API: Lieberman-Warner bill could reduce domestic gas supply

A climate change bill headed for the US Senate floor in early June could greatly reduce domestic gas production and send refining production and jobs overseas, according to an API-commissioned report.

May 6th, 2008

Nick Snow
Washington Editor

WASHINGTON, DC, May 6 -- A climate change bill headed for the US Senate floor in early June could greatly reduce domestic natural gas production and send refining production and jobs overseas, according to a new report commissioned by the American Petroleum Institute.

ICF International report, which API released May 5, says that S. 2191, which Sens. Joseph I. Lieberman (I-Conn.) and John W. Warner (R-Va.) introduced 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 estimated 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 gas, and it is estimated that gas drilling "would decline, relative to the base case and depending on assumptions about potential additional mitigation efforts, by about 18-22% over 2012-20 and about 31-40% over 2021-30," the report maintains.

Domestic gas production could be reduced (from the level estimated without the bill's enactment) by 3-4% in 2012, by 5-6% in 2020, and 7-12% in 2030, it indicates. "Over the entire 2012-30 period, lost natural gas production is estimated at 20.4-30.8 tcf, which is roughly equal to 1½ years worth of production," it says.

Less for refining in US
The report also 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 b/d in 2020 from a level of about 18.5 million b/d under the study's base case, it continues. Imports of refined products could increase in 2020 to about 29% from 15% under the base case, the report says.

Refiners and gas processors would feel additional negative impacts because they would be required to buy emissions allowances for their customers that would cost much more than the allowances for their own operations.

For refiners, consumer emissions allowance costs would total an estimated $90.21 billion in 2012 (compared with more than $10.37 billion for emissions allowances from their own operations) and nearly $123.45 billion in 2020 (versus more than $13.59 billion). Gas processors could pay $39.62 billion for consumers' emission allowances (compared with nearly $1.86 billion for their own operations' allowances) in 2012 and $59.89 billion (vs. nearly $2.2 billion for refiners allowances) 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 gas processors or producers, the adverse impact on US natural gas supplies would be greater than estimated in the report, it says in its executive summary. The report did not examine that scenario 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 of 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]," Jones said. When a refiner would plan to increase capacity, "some accountant would ask why the money shouldn't be spent overseas where greenhouse gas emission allowances aren't required. Tankers [that] 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 Pres. Red Cavaney, who participated in the teleconference with API Chief Economist John C. Felmy and Lou Hayden, another API policy analyst.

Hayden said 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 because the 2007 Energy Independence and Security Act and other existing laws already may be having a negative impact on greenhouse gas emissions.

API released a second report May 5 which shows that the US oil and gas industry invested about $42 billion in greenhouse gas emission mitigation technologies during 2000-06. 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 major 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," he said. Cavaney also expects this Congress to debate the issue but that the next one will actually discuss details.

Contact Nick Snow at nicks@pennwell.com.

More in General Interest