Prudent Development: Realizing The Potential of North America's Abundant Natural Gas and Oil Resources by The National Petroleum Council, 2011

PRUDENT
DEVELOPMENT
Realizing the Potential of North Americas Abundant Natural Gas and Oil Resources
National Petroleum Council
2011
PRUDENT
DEVELOPMENT
Realizing the Potential of North Americas Abundant Natural Gas and Oil Resources
A report of the National Petroleum Council September 2011 Committee on Resource Development James T. Hackett, Chair
NATIONAL PETROLEUM COUNCIL David J. OReilly, Chair Douglas L. Foshee, Vice Chair Marshall W. Nichols, Executive Director
U.S. DEPARTMENT OF ENERGY Steven Chu, Secretary
The National Petroleum Council is a federal advisory committee to the Secretary of Energy. The sole purpose of the National Petroleum Council is to advise, inform, and make recommendations to the Secretary of Energy on any matter requested by the Secretary relating to oil and natural gas or to the oil and gas industries.
All Rights Reserved Library of Congress Control Number: 2011944162 National Petroleum Council 2011 Printed in the United States of America
The text and graphics herein may be reproduced in any format or medium, provided they are reproduced accurately, not used in a misleading context, and bear acknowledgement of the National Petroleum Councils copyright and the title of this report.
Outline of Report Materials

Summary Report Volume (also available online at www.npc.org) y Report Transmittal Letter to the Secretary of Energy y Outline of Report Materials y Preface y Executive Summary y Study Request Letters y Description of the National Petroleum Council y Roster of the National Petroleum Council Full Report Volume (printed and available online at www.npc.org) y Outline of Full Report (see below) Additional Study Materials (available online at www.npc.org) y Summary and Full Report (pdfs with hyperlinks) y Report Slide Presentations y Webcasts of NPC Report Approval Meeting and Press Conference y Study Topic and White Papers (see page vi for list) y Study Survey Data Aggregations
Outline of Full Report

Preface Executive Summary
Americas Energy Future Core Strategies Support Prudent Natural Gas and Oil Resource Development and Regulation Better Reflect Environmental Impacts in Markets and Fuel/Technology Choices Enhance the Efficient Use of Energy Enhance the Regulation of Markets Support the Development of Intellectual Capital and a Skilled Workforce Conclusions
outline of report materials
Chapter One: Crude Oil and Natural Gas Resources and Supply
Abstract Introduction and Summary Summaries and Key Findings Summary of Scope and Objectives Summary of Methodology North American Oil and Natural Gas Resource Endowment Hydrocarbon Resource Assessment Uses and Definitions Overview of Recent and Current North American Oil and Gas Resource Assessments Key Findings and Observations Analysis of Resource and Production Outlooks and Studies Overview Crude Oil Natural Gas Prospects for North American Oil Development Overview Offshore Arctic Onshore Oil Unconventional Oil Crude Oil Pipeline Infrastructure Prospects for North American Gas Development Overview Offshore Arctic Onshore Gas Natural Gas Infrastructure North American Oil and Gas Production Prospects to 2050
Chapter Two: Operations and Environment

Abstract Introduction and Summary Environmental Challenges Prudent Development Major Findings: Assuring Prudent Development Chapter Organization Resource Play Variations and Associated Environmental Challenges Overview of the Life Cycle of Natural Gas and Oil Exploration and Production Developing Onshore Conventional Natural Gas and Oil Resources ii
pruDent DeVelopment: realizing the potential of north americas abundant natural Gas and oil resources
Developing Offshore Conventional Natural Gas and Oil Resources Developing Unconventional Natural Gas and Oil Resources History of Innovation in Environmental Stewardship Onshore Development of Natural Gas and Oil Offshore Development of Natural Gas and Oil Future Expectations History of Natural Gas and Oil Environmental Laws Prior to 1935 Initiation of Natural Gas and Oil Conservation U.S. Oil Production Dominance Environmental Movement Environmental Regulation Refinement Sustainable Strategies and Systems for the Continued Prudent Development of North American Natural Gas and Oil Life-Cycle Assessments and Footprint Analyses Environmental Management Systems Public-Private Partnerships Data Management Systems Offshore Safety and Environmental Management Center for Offshore Safety Outer Continental Shelf Safety Oversight Board Regulatory Framework on the Outer Continental Shelf Lease Sale Planning Process Coastal Marine Spatial Planning Consideration of Studies on the Deepwater Horizon Incident Offshore Operations and Environmental Management Findings Key Findings and Policy Recommendations Key Findings Definitions of Sustainable Development
Chapter Three: Natural Gas Demand

Abstract Summary Back to the Future: Two Decades of Natural Gas Studies Range of U.S. and Canadian Natural Gas Demand Projections Potential U.S. and Canadian Total Natural Gas Requirements Compared to Natural Gas Supply U.S. Power Generation Natural Gas Demand Natural Gas Demand Summary Drivers of Power Generation Natural Gas Demand
iii
Power Generation Natural Gas Demand Projections Harmonization of U.S. Natural Gas and Power Markets U.S. Residential and Commercial Natural Gas, Distillate, and Electricity Demand U.S. Residential Energy U.S. Industrial Natural Gas and Electricity Demand Industrial Natural Gas Demand Industrial Electricity Demand U.S. Transmission Natural Gas Demand U.S. Transmission Natural Gas Demand Other Transmission Issues Full Fuel Cycle Analysis Canadian Natural Gas and Electricity Demand Canadian Natural Gas Demand Canadian Residential Natural Gas and Electricity Demand Canadian Commercial Natural Gas and Electricity Demand Canadian Industrial Natural Gas and Electricity Demand Canadian Power Generation Demand A View on 2050 Natural Gas Demand Potential Vehicle Natural Gas and Electricity Demand NGV Natural Gas Demand PEV Electricity Demand Total Potential Natural Gas Demand for Vehicles LNG Exports Exports to Mexico U.S. Liquids Demand Policy Recommendations Increase Energy Efficiency Promote Efficient and Reliable Energy Markets Increase Effectiveness of Energy Policies Support Carbon Capture and Sequestration Research and Development Description of Projection Cases
Chapter Four: Carbon and Other Emissions in the End-Use Sectors

Abstract Summary Emissions Baseline and Projections Summary of Findings Greenhouse Gas Emissions: Unconstrained Cases Greenhouse Gas Emissions: Constrained Scenarios Sulfur Dioxide, Nitrogen Oxides, and Mercury iv
Life-Cycle Emissions of Natural Gas and Coal in Power Generation Life-Cycle Analysis of Natural Gas and Coal in Power Generation Other LCA Studies Methane Reduction Programs and Technologies Conclusions Recommendations Natural Gas End-Use Technologies Methodology Findings Impact of Non-GHG EPA Rules on the Power Sector Retirement Decision Methodology Results Intra-Study Themes Other Considerations Limitations Policy Considerations Methodology Findings Evaluation of Policy Options and Frameworks Recommendations
Chapter Five: Macroeconomics

Abstract Summary Macroeconomic Impacts of the Natural Gas and Oil Industry on the Domestic Economy Related Industries Taxes and the Natural Gas and Oil Industry Federal Corporate Income Taxes Severance Taxes Royalties Other Taxes Generated Directly by the Industry Tax Deductions for the Natural Gas and Oil Industry Natural Gas and Oil Workforce Challenges Challenge #1 Aging Natural Gas and Oil Workforce Challenge #2 Long Decline in University-Level Population Seeking Natural Gas and Oil Careers Challenge #3 The U.S. Need for Increased Investment in K-12 Mathematics and Science Education Responding to the Workforce Challenges
Natural Gas and Crude Oil Volatility Impacts on Producers and Consumers Commodity Price Volatility Background: Commodity Prices Macroeconomic Impacts of Changing Commodity Prices Energy Sector-Specific Impacts of Changing Commodity Prices Impacts on Volatility Assessing the Business Model of the Natural Gas and Oil Industry Company Roles within the Unconventional Natural Gas Business How the Business Model Works: Process of Unconventional Development International Unconventional: Will It Work? Implications of the Shift to an Unconventional Natural Gas Business Model The U.S. Governments Role in the Business Model for Unconventional Gas Development Governing Principles for the Government The Governments Choice of Tools to Employ in the Natural Gas and Oil Industry Business Model Bibliography
Appendices
Appendix A: Request Letters and Description of the NPC Appendix B: Study Group Rosters Appendix C: Additional Materials Available Electronically Acronyms and Abbreviations Conversion Factors
List of Study Topic and White Papers

Resource & Supply Task Group
Subgroup Topic Papers Paper #1-1: Oil and Gas Geologic Endowment Paper #1-2: Data and Studies Evaluation Paper #1-3: Offshore Oil and Gas Supply Paper #1-4: Arctic Oil and Gas Paper #1-5: Onshore Conventional Oil Including EOR Paper #1-6: Unconventional Oil Paper #1-7: Crude Oil Infrastructure Paper #1-8: Onshore Natural Gas Paper #1-9: Natural Gas Infrastructure Task Group White Papers Paper #1-10: Liquefied Natural Gas (LNG) Paper #1-11: Methane Hydrates vi
Paper #1-12: Mexico Oil & Gas Supply Paper #1-13: Natural Gas Liquids (NGLs)
Operations & Environment Task Group

Environmental & Regulatory Subgroup Topic Papers Paper #2-1: Water/Energy Nexus Paper #2-2: Regulatory Framework Paper #2-3: U.S. Oil and Gas Environmental Regulatory Process Overview Paper #2-4: U.S. Environmental Regulatory and Permitting Processes Paper #2-5: Canadian and Provincial Permitting and Environmental Processes Paper # 2-6: Evolving Regulatory Framework Offshore Operations Subgroup Topic Papers Paper #2-7: Safe and Sustainable Offshore Operations Paper #2-8: Offshore Environmental Footprints and Regulatory Reviews Paper #2-9: Offshore Environmental Management of Seismic and Other Geophysical Exploration Work Paper #2-10: Offshore Production Facilities and Pipelines, Including Arctic Platform Designs Paper #2-11: Subsea Drilling, Well Operations and Completions Paper #2-12: Offshore Transportation Paper #2-13: Offshore Well Control Management and Response Paper #2-14: Offshore Data Management Technology Subgroups Topic Papers Paper #2-15: Air Emissions Management Paper #2-16: Biodiversity Management and Technology Paper #2-17: Management of Produced Water from Oil and Gas Wells Paper #2-18: Oil Production Technology Paper #2-19: Natural Gas Pipelines Challenges Paper #2-20: Regulatory Data Management Paper #2-21: Research, Development and Technology Transfer Paper #2-22: Siting and Interim Reclamation Paper #2-23: Sustainable Drilling of Onshore Oil and Gas Wells Paper #2-24: Waste Management Paper #2-25: Plugging and Abandonment of Oil and Gas Wells Onshore Operations Subgroup Paper #2-26: Life Cycle of Onshore Oil and Gas Operations Paper #2-27: North American Oil and Gas Play Types Task Group White Papers Paper #2-28: Environmental Footprint Analysis Framework Paper #2-29: Hydraulic Fracturing: Technology and Practices Addressing Hydraulic Fracturing and Completions
vii
Demand Task Group

Subgroup Topic Papers Paper #3-1: Power Generation Natural Gas Demand Paper #3-2: Residential and Commercial Natural Gas and Electricity Demand Paper #3-3: Industrial Natural Gas and Electricity Demand Paper #3-4: Transmission Natural Gas Demand Task Group White Papers Paper #3-5: What Past Studies Missed Paper #3-6: Natural Gas Exports to Mexico Paper #3-7: Liquids Demand
Carbon and Other End-Use Emissions Subgroup

Subgroup Topic Papers Paper #4-1: Baseline and Projections of Emissions from End-Use Sectors Paper # 4-1a: Addendum: GHG Constrained Cases Paper #4-2: Life-Cycle Emissions of Natural Gas and Coal in the Power Sector Paper #4-3: Natural Gas End-Use GHG Reduction Technologies Paper #4-4: Impact of EPA Regulations on the Power Sector Paper #4-5: Policy Options for Deployment of Natural Gas End-Use GHG Reduction Technologies
Macroeconomic Subgroup
Subgroup Topic Papers Paper #5-1: Macroeconomic Impacts of the Domestic Oil & Gas Industry Paper #5-2: Commodity Price Volatility Paper #5-3: U.S. Oil & Gas Industry Business Models
viii
Preface
NatioNal Petroleum CouNCil
The National Petroleum Council (NPC) is an organization whose sole purpose is to provide advice to the federal government. At President Harry Trumans request, this federally chartered and privately funded advisory group was established by the Secretary of the Interior in 1946 to represent the oil and natural gas industrys views to the federal government: advising, informing, and recommending policy options. During World War II, under President Franklin Roosevelt, the federal government and the Petroleum Industry War Council worked closely together to mobilize the oil supplies that fueled the Allied victory. President Trumans goal was to continue that successful cooperation in the uncertain postwar years. Today, the NPC is chartered by the Secretary of Energy under the Federal Advisory Committee Act of 1972, and the views represented are considerably broader than those of the oil and natural gas industry. About 200 in number, Council members are appointed by the Energy Secretary to assure wellbalanced representation from all segments of the oil and natural gas industry, from all sections of the country, and from large and small companies. Members are also appointed from outside the oil and natural gas industry, representing related interests such as states, Native Americans, and academic, financial, research, and public-interest organizations and institutions. The Council provides a forum for informed dialogue on issues involving energy, security, the economy, and the environment of an ever-changing world. studies on two topics: (1) Future Transportation Fuels; and (2) Prudent Development of North American Natural Gas and Oil Resources. The Secretary stated that the Council is uniquely positioned to provide advice to the Department of Energy on these important topics. In the Fuels Study request, Secretary Chu asked the Council to conduct a study which would analyze U.S. fuels prospects through 2030 for auto, truck, air, rail, and waterborne transport, with advice sought on policy options and pathways for integrating new fuels and vehicles into the marketplace including infrastructure development. Expanding on his September 2009 request, in a supplemental letter dated April 30, 2010, Secretary Chu further asked that the Fuels Study examine actions industry and government could take to stimulate the technological advances and market conditions needed to reduce life-cycle greenhouse gas emissions in the U.S. transportation sector by 50% by 2050, relative to 2005 levels, while enhancing the nations energy security and economic prosperity. That study is now underway, with an anticipated completion in the first half of 2012. This North American Resources Study report is the Councils response to the second study request, in which Secretary Chu asked the NPC to reassess the North American natural gas and oil resources supply chain and infrastructure potential, and the contribution that natural gas can make in a transition to a lower carbon fuel mix. He further expressed his interest in advice on policy options that would allow prudent development of North American natural gas and oil resources consistent with government objectives of environmental protection, economic growth, and national security. In his supplemental letter of April 2010, Secretary Chu stated: the
PREFACE
Study requeSt
By letter dated September 16, 2009, Secretary of Energy Steven Chu requested the NPC to conduct
United States sees a future in which valuable domestic energy resources are responsibly produced to meet the needs of American energy consumers consistent with national, environmental, economic and energy security goals, [and the United States] has the opportunity to demonstrate global leadership in technological and environmental innovation. Accordingly, I request the Councils advice on potential technology and policy actions capable of achieving this vision. Appendix A contains full copies of both letters from the Secretary.
Subgroups focused on specific subject areas. Figure1 provides an organization chart for the study and Table1 lists those who served as leaders of the groups that conducted the studys analyses. The members of the various study groups were drawn from NPC members organizations as well as from many other industries, state and federal agencies, environmental nongovernmental organizations (NGOs), other public interest groups, financial institutions, consultancies, academia, and research groups. More than 400 people served on the studys Committee, Subcommittee, Task Groups, and Subgroups and while all have relevant expertise for the study, fewer than 50% work for natural gas and oil companies. Appendix B contains rosters of these study groups and Figure 2 depicts the diversity of participation in the study process. In addition to these study group participants, many more people were involved through outreach activities. These efforts were an integral part of the study with the goal of informing and soliciting input from an informed range of interested parties. Study group and outreach participants contributed in a variety of ways, ranging from full-time work in multiple study areas, to involvement on a
Study orgaNizatioN
In response to the Secretarys requests, the Council established a Committee on Resource Development to study this topic and to supervise preparation of a draft report for the Councils consideration. The Committee leadership consisted of a Chair, Government Cochair, and four subject-area Vice Chairs. The Council also established a Coordinating Subcommittee, three Task Groups, and three Coordinating Subcommittee level analytical Subgroups to assist the Committee in conducting the study. These study groups were aided by four Coordinating Subcommittee level support Subgroups and twenty-one Task Group-level
Figure P-1. Structure of the North American Resource and Development Study Team
Figure 1. Structure of the North American Resource Development Study Team

COMMITTEE ON RESOURCE DEVELOPMENT
COORDINATING SUBCOMMITTEE
RESOURCE & SUPPLY TASK GROUP
OPERATIONS & ENVIRONMENT TASK GROUP
DEMAND TASK GROUP
ANTITRUST ADVISORY SUBGROUP
END-USE EMISSIONS AND CARBON REGULATION SUBGROUP
MACROECONOMIC SUBGROUP
POLICY SUBGROUP
INTEGRATION SUBGROUP
REPORT WRITING SUBGROUP
PRUDENT DEVELOPMENT: Realizing the Potential of North Americas Abundant Natural Gas and Oil Resources
Table 1. North American Resource Development Study Leaders

Chair Committee James T. Hackett Chairman and Chief Executive Officer Anadarko Petroleum Company Government Cochair Committee Daniel P. Poneman Deputy Secretary of Energy U.S. Department of Energy Vice Chair Resource & Supply Marvin E. Odum President Shell Oil Company Vice Chair Operations & Environment Aubrey K. McClendon Chairman of the Board and Chief Executive Officer Chesapeake Energy Corporation Vice Chair Demand Daniel H. Yergin Chairman IHS Cambridge Energy Research Associates, Inc. Vice Chair Policy Philip R. Sharp President Resources for the Future Chair Coordinating Subcommittee D. Clay Bretches Vice President, E&P Services and Minerals Anadarko Petroleum Company Government Cochair Coordinating Subcommittee Christopher A. Smith Deputy Assistant Secretary for Oil and Natural Gas U.S. Department of Energy Chair Resource & Supply Task Group Andrew J. Slaughter Business Environment Advisor Upstream Americas Shell Exploration & Production Company Chair Operations & Environment Task Group Paul D. Hagemeier Vice President, Regulatory Compliance Chesapeake Energy Corporation Chair Demand Task Group Kenneth L. Yeasting Senior Director, Global Gas and North America Gas IHS Cambridge Energy Research Associates, Inc. Chair Policy Subgroup Susan F. Tierney Managing Principal Analysis Group, Inc. Chair End-Use Emissions & Carbon Subgroup Fiji C. George Carbon Strategies Director El Paso Corporation Chair Macroeconomic Subgroup Christopher L. Conoscenti Exective Director, Energy Investment Banking J.P. Morgan Securities LLC
specific topic, to reviewing proposed materials, or to participating solely in an outreach session. Involvement in these activities should not be construed as endorsement or agreement with all the statements, findings, and recommendations in this report. Additionally, while U.S. government participants provided significant assistance in the identification and compi-
lation of data and other information, they did not take positions on the studys policy recommendations. As a federally appointed and chartered advisory committee, the NPC is solely responsible for the final advice provided to the Secretary of Energy. However, the Council believes that the broad and diverse study group and outreach participation has informed and
PREFACE
Figure P-2. Study Participant Diversity

Figure 2. Study Participant Diversity 4. Consider the evolutionary path of technology and the ability of the United States to demonstrate technological leadership. 5. Develop policy recommendations following and deriving from the development of facts. 6. Provide and adhere to clear objectives and a detailed scope of work. 7. Set clear expectations for study participants commitment level and duration. 8. Communicate regularly with leadership, team members, and external stakeholders. As part of providing a broad review of current knowledge, the study groups examined available analyses on North American oil and gas resources, supply, demand, and industry operations. The main focus of the analysis review was on the United States and Canada, as both countries are very large oil and natural gas producers and both have very large future supply potential in those resources. Mexico is geographically part of North America and is recognized as an important crude oil supplier to the United States as well as a current importer of approximately 1billion cubic feet per day of natural gas. These linkages are discussed in more detail in the Demand and Resources and Supply chapters. The study team did not, however, attempt to undertake an in-depth review of future resources and supply potential from Mexico. The varied analyses reviewed during the study included those produced by the Energy Information Administration, International Energy Agency, and National Energy Board of Canada, among others. In addition, the study incorporated the January 2011 Report of the Presidential Oil Spill Commission, the National Academy of Engineering Macondo Study, the (as then incomplete) Joint Investigation Teamstudy by the Bureau of Ocean Energy Management (BOEM) and U.S. Coast Guard, and other studies. The NPC also conducted a broad survey of proprietary energy outlooks. As an integral part of this process, the public accounting firm Argy, Wiltse & Robinson, P.C. received, aggregated, and protected the proprietary data responses. Using these datasets, both public and private, the study groups organized the material to compare and contrast the views through 2050, the period selected in the request from Secretary Chu. Most of the
CONSULTANT/ FINANCIAL/ LEGAL END USERS OIL AND GAS INDUSTRY
NGOs GOV'T FEDERAL AND STATE
ACADEMIA AND PROFESSIONAL SOCIETIES

