The Absurd Report

ICF Report: Lieberman/Warner Climate Security Act of 2007, S.2191

EXECUTIVE SUMMARY OVERVIEW

This study estimates the impacts of the Lieberman/Warner Climate Security Act of 20071 on U.S. oil and gas operations and the potential impacts on U.S. energy supplies. Extending the analysis in the preceding report, Impact Assessment of Mandatory GHG Control Legislation on the Refining and Upstream Segments of the U.S. Petroleum Industry, this study used detailed models of the U.S. oil and natural gas production, natural gas processing, and the U.S. and global refining sectors to estimate impacts on new oil and gas drilling, the potential shutdown of existing wells, increased costs on natural gas processing plants, investment in refining capacity in the global refining market, and refinery throughput. The results presented herein raise questions about the broader implications of the impact of the Lieberman/Warner bill on U.S. energy supplies.

This report does not take into account how the cost of consumer emission allowances to natural gas processors under the Lieberman-Warner bill could affect natural gas supply. To the extent that any of the consumer allowance costs are borne by natural gas producers and/or processors, the adverse impact on U.S. natural gas supplies would be greater than estimated in this report. Additionally, this study estimates the cost to producers due to the Lieberman/Warner bill but it does not attempt to estimate how these costs and other costs imposed by the bill might impact overall energy market including supply, demand and market prices.

Requirements for the Oil and Gas Sector:

The Lieberman/Warner bill as passed by the Senate Environment and Public Works Committee2
would require:

o Exploration and production activities to obtain allowances for facility greenhouse gas
emissions (GHG). Under a rulemaking required by the bill, E&P activities also may to be
required to obtain allowances for “consumer emissions” (emissions from consumer use of
natural gas) for any gas not sent to a natural gas processing plant;

o Natural gas processing plants to obtain allowances for facility GHG emissions and emissions
from consumer use of natural gas and NGLs delivered to the market;

o Refineries to obtain allowances for facility GHG emissions and emissions from consumer use
of petroleum products. Similarly, importers of refined petroleum products have the same
obligations.

Key Assumptions & Caveats

o GHG Emission Allowance Costs:

o The assumed costs of GHG emission allowances are comparable to or below estimated
allowance costs found in recent studies of the Lieberman/Warner bill.

o The potential impacts of the low carbon fuels standard in the Lieberman/Warner bill were
not evaluated.

o Baseline & Mitigation Technologies:

1 Lieberman/Warner Climate Security Act of 2007, S. 2191
2 The wording in the bill requires some interpretation and coverage of emissions related to natural gas will depend on a required EPA rulemaking to be completed within two years of the bill becoming law. While not addressed in this analysis, importers of finished petroleum products and natural gas would be responsible for any facility emissions as well as consumer emissions from the use of those products.API Report Addendum ES2

o Based on experience under the EPA Natural Gas STAR program, improved technologies
are expected to result in lower methane emissions per well in coming years. For
example, methane emissions per onshore natural gas well are expected to decline by 27%
between 2012 and 2020 in the base case. The potential for additional methane emission
reductions under Lieberman/Warner has been estimated using the large database created
through the Gas STAR program.

o The refining base case incorporates recent fuel quality requirements such as the
introduction of Ultra Low-Sulfur Diesel fuels. Additionally, the base case assumes that
by 2012 and 2020, a series of Sulfur Dioxide (SOx) Emission Control Areas (SECAs)
will be established requiring significant reductions in the sulfur content of marine bunker
fuels. Despite these increasingly stringent fuel specification requirements, expected
investments in the base case results in CO2 emissions per unit of refinery throughput that
are estimated to be 4% lower in 2020 than in 2012. Lacking a data base comparable to
that of the Gas STAR program, robust estimates of refinery mitigation potential and cost
could not be developed.

o Allowances for Facility Emissions and Consumer Emissions:

o The estimated cost of allowances for facility emissions are assumed to be fully absorbed
by the facility and lead to the estimated impacts. The cost of allowances for emissions
from consumer use of fuels delivered to the market is estimated and reported but not
integrated into facility operating cost estimates or the overall operation of energy
markets.

o It is critical to note that the estimated required allowances for consumer emissions are
many times that for facility emissions – more than 20 times (about $39 billion) for natural
gas processing plants and roughly 9 times (about $90 billion) for refineries in 2012. A
fully-integrated assessment of the Lieberman/Warner bill requires a detailed full-market
assessment of:

o potential impacts of allowance costs on domestic energy supplies – covering facility
allowances as well as consumer allowance costs;

o potential impacts of allowance costs on energy consumers and demand-side
responses;

o the integration of these supply- and demand-side initial impacts and subsequent
market responses within the broader functioning of the complex US economy.

