The high-profile National Petroleum Council (NPC) study on natural gas has a “significant flaw” in that it overstated the potential impact of energy policy changes on future gas supply and demand, but it “virtually ignores” the effect of markets and prices on supply-demand, according to a Washington, DC-based energy consultant.

The approach of the NPC report, which was released in late September, “was to forecast how policy measures affect supply and demand, and then to model how supply and demand affect price, but to largely ignore the fact that prices have a huge impact on supply and demand,” James Wilson of LECG LLC told NGI in prepared comments.

The report “exaggerates the impact of policy on prices,” he said. “I think the last 20-25 years of energy policy [have] shown that markets respond very quickly to prices, while attempts by policy-makers to encourage or discourage certain types of supply or demand, when prices are telling producers and consumers to behave otherwise, are often not very effective.”

Wilson disputed the study’s conclusion that proposed policy changes — such as increased land access for producers, and greater efficiency and conservation efforts — could save gas consumers $1 trillion over the next two decades. “The recommended policies may save consumers a lot, but not the $1 trillion stated in the report.”

The NPC study failed to estimate how much the gas consumer savings would cost the federal government, he noted, or identify sectors of the energy industry that may suffer revenue losses as a result of certain recommended policy changes.

The NPC, an advisory committee to the secretary of the Department of Energy (DOE), evaluated in the report two scenarios for future policy actions. The “balanced path” assumed the implementation of a set of policies to encourage gas supply and discourage gas demand, while the “reactive path” assumed a less proactive policy approach. Gas prices were estimated in the $4/MMBtu range through 2025 under the more favorable “balanced path,” and $6/MMBtu under the “reactive path” scenario.

It “was clear” during a FERC conference Tuesday on the NPC report that the “approach was to identify policy measures, have the various study subgroups forecast the impacts of the policy measures on the various components of supply and demand (LNG, coal generation, renewables, industrial gas demand, power sector gas demand et al), and then combine these individual component forecasts into a model to develop the price trajectories for the two scenarios,” Wilson said.

“What clearly was not done (or done only to a very limited extent) was to go back to the subgroups with the results of the modeling [$6 gas from 2005 through 2025 under the reactive path, and $4 gas under the balanced path], and revisit the component forecasts considering these prices.”

The NPC approach led to some conclusions that were hard to swallow, according to Wilson. Under the balanced path, U.S. liquefied natural gas (LNG) capacity is expected to increase to 15 Bcf/d in 2025, while it would be less (12.5 Bcf/d) under the reactive scenario. The higher LNG capacity is based solely on the assumption that terminal permitting will take only one year, while the reactive path assumes two years for permitting. “These forecasts reflect only the policy assumption, not the prices” of gas.

Similarly, gas demand for power generation is projected to be higher under the $6/MMBtu (reactive) scenario than the balanced path. “This is because under the balanced path scenario, it is assumed that policies will encourage [the] use of alternative fuels” for generation, he said.

The study also found that gas demand in the industrial and commercial sectors would be slightly higher under the $4 gas scenario than under the reactive path. While “this difference is consistent with the prices,” Wilson noted that “no attempt was made to forecast how these sectors, or the power sector, would adapt over 20 years of $6 gas and $20 oil.”

Another inconsistency, he said, was the study projected there would be twice as much renewable-fueled power generation with gas priced at $4 than $6.

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