>400 PARTICIPANTS; >50% PARTICIPANTS FROM OUTSIDE THE OIL AND GAS INDUSTRY
enhanced its study and advice. The Council is very appreciative of the commitment and contributions from all who participated in the process.
Study aPProaCh
A central goal of the study was to fully comply with all regulations and laws that cover a project of this type. For that reason, every effort was made to conform to all antitrust laws and provisions as well as the Federal Advisory Committee Act. As part of this compliance effort, this study does not include a direct evaluation of commodity prices despite the extremely important role these play in balancing supply and demand. After careful thought, the Council decided upon the following principles to guide the study: 1. Identify and involve a broad and diverse set of interests to participate in the study. 2. Utilize consensus-based leadership to produce the best results. 3. Provide a broad review of current research and conduct new studies only as needed. 4
outlooks evaluated, however, extended only through 2035 and a number ended before that date. For that reason, the material framing many aspects of the study for the 15 years between 2036 and 2050 are more qualitative than quantitative in nature. To avoid overlap and leverage resources, both the Fuels Study and North American Resources Study teams created Integration Subgroups to coordinate work within and between the two parallel projects. The Resources Study thus evaluated the petroleum resource base and the infrastructure necessary to bring petroleum to the refinery while the Fuels Study focused on refinery capacity, upgrading, and downstream infrastructure. The Fuels Study also examined the demand for petroleum motor transportation fuels as well as natural gas demand for transportation. With regard to the latter, the Resources Study received access to the Fuels Studys initial view on high potential natural gas vehicle demand and the effect of electric vehicles on natural gas consumption, but the Resource Study advanced timeline did not allow for inclusion of the final Fuels Study analysis in these areas. By addressing these potential overlaps and establishing firm means of communication, the results of both studies were significantly improved and the time necessary for completing each of the Councils studies was shortened. The Resources Study Task Groups and Subgroups carefully evaluated the numerous studies available within their respective areas using the grounded perspective resulting from their combined hundreds of years of experience. They determined the key drivers for each outlook and developed a fact-based understanding of the key issues within demand and supply as well as end-use emissions, the economy and prudent environmental operations. From this background, the Committee on Resource Development brought important findings to the attention of the Council. These findings led to the creation of recommendations on government policy that could favorably affect the ability of natural gas to manage the countrys transition to a lower carbon fuel mix.
review this Integrated Report and supporting details in different levels of detail, the report is organized in multiple layers as follows: y Executive Summary is the first layer and provides a broad overview of the studys principal findings and resulting policy recommendations. It describes the significant increases in estimates of recoverable natural gas and oil resources and the contributions they can make to the nations economic, security, and environmental well-being if properly produced and transported. y Report Chapters provide a more detailed discussion of the data, analyses, and additional background on the findings. These individual chapters of the Integrated Report are titled by subject area i.e., Demand, Macroeconomics, etc. These chapters provide supporting data and analyses for the findings and recommendations presented in the Executive Summary. y Appendices are at the end of the Integrated Report to provide important background material, such as Secretary Chus request letters; rosters of the Council and study groups membership; and descriptions of additional study materials available electronically. Also included are conversion factors used by all study groups in the creation of the report, as well as a list of acronyms and abbreviations. y Topic and White Papers provide a final level of detail for the reader. These papers, developed by or for the studys Task Groups and Subgroups, formed the base for the understanding of each study segment, such as Onshore Gas and Industrial Demand, and were heavily utilized in the development of the chapters of the Integrated Report. A list of short abstracts of these papers appears in Appendix C and the full papers can be viewed and downloaded from the NPC website (http://www.npc.org). The Council believes that these materials will be of interest to the readers of the report and will help them better understand the results. The members of the NPC were not asked to endorse or approve all of the statements and conclusions contained in these documents but, rather, to approve the publication of these materials as part of the study process. The papers were reviewed by the Task Groups and Subgroups but are essentially stand-alone analyses of the studies used by each group. As such, statements and suggested findings that appear in these papers are not endorsed by the NPC unless they were incorporated into the Integrated Report.
PREFACE
Study rePort StruCture

In the interest of transparency and to help readers better understand this study, the NPC is making the study results and many of the documents developed by the study groups available to all interested parties. To provide interested parties with the ability to
The Integrated Report and the Topic and White Papers are publicly available. They may be individually downloaded from the NPC website (http://www. npc.org). Readers are welcome and encouraged to
visit the site to download the entire report or individual sections for free. Also, published copies of the report can be purchased from the NPC.
Executive Summary
xtraordinary events have affected energy markets in the years since the National Petroleum Council (NPC) reported on the Hard Truths about energy in 2007.1 That study concluded that the world would need increased energy efficiency and all economic forms of energy supply. This is still true today, but in the few years since then, significant technology advances have unlocked vast natural gas and oil resources. The newly and greatly expanded North American natural gas and oil resources are already benefiting our country economically and increasing employment. Growing supplies of natural gas have resulted in lower prices, helping to revitalize many U.S. industries and, in some parts of the country, lower the cost of producing electricity. The increased competitiveness of natural gas could lead to greater use for power generation, helping to further reduce emissions from electricity production. Technological advances and the expansion of economically recoverable natural gas and oil reserves can substantially improve Americas energy security. North America has also become much more integrated in energy terms; Canada provides a quarter of Americas total oil imports, almost double that of the next largest source. The great expansion of economically recoverable natural gas is central to meeting Americas overall needs, as natural gas is one of the cornerstone fuels on which the nations economy depends. Natural gas provides a quarter of Americas overall energy and is used to generate a quarter of the nations electricity. It provides the heat for 56 million homes and apartments and delivers 35% of the
energy and feedstocks required by Americas industries. What happens to natural gas supplies affects all Americans. Other events have detracted from these positive developments. Consumers have been coping with the effects of high petroleum prices. There have been tragic accidents, such as the Macondo oil spill in the deepwater Gulf of Mexico and the natural gas pipeline explosion in San Bruno, California. Concerns have been raised about the environmental impacts of oil sands and shale gas extraction. Some are questioning the industrys ability to develop North American oil and gas resources in an environmentally acceptable and safe manner. All this sets the context for this study, highlighting the need to continue to develop Americas natural gas and oil resources in a manner that will balance energy, economic, and environmental security needs as part of a transition to a lower carbon energy mix. In his letter asking the NPC to conduct this study, the Secretary of Energy requested that the assessment concentrate on two tasks: developing an upto-date understanding of the potential natural gas and oil supply opportunities in North America2; and examining the contribution that natural gas could make in a transition to a lower carbon fuel mix. He focused the NPCs attention on interrelated national objectives of enhancing the nations energy security and economic competitiveness while minimizing environmental impacts, including climate change. He instructed the NPC to use a study process to venture beyond business-as-usual industry and government assessments.
2 This study generally focuses on resources in the United States and Canada.
EXECUTIVE SUMMARY
National Petroleum Council, Hard Truths: Facing the Hard Truths about Energy, July 2007 (Hard Truths).
AMERICAS ENERGY FUTURE

This study came to four conclusions about natural gas and oil. These findings can help guide the nations actions. First, the potential supply of North American natural gas is far bigger than was thought even a few years ago. As late as 2007, it was thought that the United States would have to become increasingly dependent on imported liquefied natural gas, owing to what appeared to be a constrained domestic supply. That is no longer the case. It is now understood that the natural gas resource base is enormous and that its development if carried out in acceptable ways is potentially transformative for the American economy, energy security, and the environment, including reduction of air emissions. These resources have the potential to meet even the highest projections of demand reviewed by this study. Second and perhaps surprising to many Americas oil resources are also proving to be much larger than previously thought. The North American oil resource base offers substantial supply for decades ahead and could help the United States reduce, but not eliminate, its requirements and costs for oil imported from outside of North America. The United States and Canada together produce 4% more oil than Russia, the worlds largest producer. However, as Hard Truths stated, energy independence is not realistic in the foreseeable future, although economic and energy security benefits flow from reducing imports through efficiency and increasing domestic production. Realizing the potential of oil, like natural gas, in the future will depend on putting in place appropriate access regimes that can allow sustained exploration and development activity to take place in resourcerich areas. Third, we need these natural gas and oil resources even as efficiency reduces energy demand and alternatives become more economically available on a large scale. Even presuming that the United States uses energy much more efficiently, diversifies its energy mix, and transitions to a lower carbon fuel mix, Americans will need natural gas and oil for much of their energy requirements for the foreseeable future. Moreover, the natural gas and oil industry is vital to the U.S. economy, generating millions of high-paying jobs and providing tax revenues to federal, state, and local governments. 8
Fourth, realizing the benefits of natural gas and oil depends on environmentally responsible development. In order to realize the benefits of these larger natural gas and oil resources, safe, responsible, and environmentally acceptable production and delivery must be ensured in all circumstances. Many natural gas and oil companies are committed to such goals and work hard to achieve them. The critical path to sustained and expanded resource development in North America includes effective regulation and a commitment of industry and regulators to continuous improvement in practices to eliminate or minimize environmental risk. These steps are necessary for public trust. Recognizing that access to available resources can be undermined by safety and environmental incidents, all industry participants must continuously improve their environmental, safety, and health practices, preserving the benefits of greater access for the industry, consumers, and all other stakeholders. In making these core findings, the NPC examined a broad range of energy supply, demand, environmental, and technology outlooks through 2050. The study participants addressed issues relating to public health, safety, and environmental risks associated with natural gas and oil production and delivery practices, as well as opportunities for natural gas to reduce emissions from energy use. The NPCs findings and recommendations are summarized below and explained in detail in the report chapters. 1. NATURAL GAS IS A VERY ABUNDANT RESOURCE Americas natural gas resource base is enormous. It offers significant, potentially transformative benefits for the U.S. economy, energy security, and the environment. Thanks to the advances in the application of technology pioneered in the United States and Canada, North America has a large, economically accessible natural gas resource base that includes significant sources of unconventional gas such as shale gas. This resource base could supply over 100 years of demand at todays consumption rates. Natural gas, properly produced and delivered, can play an important role in helping the United States reduce its carbon and other emissions. But these potentially transformative benefits cannot happen without access to resource-rich basins and the consistent application of responsible development practices.
The United States is now the number one natural gas producer in the world and together with Canada accounts for over 25% of global natural gas production (Figure ES-1). While shale and other unconventional gas resources are the new game changers, significant conventional resources are being produced in onshore and offshore areas. Lower and less volatile prices for natural gas in the past two years reflect these new realities, with benefits for American consumers and the nations competitive and strategic interests, including the revitalization of several domestic industries. New applications of technologies such as horizontal drilling and hydraulic fracturing have brought about this recent increase in natural gas production and the reassessment of the size of the U.S. recoverable natural gas resource base. Figure ES-2 shows how the estimates of U.S. technically recoverable resources have greatly increased over the past decade, with estimates of recoverable shale gas being the most striking reason for changes over the decade.3 The natural gas resource base could support supply for five or more
3 Technically recoverable resources are resources that can be produced using current technology, as defined by the Energy Information Administration (EIA).
decades at current or greatly expanded levels of use. Figure ES-3 shows estimates of the wellhead development cost from three estimates of future natural gas resources derived from the recent Massachusetts Institute of Technology (MIT) study4 on natural gas, along with low and high estimates of cumulative, total demand from 2010 to 2035.5 The wellhead development cost, as estimated by the MIT study, should not be read as an expected market price, since many factors determine the price to the consumer in competitive markets. In the longer term, there are additional potential major resources in Arctic and other offshore
4 MIT Energy Initiative, The Future of Natural Gas: An Interdisciplinary MIT Study, Massachusetts Institute of Technology, 2011 (MIT 2011 Gas Report). As presented on Figure ES-3, the MIT Mean Resource Case shows the mean resource estimate, based on 2007 technology levels; the Advanced Technology Case shows the mean resource estimate based on advanced technologies; and the High Resource Technology Case shows the high resource estimate using advanced technologies, as defined in that study. Figure ES-3 also shows the range of cumulative natural gas demand for 2010 through 2035. The range is based on the NPC Demand Task Group estimate that North American natural gas demand for 2035 could range from 25 to 45 trillion cubic feet per year, with a 2010 beginning point of 26 trillion cubic feet per year.
Figure ES-1. United States and Canada Are Among Leading Natural Gas Producers
60
BILLION CUBIC FEET PER DAY
40
20
USA
RUSSIA
CANADA
IRAN
QATAR
NORWAY
CHINA
SAUDI INDONESIA ALGERIA ARABIA
Source: BP Statistical Review of World Energy.