o Thus far, no major analysis of the impact of climate bills on the overall US economy has
investigated in-depth the potential supply-side impacts on US oil and gas supplies. The
ICF study is the first study to do so. While the analysis is “static” and does not attempt to
evaluate potential impacts on consumers, overall energy demand, market prices for fuels,
or the overall economy, it provides a basis for beginning to integrate oil & gas energy
supply considerations into a broader analysis of climate bills.

Impacts on the Nation’s Energy Supplies
o Reduction in Natural Gas Supplies

o The cost of GHG emission allowances is estimated to raise the cost of drilling new wells
somewhat but result in a substantial increase in the cost of operating wells. Even though
methane emissions from the E&P sector are small relative to the nation’s overall GHG
emissions (about 1%), the impact on investment in new wells would be substantial
because the estimated cost of allowances is high relative to the cost of operating gas
wells.

􀂃 Compared to an estimated average gas well operating cost of around $25,000/year, the increased operating costs associated with Lieberman/Warner API Report Addendum ES3
are estimated at about $12,500 in 2012 and $25,600 in 2030, or roughly 50% and 100% increases in operating costs.

􀂃 Additionally, obtaining allowances for natural gas processor facility emissions is estimated to increase the cost of operations by an estimated $0.13 per Mcf processed in 2012, $0.18 per Mcf processed in 2020, and $0.27 per Mcf processed in 2030.

􀂃 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% to 22% over 2012-2020 and about 31% to 40% over 2021-2030.

o Taking into account the estimated allowances costs incurred for upstream facility
emissions but not any allowance costs associated with consumer emissions from the use
of natural gas, overall US natural gas production is estimated to be reduced from base
case projections about 3-4% in 2012, about 5% to over 6% in 2020, and 7% to over 12%
in 2030 depending on mitigation assumptions. Over the entire 2012-2030 period, lost
natural gas production is estimated at 20.4 TCF to 30.8 TCF which is roughly equal to
one to one and one/half years worth of production. This assumes that drilling reductions
occur mostly on marginal fields – those with the lowest expected new production. The
lower impact estimate reflects additional methane emission mitigation efforts beyond the
27% reduction in emissions per well already incorporated in the base case. U.S. oil
production also is estimated to be adversely impacted but by smaller amounts.

o These estimated production impacts were estimated based on the impact of allowance
costs from facility emissions only and do not consider the potential impacts of the much
larger consumer emissions or any broader market supply & demand impacts that are
likely to occur under the economy-wide implementation of Lieberman/Warner.

o Increased Dependence on Imported Refined Petroleum Products

o Because U.S. refineries would be required to obtain allowances for facility emissions
while most foreign refineries would not, U.S. refineries would become increasingly
disadvantaged as estimated allowance costs increased. Investment in U.S. refinery
facilities is estimated to drop over $3 billion/year in 2012 from the base case and about
$11.5 billion/year in 2020. As refinery throughput moved overseas, U.S. jobs would be
lost but global refinery GHG emissions are estimated as unchanged.

o U.S. refinery throughput is estimated to decline by about 3 million barrels a day off a
base case level of about 18.5 million barrel/day in 2020. Total U.S. imports of crude oil
plus refined petroleum products are estimated to shift from about 15% refined petroleum
products in the 2020 base case to about 29% under Lieberman/Warner.

o Increase Cost of Producing Energy for the Nation

o The estimated reductions in output under Lieberman/Warner are driven by the allowance
costs requirement for facility emissions. Additionally, covered facilities also must obtain
allowances for emissions from consumer use of natural gas and petroleum products. The
estimated cost of allowances for consumer emissions vastly outweigh the estimated cost
of allowances for facility emissions as summarized in the table below.

o For natural gas, the estimated costs of allowances for facility and consumer emissions are
equivalent to about $2.28 per MCF of natural gas in 2012, and about $3.14 per MCF in
2020.

o For refining, the estimated costs of allowances for facility and consumer emissions are
equivalent to about 43 cents per gallon of petroleum product in 2012 and about 61 cents
per gallon in 2020.
API Report Addendum ES4

For the full report and the table referred to go here…

Tags: Lieberman-Warner Climate Change Bill

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