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API Study: Climate Bill Would Cut Gas Production

The high cost of controlling greenhouse gas (GHG) emissions under climate change legislation pending in Congress would add an estimated 50% to natural gas well operating costs in 2012 and 100% by 2030, contributing to a production decline of 3-12%, according to a study released last Monday by the American Petroleum Institute (API).

The increase in operating costs, plus emissions control costs for drilling and processing, would lower the drilling incentive and reduce U.S. natural gas production by 3-4% in 2012, 5-6% in 2020 and 7-12% in 2030, the study, prepared by ICF International and commissioned by API, said.

Over the 2012-2030 period an estimated 20-30 Tcf of production would be lost. The study of the potential impact of the pending cap-and-trade climate control bill sponsored by Sens. Joseph Lieberman (I-CT) and John Warner (R-VA) does not include the impact from emissions controls and allowances of gas pipelines or at the consumer end.

"During the same time frame that API's analysis shows production dropping by 6%, our studies indicate that the U.S.will need approximately 20% more natural gas," said R. Skip Horvath, president of the Natural Gas Supply Association. "Less natural gas and increasing demand will mean upward pressure on prices in coming years. That's an inconvenient truth, but it's something we can fix by making more natural gas available."

Horvath noted that the cost of natural gas has already increased from $7.60/MMBtu in April of 2007 to approximately $10 today. Just five years ago gas was selling for $5.26. "API's study of the Lieberman-Warner legislation is deeply troubling and we hope Congress will pay attention to it and modify the bill to bring more supply on-line. Congress should be looking for ways to increase natural gas production and we're willing to work with elected officials to do just that."

The study also included an assessment of the impact of the pending legislation on oil production and refining, saying refinery throughput is estimated to decline by 3 million b/d from a base case level of 18.5 million b/d in 2020 as refiners are driven overseas by the GHG costs.

ICF looked at the potential supply-side impacts of the Lieberman-Warner cap-and-trade climate bill. It estimated that oil and natural gas companies could be required to spend almost $23 billion for allowances for facility greenhouse gas emissions and another $183 billion for allowances for emissions from consumer use of fuels in 2020.

Even though methane emissions from the exploration and production (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.

Under a rulemaking required by the bill, E&P activities may to be required to obtain allowances for "consumer emissions," that is emissions from consumer use of natural gas for any gas not sent to a processing plant; while the processing plants would have to obtain allowances for facility GHG emissions and as well as consumer emissions for natural gas and natural gas liquids delivered to the market.

A recent report on the Lieberman/Warner bill by the Energy Information Administration said it would drive up the cost of natural gas as more and more generation load switched from coal to natural gas, putting additional pressure on an already tight market (see NGI, May 5).

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