EXECUTIVE SUMMARY
Figure ES-2. U.S. Natural Gas Technically Recoverable Resources Are Increasing
Figure ES-2. U.S. Natural Gas Technically Recoverable Resources Are Increasing
TRILLION CUBIC FEET
10
2003 2004 2005 2006 YEAR 2007 2008 2009 2010 2011
4,000
NATIONAL PETROLEUM COUNCIL (NPC)
POTENTIAL GAS COMMITTEE
ENERGY INFORMATION ADMINISTRATION/ DEPARTMENT OF ENERGY/MINERALS MANAGEMENT SERVICE
INTERSTATE NATURAL GAS ASSOCIATION OF AMERICA
3,000
ICF INTERNATIONAL, INC.
MASSACHUSETTS INSTITUTE OF TECHNOLOGY
AMERICAS NATURAL GAS ALLIANCE
NPC SURVEY LOW
NPC SURVEY MID
NPC SURVEY HIGH
2,000
1,000
1999
2000
Notes: Minerals Management Service (MMS) no longer exists; its functions are now administered by the Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE). For a detailed discussion of the survey that the NPC used to prepare these low, mid, and high estimates, see the Preface as well as the Resources and Supply chapter.
Figure ES-3. North American Technically Recoverable Natural Gas Resources
Figure ES-3. North American Natural Gas Resources Can Meet Decades of Demand
10 WELLHEAD DEVELOPMENT COST (2007 DOLLARS PER MILLION CUBIC FEET)
LOW DEMAND HIGH DEMAND
8
RANGE OF CUMULATIVE DEMAND 20102035
6
MIT MEAN RESOURCE CASE MIT ADVANCED TECHNOLOGY CASE MIT HIGH RESOURCE TECHNOLOGY CASE
4 3 0 1,000 TRILLION CUBIC FEET 2,000 3,000
Note: The y-axis represents estimated wellhead cost of supply. The cost of supply can vary over time and place in light of di erent regulatory conditions, di erent technological developments and deployments, and other di erent technical conditions. In none of these cases is cost of supply to be interpreted as an indicator of market prices or trends in market prices, since many factors determine prices to consumers in competitive markets. Source of MIT information: The Future of Natural Gas: An Interdisciplinary MIT Study, 2011.
regions, or with advances in technology from methane hydrate deposits in various locations, mainly offshore. These opportunities could allow natural gas to continue to play a central role in the North American energy economy into the next century. Development of these natural gas resources will require timely investment in the expansion of delivery infrastructure. To date, market signals and existing regulatory structures have worked well in bringing about new natural gas delivery and storage infrastructure. The technological success in the United States opens up significant new opportunities for global technological leadership and an expanded global role for U.S. natural gas and oil companies.6 Many countries
6 Unless specifically described in context below, the term natural gas and oil companies used in this report includes not only exploration or production companies, but also service companies that support drilling and operations, as well as companies that transport oil and gas.
around the world ranging from China to Poland, Ukraine, and South Africa are now assessing their own shale gas resources and development potential. U.S. companies are playing an important role in these activities. Natural gas can also help the United States reduce greenhouse gas7 (GHG) and other air emissions in the near term, especially if methane emissions from gas production and delivery are reduced. The biggest opportunity is in the power sector, but there are also opportunities in the industrial, commercial, and residential sectors (Figure ES-4). In recent years, relatively favorable prices for natural gas have displaced some coal-fired generation. More natural gas use will likely result from the electric industrys response to upcoming federal environmental regulations that may encourage retirement of some of the nations coal-fired power plants. In the long term, if the nation
7 The major GHG emissions of concern in this report are carbon dioxide (CO2), nitrous oxide (N2O), and methane (CH4).
EXECUTIVE SUMMARY
11
desires deeper reductions in GHG emissions, it will need to address the GHG emissions of all fossil fuels, including natural gas, by putting a price on carbon8 and advancing other technologies, including those that can capture and sequester carbon dioxide (CO2). 2. SURPRISINGLY, OIL IS ALSO AN ABUNDANT RESOURCE
class resource basins, some of which are located in remote areas offshore and in the Arctic. Going forward, access to these resources depends upon responsible development practices being consistently deployed.
After declining in recent years, North American oil production rose in 2009 and 2010 due to advances in Contrary to conventional wisdom, the North technology and significant investment in exploration American oil resource base also could proand development by companies over a number of previde substantial supply for decades ahead. ceding years. As a result, the United States and CanThrough technology leadership and susada have several already-producing world-class basins tained investment, the United States and in particular in the deepwater Gulf of Mexico and Canada together now constitute the largest the Alberta oil sands. These areas contribute substanoil producer in the world. We have worldtially to North American oil production, and could sustain and grow current production beyond 2030. In addition, onshore conventional oil is a large sup8 See http://www.ipcc.ch/pdf/assessment-report/ar4/wg3/ ply source, although made up of a multitude of small ar4-wg3-annex1.pdf. Generally, the term price on carbon developments. The long-term decline of production refers to an assessment of the negative externalities of GHG from onshore conventional fields has reversed in emissions and the associated economic value of reducing or avoiding one metric ton of GHG in carbon dioxide equivalent. recent years through techniques such as enhanced oil Discussions in this report do not differentiate between an recovery (EOR) and hydraulic fracturing. The United explicit carbon price (e.g., under a cap and trade or carbon tax States is the third producer policy) and an implied carbon cost (e.g., Technologies Can Help Reduce Greenhouselargest oil Emissions in the world, Figure ES-4. Natural Gas specific regulatory Gas (GHG) after Russia and Saudi Arabia (Figure ES-5). limitations on the amounts of emissions).
WAS Fig. ES-3
Figure ES-4. Natural Gas Technologies Can Help Reduce Greenhouse Gas Emissions
HIGH
FUEL CELLS
NATURAL GAS CARBON CAPTURE AND SEQUESTRATION
DIFFICULTY OF IMPLEMENTATION
MEDIUM
REFUEL OR REPOWER EXISTING COAL- OR OIL-FIRED PLANTS
COMBINED HEAT & POWER INDUSTRIAL FUEL SWITCHING RESIDENTIAL/COMMERCIAL APPLIANCES LOW NEW NATURAL GAS POWER PLANTS DISPATCHING NATURAL GAS PLANTS AHEAD OF COAL PLANTS MEDIUM HIGH
LOW
GHG REDUCTION POTENTIAL
12
Foundational Concepts
Based on the request from the Secretary of Energy, the NPC used four key concepts to evaluate potential policy recommendations that arose in the study: economic prosperity, environmental sustainability, energy security, and prudent development. Economic prosperity means not just the level of wealth of a country, but also its economic growth, economic security, and economic competitiveness. This goal also includes the notion of balancing the interests of todays society against those of tomorrows. Environmentally sustainable means allowing for the maintenance of environmental quality and resource protection over time. Environmental sustainability encompasses impacts such as air and water pollution that directly affect public health, as well as these and other impacts affecting ecosystem vitality, biodiversity, habitat, forestry and fisheries health, agriculture, and the global climate. It is related to the concept of sustainable development as defined by the Brundtland Commission, formerly known as the World Commission on Environment and Development: meeting the needs of the present without compromising the ability of future generations to meet their own needs. Energy security means minimizing vulnerability to energy supply disruptions and the resulting volatile and disruptive energy prices. Longer-term growth in oil production can come from several new and emerging North American supply sources. One source is tight oil, found in geological formations where the oil does not easily flow through the rock, such as in the Bakken formation of North Dakota, Saskatchewan, Montana, and Manitoba. Tight oil has also benefited from technologies similar to those used for shale gas, including hydraulic fracturing. Over the next 20 years, tight oil production could continue to grow. A second potentially large supply source is in new offshore areas, particularly in the Gulf of Mexico and the Atlantic and Pacific coasts of the United States and Canada. Access to and potential development of these new U.S. areas would require an Executive Branch level directive to include such areas in the 20122017 Leasing Program. New offshore areas could provide both natural gas and oil in significant quantities to supplement the continuing Since most of the U.S. energy supply is domestic, energy security is affected by the development of domestic resources, as well as the security of delivery and production systems such as natural gas pipelines, refineries, power plants, and electric power transmission. Likewise, as some of the U.S. energy supply comes from other countries, energy security also involves geopolitical considerations associated with protecting and enhancing U.S. strategic interests internationally. Potential disrupters of energy security cover a range, among which are turmoil in foreign supplier countries; the disruption of a major supply source or delivery infrastructure; assaults on the supply chain; natural disasters; and global environmental issues and extreme weather events, as characterized by the 2010 Quadrennial Defense Review Report of the U.S. Department of Defense. The concept of prudent development of North American natural gas and oil resources means development, operations, and delivery systems that achieve a broadly acceptable balance of several factors: economic growth, environmental stewardship and sustainability, energy security, and human health and safety. Prudent development necessarily involves tradeoffs among these factors. Consideration of the distribution of costs and benefits is a key part of prudent development. strong production in the Gulf of Mexico. Third, new Arctic oil and natural gas supply have a potential of the equivalent of over 200 billion barrels of oil. This is in addition to existing oil supply and proven natural gas reserves on the Alaska North Slope. The new Arctic resources could yield significant supply after 2025. Fourth, another very large long-term oil supply source lies in the shale oil deposits of Colorado, Utah, and Wyoming. The development of these billions of barrels of oil from these new resource areas will require sustained investment, substantial advances in technology, and environmental risk management systems and approaches.9 In many instances, there will be the need for new pipelines and other infrastructure.
9 There are several trillion barrels of oil-in-place. How much can be extracted will greatly depend on the technology and economics.
EXECUTIVE SUMMARY
13
Figure ES-5. United States and Canada Are among Leading Oil Producers WAS Figure ES-4
Figure ES-5. United States and Canada Are Among Leading Oil Producers
12
MILLION BARRELS PER DAY
0 RUSSIA SAUDI ARABIA USA IRAN CHINA CANADA MEXICO UNITED VENEZUELA ARAB EMIRATES IRAQ
Continuing significant technological advances could extend North American oil production for many decades in various areas, such as other offshore areas, other unconventional oil opportunities, and eventually, oil shale. In recent years, there has been rapid learning and deployment of new production techniques to unlock higher actual and potential natural gas supply, particularly from tight and shale gas reservoirs. Such learnings have not yet been fully applied to new and emerging oil opportunities. As the emerging oil opportunities develop both onshore and offshore and with application of some of the technologies now enabling access to unconventional natural gas, similar upward re-appraisal of potential oil supply will likely follow. Such appraisals are an ongoing process as new resources are brought into the development phase. Figure ES-6 shows the various sources of current supply as well as projected supply in 2035 under limited potential and high potential scenarios. The limited potential scenario is characterized by limited resource access, constrained technology development, as well as greater regulatory barriers. The high potential scenario is characterized by more access, 14
substantial advances in technology, and regulatory burdens that are not significantly different than today. Even under the high potential scenario, the United States will still need to import oil for the foreseeable future. Enhanced access is also a key enabler that could move North American oil production towards the higher potential pathway indicated here. Resourcerich areas such as the eastern Gulf of Mexico, the Atlantic and Pacific continental margins, and the Arctic are capable of delivering new volumes of oil supply, potentially extending over several decades. Indeed, in the Arctic, unless new oil production can be developed as a consequence of sustained exploration, the key infrastructure link currently operating (the TransAlaska Pipeline System from the Alaska North Slope to the crude oil loading terminal at Valdez, Alaska) will have to be decommissioned when the declines from existing Alaska North Slope production cause pipeline flows to fall below minimum operating levels. Such an outcome could leave a huge resource stranded with deleterious consequences for the economy and for energy security.
This current and future development of U.S. and Canadian oil can translate into energy security benefits through reducing oil imports. Other potential benefits include improved balance of trade, jobs, and economic multiplier effects from domestic drilling, production, and delivery. 3. AMERICA NEEDS NATURAL GAS AND OIL EVEN AS ALTERNATIVE RESOURCES BECOME AVAILABLE Even as the United States uses energy much more efficiently and diversifies its energy mix, Americans will need natural gas and oil for the foreseeable future. Natural gas can enable renewable power through management of intermittency. Natural gas and oil are currently indispensable ingredients in the American economy and Americans standard of living. A vibrant domestic natural gas and oil industry has the potential to add muchneeded domestic jobs and revenues for federal,
state, and local governments. In a competitive global business environment, where companies have the ability to move capital around the world, a dependable and affordable supply of natural gas and oil is important for creating economic growth, investment, and jobs in the United States. Abundant supplies of natural gas are vital to improving the competitiveness of domestic industries that use natural gas as a fuel and feedstock. Though North America has abundant natural gas and oil resources, these resources must still be used wisely; and energy efficiency measures should be developed and implemented wherever they are cost effective. Together, natural gas and oil make up nearly twothirds of U.S. energy use.10 Even with increasing energy efficiency, buildings, motor vehicles, industrial facilities, and other energy-using equipment will remain highly dependent on natural gas and oil
10 EIA, Annual Energy Outlook 2011, Reference Case.
Figure ES-6. More Resource Access and Technology Innovation Could Substantially Increase North American Oil Production
Figure ES-6. More Resource Access and Technology Innovation ALSO used as Figure 1-5 Could Substantially Increase North American Oil Production
NATURAL GAS LIQUIDS OIL SHALE TIGHT OIL OIL SANDS ARCTIC OFFSHORE ONSHORE CONVENTIONAL
20
UNCONVENTIONAL OIL
10
}
0 2010
{
2035 LIMITED 2035 HIGH POTENTIAL
Notes: The oil supply bars for 2035 represent the range of potential supply from each of the individual supply sources and types considered in this study. The speci c factors that may constrain or enable development and production can be di erent for each supply type, but include such factors as whether access is enabled, infrastructure is developed, appropriate technology research and development is sustained, an appropriate regulatory framework is in place, and environmental performance is maintained. Note that in 2010, oil demand for the U.S. and Canada combined was 22.45 million barrels per day. Thus, even in the high potential scenario, 2035 supply is lower than 2010 demand, implying a continued need for oil imports and participation in global trade. Source: Historical data from Energy Information Administration and National Energy Board of Canada.
EXECUTIVE SUMMARY
15
for many years to come. Thus, these fuels are critical in the U.S. economy, particularly as part of a strategy to transition towards a low-carbon energy mix in the future. There is enough supply to meet a range of demand levels for decades from business as usual, to scenarios with much greater penetrations of natural gas in the power, industrial, and transportation sectors. And, using these resources much more efficiently will strengthen the nations economic resiliency, reduce environmental impacts, and enhance energy security. As noted in Hard Truths and other studies, investment in and deployment of energy efficiency measures is frequently cost effective and will reduce demands for fossil fuels and the impacts of their associated emissions. Energy efficiency deserves continued and increased efforts.11 At the same time, in meeting the needs of U.S. consumers, the American natural gas and oil industry plays an essential role in the U.S. economy. Companies directly engaged in the oil and natural gas industry employ over 2 million Americans who earn over $175 billion in labor income. The employment figure jumps to over 9 million Americans with $533 billion in labor income when including the jobs created by the spending on goods and services of natural gas and oil companies and their employees. PricewaterhouseCoopers has estimated that the domestic oil and natural gas industry directly generated approximately $464 billion
11 Hard Truths recommended that the United States moderate demand by increasing energy efficiency through improved vehicle fuel economy and by reducing energy consumption in the residential and commercial sectors. Hard Truths concluded that: anticipated energy use in the residential and commercial sectors could be reduced by roughly 15 to 20 percent through deployment of cost-effective energy-efficiency measures that use existing, commercially available technologies. Assuming that all these measures are put in place over the next decades and that all other factors such as level of services are held constant, U.S. residential/commercial energy consumption could be reduced by 7 to 9 quadrillion Btu. Technologies to accomplish savings of these magnitudes are indicated to be available in the marketplace. (page 43) a doubling of fuel economy of new cars and light trucks by 2030 is possible through the use of existing and anticipated technologies, assuming vehicle performance and other attributes remain the same as today. Depending upon how quickly new vehicle improvements are incorporated in the on-road light duty vehicle fleet, U.S. oil demand would be reduced by about 3-5 million barrels per day in 2030. Additional fuel economy improvements would be possible by reducing vehicle weight, horsepower, and amenities, or by developing more expensive, step-out technologies. (pages 14-15)
in combined operational expenses and capital investment in 2009 equivalent to over 3% of Americas gross domestic product (GDP).12 In the United States, federal, state, and local governments also benefit from the substantial amount of taxes and royalties paid by natural gas and oil companies. Taking into account all corporate income taxes, severance taxes, royalties on federal lands, sales taxes, payroll taxes, property and use taxes, and excise taxes, natural gas and oil companies generate over $250 billion in government revenue annually. Although natural gas and oil have long been viewed as related fuels, their uses are quite different. Natural gas is especially important for heating, power generation, and industrial uses such as chemical manufacturing. By contrast, around 97% of all energy used in the transportation sector comes from oil. The import picture differs as well. Nearly all of the natural gas consumed in North America is produced within the same continental boundaries, while about half of the crude oil processed in North American refineries is imported. Within North America, Canada is a net exporter of crude oil and the United States is a net importer.13 Low natural gas prices make U.S. manufacturers and farmers more competitive. U.S. firms rely on natural gas- and oil-derived chemicals as building blocks for the production of electronics (including computers and cell phones), plastics, medicines and medical equipment, cleaning products, fertilizers, building materials, adhesives, and clothing. When manufacturers use natural gas as a fuel and feedstock, they create a variety of products that are used every day. These products are valued at greater than eight times the cost of the natural gas used to create them, providing significant benefit to the nations economy.14
12 PricewaterhouseCoopers, The Economic Impacts of the Oil and Natural Gas Industry on the U.S. Economy in 2009: Employment, Labor Income, and Value Added, May 2011. 13 In 2010, U.S. net crude oil imports were 9.1 million barrels per day, which was about 62% of its total refinery crude oil inputs. Canada, in contrast, is a net crude oil exporter, as it imports crude oil into eastern Canadian refineries but exports crude oil to the United States from western Canadian production. On a net basis, Canada exports 1.4million barrels per day, but its crude oil exports to the U.S. total 1.99 million barrels/day, 22% of U.S. crude oil imports. So, for both countries together, net crude oil imports total 7.7 million barrels per day, or about 47% of combined refinery crude oil runs. Source: BP and EIA. 14 Based on information in the American Chemistry Council, Guide to the Business of Chemistry, 2011; and American Chemistry Council, Shale Gas and New Petrochemicals Investment: Benefits for the Economy, Jobs, and US Manufacturing, Economics & Statistics, March 2011.
16
Observers of natural gas markets forecast a wide range of future natural gas demand for the United States and a narrower range for Canada.15 For the United States, most of the variation in natural gas demand comes from the power sector; for Canada, it comes from the industrial sector. Figure ES-7 shows demand in 2010, along with several projections for 2020 and 2030.16 Over 120 gigawatts (GW) of natural gas combined cycle capacity was added from 2000 to 2008. The power sector has already substituted the use of natural gas for some coal because of low natural gas prices. The increased use of these new and efficient natural gas units decreased the GHG emissions from U.S. power plants by about 83 million metric tons of CO2, or
15 The NPC assessed the numerous recent forecasts of demand for U.S. and Canadian natural gas that exist in the public domain. Additionally, the NPC studied a number of proprietary forecasts and conducted a survey. The study subgroups also examined aggregated proprietary data collected via a confidential survey of private organizations, primarily gas and oil companies and specialized consulting groups. The proprietary data were collected by a third party and aggregated to disguise individual responses. 16 The AEO cases are from the Annual Energy Outlook, prepared by the EIA. The proprietary cases are aggregated third-party forecasts.
about 1% of total U.S. emissions in 2005.17 Compared to 2000, natural gas use for power generation has grown by almost 45% from 2000 to 2010. It is projected to increase as much as another 75% by 2030.18 The availability of abundant low cost natural gas is helping to revitalize several industries, including petrochemicals, leading to several billions of dollars of new investment in domestic industrial operations that would not have been anticipated half a decade ago. Upcoming environmental regulations affecting power plants, combined with expectations for future natural gas prices informed by published forecasts, will have an impact on the use of natural gas in the power sector. Relatively old and inefficient coal-fired power plants with limited emission controls will likely retire, with various studies estimating retirements ranging
17 Based on EIA, U.S. Carbon Dioxide Emissions in 2009: A Retrospective Review, http://www.eia.doe.gov/oiaf/environment/ emissions/carbon/ and NPC analysis of EIA, Monthly Energy Review, April 2011. 18 Compared to 2000, natural gas use for power generation has grown from 14 billion cubic feet per day (Bcf/d) in 2000 to 20 Bcf/d in 2010, and is projected to be between 19 and 35 Bcf/d by 2030 (see Figure ES-7).
Figure ES-7. The Power Sector Shows the Most Variation in Projected U.S. Natural Gas Demand WAS Figure ES-6, ALSO Figure 3-2 Figure ES-7. The Power Sector Shows the Most Variation in Projected U.S. Natural GasDemand 100
VEHICLE TRANSMISSION RESIDENTIAL COMMERCIAL INDUSTRIAL POWER
80
60
40
20
2000
2010
AEO 2010
AEO 2011
MAX.
MED.
MIN.
AEO 2010
AEO 2011
MAX.
MED.
MIN.
REFERENCE CASE
PROPRIETARY
REFERENCE CASE
PROPRIETARY
2020
Notes: AEO2010 = EIAs Annual Energy Outlook (2010); AEO2011 = EIAs Annual Energy Outlook (2011).
2030
EXECUTIVE SUMMARY
17
Figure ES-8. Estimated GHG Emission Reductions from the Use of Natural Gas Vary W WAS Figure ES-7
from 12 to 101 GW of capacity by 2020. The study average of 58 GW of coal-fired capacity retirements represents about 6% of total U.S. generating capacity, or around 18% of coal-fired capacity. This will likely increase demand for natural gas at power plants, lead to new investment in natural gas-fired generation, and lower GHG emissions from the power sector (on average, around 3.5% of the 2005 U.S. total by 2020). In the longer term, increased natural gas supplies, along with the possible introduction of policies to reduce GHG emissions, could yield more substitution of natural gas for other fossil fuels, mainly coal. According to studies reviewed as part of this NPC study, natural gas could help reduce emissions in the long term (such as a 50% reduction from a 2005 baseline by 2050). A steeper emissions reduction target, such as 80% or more by 2050, will likely also require more aggressive emission control technologies like carbon capture and sequestration (CCS) for both coal and natural gas power plants, if these fossil fuels were to remain a significant energy source for power generation. Excluding transportation, the potential reduction in GHG emissions from natural gas use ranges from an equivalent of 126864 million metric tons of CO2 per year by 2030, or about 212% of total 2005 U.S. GHG emissions (Figure ES-8). This broad range of GHG reductions reflects the potential application of diverse natural gas technologies across the end-use sectors, including appliances, power infrastructure, and infrastructure retrofits in applications within the residential, commercial, and industrial end-use sectors. In addition to emissions of CO2 at the point of natural gas combustion, there are emissions of methane into the atmosphere that result from the production and delivery of natural gas.19 Some emissions occur in normal operations through venting for safety reasons such as to relieve pressure. Other emissions occur because of leaks in equipment such as compressor seals and connections. Because methane is a GHG that is significantly more potent than CO2 in its global warming potential,20 it is vital to minimize these emissions. In the April 2011 annual national GHG inventory update, the Environmental Protection Agency (EPA) estimated that fugitive methane emissions by natural gas companies accounted for approximately 4% of
19 Methane is a chemical compound that is the primary component of natural gas. 20 See a more detailed discussion in Chapter Four about the issues surrounding the relative potency of methane and CO2 from a global warming potential.
Figure ES-8. Estimated GHG Emission Reductions from the Use of Natural Gas Vary Widely
900
INDUSTRIAL COMMERCIAL RESIDENTIAL POWER 864 59 84 150
700
500
300
571
100 0
7 15
126 34 70
LOW HIGH MILLION METRIC TONS OF CO2 EQUIVALENT PER YEAR (2030)
U.S. GHG emissions in 2009. There is, however, a very high degree of uncertainty around estimates of methane emissions and, therefore, better data are needed while efforts continue to reduce such emissions. Taking into account EPAs recently revised estimates of methane emissions during production and delivery, the life-cycle emissions for natural gas are about 35% lower than coal on a heat-content (British thermal unit [Btu]) basis.21 In terms of the production of electricity, for efficiencies typical of coal- and natural gas-fired plants, natural gas has about 5060% lower GHG emissions than those of a coalfired plant (Figure ES-9).22 Beyond the power sector, there is potential for increased use of natural gas to displace oil in the transportation sector. The NPC Future Transportation
21 Life-cycle emissions include those from the direct combustion of natural gas, as well as methane emissions from the production and delivery of natural gas. 22 The natural gas combined cycle turbine unit has a heat rate of 7,000 Btu/kWh, while the coal plant at 30% efficiency has a heat rate of 11,377 Btu/kWh and the coal plant at 38% efficiency has a heat rate of 9,000 Btu/kWh.
18
Figure ES-9. Life-Cycle GHG Emissions for Natural Gas Are about One-Half of Coal
3,000
EMISSION RATE (LBS. OF CO2 EQUIVALENT PER MEGAWATT HOUR)
2,528
2,000
2,000
Fuels (FTF) study is examining the implications for gasoline and diesel demand of natural gas vehicles and plug-in electric vehicles that could create some natural gas demand for power generation, as well as fuel cell electric vehicles using hydrogen reformed from natural gas. Since the FTF study will be completed after this study, the final results of the FTF study cannot be incorporated here. Consequently, the NPCs study of natural gas and oil resources examined high-potential-demand cases for natural gas vehicles, plug-in electric vehicles, and fuel cell electric vehicles from published sources. For example, in 2035, U.S. and Canadian transportation could potentially consume 13 billion cubic feet per day (Bcf/d) of gas. There is a wide range in the estimates of future demand for natural gas. The most aggressive estimate of total natural gas demand, including transportation, is 133 Bcf/d by 2035, an 85% increase from 2010 natural gas requirements of 72 Bcf/d.23 The low-end estimate of total natural gas demand for 2035 is 72 Bcf/d (Figure ES-10). It appears that
23 U.S. and Canadian demand for 2035 is based on an extrapolation of 20202030 Proprietary Maximum and Minimum cases.
1,000
1,034
NATURAL GAS COAL PLANT (30% COMBINED EFFICIENCY) CYCLE (48% EFFICIENCY)
COAL PLANT (38% EFFICIENCY)
Figure ES-10. North American Natural Gas Production Could Meet High Demand
Figure ES-10. North American Natural Gas Production Could Meet High Demand
150
LIQUEFIED NATURAL GAS EXPORTS CANADIAN DEMAND U.S. DEMAND SUPPLY (HIGH POTENTIAL) SUPPLY (LIMITED POTENTIAL)
EXPORTS TO MEXICO VEHICLE DEMAND
100
50
0
Notes:
DEMAND 2010
SUPPLY
LOW DEMAND
SUPPLY 2035
HIGH DEMAND
2035 Development facilitated by access to new areas, balanced regulation, sustained technology development, higher resource size. 2035 Development constrained by lack of access, regulatory barriers, low exploration activity, lower resource size.
EXECUTIVE SUMMARY
19
even a 2035 potential demand requirement of up to 133 Bcf/d could be supplied. And based on the MIT 2011 Gas Report, The Future of Natural Gas, this high potential demand could be supplied at a current estimated wellhead production cost range in 2007 dollars of $4.00 to $8.00 per million Btu (MMBtu),as shown by comparing the information in Figure ES-10 and Figure ES-3, and based on current expectations of cost performance and assuming adequate access to resources for development.24 This wellhead development cost should not be read as an expected market price, since many factors determine the price to the consumer in competitive markets. While natural gas and oil bring many benefits, they come with mixed impacts, as do other sources of energy. Production and delivery of energy involves real health, safety, and environmental considerations and risks. Using natural gas and oil resources much more efficiently, producing them with lower environmental impacts, and diversifying U.S. energy mix are essential. The nation should adopt energy efficiency measures wherever economically attractive, and government policies should address impediments to that objective. 4. REALIZING THE BENEFITS OF NATURAL GAS AND OIL REQUIRES ENVIRONMENTALLY RESPONSIBLE DEVELOPMENT Achieving the economic, environmental, and energy security benefits of North American natural gas and oil supplies requires responsible approaches to resource production and delivery. Development in different geographic areas, such as deepwater offshore basins or onshore areas with shale gas resources in populated areas, requires different approaches and continued technological advances. But in all locales and conditions, the critical path to sustained and expanded resource development in North America includes effective regulation and a commitment of industry and regulators to continuous improvement in practices to eliminate or minimize environmental risk. These steps are necessary for public trust.
Risk to the environment exists with oil and natural gas development, as with any kind of energy production. Natural gas and oil companies have drilled for and delivered energy in the United States and Canada for a century and a half. Through that time, much has changed in how natural gas and oil are produced, and how drilling and production are regulated. In general, exploration and production occur in a far safer and environmentally responsible fashion than in generations past, in no small part as a result of changes in public environmental awareness, government regulation, technological innovations, and companies actions. In spite of the exploration and production improvements, there will undoubtedly be areas that remain off limits, based on unique environmental attributes.25 The key is that as environmental considerations evolve, both natural gas and oil companies and the government continue to work to improve environmental performance. Many, if not most, natural gas and oil companies have committed themselves to operating at high levels of performance with respect to environment, safety, and health impacts. Oil and gas industry occupational injury statistics from 1994 to 2009 show significant reductions compared to all of private industry.26 As an example of improvements in environmental performance, on Alaskas North Slope, the surface footprint of drill pads has been reduced from 65 acres to 9 acres27 and the volumes of waste generated from 100 barrels of oil equivalent of reserve additions has shrunk from 7.5 to 3.4 barrels.28 Advances in water use management practices have resulted in reduced demands on freshwater sources and many operators are pursuing reuse of produced water in fracture operations. According to the MIT 2011 Gas
25 The most obvious examples are resources located in national parks. 26 The oil and natural gas industry had an injury and illness incidence rate of 5.4 per 100 full-time workers in 1994 (compared to 8.4 per 100 for all private industry that year), and improved the rate to 1.6 per 100 in 2009 (compared to 3.6 per 100 in that year for all private industry). Source: U.S. Department of Labor, Bureau of Labor Statistics, Survey of Occupational Injuries and Illnesses, Table 1, Incidence rates of nonfatal occupational injuries and illnesses by case type and ownership, selected industries, 1994, 2009. 27 American Petroleum Institute, Examples of Technology at Work in the Arctic, Autumn 2008, http://www.api.org/policy/ exploration/upload/Technology_at_Work_Arctic.pdf. 28 U.S. DOE, Environmental Benefits of Advanced Oil and Gas Exploration and Production Technology, DOE-FE-0385, October 1999.
24 MIT 2011 Gas Report, page 31.
20
Hydraulic Fracturing
Hydraulic fracturing is the treatment applied to reservoir rock to improve the flow of trapped oil or natural gas from its initial location to the wellbore. This process involves creating fractures in the formation and placing sand or proppant in those fractures to hold them open. Fracturing is accomplished by injecting water and fluids designed for the specific site under high pressure in a process that is engineered, controlled, and monitored. areas, with the drilling equipment and production pipe sealed off using casing and cementing techniques. The technology and its application are continuously evolving. For example, testing and development are underway of safer fracturing fluid additives. The Interstate Oil and Gas Compact Commission (IOGCC), comprised of 30 member states in the United States, reported in 2009 that there have been no cases where hydraulic fracturing has been verified to have contaminated water. A new voluntary chemical registry (FracFocus) for disclosing fracturing fluid additives was launched in the spring of 2011 by the Ground Water Protection Council (GWPC) and the IOGCC. Texas operators are required by law to use FracFocus. The Environmental Protection Agency concluded in 2004 that the injection of hydraulic fracturing fluids into coalbed methane wells poses little or no threat to underground sources of drinking water. The EPA is currently studying hydraulic fracturing in unconventional formations to better understand the full life-cycle relationship between hydraulic fracturing and drinking water and groundwater resources. The Secretary of Energys Advisory Board is also studying ways to improve the safety and environmental performance relating to shale gas development, including hydraulic fracturing.
U.S. EPA, Office of Water, Office of Ground Water and Drinking Water, Evaluation of Impacts to Underground Sources of Drinking Water by Hydraulic Fracturing of Coalbed Methane Reservoirs, (4606M) EPA 816-R-04-003, June 2004. Secretary of Energy Advisory Board (SEAB), Natural Gas Subcommittee (http://www.shalegas.energy.gov/aboutus/ members.html), 90-Day Interim Report (http://www. shalegas.energy.gov/resources/081811_90_day_report_ final.pdf), Safety of Shale Gas Development, May5,2011, http://www.shalegas.energy.gov/
Fracturing Facts
Hydraulic fracturing was first used in 1947 in an oil well in Grant County, Kansas, and by 2002, the practice had already been used approximately a million times in the United States.* Up to 95% of wells drilled today are hydraulically fractured, accounting for more than 43% of total U.S. oil production and 67% of natural gas production. The first known instance where hydraulic fracturing was raised and addressed as a technology of concern was when it was used in shallow coalbed methane formations that contained freshwater (Black Warrior Basin, Alabama, 1997). In areas with deep unconventional formations (such as the Marcellus areas in Appalachia), the shale gas under development is separated from freshwater aquifers by thousands of feet and multiple confining layers. To reach these deep formations where the fracturing of rock occurs, drilling goes through the shallower
* Interstate Oil and Gas Compact Commission, Testimony

