national total, the impact on investment in new wells would be substantial because the estimate cost of allowances is high relative to gas well operating costs, the report says in its executive summary.

"Higher costs would reduce the incentive to drill for natural gas and it is estimated that natural gas drilling would decline, relative to the base case and depending on assumptions about potential additional mitigation efforts, by about 18-22% over 2012-2020 and about 31-40% over 2021-2030," it says.

Domestic gas production could be reduced from its estimated level without the bill's enactment by 3-4% in 2012, 5-6% in 2020 and 7-12% in 2030, it indicates. "Over the entire 2012-2030 period, lost natural gas production is estimated at 20.4 [trillion cubic feet] to 30.8 Tcf which is roughly equal to one and a half years worth of production," it says.

Less for refining in US

It warns that refinery investment would move overseas because US plants would be required to obtain greenhouse gas allowances for emissions when most foreign refineries would not. Domestic refinery investment could drop by more than $3 billion/year by 2012 and $11.5 billion/year by 2020, it says.

US refinery throughput could drop by an estimated 3 million bbl a day in 2020 from a level of about 18.5 million b/d under the study's base case, it continues. Refined product imports could increase their share of total petroleum imports in 2020 from about 15% under the base case to about 29%, the report says.

It says that refiners and natural gas processors would feel additional financial impacts because they both would have to buy emissions allowances for their customers, which would cost significantly more than the allowances for their own operations.

For refiners, consumer emissions allowance costs would total an estimated $90.21 billion in 2012 (compared to more than $10.37 billion for emissions allowances from their own operations) and nearly $123.45 billion (more than $13.59 billion) in 2020. Gas processors could pay $39.62 billion for consumers' emission allowances in 202 (compared to nearly $1.86 billion for their own operations' allowances) in 2012 and $59.89 billion (nearly $2.2 billion) in 2020, the study projects.

The study does not consider how the cost of consumer emissions allowances for gas processors could affect domestic gas supplies if the Lieberman-Warner bill is enacted. "To the extent that any of the consumer allowance costs are borne by natural gas processors and/or producers, the adverse impact on US natural gas supplies would be greater than estimated in this report," it says in its executive summary. The report did not examine this because it could have created antitrust problems, API policy analyst Russell Jones said. But the American Exploration & Production Council and American Gas Association have both raised the question with senators and their staffs.

Focus on supplies

"When we started this study, the question was what the impact would be under the Lieberman-Warner bill's mandated requirements. We thought it would be better to look at supplies, which had not been done previously," Jones told reporters during a May 5 teleconference.

Other industries have suggested that requirements under the Lieberman-Warner bill would send jobs overseas, he said. "This study convinced us that our industry also has to worry about international leakage [of refining jobs]. When a refiner would go to increase capacity, some accountant would ask why the money shouldn't be spent overseas where greenhouse gas emission allowances aren't required. Tankers which transport products instead of crude oil would be required, but the same pipelines and terminals would be used," he said.

"Refineries are very long-lived assets that require huge investments. Signals such as those which Lieberman-Warner would send are causes for concern because they would make executives in board rooms consider where they will invest for additional capacity," noted API President Red Cavaney, who also participated in the teleconference with API Chief Economist John C. Felmy and Lou Hayden, another API policy analyst.

Hayden said that Lieberman and Warner's staffs have been receptive to possible gas cost impacts of the bill and the need to increase access to more domestic supplies. But he suggested that a bigger question is how extensive mandatory measures must be since the 2007 Energy Independence and Security Act and other existing laws already may be having an impact on greenhouse gas emissions.

API also released a second report on May 5 which shows that the US oil and gas industry invested about $42 billion in greenhouse gas emission mitigation technologies from 2000 to 2006. This represents 45% of an estimated $94 billion spent on such technologies by all US industries and the federal government, according to the report by T-Squared & Associates and the Center for Energy Economics at the University of Texas at Austin.

Cavaney suggested that the upcoming debate on S. 2191 may not lead to passage of significant climate change legislation this year but could set the stage for action in 2009. "We anticipate Congress coming together with a climate change bill and we want to be a part of it. We think that while the debate has gone on for a long period, starting to look at details is just beginning. We expect this Congress to debate the issue but the actual discussion of details to take place in the next one," he said.

Contact Nick Snow at nicks@pennwell.com

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