Responding to criticism about the accuracy of the model and projected gas cost savings in the National Petroleum Council’s (NPC) natural gas study, John Guy, the deputy secretary of the NPC, said Wednesday that the agency’s members intend to have discussions about the merits of the critique but are unlikely to take any action if serous flaws in the report are uncovered.

“I think what you really have to do at the end of the day is [ask] would we come up with different gas policy recommendations based on [errors in the model],” Guy said in an interview with NGI. “That’s the bottom line of the whole thing. But our study is done. Our committees are complete, and unless the secretary [of energy] asks us to do it again…we won’t do that.”

This week three economists — James F. Wilson of consulting firm LECG LLC, Ken Costello of the National Regulatory Research Institute and Hillard G. Huntington of Stanford University — circulated a draft of a critique of the NPC study at the summer meeting of the National Association of Regulatory Utility Commissioners in Salt Lake City. They claim to have found significant flaws in the modeling used in the study, which is highly regarded by many inside and outside the industry. Furthermore, they said the errors resulted in misguided policy recommendations and greatly exaggerated estimates of consumer cost savings from those recommendations (see Daily GPI, July 14).

The economists said that many of the components in the model were set without regard to expected natural gas prices. The amount of liquefied natural gas (LNG) imports and the timing of the Alaska and Mackenzie Delta pipelines in one of the scenarios were set outside the model. Furthermore, the interplay of various market events and policy changes was diminished or nonexistent.

But Guy noted that the NPC study involved input from “hundreds and hundreds of people from governments both in this country, Canada and Mexico, from academia, from the industry and from non oil and gas industry participants, particularly on the industrial side, from electric utilities and various consumers of natural gas.

“Nobody would look at this and say that all the model work was spot on and we had a view of the future,” he admitted. “The purpose of the study was not to do a forecast of future gas supply and demand. The purpose of the study was that the secretary asked us to look at a number of different policy things and to give him advice on policy areas. In order to do that, you have to put some numbers around it; you have to impart the discipline of an analytical process.

“We used the discipline of a modeling process and assumptions, but that is one of the reasons we ran 30 or so sensitivity cases,” he said. “It was a monumental amount of work that went into the resource reassessment, but I think that any geologist or geophysicist would tell you that we could be wrong. There could be more gas or less gas. It’s an estimate, a guess based on lots of knowledge and with publicly available databases.”

Guy said the NPC used a forecast model from Arlington-based Energy and Environmental Analysis Inc. (EEA) that is widely used in the industry, by the Federal Energy Regulatory Commission and by the Department of Energy.

“We didn’t assume the gas price [projections in the study]; the prices were the result of a model from EEA that we’ve used in two previous gas studies… We felt that model was probably the best that was available in the marketplace. But it went through considerably more peer review during the course of this study. All of the assumptions were reviewed. The input assumptions came from our study teams not from the consulting group. Plus there were a number of structural changes to the model to improve it.”

Guy also said the criticism of the NPC study on natural gas may be based on misunderstanding or a lack of information. The agency only recently released hundreds of pages of data and information that were used to support the study’s conclusions.

“It’s a very detailed and in-depth study and I’m not sure whether the authors of the [critique] had full access to all of it when they were initially writing their paper, but they are being given access to it now. And the members or our group have made offers to continue a dialogue with them to help them better understand what the NPC study did and why certain decisions were made.

“The idea is to allow them the opportunity to fully investigate this and make sure whether there are misunderstandings, or whether there are basic philosophical differences or academic differences of approach.

“Clearly some things may be misunderstandings,” he said, noting that the economists criticized the NPC for recommending subsidies for the Alaska pipeline when no such recommendation was made.

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