Submitted to the House Committee on Natural Resources, Subcommittee on Energy and Mineral Resources, June 18, 2009, Attachment B. IHS Global Insights, Measuring the Economic and Energy Impacts of Proposals to Regulate Hydraulic Fracturing, 2009; and EIA, Natural Gas and Crude Oil Production, December 2010 and July 2011. Interstate Oil and Gas Compact Commission, Testimony Submitted to the House Committee on Natural Resources, Subcommittee on Energy and Mineral Resources, June 18, 2009, Attachment B.
EXECUTIVE SUMMARY
21
Environmental and Public Health Concerns

Environmental and public health concerns associated with oil and natural gas development vary according to location and type of resource, whether the resource is onshore versus offshore, and the methods employed to extract and deliver the resource. The following issues are addressed in the chapters of this report: Hydraulic fracturing consumption of freshwater (volumes and sources); treatment and/ or disposal of produced water returned to the surface; instances of naturally occurring radioactive material in produced water; seismic impacts; chemical disclosure of fracture fluid additives; potential ground and surface water contamination. Onshore operations wellbore integrity; air emissions from combustion, venting, or leaks; methane migration into drinking water; community impacts including noise, odors, proximity to residential areas, and volume of truck traffic; fragmentation of and impacts on wildlife habitats; water contamination; waste management; and human health and safety. Offshore operations the marine environment brings different concerns than for onshore; pressures and temperatures at remote wellheads make prevention and response to a major release more challenging; and seismic noise associated with exploration and drilling activities is recognized as a concern for whale populations and other marine life, including fish. Arctic ice environments responding to an oil spill in low temperatures with the presence of broken sea ice; potential threats to sensitive habitat; and seismic noise. Oil sands volumes of water needed generate issues of water sourcing; removal of overburden for surface mining can fragment wildlife habitat and increase the risk of soil erosion or surface run-off events to nearby water systems; GHG and other air emissions from production.
Report, which reviewed three reports of publicly reported incidents related to gas well drilling, there were only 43 widely reported incidents related to gas well drilling in the past decade (to2010)29 during which time, there were about 20,000 shale gas wells drilled with almost all of them being hydraulically fractured.30 Unfortunately, accidents have occurred in operations of even the most committed companies. Efforts by all industry members to achieve and sustain high environment, health, and safety performance are essential. Many in and outside of the natural gas and oil industry worry that accidents or inferior practices of some companies could undermine public trust in the entire industry. Consistent use of responsible practices to protect the environment and public health are important on their own, and will also help avoid additional restrictions on access to resources and support access to additional resources that could help meet future energy needs. Natural gas and oil resources in North America are developed in a wide variety of settings, each of which has a variety of environmental challenges. For instance, in offshore development, the response to a major oil spill incident is complicated by conditions in the marine location, with drilling occurring up to several thousand feet below sea level. Onshore natural gas and oil development takes place in a wide range of locations, including arid deserts and coastal wetlands, wildlife habitats, rural and urban settings, and pristine landscapes and industrial parks. The various locations pose different issues in areas such as water sourcing, effluent disposal, site preparation and reclamation, and reduced fragmentation and protection of wildlife habitat. Specific standards and regulations that may be appropriate for production in some areas may not be effective in others.
29 Of these, 47% of the incidents involved groundwater contamination by natural gas or drilling fluids; 33% involved on-site surface spills; 9% involved off-site disposal issues; and the remaining 10% involved water withdrawal issues, air quality issues, and blowouts. With over 20,000 shale wells drilled in the last 10 years, the environmental record of shale gas development has for the most part been a good one but it is important to recognize the inherent risks and the damage that can be caused by just one poor operation. In the studies surveyed, no incidents are reported which conclusively demonstrate contamination of shallow water zones with fracture fluids. MIT 2011 Gas Report, Appendix 2E. 30 MIT 2011 Gas Report, pages 39-40.
22
The different types of natural gas and oil resources and geologic formations also pose different development and environmental challenges. The variations among coalbed natural gas, tight sands, shale gas, oil sands, shale oil, and conventional opportunities can differ widely and require different approaches for production and delivery and different risk management practices to manage environmental impacts. Regulations and operating practices need to be tailored for the specific setting. The number and variety of companies engaged in natural gas and oil development differ dramatically depending on the location and type of resource. In offshore development, because of the large capital investments and financial risk, generally the companies are fewer in number and larger in size than onshore. Onshore, around 7,000 companies are involved in natural gas and oil exploration and production, including 2,000 drilling operators and hundreds of service companies. The size of these firms ranges from those with very few employees to major integrated international oil companies with tens of thousands of U.S. employees. Oil and gas activity has increased dramatically, and development is now occurring in some areas where there has not been significant activity for decades. In those circumstances, regulatory capability may have to be and in some states,31 already has been enhanced and companies need to engage with local communities. Regulators face the challenge of keeping up with increased activity and staying abreast of technological developments. Regulatory programs have to be administered effectively and with clarity during a time of extraordinary budget pressures. A complex regulatory framework governs operational requirements, drilling practices, land use, water use, and other environmental safeguards. These involve many agencies of the federal, state, and even local governments. Ensuring best regulatory practices means providing adequate resources for development
31 For example, Colorado has recently updated its regulations, in part to address the intensity of development in parts of the state where less development has occurred historically; in 2010, Pennsylvania instituted a number of policies to update its regulations and regulatory capability, to address various issues relating to increased natural gas development in the state. See: Colorado Oil and Gas Conservation Commission, 2009 amended rules (http://cogcc.state.co.us/); and STRONGER, Pennsylvania Hydraulic Fracturing State Review, September 2010.
Environmental Regulation of the Natural Gas and Oil Industry

State, federal, and in some cases, regional regulations are in place to govern oil and natural gas production for the purpose of achieving safety, public health, and environmental protection. The interaction of these many layers of regulation is complex and generally effective. However, regulation among jurisdictions is uneven and in some cases requires strengthening resources available for staffing, keeping abreast of changes in the industry, and enforcement. In certain circumstances, there are federal legislative exemptions or special considerations afforded the oil and gas industry that some environmental advocates believe result in material deficiencies in environmental protection, particularly in relation to water and air quality. Others, including many in the natural gas and oil industry and in state governments, maintain that the special classifications under federal law are appropriate and supported by scientific or economic findings, addressed by state laws, and are parallel to special considerations that exist for many industries. There is a range of views on whether outstanding regulatory issues are best addressed through state or federal regulatory action. Many state agencies have been involved in regulating oil and gas development for much longer than the federal government and have unique knowledge and expertise relative to the local geological, hydrological, environmental, and land use setting, and are responsible for regulation and development of private and state natural gas and oil resources, as well as for implementing certain federal laws and regulations. Federal agencies have similar responsibilities for federal mineral development and environmental performance of companies where the federal government owns or controls such mineral rights or lands. Some entities believe states are generally more adept than federal agencies in their ability to adapt to changes in technology and new industry practices and more efficient. Others believe that only through federal regulation can there be assurance of a reasonably consistent level of environmental and public health protection across the country, and on public and private lands.
EXECUTIVE SUMMARY
23
and enforcement of regulations, ensuring that regulatory staff has the technical capabilities to make sound decisions, and creating a regulatory culture that embraces efficiency, innovation, and effectiveness. It also depends upon providing consistency of regulation and understanding the specific planning and practices required by the particular character of production and operating risks of different resource areas. An example of the type of permitting and oversight that accompanies the development of a natural gas and oil project is illustrated in Figure ES-11. Not every development project is exactly the same, and in fact, there are significant differences between the Pennsylvania illustration and Deepwater Offshore development, as well as development on federal lands where the federal National Environmental Policy Act process is applied. However, the requirement for regulatory interaction at each stage of the process is common. Also, some of the state regulatory and oversight functions identified in this illustration are also delegated from federal regulatory programs. The federal programs are not highlighted in this illustration.
Better reflect environmental impacts in markets and fuel/technology choices. Enhance the efficient use of energy. Enhance the regulation of markets. Support the development of intellectual capital and a skilled workforce. As policymakers consider the recommendations of this report and seek to create policies to implement them, they should rely to the greatest extent possible on market-based policies to provide signals and incentives to industry and consumers. These approaches have the best chance of providing cost-effective and creative solutions to responsibly meet the nations energy needs.
Support Prudent Natural Gas and Oil Resource Development and Regulation
The NPC found several key areas where more could be done to support prudent natural gas and oil resource development and regulation. Fundamental to all of these issues is that commitment to excellent environmental performance and continuous improvement must be maintained at both the leadership level of companies and throughout their organizations. In support of these outcomes, the NPC recommends the establishment of industry-led, regionally based, councils of excellence for identification and dissemination of effective environment, health, and safety practices for natural gas and oil production and delivery.32 The intention is to involve industry, government, academics, nongovernmental organizations (NGOs), and other stakeholders in processes that are light on bureaucracy, dedicated to sharing technical information, and benefit from the substantive work of many existing industry and public-sector organizations such as the Society of Petroleum Engineers, the State Review of Oil and Natural Gas Environmental Regulations (STRONGER), the Ground Water Protection Council, the Interstate Oil and Gas Compact Commission, the standard-setting program
32 These exchanges of environmental, health, and safety practices (as well as other similar exchanges referenced elsewhere in this report) must be conducted in compliance with applicable laws and regulations, including federal and state antitrust laws.
CORE STRATEGIES
The NPC used the fundamental concepts of economic prosperity, environmental sustainability, energy security, and prudent development as lenses for viewing the potential of natural gas and oil as energy sources and the potential of gas to help reduce GHG emissions. In doing this, the NPC kept in mind that the United States generally relies on markets to produce efficient use of resources in the economy and on private entrepreneurs to innovate. Government policy plays an important role in helping markets function through setting the rules of the road, such as establishing the rule of law to support contracts, enforcing property rights, maintaining a regulatory regime, and through providing public goods (such as basic research and development). Designing and implementing government policy in markets, however, should be done with care and consideration of possible unintended consequences. As described more fully in this report, the NPC proposes a number of recommendations for adoption by governments and companies. These recommendations are organized around five core strategies: Support prudent natural gas and oil resource development and regulation. 24
of the American Petroleum Institute (API), and others.33 Since there is lack of general information and awareness about what may be effective practices in a given region, and since companies vary in their access to the most-recent information about effective practices, such councils could address such deficiencies and provide for the more rapid dissemination of information. Leaders in government should be committed to high-quality environmental supervision and outcomes by ensuring adequate resources for efficient and effective regulation and enforcement. Government officials should also ensure that their regulatory requirements evolve and keep pace with the development of new and highly effective practices. The NPC recommends cooperation between the councils of excellence and regulators. Community engagement needs to be a core value and fundamental practice of companies, and these councils may be ways to communicate constructive avenues to share information with communities and to listen to their concerns. Companies should also increase efforts to reduce emissions from their gas production and delivery activities. Finally, governments should structure policies to support prudent development of resources.
protection has improved. This has occurred as companies have applied more sophisticated technologies to drilling and production practices. In recent years, public confidence in natural gas and oil development and in some of the associated regulatory mechanisms has frayed. The tragic circumstances of the Macondo accident in the Gulf of Mexico in 2010 and community attention to real and perceived safety, water quality, and other environmental impacts of shale gas extraction in some parts of the country have heightened public awareness and concerns. In some cases, natural gas and oil production activity is increasing in populated areas and in closer proximity to residential areas. Companies gain exposure to and adopt new technologies and operating practices in different ways and at different rates. More systematic mechanisms to identify, evaluate, and disseminate information to companies and regulators about effective environmental, health, and safety practices with a regional focus would improve information transfer. In light of the many existing organizations involved in one or another aspect of this work, the focus should be on developing mechanisms for information sharing, and not the establishment of new bureaucracies. The goal would be to promote more consistently highquality performance on environment, safety, and health issues across all companies. The concept is for the council(s) to be nimble, flexible, technically competent, and aimed at collecting and disseminating effective environmental, health, and safety practices to all interested parties, rather than reinventing the wheel. There are existing examples of mechanisms for sharing (and developing new) effective practices, including the recently formed Center for Offshore Safety under API, as well as activities by the Society of Petroleum Engineers and the Petroleum Technology Transfer Council. Each has its own particular mission, structure that includes non-industry representatives, and programmatic activities with the goal of enhancing the performance of its members. Another example is the APIs standard-setting organization which is separate from APIs advocacy organization and is responsible for developing many standards and recommended practices for onshore and offshore operations through a standarddevelopment process that encourages third-party participation.
EXECUTIVE SUMMARY
Establish Councils of Excellence for Sharing Effective Environmental, Health, and Safety Practices
Over many decades, natural gas and oil companies have made continuous and significant improvements in production processes and practices. These have resulted in energy production with lower environmental impacts. Although accidents, spills, and other problems have occurred, overall environmental
33 STRONGER is a nonprofit organization whose purpose is to assist states in documenting the environmental regulations associated with the exploration, development, and production of crude oil and natural gas; it uses a voluntary peer-review process of state regulatory approaches in order to share innovative techniques and environmental protection strategies, and to identify opportunities for program improvement. The Ground Water Protection Council is a nonprofit organization whose members consist of state groundwater regulatory agencies, which promote and ensure the use of best management practices and fair but effective laws regarding comprehensive groundwater protection. The Interstate Oil and Gas Compact Commission is a chartered multistate government agency that promotes the conservation and efficient recovery of domestic oil and natural gas resources while protecting health, safety, and the environment.
25
Natural gas and oil companies should draw upon existing activities, as appropriate, and form council(s) of excellence that may be affiliated with or grow out of an existing organization. Their function would be to act as a centralized repository and more systematic mechanism to collect, catalog, and disseminate environmental, health, and safety standards, practices, procedures, and management systems that pertain to a region and resource play. Because development of natural gas and oil resources differs depending on factors such as the geology, water resources, geography, and land uses of the region, what constitutes effective practice may well be regionally defined. As such, there may be a need for multiple councils, each with a regional focus. The council(s) would be industry led, but should be open to companies, regulators, policymakers, nongovernmental stakeholders, and the public. Their information would be publicly accessible to interested parties as well as government agencies. Experience in developing a first regional council (potentially in the Marcellus region) could provide insights for other subsequent councils. A result of such council(s) of excellence should be continuous improvement by all company participants (and others, including nonparticipating companies and regulators). Effective practices are not static. They must evolve with changing technology, and different effective practices will apply in different types of development areas. There are many existing organizations that are already seeking to collect and disseminate relevant information and assist state regulators to have more effective environment, health, and safety regulatory approaches. These organizations include STRONGER, the GWPC, and the IOGCC. The proposed councils should benefit from their efforts and be useful to them as well. One of these existing multistate organizations should be considered as a possible vehicle for housing these councils.
of environmental safeguards and practices. While the leaders of many natural gas and oil companies are already committed to excellent environmental performance and take action to ensure this at their firms, all leaders of natural gas and oil companies should commit and lead their firms to excellent environmental performance. These companies should consider more effective environmental, health, and safety performance as critical success factors for their enterprises. Natural gas and oil companies should establish regionally focused council(s) of excellence in effective environmental, health, and safety practices. These councils should be forums in which companies could identify and disseminate effective environmental, health, and safety practices and technologies that are appropriate to the particular region. These may include operational risk management approaches, better environmental management techniques, and methods for measuring environmental performance. The governance structures, participation processes, and transparency should be designed to: promote engagement of industry and other interested parties, and enhance the credibility of a councils products and the likelihood they can be relied upon by regulators at the state and federal level.
Adopt Policies for More Effective Regulation of Natural Gas and Oil Production and Operations
Most regulation relating to natural gas and oil production in onshore areas occurs at the state rather than the federal level. In the 33 states where natural gas and oil resources are currently in development, state agencies establish most of the terms and conditions under which natural gas and oil production may occur. This is particularly true for mineral resources located on or under lands in private ownership. The federal government has jurisdiction over development on federal land, where federal mineral rights exist under privately owned lands, and in the offshore areas of the Outer Continental Shelf. Within this context of natural gas and oil development on private and public lands, there are multiple and overlapping areas of regulatory jurisdiction.
Recommendation
The NPC makes the following recommendations for more effective environmental performance of natural gas and oil production and delivery operations: The leaders of companies set the expectations for their individual organizations and focus attention on the critical nature and importance 26
States are heavily involved in regulating the terms and conditions of access to and environmental impacts of resource development and extraction, while local governments often regulate land-use issues. The federal government regulates certain aspects of air pollution, water resource protection, and wastewater disposal. Where the federal government itself owns the land or mineral rights, the federal government also controls land use, terms and conditions of access and use, and many other issues. For both state and federal regulation, it is important that regulatory requirements and oversight evolve to incorporate new technological developments and practices. This is necessary to identify new standards that may arise from the development of new science or technical information, and to keep up with the pace of industry activity. While regulation of companies access to and development of natural gas and oil resources exists in every state where such resources are located, states use different approaches and different standards in regulating the industry due to varying geologic, climate, environmental, institutional, and statutory factors. Over the years, the states have adopted tools to help each other do their jobs better. An example is the STRONGER organization, which provides peer reviews of state regulatory approaches. STRONGER is a nonprofit organization comprised of environmental, state, and industry stakeholders. STRONGERs mission is to assist states by sharing innovative techniques and environmental protection strategies for exploration, development, and production of oil and natural gas. Another example is the IOGCC through which oil- and gas-producing states share information and tools to solve common problems, focus on model statutes and environmental stewardship, and acknowledge their differences. Effective regulatory oversight should support the multiple objectives of prudent development and take into account different operating conditions for development and operations. Such oversight benefits not just the public, but also industry, by providing skilled regulatory personnel who can handle issues efficiently and effectively and keep abreast of technological developments. In addition, effective and credible regulatory oversight should take into consideration standards set by independent standard-setting organizations and strengthen regulation consistent with evolving standards for prudent development. To achieve these goals, regulators require adequate
resources, including sufficient staff, training, and technical expertise. A fee-based funding mechanism is one approach that could provide these resources in states where there are neither the resources nor adequate industry contributions to support this function, provided that such fees support the institutional mission of efficient and effective regulation and are not used solely to increase taxes for general budgetary support.
Recommendation
The NPC makes the following recommendations for more effective regulatory programs: Leaders of governments must be committed to efficient and effective oil and natural gas regulation; create organizational cultures aimed at that outcome; and ensure that their regulatory requirements evolve with improvements in scientific information, technology, and operational practices. State and federal agencies should seek a balance between prescriptive and performancebased regulations to encourage innovation and environmental improvements while maintaining worker and public safety. Federal agencies should undertake efforts to better coordinate and streamline permitting activities on federal lands and in the Outer Continental Shelf. Regulators at the federal and state level should gain practical insights from the work of credible council(s) for excellence in effective environmental, safety, and health practices. Regulators at the federal and state level should have sufficient funding to ensure adequate personnel, training, technical expertise, and effective enforcement to properly regulate natural gas and oil companies. STRONGER should be bolstered and increase the scope of its activities. All states with natural gas and oil production should actively participate in STRONGER and use its recommendations to continuously improve regulation. It should be adequately funded, including from the federal government.
EXECUTIVE SUMMARY
27
Figure ES-11. The Natural Gas and Oil Industry Gas andRegulated: Figure ES-11. The Natural Is Well Oil Industry
1. LEASE LAND
Multiple Use Stipulations Non-Surface Use Stips Federal ESA Review DCNR Species of Concern
LEASE CONDITIONS
2. SEISMIC ACQUISITION
DCNR - Seismic Survey Agreement U.S. Fish & Wildlife DCNR PA Game PA Fish & Boat PNDI Mapping PA Game Comm. Right-of-Way & Spec. Use DEP Explosive Permits PA DOT State Road Permits PA County Local Road Use Permits
High Occupancy Road Permits Local Zoning Issues Seasonal Game Restrictions Stream, Road & Pad Bu ers Holiday Work Restrictions Disturbance Limits Road Use Bonds
START
Submit Bid to SLO
Collect Seismic Data Evaluate Data
5. DRILLING AND COMPLETION

Local Water Well Survey & Tests DEP Coal/Non-Coal Determination Surface Owner Sign-o DEP File Drilling Plan Compliant with PA Const. & Op. Stds. DEP Pre-Spud Noti cation Local Sewage Permits SRBC Registration DEP/SRBC Water Mgmt Plan
6. WELL START UP
DEP PERMIT TO DRILL
Frac Focus Report SRBC Post Drill Report DEP Solid Waste Mgmt Permit DEP Gas Flaring Permit DEP Post Drill Reports
SPUD, DRILL & FRAC WELL TEMPORARY FLOW BACK
Cuttings & Waste Mgmt. (Tested & Sent to DEP Licensed Land ll) Adhere to Previous Permit Conditions Obey All Lease Stips Obey Local Ordinance Requests Inspections & Oversight PA Fish & Boat PA Game DCNR DEP SRBC Local Operator
LEGEND: BMP Best Management Practice COE U.S. Army Corps of Engineers DCNR PA Dept. of Conservation & Natural Resources DEP PA Dept. of Environmental Protection EA Environmental Assessment
Well Test & Clean Up All Water Recycled Solids Disposed o site at Approved, Permitted Facility
EPA Environmental Protection Agency ESA Federal Endangered Species Act FAA Federal Aviation Administration NOI Notice of Intent PA DOT PA Dept. of Transportation
PNDI PA Natural Diversity Inventory SLO State Lands O ce SPCC Spill Prevention, Control & Countermeasure Plan SRBC Susquehanna River Basin Commission U.S. F&W U.S. Fish & Wildlife Service
28
Project Development Requirements Requirements in Pennsylvania Is Well Regulated: Project Development in Pennsylvania
3. SITE SELECTION
FEMA/Local-Flood Plain Determination U.S. FAA Air Clearance Consult PA Biological Review Pre-const. EA Forestry Approval of Location PA DEP Road Const. Plan DCNR Location and Approval DEP COE - Wetlands & Stream Crossings PA Game Commission Species of Concern PA Fish & Boat Species of Concern U.S. F&W Federal ESA Issues; Seasonal Stips Penn-State Historical Preservation Cultural Resources Storm water Pre-Const. Notice (BMP)
4. LOCAL CONSTRUCTION
NOI to DEP (w/ Local Notice & Comment) Managing Agencies Seasonal Activity Restrictions PA DOT Road Const. Permits PA County Local Road Const. Permits SRBC Water Access Permits Local Municipal Zoning & Land Development Permits
DEP Pre-Const. Meeting Activity Notice Various Agencies Build Location & Access Roads DEP Inspection Compliance Monitoring (Life of Well)
AND PRODUCTION
INFRASTRUCTURE & HOOK UP
7. RESTORATION AND RELEASE
Repeat Steps 3 & 4 DECOMMISSIONING DEP Air Permits EPA SPCC Requirements DEP Plugging Permit Landowner / Lease - Adhere to Restoration Requirements
END
TERMINATION OF PRODUCTION
Construct Gathering Lines Construct Permanent Facilities Connect to Sales Line
Maintenance Activities Repeat Steps 3 & 4 Inspections (Life of Well) DEP EPA SRBC COE U.S. F&W Operator Monitor Well Integrity (Reg. Req.) DCNR
Release of Land & Location Operator Shut-In Production Plug Well Decommission & Remove Equipment Abandon Gathering Lines (See Steps 3 & 4)
Source: Adapted from Governors Marcellus Shale Advisory, Commission Report by Jim Cawley, Lt. Governor, Commonwealth of Pennsylvania, July 22, 2011. Full Report Found at http://www.pa.gov. Also see Pennsylvania Public Records for Grugan development: Gathering Line - Permit #ESX10-035-0002, GP0518291004, GP0818291001; COP Tract 289 Pad E Permit #ESX10-081-0076, API #37-081-20446 (Well #E-1029H); COP Tract 285 Pad C - Permit #GP0718291001, ESX10-035-0007. Additional reporting and oversight required for exceptions to permitted activity not shown.
PRODUCE WELL
EXECUTIVE SUMMARY
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Commit to Community Engagement

Every natural gas and oil company must be committed to community engagement. Even though a company may believe its environmental performance is at the highest level, maintaining transparency regarding issues is important to public stakeholders. Industry needs to explain its production practices and environmental, safety, and health impacts in nonproprietary terms. The public should have the information necessary to have an understanding of the challenges, risks, and benefits associated with natural gas and oil production, including the cumulative impacts in a region of the development of multiple wells. Transparent reporting of comparable and reliable information can provide companies the tangible and intangible benefits of stronger relationships with communities, employees, and public interest groups. This is an essential part of earning and maintaining public trust and critical to establishing appropriate public policies and regulations. While providing information is important, natural gas and oil companies should also work with communities and seek ways to reduce the tangible or perceived negative impacts of development. This should include predevelopment planning to identify issues such as noise and traffic and seek ways to mitigate them. Companies should ask for alternative views, and reflect stakeholders positions in strategic objectives and communications. One recent example of the natural gas and oil industrys community engagement is found in FracFocus, the hydraulic fracturing chemical registry website. A joint project of the GWPC and the IOGCC, FracFocus provides a place where companies can post information about the chemicals used in the hydraulic fracturing of oil and gas wells. Many natural gas and oil companies participate in FracFocus, but not all companies do so. Increasing the participation in FracFocus to all natural gas and oil companies that engage in hydraulic fracturing, and adding into the system all wells currently in drilling or production, would be an important step in raising the level of community engagement. Another example is the practice of drilling multiple wells from a single pad, which can significantly reduce the truck traffic and minimize surface disturbance. Much effort is now going into innovations aimed at significantly reducing the water usage for hydraulic fracturing, and it is expected that the effects will be seen over the next few years. 30
Recommendation
The NPC makes the following recommendations to increase community engagement by natural gas and oil companies and, in so doing, support prudent development practices: Natural gas and oil companies should engage affected communities to establish shared understandings of expectations and awareness of issues and facts. Engagement should include sharing of information relevant to the community on a transparent and comparable basis. The industry and state and federal agencies must develop and disseminate science-based information on practices and risks to inform the public and build public confidence. All levels of the natural gas and oil industry should use appropriate and comprehensive predevelopment planning, risk assessment, and innovative applications of technology, which must be adapted to the variability of resource types and regional differences. Every natural gas and oil company that uses hydraulic fracturing should participate in FracFocus and comply with applicable statemandated registries. The Department of the Interior should require every natural gas and oil company that uses hydraulic fracturing on federal lands to participate in FracFocus.
Actions to Measure and Reduce Methane Emissions

Since methane is a potent GHG, emissions should be minimized in production and delivery. The EPA Gas STAR program is a voluntary industrygovernment partnership that has helped to eliminate over 900 Bcf of methane emissions since 1993. However, Gas STAR lacks robust quantification protocols to document the reductions and does not fully account for reduction practices employed within the industry. Moreover, not all companies participate in Gas STAR. An enhanced Gas STAR industrygovernment partnership, or an alternative, could provide an improved forum to review the barriers to greater adoption of methane emission-reducing
technologies, develop and fund research for a variety of new methane reduction technologies, and update processes and practices to improve emissions accounting and reduction protocols. Compliance with the EPA mandatory reporting of GHG emissions should result in improved characterization of the emissions profile of the industry and enable identification and adoption of technologies to minimize the loss of natural gas.
Recommendation
The NPC makes the following recommendations to reduce methane emissions: Use industry-government partnerships to promote technologies, protocols, and practices to measure, estimate, report, and reduce emissions of methane in all cycles of production and delivery. Ensure greater adoption of these technologies and practices within all sectors of the natural gas industry, with a focus on significantly reducing methane emissions while maintaining high safety and reliability standards.
In places, the term of leases can pose access problems. For example, offshore areas could make an important contribution to natural gas and oil supply over the next 20 to 30 years. Steps that could allow these areas to be considered for development, such as updated resource assessments and the development of environmental impact studies, are important to sustaining supply potential. Also, proposals that put into question the status of existing leases where drilling activity has not yet taken place (use it or lose it) are a threat to adequate access and resource development. It can take considerable time to develop lease exploration and drilling plans and receive requisite approvals, since drilling activity requires water and air discharge permits and other environmental assessments. In some areas, such as the high-cost, financially risky offshore environment, 10-year lease terms are a minimum length of time for these processes and decisions to be made. Longer lease periods would be more effective in frontier areas such as the Arctic, which have shorter annual drilling windows, very limited processing and transport infrastructure, and more complex permitting procedures and environmental review processes. A second necessary condition to enable development is predictable regulatory regimes. The public has a right to expect regulatory compliance by companies and proper government oversight. However, examples of overlapping or conflicting regulations that unreasonably impede development should be addressed. State or Canadian provincial regulations are usually more adapted to local subsurface and surface conditions, which can vary widely across regions of North America. Timely decision-making and regulatory clarity should also be objectives of government policy. Delays and regulatory congestion not only create uncertainty and draw out projects, but they can also negatively affect the economics of projects and add costs. Regulators should take care to ensure that they aim their regulatory processes on achieving meaningful outcomes, and minimize situations where long review periods produce diminishing returns to the public. The third necessary condition to enable development is continued support for research and technology development. Much research and technology development is conducted by private companies, and it is important to not jeopardize this private enterprise system of innovation. However, sometimes the payoff period for such research is too long to attract
EXECUTIVE SUMMARY
Other Policies to Support Prudent Development

Access to resources is a necessary condition for oil and gas development. The ability to develop subsurface areas with known or potential natural gas or oil resources often depends on decisions of owners of land and mineral rights and of policymakers. In circumstances of limited or contested access, even where there is a known natural gas or oil resource, exploration and development activities cannot be undertaken effectively. Access limitations can be explicit, such as recent moratoria applied to shale exploration and development in some areas. Limitations can occur less explicitly, resulting from ineffective or unpredictable permitting regimes, or public opposition. Recent advancements in technology and operating practices may be able to alleviate some environmental concerns that originally contributed to these access restrictions. Policymaking on issues affecting access should reflect a balance of economics, energy security, and environmental protection.
31
private support. Therefore, private investment cannot be counted on to perform this work. In other cases, the intellectual property developed by research is better held as a public good rather than being held privately. This can occur when the benefits of the research would accrue to the United States as a whole, yet do not meet the criteria of any individual company to justify the investment.
Recommendation
The NPC makes the following recommendations regarding other policies to support prudent development of natural gas and oil resources: Policymakers on issues affecting access should reflect the balance of economic, energy security, and environmental issues, and consider technology and operational advancements that allow environmentally responsible development. Revise policies applicable to frontier areas with long lead times, challenging physical conditions, or new technology applications (e.g., deep offshore Gulf of Mexico and Arctic).
Allow the length of leases to correspond
federal agencies may be appropriate homes for a range of research and technology development efforts, the Department of Energy should lead in identifying, in some cases funding, and in other cases supporting public-private partnerships for research and development on energy and certain environmental issues of national interest (e.g., precommercial issues or issues where companies cannot retain intellectual property). Examples where federal involvement is needed include:
The environmental impact of oil spills
and cleanup, including residual effects of chemical dispersants, and science-based risk assessments relating to methane hydrates
Science and pre-commercial technology Technology and methods for understand-
ing, quantifying, and mitigating the environmental impacts and other risks of natural gas and oil development to continue to improve the environmental performance of exploration and development activities currently off limits to exploration and production.
Assessments of resource base in areas
to the long development lead times necessary to allow for appropriate incentives for private-sector investments in exploration and prudent development.
Maintain tailored royalty relief targeted
towards supporting pre-commercial investment by early adopters of new technology or entrants into new types of resources with potential for the long-term resource development.
Better Reflect Environmental Impacts in Markets and Fuel/ Technology Choices

Potential Policies for Internalizing the Cost of Carbon Impacts into Fuel Prices
In recent years, the substitution of natural gas for coal in electric power generation has decreased GHG emissions. Moreover, if the EPAs proposed non-GHG rules for power plants take effect, additional GHG emissions reductions are expected to occur. In his letter asking the NPC to conduct this study, the Secretary of Energy asked the NPC to examine the contribution that natural gas could make in a transition to a lower carbon fuel mix. He did not ask the NPC to weigh in on the merits of adopting a climate policy. However, the NPC does believe that any consideration of climate policy should take into account
Congress should ensure adequate funding to the Energy Information Administration for the collection, analysis, and communication of data on natural gas, oil, and other elements of the energy system. All are essential to support informed decisions by governments, private firms, and the public. Even as natural gas and oil companies continue to fund their own proprietary technology and other research, federal government agencies should also support the development of new technology. While different
32
the impacts on the national economy and competitiveness, the environment, and energy security, and be part of a global framework. The NPC recognizes, however, that the United States, with its market-based economy, will find it difficult if not impossible to substantially further decrease its GHG emissions without introducing higher costs or regulatory controls associated with GHG emissions from development, delivery, or combustion of fossil fuels. Absent a price on carbon, energy efficiency and those power sources with lower carbon intensity such as renewables, nuclear, and natural gas will tend to be undervalued as individuals, businesses, and governments make decisions. A price on carbon, implied or explicit, or similar regulatory action that prices the environmental costs of fossil fuel emissions, will help to accelerate shifts to lower carbon-intensity sources of electric power. Such policies could take the form of an explicit carbon price, such as a carbon tax, or other market mechanisms. If policymakers were to adopt a carbon-pricing mechanism, the policy should ensure that the carbon price signal is not distorted to favor one energy source over another except with respect to carbon intensity. There should be a level playing field with regard to carbon-related attributes of energy alternatives. Designed appropriately, a carbon policy could provide the economic incentive for further improvements in energy efficiency; increased use of lower-carbon fuels such as natural gas; as well as for the development of other low- to zero-emitting technologies including renewables, nuclear, and technologies that allow for capture and sequestration of CO2. Other policies can introduce an implied carbon price, such as through the use of a performance standard, a clean energy standard (CES), or coal plant retirement incentives. If the United States were to proceed with a CES, then such a CES policy should include natural gas as a qualified clean energy source for both new and existing natural gas power plants. All energy resources included in a CES should be qualified on the basis of life-cycle analysis that reflects total emissions from the fuel, including production, delivery, and combustion. A national carbon policy, incorporating the characteristics in the recommendation below, would help provide predictable signals for decisions about long-lived capital investments and allow for innovation and incremental steps towards a lower carbon energy mix. Providing clarity on carbon policy would reduce regulatory uncertainty and help business investment decisions.
Recommendation
The NPC makes the following recommendations with respect to potential policies for internalizing the cost of carbon impacts into fuel and technology choices: As Congress, the administration, and relevant agencies consider energy policies, they should recognize that the most effective and efficient method to further reduce GHG emissions would be a mechanism for putting a price on carbon emissions that is national, economy-wide, market-based, visible, predictable, transparent, applicable to all sources of emissions, and part of an effective global framework.
Should policymakers implement clean
energy standards or other electric generation performance standards, such policies should allow natural gas to qualify as a clean energy source based on relative carbon-related emissions performance. Any policy should include consideration of the impacts on the national economy and industry and should provide a predictable investment climate. To minimize adverse impacts on energy security and affordability, implementation should address the need for phase-in of carbon prices and emission controls.
Policies for Keeping Options Open for Advanced Technology for CCS
Direct and indirect policies to set a price on carbon emissions from fossil fuel combustion and delivery would value natural gas ability to provide energy with lower GHG emissions than other fossil fuels. However, if very deep reductions in GHG emissions are desired over the long run, fossil fuels, including natural gas, could play only a limited role in providing energy unless there is a means to capture and sequester the CO2 emissions from burning fossil fuels. CCS could provide such a means. Currently, CCS research is focused on coal-fired power production. However, all fossil fuels, including natural gas, would benefit from CCS; thus, CCS
EXECUTIVE SUMMARY
33
research, development, and demonstration should be fuel neutral and include options that allow for potential applications in and out of the power sector. Therefore, CCS research and development funding should include natural gas. The petroleum refining and natural gas processing industries have been separating CO2 from gas streams for decades and have invested significant research in developing technologies for making this separation. Even so, separating CO2 remains expensive. Additional research might lower this cost. There is also a need for further research on aspects of long-term geological storage. CO2 separation from flue gas on the scale of a large electric power plant has not been demonstrated to date. Full-scale demonstration projects would provide the opportunity to learn how current CCS technologies might work on a large scale. Several demonstration projects are underway and more have been proposed. CCS demonstration projects will require government support in the near term, since they will be uneconomic without a significant price on carbon. A way to reduce the cost of research and development of CCS is to combine it with commercial opportunities for using captured CO2. Enhanced oil recovery is a technique currently in use for increasing the amount of oil that can be extracted from an oil field. When CO2 is injected into certain types of oil fields for EOR, the CO2 enhances oil mobility and can increase recovery from a reservoir. This use of CO2 in EOR can be a method of geologic sequestration and it can provide first movers with repositories for scaled-up capture projects. CO2 EOR production has been increasing for the last two decades and now amounts to about 10% of onshore conventional oil volumes. There are various mechanisms to support funding for research, development, and demonstration programs, and policymakers should consider innovative methods to address support for CCS research and development. In addition, the need to develop the legal and regulatory framework to enable CCS remains as important today as it was when Hard Truths was published in 2007. These include policies that provide for a clear transfer of long-term responsibility for closed storage sites, after appropriate site integrity verification, to a government or other public entity for long-term management. 34
Recommendation
To keep the option open in the long run of using natural gas in a situation where deeper reductions in GHG emissions are desired or necessary, the NPC makes the following recommendations regarding advanced technology for CCS: The federal government should work with the states, universities, and companies in the electric, oil and gas, chemical, and manufacturing sectors to:
Fund basic and applied research efforts
on CCS such as the cost of carbon capture, geologic issues, and the separation of CO2 from combusted gases demonstration projects on a range of technologies and applications that is conducive to CCS
Develop some number of full-scale CCS
Establish a legal and regulatory framework Find mechanisms to support the use of
anthropogenic CO2 without raising its cost to users in appropriate EOR applications
Strive to be fuel, technology, and sector
neutral, and include a range of geologic storage options.
Policies for Providing Information about Environmental Footprints and FullFuelCycle Impacts
All energy choices involve trade-offs of one form or another. Environmental footprint analyses incorporate the impacts that energy choices have on a variety of impact measures, including water and air quality, land and water resource use, human health, and wildlife health. Such footprint analyses provide a method for comparing the impacts of energy resources on different environmental outcomes. For example, a wellconstructed footprint analysis would compare on a common basis the water use or land use associated with extraction of one energy resource such as shale gas development, with other energy resources such as coal or biofuels. In that example, water use could be measured in terms of energy content of the fuel or in terms of each fuels ability to power a common unit of electricity.
In theory, an environmental footprint analysis is an objective, science-based assessment of the potential positive and negative impacts of each energy source. In practice, however, environmental footprint analyses are in early stages of development, with analyses exhibiting different techniques for measuring impacts and widely varying assumptions that often end up producing apples-to-oranges comparisons across fuel and energy resources. There are technical issues such as incomplete data and the lack of consensus around quantification of impacts and risks. This latter fact complicates the ability of this potentially important technique to provide policymakers with useful information to evaluate the relative importance of the different impacts. Moreover, the different resource types for the same fuel may have different impacts, such as with shale gas versus conventional gas. Environmental footprint results, however, are not intended to be a rationale for not mitigating the impacts of any fuel. Policymakers should refine their understanding of the life-cycle and environmental footprint of energy sources, including natural gas and oil, as part of providing a high-quality information base for making decisions about energy choices that reflect the different nature and intensity of impacts. Information from environmental footprint analyses could be incorporated into analyses used in making investment and purchasing decisions by consumers, producers, and state and federal governments.
In contrast to environmental footprint analysis, a full fuel cycle (FFC) analysis is a tool that can help inform choices about end-use technologies, such as a natural gas versus an electric water heater. Such an FFC analysis incorporates information about both the impacts (e.g.,CO2 emissions) of energy consumption at the point of ultimate consumption, as well as those impacts attributable to the energy consumed or vented as part of the fuel extraction, processing, and transportation. FFC analysis could also account for impacts associated with energy losses from thermal combustion in power-generation plants and energy losses in transmission and distribution to homes and commercial buildings. FFC analysis could inform energy-related policies at different levels and branches of government. FFC and footprint analyses are particularly useful in understanding the complete impact of energy-related decisions on total energy consumed and total emissions, especially when comparing two or more fuel options to achieve the same end-use result. FFC analysis could be applied in various decision-making settings, such as: development and implementation of appliance and building energy efficiency standards; comparisons of different technology choices such as a natural gas water heater to an electric water heater; home energy rating systems (HERS) index; and decisions about whether to approve power plant applications. Continued development of FFC methodologies used to assess environmental benefits and costs of energy supplies would be instructive to policymakers, consumers, and the industry alike.
Recommendation
The NPC makes the following recommendations on environmental footprint analyses to enhance the evaluation of the environmental impact of energy resource choices: The federal government should support the development of consistent methodologies for assessing environmental footprint effects such as impacts on water and land. As sound methodologies are established and vetted, regulators and other policymakers should use environmental footprint analyses to inform regulatory decisions and in implementing other policies where energy resource choices involve economic and environmental trade-offs.
Recommendation
The NPC makes the following recommendations for full fuel cycle analyses to enhance the evaluation of the environmental impact of energy choices: The federal government should complete development of and adopt consistent methodologies for assessing full fuel cycle effects. As sound methodologies are established, regulators and other policymakers should use full fuel cycle analyses to inform regulatory decisions and implementation of other policies where fuel and technology choices involve energy and environmental trade-offs.
EXECUTIVE SUMMARY
35
Enhance the Efficient Use of Energy

Given the importance of energy efficiency and the continuing availability of untapped economical efficiency opportunities, the NPC finds that stronger action is still needed: To enhance efficiency of energy use in buildings and appliances, through: Continued progress to adopt stronger efficiency standards for buildings and appliances Regulatory changes to remove the disincentives for natural gas utilities and electric utilities to deploy energy efficiency measures. To eliminate barriers to combined heat and power as a way to increase the efficiency of electricity production.
local authorities. To help state and local governments, the federal government can further support development and periodic update of national model energy codes, allowing and encouraging states to adopt the most recent of such codes.34 These model codes are typically updated on a three-year schedule. The federal government can also provide technical assistance, training, and other measures to improve state and local ability to enact and enforce codes. While building codes typically apply only to new structures or major renovations, appliance standards can reduce energy consumption in existing buildings. Efficient new appliances in the residential and commercial sectors could reduce energy consumption and, in turn, GHG emissions from these sectors by 12% and 7%, respectively. FFC analysis could provide the basis for these appliance standards.35
Enhance Efficiency of Energy Use in Buildings and Appliances

Building and Appliance Efficiency Standards
Buildings constitute a major source of demand for power, space heating and cooling, and lighting. In many situations, avoiding energy consumption through installation of more efficient appliances or changes to the building shell can be the most costeffective strategy for satisfying customers energy needs. Compared to implementing energy efficiency, all other energy resources and technologies involve trade-offs among economic, environmental, and energy security objectives. The 2007 NPC Hard Truths report identified many energy efficiency policy options, most of which are still applicable today. Implementing energy-efficient technologies can reduce the need to produce, deliver, and transform energy, thus avoiding emissions and resource use, mitigating environmental and health impacts, saving consumers money, and enhancing energy security. For instance, if the United States used energy at 1973 efficiency levels in all sectors of the economy, about 56% more energy would be consumed today equal to another 52 quadrillion Btu that otherwise would have had to be extracted, delivered, combusted, or otherwise harnessed to produce usable energy for consumers needs. Increasing energy efficiency can thus provide long-term benefits. Significant energy savings have been achieved in the United States through building codes and appliance and equipment standards. Building codes are administered by the 50 states and by thousands of 36
Recommendation
The NPC makes the following recommendations to support the adoption of energy efficiency in buildings and appliances: The federal government should continue to support the updating of national model building codes issued by existing institutions and to provide technical assistance, training, and other support for state and local enactment and enforcement of the updated codes. The federal government should continue to update energy efficiency standards for appliances and equipment over which it has statutory authority. Federal and state governments should consider incentives for products and buildings that are more efficient than required by laws and standards, such as Energy Star qualifying products. State and local governments should adopt programs to support cost-effective energy efficiency in buildings.
34 The International Energy Conservation Code (IECC) issued by the International Code Council (ICC) develops national model energy codes for residential buildings. The American National Standards Institute (ANSI), the American Society of Heating, Refrigerating, and Air-Conditioning Engineers (ASHRAE), and the Illuminating Engineering Society of North America (IESNA) Standard 90.1 are national model energy codes for commercial buildings. 35 See Chapter Four.
Utility Regulatory Policies to Support Greater Cost-Effective Energy Efficiency

Gas and electric utilities are natural entities to provide some types of energy efficiency programs, such as installing weather-proofing or distributing appliance rebates, because those utilities have information about the consumption patterns of their customers, have an ongoing relationship with them, and often have the expertise to implement energy efficiency programs. Moreover, treating energy efficiency as a resource in their portfolio of supply options can help utilities deliver supply for their customers at lower overall costs. Under traditional ratemaking policies, however, utilities that sell electric power or natural gas to enduse consumers have the incentive to sell more of their product to consumers once rates have been set: higher sales means higher revenues and lower sales means just the opposite. To overcome this disincentive, ratemaking policies should align the financial interests of both electric and gas utilities with those of their customers in providing cost-effective energy efficiency measures.
or heating and produce electricity as a secondary product for their own consumption or for sale. CHP can operate at nearly 70% energy-efficiency rates versus about 32% for base-load coal plants. Today CHP accounts for almost 9% of total electricity produced. Greater use of CHP can provide a significant opportunity to lower energy costs and thus improve the competitiveness of manufacturing, while providing larger societal benefits such as improving overall efficiency of power generation, lowering emissions, increasing reliability of the electric grid, and reducing transmission losses. CHPs power can be used internally or sold to the electricity grid. In many areas, regulatory barriers prevent otherwise economic investments in CHP. These barriers include rules relating to interconnecting CHP facilities to the grid, policies limiting the sale of CHP power to the market, problems with pricing, and the ability to enter into long-term contracts for the power output from CHP. Greater flexibility, for instance, is needed to allow manufacturing facilities to sell power to one another, or in regulated states to wheel power from one facility to another. Additionally, typical environmental regulations also measure emissions of power combustion as a function of heat input (e.g., emissions per Btu consumed) rather than emissions associated with output (e.g., emissions per kilowatt-hour of output). This regulatory design disadvantages CHP units and other, more efficient technologies. Higher efficiency generally means lower fuel consumption and lower emissions of all pollutants.
Recommendation
The NPC makes the following recommendation to remove the disincentives for natural gas utilities and electric utilities to deploy energy efficiency measures: State and federal utility regulators should adopt for utilities:
Ratemaking policies to align utility finan-
cial incentives with the adoption of costeffective energy efficiency measures cost-effective energy efficiency so as to support the adoption of cost-effective energy efficiency measures on a timely basis.
Recommendation
The NPC makes the following recommendations to eliminate the barriers to CHP and thus increase the efficiency of electricity production in the United States: State and federal utility regulators should adopt policies for both natural gas and electric utilities that remove barriers to CHP in interconnection, power sales, and power transfers. Policymakers should include CHP and energy efficiency in any clean energy standard. The EPA should use output-based performance standards for emissions from power generation, including CHP, as a means to reflect inherent energy efficiency differences in power generation technologies.
Goals and targets for the deployment of
Remove Barriers to Combined Heat and Power to Increase the Efficiency of Electricity Production
Another opportunity for energy savings comes from combined heat and power (CHP) facilities. Such facilities can function within industrial plants such as paper mills or chemical plants. CHP can also be found in large institutions such as universities or hospitals. These facilities produce steam for industrial purposes
EXECUTIVE SUMMARY
37
Enhance the Regulation of Markets

In large part, the U.S. economy relies on open markets for goods and services that are influenced by government policy and regulation. Government regulation creates the rules of the road for markets. Accordingly, the design and implementation of regulations matter to accomplish desired results without introducing needless restrictions or costs. In this study, the NPC found three areas where changes to government regulation would enhance the functioning of energy markets and promote the goals of prudent development of natural gas and oil resources, and national economic prosperity, environmental sustainability, and energy security. These areas for improved regulation are: Mechanisms for utilities to manage the impacts of price volatility Harmonization of market rules and service arrangements between the wholesale natural gas and wholesale electric markets Environmental regulatory certainty affecting investments and fuel choices in the power sector.
Moreover, other factors provide further dampening on the potential for natural gas price volatility. First, substantial investments in LNG import capacity made over the past decade could now serve almost one-third of annual U.S. demand. Second, new investments have been made in natural gas storage. Third, some states use demand response and energy efficiency in order to manage price volatility. Natural gas prices are currently low in comparison to recent history, making gas-fired generation attractive relative to coal in some situations. One form of risk faced by builders of new natural gas-fired power plants is the perception that natural gas prices are more volatile than the prices of competing fuels such as coal. This perception is grounded in historical experience when utilities made investments in (or purchases of power from) natural gas-fired power generation technologies only to have the prices unexpectedly rise. The price increases created difficulties, as these costs needed to be allocated between producers and consumers in states with traditionally regulated electric utilities and natural gas utilities. Some regulators and electric utilities may fear another spike in prices, and be reluctant to engage in another era of gas-fired power generation investments. Also, in many states, the regulatory legacy resulting from outof-market, take-or-pay contracts from several decades ago creates regulatory risk and a barrier for electric and gas utilities, if they were to enter into long-term contracts for natural gas and then gas prices change in ways that introduce questions about the prudency of those original contract decisions. Even where various contract instruments were used more recently for price hedging purposes, some utilities have been subject to hindsight review by state utility commissions and more recently have had to refund some hedging costs to ratepayers. These experiences with regulatory risk have made investment in gas-fired generation less attractive for utilities.
Mechanisms for Utilities to Manage the Impacts of Price Volatility

Crude oil and natural gas price volatility poses a challenge to the natural gas and oil industry and the consumers of its products. Volatility is a measure of the pace and magnitude of price changes. Price changes send signals to consumers and producers that lead them to adapt their behavior to match market conditions. Consumers tend to consume more when prices are lower and less when prices rise. Higher prices tend to encourage the development of additional supply, while lower prices tend to discourage additional supply. Well-functioning and transparent commodities futures markets provide producers and consumers of crude oil and natural gas the ability to mitigate price volatility. North American natural gas markets, with vast domestic supplies, have been relatively insulated from global supply and demand shocks. Despite this, there have still been fluctuations in U.S. natural gas prices due to supply and demand imbalances, especially in the past decade. The recent development of unconventional natural gas resources, however, is dramatically increasing supply relative to demand and dampening the expectation of future price volatility. 38
Recommendation
The NPC makes the following recommendations to allow natural gas utilities and electric power utilities to manage their natural gas price risk: The NPC supports changes in regulatory policy that remove regulatory barriers from utilities managing their natural gas investment portfolios using appropriate hedging approaches,
including long-term contracts. Any such rules should not impede the ability of utilities to appropriately hedge their price risk. Regulators (such as state utility commissions) and other policymakers should allow market participants such as utilities to use mechanisms to mitigate and manage the impacts of price volatility. These mechanisms include long-term contracts for natural gas, use of hedging instruments by regulated entities like utilities, and investment in storage facilities.
Harmonization of Market Rules and Service Arrangements between the Wholesale Natural Gas and Wholesale Electric Markets
From 2000 to 2010, the use of natural gas for power generation has increased from 16 to 24% of total electric sector generation. In terms of fuel use, the power sectors use of natural gas grew from 14 to 20 Bcf/d (rising from 22 to 31% of total gas demand). Natural gas use for power generation is expected to increase further in the future, in light of three factors: A change in expectations about North American natural gas supply and costs due to the economic viability of shale gas development. Concerns about high and volatile natural gas prices, flat production, and increasing LNG imports have changed to forecasts of lower and more stable natural gas prices and abundant North American natural gas supplies that could meet almost any natural gas demand requirement.36 An expectation of strong growth in intermittent renewable generation capacity that increasingly requires backup by gas-fired generation to stabilize grid operations. An expectation of substantial retirements of coalfired generation in the next few years as a consequence of implementation of the EPAs proposed non-GHG regulations, combined with lower gas price expectations.
36 See, for example, EIA, 2011 Annual Energy Outlook, Reference Case wellhead price forecast for 2030 declined from $7.80 (2007$) per MMBtu for the 2009 Reference Case to $5.66 (2009$) for the 2011 Reference Case.
Further growth in natural gas use for power generation, however, should not be taken for granted. The increased use of natural gas for electricity production, especially during peak periods in regional gas and electric markets, is raising concerns about potential operational problems for both pipeline operators and power generators. Some power generators have identified some terms and conditions of natural gas services that are inhibiting them from building and operating gas-fired generation plants.37 Conversely, some pipelines have stated that they are not being adequately compensated for providing service to gasfired generators that are backstopping intermittent renewables.38 Accordingly, federal and state regulators and industry leaders are calling for more formalized coordination between the electric and gas sectors. This will not be an easy task. Both the natural gas pipeline network and the electric transmission grid operate under different complex systems of rules and regulations that have evolved independently over decades. For example, the natural gas industry uses a standardized definition of an operating day, but the power sector has multiple definitions of operating days. The scheduling rules and timelines for power generators (e.g., for day-ahead and real time markets) may not synchronize between electric control areas or with pipeline capacity nomination schedules or rights. Gas-fired generators not holding firm pipeline transportation frequently have to commit power to the regional electricity grid before they have the assurance of pipeline capacity. With the prospects that natural gas will become an even larger supply source for power generation, and with the increasing need for natural gas generation to backstop intermittent renewable generation, coordinating these respective operating and regulatory systems will become increasingly complicated. As natural gas and electric markets become more entwined, greater coordination between the two will be required. One way to enhance this coordination and to minimize surprises is to increase the transparency of operations. The Federal Energy Regulatory Commission has done this for natural gas markets by requiring interstate pipelines to post on the web
37 See Chapter Three for a more complete discussion of issues relating to the interaction of natural gas and electric wholesale markets. 38 INGAA Foundation, Firming Renewable Electric Power Generators: Opportunities and Challenges for Natural Gas Pipelines, March 2011.
EXECUTIVE SUMMARY
39
extensive data on their operations. Increasing the information about generation and transmission operations would increase transparency and would benefit the smooth functioning of the market. Another interdependency issue that needs to be addressed is the recovery of costs incurred by pipelines in providing service to gas-fired generators and, in turn, the recovery of those costs by gas-fired generators from electric customers. The diversity of various organized and non-organized wholesale power markets requires different approaches. Finally, there is an expectation that any retirementrelated reduction in coal-fired generation can be met, to some extent, by existing gas-fired generation. However, none of the retirement studies examined whether there were any electric transmission bottlenecks to doing so.
Transmission operators should identify any transmission bottlenecks or power market rules that limit the ability of natural gas combinedcycle plants to replace coal-fired generation.
Environmental Regulatory Certainty Affecting the Power Sector

The EPA is in the process of finalizing a number of regulations that will affect the power sector over the next several years. These include the Clean Air Transport Rule (now finalized and called the Cross-State Air Pollution Rule); the proposed Air Toxics rule (also known as the Maximum Achievable Control Technology rule); and proposed regulations regarding cooling water intake structures (the 316(b) Rule under the Clean Water Act); and coal combustion byproducts (coal ash). Compliance costs associated with these regulations may contribute to some power plant owners decisions to retire some coal-fired power plants rather than retrofit them to comply with the new environmental rules. There is debate in the industry with respect to costs, benefits, and effects on reliability. Economics suggest that natural gas generation will be a likely source of power to replace generation from retired coal units. According to studies reviewed by the NPC, the estimated amount of coal-fired capacity that will retire through 2020 ranges from 12 GW to 101 GW of capacity. Based on the study average of 58 GW, this represents about 6% of total U.S. generating capacity, or around 18% of coal-fired capacity. If this amount of coal-fired generation is replaced by gasfired generation as a result of these regulations, there could be a decrease in power sector CO2 emissions of 11% of total emissions by 2020. Other impacts would include lower electric power sector emissions of sulfur dioxide, nitrogen oxides, and mercury, with reductions of 19%, 16%, and 12%, respectively, below 2005 levels. Current uncertainty regarding the timing and content of some of the pending EPA regulations contributes to some power plant owners and operators waiting to make decisions on affected power plants and on alternatives in the marketplace. These decisions may include whether and when to retire aging coal-fired power plants, as well as whether and when to build other generation types, including natural gas generation. Increasing the certainty with respect to the timing of new regulations would support timely investment decisions affecting an important amount of power
Recommendation
The NPC recommends continuing the efforts to harmonize the interaction between the natural gas and electric markets: The Federal Energy Regulatory Commission, the North American Electric Reliability Corporation, the North American Energy Standards Board, the National Association of Regulatory Utility Commissioners, and each formal wholesale market operated by the Regional Transmission Organizations should, with robust participation from market participants, undertake to:
Develop policies, regulations, and standard-
ized business practices that improve the coordinated operations of the two industries and reduce barriers that hamper the operation of a well-functioning market
Increase the transparency of wholesale elec-
tric power and natural gas markets

Address the issue of what natural gas ser-
vices generators should hold, including firm transport and storage, and what services pipeline and storage operators should provide to meet the requirements of electricity generators as well as compensation for such services for pipeline and storage operators and generators 40
generation capacity and regarding impacts on fuel markets. Resolution of the EPA rules, as well as compliance timelines and implementation decisions affecting individual plants, must take into consideration reliability impacts, recognizing that there are a variety of tools available to address location-specific reliability issues.
Support the Development of Intellectual Capital and a Skilled Workforce

Compared to other industries, the workforce in the natural gas and oil industry and the agencies that regulate them has an older average age. A large gap exists between the number of retiring technical professionals and the number of graduates coming out of junior college, college, and graduate school with the knowledge and skills required to work in the industry. Figure ES-12 illustrates this for one segment. This leads to potential workforce challenges for the industry and its regulators. Part of this is pure demographics, as the baby boomer generation has begun to retire from the workforce. But there also is not enough industry activity on university campuses. Moreover, government study grants to undergraduate and graduate-level engineering and geosciences projects often do not relate to the natural gas and oil industry. Despite a recent uptick in enrollments in petroleum engineering and natural gas and oil-focused geosciences programs, the
Recommendation
The NPC makes the following recommendation to provide more regulatory certainty to the power sector: Policymakers should take into account the benefits for market conditions from the finalization of EPA regulations affecting the power sector, especially those regulations not related to controlling GHG emissions. These benefits include reduced uncertainty in the market and provision of near-term investment signals, as well as the reduction of emissions of sulfur dioxide, nitrogen oxide, mercury, and particulates, along with collateral reductions of GHG emissions from power generation.
Figure ES-12. More Petroleum Engineers are Approaching Retirement (2010)

WAS Figure ES-11, ES-13 20
Figure ES-12. More Petroleum Engineers Are Approaching Retirement (2010)
PERCENT OF WORKFORCE
10
0 0 <20 20 24 25 29 30 34 35 39
Source: Society of Petroleum Engineers.
40 44 45 49 AGE RANGE
50 54
55 59
60 64
65+
EXECUTIVE SUMMARY
41
prospective graduates will not have the experience or the raw numbers to replace the number of retiring, well-seasoned professionals. Increased support for new faculty positions and research programs could address this problem at various levels of higher education: in community colleges, universities, graduate programs, faculty appointments, and in various fields (in the geosciences, in addition to other areas of earth sciences, engineering, below-surface-water hydrology, and environmental programs). In addition, there is evidence that support at the K-12 (kindergarten to 12th grade level) would also be helpful.39 Because science literacy is important for public understanding of energy issues, energy science should be included in curricula at these levels.
Congress should provide financial support for higher-education programs, including faculty positions and research programs in areas of national interest related to energy resources. The NPC also supports the recommendations of the National Academy of Sciences Rising Above the Gathering Storm with respect to the need to move the United States K-12 education system in science and mathematics to a leading position by global standards.
CONCLUSIONS
The NPC reiterates the important findings of this study: The North American natural gas resource base is very large indeed, a size that has only become apparent over the last half decade. Natural gas plays a critical role in supplying a quarter of the United States energy and what is likely to be a growing share of electric generation, including enabling renewable energy. Similarly, the oil resources are also very large, with major opportunities for development. The United States needs these resources to reduce oil imports even after continued efforts to improve energy efficiency, and even as the nation transitions to a lowercarbon energy system. Realizing the benefits of these natural gas and oil resources requires environmentally responsible development of them in all circumstances, continually taking advantage of new technologies and evolving effective practices. That is the route forward for advancing Americas economic, environmental, and energy security objectives.
Recommendation
The NPC makes the following recommendations to increase the number of qualified natural gas and oil professionals: Natural gas and oil companies should review and consider increasing their financial support for educational/training activities to support the development of the next generation of professionals with knowledge and skills in the fields necessary for prudent development of the nations natural gas and oil resource base.
39 See, for example: National Academies, Rising Above the Gathering Storm, Revisited, 2010.
42
REQUEST LETTERS
AND DESCRIPTION OF THE NPC
request letters and description of the npc
prudent deVelopMent: realizing the potential of north americas abundant natural Gas and oil resources
DESCRIPTION OF THE NATIONAL PETROLEUM COUNCIL

In May 1946, the President stated in a letter to the Secretary of the Interior that he had been impressed by the contribution made through government/industry cooperation to the success of the World War II petroleum program. He felt that it would be beneficial if this close relationship were to be continued and suggested that the Secretary of the Interior establish an industry organization to advise the Secretary on oil and natural gas matters. Pursuant to this request, Interior Secretary J. A. Krug established the National Petroleum Council (NPC) on June 18, 1946. In October 1977, the Department of Energy was established and the Council was transferred to the new department. The purpose of the NPC is solely to advise, inform, and make recommendations to the Secretary of Energy on any matter requested by the Secretary, relating to oil and natural gas or the oil and gas industries. Matters that the Secretary would like to have considered by the Council are submitted in the form of a letter outlining the nature and scope of the study. The Council reserves the right to decide whether it will consider any matter referred to it. Examples of studies undertaken by the NPC at the request of the Secretary include: y Industry Assistance to Government Methods for Providing Petroleum Industry Expertise During Emergencies (1991) y Petroleum Refining in the 1990s Meeting the Challenges of the Clean Air Act (1991) y The Potential for Natural Gas in the United States (1992) y U.S. Petroleum Refining Meeting Requirements for Cleaner Fuels and Refineries (1993) y The Oil Pollution Act of 1990: Issues and Solutions (1994) y Marginal Wells (1994) y Research, Development, and Demonstration Needs of the Oil and Gas Industry (1995) y Future Issues A View of U.S. Oil & Natural Gas to 2020 (1995) y U.S. Petroleum Product Supply Inventory Dynamics (1998) y Meeting the Challenges of the Nations Growing Natural Gas Demand (1999) y U.S. Petroleum Refining Assuring the Adequacy and Affordability of Cleaner Fuels (2000) y Securing Oil and Natural Gas Infrastructures in the New Economy (2001) y Balancing Natural Gas Policy Fueling the Demands of a Growing Economy (2003) y Observations on Petroleum Product Supply (2004) y Facing the Hard Truths about Energy: A Comprehensive View to 2030 of Global Oil and Natural Gas (2007) y One Year Later: An Update on Facing the Hard Truths about Energy (2008). The NPC does not concern itself with trade practices, nor does it engage in any of the usual trade association activities. The Council is subject to the provisions of the Federal Advisory Committee Act of 1972. Members of the National Petroleum Council are appointed by the Secretary of Energy and represent all segments of the oil and gas industries and related interests. The NPC is headed by a Chair and a Vice Chair, who are elected by the Council. The Council is supported entirely by voluntary contributions from its members. Additional information on the Councils origins, operations, and reports can be found at www.npc.org. 5
NATIONAL PETROLEUM COUNCIL MEMBERSHIP 2010/2011 Term

Gary A. Adams George A. Alcorn, Sr. Robert Neal Anderson Thurmon M. Andress Robert H. Anthony Alan S. Armstrong Gregory L. Armstrong Robert G. Armstrong Gregory A. Arnold Philip K. Asherman Ralph E. Bailey Fredrick J. Barrett Riley P. Bechtel Michel Bnzit Anthony J. Best Donald T. Bollinger John F. Bookout James D. Boyd Ben M. Brigham Jon S. Brumley Philip J. Burguieres Matthew D. Cabell Kateri A. Callahan Robert B. Catell Clarence P. Cazalot, Jr. Eileen B. Claussen Kim R. Cocklin T. Jay Collins Theodore F. Craver, Jr. William A. Custard Patrick D. Daniel Vice-Chair and Commissioner Chairman, President and Chief Executive Officer Chief Executive Officer Chief Executive Officer President President Chairman, Advanced Energy Research and Technology Center Chairman, President and Chief Executive Officer President President and Chief Executive Officer President and Chief Executive Officer Chairman, President and Chief Executive Officer President and Chief Executive Officer President and Chief Executive Officer Vice Chairman, Oil and Gas President Head of Consulting Managing Director Commissioner President and Chief Executive Officer Chairman and Chief Executive Officer President President and Chief Executive Officer President and Chief Executive Officer Chairman Emeritus Chairman and Chief Executive Officer Chairman and Chief Executive Officer President, Refining and Marketing President and Chief Executive Officer Chairman of the Board and Chief Executive Officer Deloitte LLP Alcorn Exploration, Inc. Wood MacKenzie, Ltd. BreitBurn Energy LP Oklahoma Corporation Commission The Williams Companies, Inc. Plains All American Pipeline, L.P. Armstrong Energy Corporation Truman Arnold Companies Chicago Bridge & Iron Company N.V. Fuel Tech, Inc. Bill Barrett Corporation Bechtel Group, Inc. Total S.A. SM Energy Company Bollinger Shipyards, Inc. Houston, Texas California Energy Commission Brigham Exploration Company Enduro Resource Partners LLC EMC Holdings, L.L.C. Seneca Resources Corporation Alliance to Save Energy Stony Brook University Marathon Oil Corporation Pew Center on Global Climate Change Atmos Energy Corporation Oceaneering International, Inc. Edison International Dallas Production, Inc. Enbridge Inc.
NATIONAL PETROLEUM COUNCIL

Charles D. Davidson D. Scott Davis Chadwick C. Deaton David R. Demers Claiborne P. Deming David M. Demshur John M. Deutch Laurence M. Downes W. Byron Dunn Bernard J. Duroc-Danner Gregory L. Ebel Randall K. Eresman Ronald A. Erickson Behrooz Fattahi John A. Fees Fereidun Fesharaki William L. Fisher James C. Flores Douglas L. Foshee Paul L. Foster Randy A. Foutch Robert W. Gee Asim Ghosh James A. Gibbs John W. Gibson Russell K. Girling Lawrence J. Goldstein Andrew Gould Simon Greenshields James T. Hackett Gary L. Hall Frederic C. Hamilton Chairman and Chief Executive Officer Chairman and Chief Executive Officer Chairman and Chief Executive Officer Chief Executive Officer Chairman of the Executive Committee Chairman of the Board, President and Chief Executive Officer Institute Professor, Department of Chemistry Chairman and Chief Executive Officer Principal Chairman, President and Chief Executive Officer President and Chief Executive Officer President and Chief Executive Officer Chief Executive Officer 2010 President Chairman Chairman Professor and Barrow Chair, Jackson School of Geosciences Chairman of the Board, President and Chief Executive Officer Chairman and Chief Executive Officer President and Chief Executive Officer Chairman and Chief Executive Officer President President and Chief Executive Officer Chairman Chief Executive Officer President and Chief Executive Officer Director Chairman Co-Head of Global Commodities Chairman and Chief Executive Officer President Chairman and Chief Executive Officer Noble Energy, Inc. UPS Baker Hughes Incorporated Westport Innovations Inc. Murphy Oil Corporation Core Laboratories N.V. Massachusetts Institute of Technology New Jersey Resources Corporation Tubular Synergy Group, LP Weatherford International Ltd. Spectra Energy Corp Encana Corporation Holiday Companies Society of Petroleum Engineers International The Babcock & Wilcox Company FACTS Global Energy The University of Texas Plains Exploration & Production Company El Paso Corporation Western Refining, Inc. Laredo Petroleum, Inc. Gee Strategies Group, LLC Husky Energy Inc. Five States Energy Company, LLC ONEOK, Inc. TransCanada Corporation Energy Policy Research Foundation, Inc. Schlumberger Limited Morgan Stanley Anadarko Petroleum Corporation Hall-Houston Exploration Partners, L.L.C. The Hamilton Companies LLC

Harold G. Hamm John J. Hamre John A. Harju Jeffrey O. Henley John B. Hess Jack D. Hightower Stephen L. Hightower Jeffery D. Hildebrand John D. Hofmeister Forrest E. Hoglund Stephen A. Holditch Chairman of the Board and Chief Executive Officer President and Chief Executive Officer Continental Resources, Inc. Center for Strategic & International Studies
Associate Director for Research, University of North Dakota Energy & Environment Research Center Chairman of the Board Chairman, President and Chief Executive Officer Chairman, President and Chief Executive Officer President and Chief Executive Officer President and Chief Executive Officer Founder and Chief Executive Officer Chairman and Chief Executive Officer Noble Endowed Chair and Head of the Harold Vance Department of Petroleum Engineering Executive Director Chairman of the Board, President and Chief Executive Officer Executive Director, Energy Modeling Forum General Partner Executive Chairman Chairman and Chief Executive Officer President and Chief Executive Officer Past President Chairman Chairman Chairman and General Counsel President Executive Chairman Former Chairman of the Board Chairman and Chief Executive Officer Chairman of the Board and Chief Executive Officer President and Chief Executive Officer Oracle Corporation Hess Corporation Bluestem Energy L.P. Hightowers Petroleum Co. Hilcorp Energy Company Citizens for Affordable Energy, Inc. SeaOne Maritime Corp. Texas A&M University
Martin J. Houston Ray L. Hunt Hillard G. Huntington John R. Hurd Ray R. Irani Eugene M. Isenberg Terrence S. Jacobs Robert J. Johnson A. V. Jones, Jr. Jon Rex Jones Jerry D. Jordan Fred C. Julander Andy Karsner Richard C. Kelly Richard D. Kinder Peter D. Kinnear Frederick M. Kirschner John Krenicki, Jr.
BG Group plc Hunt Consolidated, Inc. Stanford University Hurd Enterprises, Ltd. Occidental Petroleum Corporation Nabors Industries, Inc. Penneco Oil Company National Association of Black Geologists and Geophysicists Van Operating, Ltd. Jones Management Corp. Knox Energy, Inc. Julander Energy Company Manifest Energy, Inc. Xcel Energy Inc. Kinder Morgan Inc. FMC Technologies, Inc. Bryn Mawr, Pennsylvania GE Energy Infrastructure

Fred Krupp Vello A. Kuuskraa Stephen D. Layton Virginia B. Lazenby David J. Lesar Nancy G. Leveson Michael C. Linn Andrew N. Liveris Daniel H. Lopez Amory B. Lovins Aubrey K. McClendon W. Gary McGilvray Lee A. McIntire Lamar McKay James T. McManus, II Rae McQuade Cary M. Maguire Kenneth B. Medlock, III President President President Chairman and Chief Executive Officer Chairman of the Board, President and Chief Executive Officer Professor of Aeronautic and Astronautics Executive Chairman Chairman, President and Chief Executive Officer President Chairman and Chief Scientist Chairman of the Board and Chief Executive Officer President and Chief Executive Officer Chairman of the Board and Chief Executive Officer Chairman and President Chairman, President and Chief Executive Officer President President and Chief Executive Officer James A. Baker III and Susan G. Baker Fellow in Energy and Resource Economics and Deputy Director, Energy Forum, James A. Baker III Institute for Public Policy Adjunct Professor, Economics Department Chairman, President and Chief Executive Officer Chairman and Chief Executive Officer Partner Chairman, President and Chief Executive Officer President Chairman President and Chief Executive Officer Chairman, President and Chief Executive Officer Environmental Defense Fund Advanced Resources International, Inc. E&B Natural Resources Management Corporation Bretagne, LLC Halliburton Company Massachusetts Institute of Technology Linn Energy, LLC The Dow Chemical Company New Mexico Institute of Mining and Technology Rocky Mountain Institute Chesapeake Energy Corporation DeGolyer and MacNaughton CH2M HILL Companies, Ltd. BP America Inc. Energen Corporation North American Energy Standards Board Maguire Oil Company Rice University
F. H. Merelli Augustus C. Miller David B. Miller Merrill A. Miller, Jr. Michael J. Miller T. O. Moffatt Jack B. Moore Michael G. Morris
Cimarex Energy Co. Miller Oil Co., Inc. EnCap Investments L.P. National Oilwell Varco, Inc. Miller Energy Company The Energy Council Cameron American Electric Power Co., Inc.
10

Steven L. Mueller James J. Mulva David L. Murfin Mark B. Murphy Richard S. Neville James E. Newsome J. Larry Nichols Patrick F. Noonan Gerardo Norcia John W. B. Northington Thomas B. Nusz Marvin E. Odum David J. OReilly Geoffrey C. Orsak James W. Owens C. R. Palmer Mark G. Papa Robert L. Parker, Jr. Donald L. Paul President and Chief Executive Officer Chairman and Chief Executive Officer President President President Principal Executive Chairman Chairman Emeritus President and Chief Operating Officer President President and Chief Executive Officer President Chairman of the Board, Retired Retired Chairman of the Board Chairman Emeritus Chairman and Chief Executive Officer Executive Chairman Executive Director of the Energy Institute and William M. Keck Chair in Energy Resources Executive Director, Center for Energy Studies Chairman of the Board, President and Chief Executive Officer President and Chief Executive Officer Chairman Former Chair President and Chief Executive Officer President and Chief Executive Officer Chairman, President and Chief Executive Officer Chairman of the Board Chief Executive Officer Chief Executive Officer Chairman of the Board and Chief Executive Officer President Former Chair Southwestern Energy Company ConocoPhillips Murfin Drilling Co., Inc. Strata Production Company Western Petroleum Company Delta Strategy Group Devon Energy Corporation The Conservation Fund Michigan Consolidated Gas Company Northington Strategy Group Oasis Petroleum, LLC Shell Oil Company Chevron Corporation Caterpillar Inc. Rowan Companies, Inc. EOG Resources, Inc. Parker Drilling Company University of Southern California
Dean, Bobby B. Lyle School of Engineering Southern Methodist University
Allan G. Pulsipher Daniel W. Rabun W. Matt Ralls Keith O. Rattie Lee R. Raymond June Ressler Corbin J. Robertson, Jr. James E. Rogers Henry A. Rosenberg, Jr. Paolo Scaroni David T. Seaton Peter A. Seligmann S. Scott Sewell Bobby S. Shackouls
Louisiana State University Ensco plc Rowan Companies, Inc. Questar Corporation National Petroleum Council Cenergy Companies Quintana Minerals Corporation Duke Energy Corporation Crown Central LLC Eni S.p.A. Fluor Corporation Conservation International Delta Energy Management, Inc. National Petroleum Council
11

Philip R. Sharp R. Gordon Shearer Scott D. Sheffield Adam E. Sieminski Timothy Alan Simon Robert C. Skaggs, Jr. Carl Michael Smith Frederick W. Smith Frank M. Stewart John P. Surma Cindy B. Taylor Dean E. Taylor Berry H. Tew, Jr. Susan F. Tierney Rex W. Tillerson Scott W. Tinker President President and Chief Executive Officer Chairman and Chief Executive Officer Chief Energy Economist, Global Markets/Commodities Commissioner, Public Utilities Commission President and Chief Executive Officer Executive Director Chairman, President and Chief Executive Officer President and Chief Operating Officer Chairman, President and Chief Executive Officer President and Chief Executive Officer Chairman, President and Chief Executive Officer Managing Principal Chairman, President and Chief Executive Officer Director, Bureau of Economic Geology and State Geologist of Texas Jackson School of Geosciences Managing Director Partner Chairman and Chief Executive Officer Chairman, President and Chief Executive Officer Executive Director Chairman and President David Mitchell Encana Professor Haskayne School of Business President President and Chief Executive Officer President and Chief Executive Officer President and Chairman Chairman, President and Chief Executive Officer Resources for the Future Inc. Hess LNG LLC Pioneer Natural Resources Company Deutsche Bank AG State of California NiSource Inc. Interstate Oil and Gas Compact Commission FedEx Corporation American Association of Blacks in Energy U.S. Steel Corporation Oil States International, Inc. Tidewater Inc.
State Geologist and Oil and Gas Supervisor Geological Survey of Alabama Analysis Group, Inc. Exxon Mobil Corporation The University of Texas
William Paschall Tosch H. A. True, III Robert B. Tudor, III William P. Utt W. Bruce Valdez J. Craig Venter Philip K. Verleger, Jr. Bruce H. Vincent John B. Walker Douglas J. Wall Cynthia J. Warner Michael D. Watford
J.P. Morgan Securities Inc. True Oil LLC Tudor, Pickering, Holt & Co., LLC KBR, Inc. Southern Ute Indian Tribe Growth Fund J. Craig Venter Institute University of Calgary Swift Energy Company EnerVest, Ltd. Patterson-UTI Energy, Inc. Sapphire Energy, Inc. Ultra Petroleum Corp.
12

John S. Watson Roger P. Webb J. Robinson West Craig E. White David W. Williams Mary Jane Wilson Timothy E. Wirth Patricia A. Woertz David M. Wood Patrick Wood, III Martha B. Wyrsch George M. Yates John A. Yates J. Michael Yeager Daniel H. Yergin John F. Young Chairman of the Board and Chief Executive Officer Interim Executive Director The Strategic Energy Institute Chairman and Chief Executive Officer President and Chief Executive Officer Chairman of the Board, President and Chief Executive Officer President and Chief Executive Officer President Chairman, Chief Executive Officer and President President and Chief Executive Officer Principal President President and Chief Executive Officer Chairman of the Board Group Executive and Chief Executive Petroleum Chairman President and Chief Executive Officer Chevron Corporation Georgia Institute of Technology PFC Energy, Inc. Philadelphia Gas Works Noble Corporation WZI Inc. United Nations Foundation Archer Daniels Midland Company Murphy Oil Corporation Wood3 Resources Vestas Americas, USA HEYCO Energy Group, Inc. Yates Petroleum Corporation BHP Billiton Petroleum IHS Cambridge Energy Research Associates, Inc. Energy Future Holdings Corp.
13
Chapter One
Crude Oil and Natural Gas Resources and Supply

Abstract
Prudent development of North American crude oil and natural gas resources should begin with a reliable understanding of the resource base, particularly as that understanding has changed significantly in recent years. It had been widely assumed for decades that natural gas and oil production potential in North America was in terminal decline. This belief was shared by governments, the public, and even the oil and gas industry, and it was one of the main filters through which energy supply and security issues were examined. To support this view, many observers referred to the Hubbert curve* delineating resource depletion, a theory that was first demonstrated by analyzing conventional oil production in the United States. On the natural gas side, the perception of imminent declining supply led to expectations that North America would soon be importing liquefied natural gas (LNG) to meet domestic demand, and thus to the construction of several new LNG regasification and import terminals in the United States and Canada. However, the widespread deployment of recent advances in drilling and completion technologies, in particular horizontal drilling and multi-stage
* The Hubbert curve was first proposed by geologist M. King Hubbert in a 1956 paper for the American Petroleum Institute. It hypothesizes that fossil fuel production follows a symmetrical bell-shaped curve, with peak production occurring when about 50% of the estimated ultimate recoverable resource has been produced. This approach correctly predicted the peak of U.S. conventional oil production around 1970 but has proved less reliable in other geographies and for other hydrocarbon resource types.
hydraulic fracturing, have dramatically changed the outlook and prospects for North American natural gas and oil supply potential. This chapter describes the revised potential for North American gas and oil supply, identifies the technology innovations responsible for expanding resource potential, and examines the implications for resource development. It sets out recent ranges of assessments of the natural gas and oil recoverable resource base in the United States and Canada, and looks at how these resources may be prudently developed, leading to productive capacity potential, depending on choices made in three areas: (1) access and regulatory regimes; (2)sustained technology development; and (3) success in managing environmental impact and risk, within the context of whether the size of oil and natural gas resources is near the high or low end of current understanding. The outline of the Resource and Supply chapter is as follows: y Summary and Key Findings y North American Oil and Natural Gas Resources y Analysis of North American Oil and Natural Gas Resource and Production Outlooks y Prospects for North American Oil Development y Prospects for North American Gas Development y North American Oil and Natural Gas Resource Development Prospects to 2050.
Chapter 1 - resourCes and supply
43
INTRODUCTION AND SUMMARY Summaries and Key Findings

Supply Summary
The North American crude oil and natural gas resource and supply system is a complex network that includes several major components: (1) the natural endowments or physical store of oil and/or natural gas in the subsurface; (2) the commercial quantities of crude oil and natural gas that can be produced from the overall subsurface source rock using known or expected technologies; (3) access to oil and natural gas resources through drilling wells or surface mining; and (4) the physical network of crude oil and natural gas pipelines to transport crude oil and natural gas to refineries and natural gas processing centers and to end-use consumers. Included in this chapter is an evaluation of the principal types of crude oil and natural gas supply within the United States and Canada, as well as those new areas of oil and natural gas resource types that could become available for development and production by the middle of this century. These include: y Arctic oil and natural gas (United States, Canada, and Greenland) y Offshore United States and Canadian oil and natural gas (non-Arctic) y Onshore natural gas (including conventional and unconventional sources) y Onshore conventional oil (including enhanced oil recovery [EOR] operations and opportunities) y Unconventional oil (including Canadian and U.S. oil sands, oil shale, and tight oil) y Methane hydrates. (This study does not include a detailed review of oil and gas resource and development potential in Mexico, although hydrocarbon prospects in that country are described in a topic paper that is available on the National Petroleum Council (NPC) website [www.npc.org] and briefly summarized later in this chapter. Mexico is geographically part of North America and is recognized as an important crude oil supplier to the United States as well as a current importer from the United States of approximately 1 billion cubic feet per day [Bcf/d] of natural gas.) 44
The principal focus of this analysis is the United States and Canada. Both countries are major oil and natural gas producers with very significant future oil and gas supply potential. This chapter describes and analyzes the infrastructure systems that make these resources available to markets. It covers the current situation as well as a framework for developing infrastructure needs over the next several decades. For natural gas, the infrastructure system includes field gathering systems, gas processing facilities, gas storage fields, and long distance high-capacity transmission pipelines. Natural gas liquids infrastructure is also discussed, given the potential for growth in liquids, such as ethane, propane, and butane, extracted from produced natural gas. This study does not report on local utility distribution pipeline systems that deliver natural gas to residential, commercial, and industrial customers. In the case of oil, infrastructure to transport produced crude oil from production areas to refineries is also assessed. The parallel NPC study on Future Transportation Fuels, referred to in the Preface, will assess refinery capacity, upgrading, and downstream infrastructure for refined products, which are not within the scope of this study. Environmental questions related to oil and natural gas production and transportation are discussed in detail in Chapter Two, Operations and Environment, although their critical importance to enabling the development of supply potential in most areas is described here.
Data Sources
Multiple data and analysis sources inform this chapter. It relies first on existing, publicly available studies to compare and contrast resource estimates and production views to 2050. In addition, the Resource & Supply Task Group conducted a confidential survey of proprietary outlooks, primarily from oil and gas companies and specialized energy consulting groups, to add additional breadth and depth to the source material. Details include: y Public Data. Approximately 50 publicly available energy outlooks from government, industry, and consultant sources were examined. The U.S. and Canadian governments provided integrated energy outlooks e.g., the Energy Information Administration (EIA), the National Energy Board of Canada (NEB), the International Energy Agency (IEA), the
United States Geologic Survey (USGS), and the Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE). y Proprietary Data. More than 80 energy and consultant companies received a request to complete a comprehensive resource, production, and supply chain survey. More than 25 industry and consultant templates were returned. The public accounting firm Argy, Wiltse & Robinson, P.C. received, aggregated, and protected the proprietary data responses. The aggregation resulted in 12 unique outlook cases.
ments to include much higher volumes of gas in the technically recoverable categories. This change, above all, has transformed the outlook for natural gas supply in North America from one of declining domestic supply and increasing imports, to one of abundant supply from within the region for decades to come, most likely at moderate cost. A 2011 Massachusetts Institute of Technology (MIT) study on North American natural gas analyzes the range and cost of natural gas resources. The MIT study lays out a number of different cases based on various assumptions, from which this study has chosen three to illustrate the sustainability of the resource at current or greatly expanded market size. These cases are summarized in Figure 1-1, where the horizontal axis shows total ultimately recoverable natural gas resources, under the three cases, and the vertical axis shows wellhead cost of supply (not to be confused with the market price of natural gas, in which many other factors come into play). The three cases featured here are the mean resource estimate with current technology (in green), the mean resource estimate with advanced technology (in blue), and the high resource estimate with advanced technology
Resource Summary
Natural gas resource assessments have recently increased as a result of technologies that can produce gas economically from source rock (such as tight gas, shale gas, and coalbed methane) in ways previously not feasible (the so-called shale gas revolution). Although these sources of natural gas have been known for many years, the application of certain technologies, including drilling horizontal wells and hydraulic fracturing, has enabled resource assess-
Figure 1-1. North American Natural Gas Resources Can Meet Decades of Demand ALSO used as Fig. ES-3
Figure 1-1. north american natural Gas resources Can Meet decades of demand
10 WELLHEAD DEVELOPMENT COST (2007 DOLLARS PER MILLION CUBIC FEET)
LOW DEMAND HIGH DEMAND
8
RANGE OF CUMULATIVE DEMAND 20102035
6
MIT MEAN RESOURCE CASE MIT ADVANCED TECHNOLOGY CASE MIT HIGH RESOURCE TECHNOLOGY CASE
4 3 0 1,000 TRILLION CUBIC FEET
2,000
3,000
Notes: The vertical axis represents estimated wellhead cost of supply. The cost of supply can vary over time and place, in light of di erent regulatory conditions, di erent technological developments and deployments, and other di erent technical conditions. In none of these cases is cost of supply to be interpreted as an indicator of market prices or trends in market prices, since many factors determine prices to consumers in competitive markets. MIT = Massachusetts Institute of Technology. Source of MIT information: The Future of Natural Gas: An Interdisciplinary MIT Study, 2011.
45
(in red). Because these technologies were viewed as advanced when the MIT study was developed but are now considered standard by the industry, they do not take into account future technology improvements. Figure 1-2 highlights a number of natural gas resource assessments from more than a decade and clearly shows the difference between estimates before and after unconventional gas began to be understood in the mid-2000s. Over an even longer period, it has been generally observed that oil and natural gas recoverable resource estimates tend to increase. The range of future technically recoverable natural gas resources used here is between 1,900 and 3,600 trillion cubic feet (Tcf), representing about 25% of global natural gas resources. This does not include potentially vast resources of methane hydrates present in the Gulf of Mexico and in the North American Arctic, some of which could become economically producible in the 20352050 time frame if development of technologies for production and environmental impact management is successful. North America is home to world-class crude oil resources in several different basins and plays. The mean undiscovered technically recoverable oil resources potential in the U.S. lower-48 offshore is estimated at nearly 60 billion barrels, of which production has only begun in one area, the central and western zones of the Gulf of Mexico, with scope for significant further development in other offshore zones. The Arctic, another world-class resource area, contains an estimated 100 billion barrels of recoverable oil (and an additional equivalent amount in recoverable natural gas). The Alberta oil sands have a recoverable oil potential of more than 300 billion barrels. These resources are relatively concentrated, but onshore conventional oil also has significant recoverable oil resources, estimated at close to 80 billion barrels, not including the potential for tens of billions of barrels present in low saturation and residual oil zones. Recent growth in unconventional tight oil production has highlighted a short to medium term resource that could be as high as 34 billion barrels. In the long term, oil shale plays, such as those in the Green River formation in Colorado, Utah, and Wyoming, are known to have an enormous amount of kerogen-rich oil shale deposits. Developing new commercially viable technology that heats the kerogen oil shale to produce recoverable oil could yield producible resources estimated at 800 billion barrels. 46
Production Potential
The United States and Canada are significant producers of both natural gas and crude oil, among the top world producing countries. The United States now surpasses Russia as the top natural gas producer in the world, as can be seen in Figure 1-3. Canada and the United States together now produce over 40% more gas than Russia and provide 25% of global gas supply. (Since the North American market represents about 25% of global gas demand, the region can now be considered self-sufficient in natural gas, unlike other major gas-consuming economies around the world, such as Western Europe, Japan, and China). The United States and Canada also produce crude oil at a globally significant scale. As shown in Figure 1-4, the United States is the third largest producer, behind Russia and Saudi Arabia. The U.S. and Canada together now produce 10.5 million barrels per day, or about 4% more oil than Russia. Figure 1-4 shows the positions of the United States and Canada among the top producers. Mexico also features prominently in this list, although this study does not detail Mexican oil production prospects. Oil as represented in this chart includes crude oil, condensate, and natural gas liquids. Success in achieving production levels of this magnitude has been built over many years of developing technologies, exploring new plays and improving operating practices, and has created a strong platform for enhanced production potential during the next several decades. However, the oil and natural gas industry must adhere to sound risk mitigation and prudent environmental management practices and the marketplace must be allowed to function within a framework of appropriate access and regulation.
Making Reserve Development Choices

This study has examined the potential for resource development and production potential from all the identified major current and future sources of natural gas and oil production in North America. The objective was to identify the level of production that could be achieved by 2035, in a high potential environment in which: (1) reasonable resource access will be available; (2) appropriate regulation will be applied; (3) industry will continue improvements in production and environmental operating practices; and (4) there will be sustained research and
Figure 1-2. u.s. natural Gas technically recoverable resources are Increasing
Figure 1-2. U.S. Natural Gas Technically Recoverable Resources Are Increasing
4,000
NATIONAL PETROLEUM COUNCIL (NPC)
POTENTIAL GAS COMMITTEE
ENERGY INFORMATION ADMINISTRATION/ DEPARTMENT OF ENERGY/MINERALS MANAGEMENT SERVICE
3,000
INTERSTATE NATURAL GAS ASSOCIATION OF AMERICA
ICF INTERNATIONAL, INC.
AMERICAS NATURAL GAS ALLIANCE
NPC SURVEY LOW
NPC SURVEY MID
NPC SURVEY HIGH
TRILLION CUBIC FEET
2,000
1,000
0 2003
1999
2000
2004
2005
2006 YEAR
2007
2008
2009
2010
2011
Note: Minerals Management Service (MMS) no longer exists; its functions are now administered by the Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE). For a detailed discussion of the survey that the NPC used to prepare these low, mid, and high estimates, see the Preface as well as this chapter. Sources: Potential Gas Committee; Energy Information Administration; Department of Energy; Minerals Management Service; Interstate Natural Gas Association of America; ICF International, Inc.; Massachusetts Institute of Technology; and Americas Natural Gas Alliance.
47
ALSO used as Fig. ES-2
Figure 1-3. united states and Canada are among leading natural Gas producers
60
40
20
USA
RUSSIA
CANADA
IRAN
QATAR
NORWAY
CHINA
SAUDI INDONESIA ALGERIA ARABIA
Figure 1-4. United States and Canada Are among Leading Oil Producers WAS Figure ES-4
Figure 1-4. united states and Canada are among leading oil producers
12
0 RUSSIA SAUDI ARABIA USA IRAN CHINA CANADA MEXICO UNITED VENEZUELA ARAB EMIRATES IRAQ
48
development of new technologies and techniques to support development of additional resources that will become available over the long term (such as oil shale and methane hydrates). This high potential is then contrasted with a limited production potential over the same time frame, should resource development be subject to constraints, including lack of access, increased regulatory barriers, lower resource potential, or lack of technology-related research and development. Neither of these extremes represents the most likely outcome, which is likely to be a point between the two. The limited and high potential cases show the impact of resource development choices made in investment and public policy. The range of oil supply potential in the United States and Canada for each significant supply source is shown in Figure 1-5, compared with that sources production in 2010. For both crude oil and natural gas, the end points for the range of potential for each resource type are not intended to be additive, since both market needs and investment focus will determine the actual mix
of resource development. The ranges indicate which supply sources can have the most impact over the time frame covered by this study, and which could be most affected by the choices made in either the constrained or unconstrained cases. North American oil production growth potential can come from a number of sources, including Canadian oil sands, the U.S. offshore (including the Gulf of Mexico), tight oil, EOR, Arctic exploration and oil shale (in that order of scope and development lead time). The point and the opportunity is that further development of these sources could lead to lower overall future declines in total U.S. and Canadian oil production. Potential for growth of these sources is summarized as follows: y Arctic oil has the scope to grow from a level of about 0.6 million barrels per day to a range of 0.30.9 million barrels per day by 2035 and considerable scope for further expansion post-2035. y Offshore, non-Arctic U.S. and Canadian oil produces about 1.8 million barrels per day and could produce between 1.8 and 2.3 million barrels per day
Figure 1-5. More Resource Access and Technology Innovation Could Substantially Increase North American Oil Production
Figure 1-5. More resource access andES-6 ALSO used as Figure technology Innovation Could substantially Increase north american oil production
NATURAL GAS LIQUIDS OIL SHALE TIGHT OIL OIL SANDS ARCTIC OFFSHORE ONSHORE CONVENTIONAL
20
UNCONVENTIONAL OIL
10
}
0 2010
{
2035 LIMITED 2035 HIGH POTENTIAL
Note: The oil supply bars for 2035 represent the range of potential supply from each of the individual supply sources and types considered in this study. The speci c factors that may constrain or enable development and production can be di erent for each supply type, but include such factors as whether access is enabled, infrastructure is developed, appropriate technology research and development is sustained, an appropriate regulatory framework is in place, and environmental performance is maintained. Source: Historical data from Energy Information Administration and National Energy Board of Canada.
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by 2035, depending on choices made to expand access and lease availability to new offshore zones and on the pace of technology development. y Onshore, non-Arctic conventional oil in the United States and Canada contributes about 3.4 million barrels per day. Access, technology and availability of CO2 for EOR are key factors that could lead to a decline to around 1.5 million barrels per day by 2035 or an expansion to over 4 million barrels per day by 2035, with these factors also playing into longer term potential. y Unconventional oil has several categories; each is at a different stage of development. The largest unconventional oil production comes from the Canadian oil sands in Alberta. These produce about 1.5 million barrels per day and by 2035 could reach between 3 and 6 million barrels per day, depending on the pace of development as influenced by access, the regulatory environment, and technology and supply chain issues. Heavy oil in Canada is a mature resource that produces about 0.4 million barrels per day, and by 2035 this could decline to about 0.15 million barrels per day or stabilize to maintain current output levels. Tight oil, such as that produced in the North Dakota/Montana Bakken play, is an emerging resource type, which has ramped up to about 0.4 million barrels per day within the past three or four years. This type of production is likely to grow to between 2 and 3 million barrels per day, depending on access to new plays and continued technology development, and the pace at which new drilling can offset decline rates of existing production. U.S. oil shale, predominantly represented by the huge deposits identified in the Green River Formation in Colorado, is a longer-term development prospect. While there have been historical attempts at production and some research projects have been underway in recent years, there is no commercial production today. It is uncertain whether this can be developed by 2035, so its potential ranges from zero to an upside of 1 million barrels per day within this time frame. In a success case, this resource would continue to grow production over a much longer period post 2035. Development of economic 50
production technologies is the key requirement for this play, with access and appropriate environmental risk management also playing a key role. Oil sands resources also exist in the United States, primarily in Utah, but these are not yet developed. They represent somewhat different challenges than the Alberta oil sands and are significantly smaller, but represent another longer-term potential prospect. By 2035, the range of output is estimated at between zero and 0.15 million barrels per day, again with longerterm growth prospects if initial activities are successful. For natural gas, the main components of supply, current and potential, are illustrated in Figure 1-6. Recent technology advances have enabled the development of widespread and large-scale tight gas and shale gas resources across North America. The study group estimated that between five and nine decades of production at moderate cost at todays market size is available from the resource base, as currently understood, if production development can continue to use critical horizontal drilling and hydraulic fracturing technologies. Natural gas supply potential can be augmented and extended with improvements in technologies to increase recovery factors or new technology development to tap into new resource types, such as methane hydrates. The dominant source of U.S. and Canadian natural gas production in the near, medium, and long terms is likely to be onshore unconventional gas, such as tight gas, shale gas, and coalbed methane, as is currently the case. In addition, other sources can play an important role: y Onshore, non-Arctic gas in the United States and Canada currently produces 24 Tcf per year. By 2035, this could grow to around 36 Tcf as required by the market, if onshore gas development is facilitated by an appropriate business environment and regulatory framework, but could decline to around 18 Tcf if development is constrained by regulatory, access, or technology restrictions. y Arctic gas, currently stranded because of lack of pipelines to market, does not contribute to current supply apart from a small quantity for local market consumption in Alaska. Depending on whether one or more natural gas pipelines are developed from
Figure 1-6. north american Natural Gas Production Potential Figure 1-6. North American natural Gas production potential
30 40+ TRILLION CUBIC FEET PER YEAR
ONSHORE CONVENTIONAL + UNCONVENTIONAL
20 30
10 20
0 10
OFFSHORE GULF OF MEXICO + ATLANTIC/PACIFIC ARCTIC 2010 LOW TIME TECHNICAL COMPLEXITY HYDRATES 2035 2050 HIGH
Note: North American oil and gas resource types have varying capabilities to in uence future supply requirements. This chart demonstrates the growth potential and technical complexity required to develop each resource. Relative bubble sizes and vertical scale indicate supply potential for each resource type in current and future views. The bubble color provides an indication of the technical complexity required to develop each resource. While many of the resource types have growth potential under the right regulatory and market conditions, those most likely to underpin future demand are what today are considered unconventional oil and gas.
the Alaska North Slope and the Mackenzie Delta, the 2035 Arctic production could range from 0 to 2.7 Tcf. y Offshore, non-Arctic natural gas currently contributes about 1.7 Tcf, almost exclusively from the U.S. Gulf of Mexico. This has declined in recent years as the resources available from the shallow water continental shelf have matured. Looking out to 2035, the range of potential offshore supply is estimated at between 2.2 and 4.8 Tcf on the high side, depending mainly on the success of new Gulf of Mexico play types and the pace and scope of opening of access to new offshore zones, particularly the eastern Gulf of Mexico and offshore Atlantic and Pacific zones. Substantial methane hydrate resources have also been identified, particularly in the Gulf of Mexico and portions of the Arctic. These could be available for development in the long term, beginning in the 20302050 period, leading to production of 110 Tcf per year by 2050, and with the potential for sustained growth over the remainder of the century. This domestic supply potential has completely transformed the outlook for imported LNG to North America. LNG regasification capacity of about 18.5 Bcf/d
was developed at multiple locations in the United States and Canada over the past decade with capacity to supply almost one-third of current market demand, anticipating expanded need for gas imports. Although this capacity may not be used to the extent foreseen, it will play a valuable role in providing flexibility of supply sources and supporting energy security. With expanded U.S. and Canadian supply potential, LNG export options are now being considered.
Infrastructure
The 2007 NPC Hard Truths study described infrastructure as a key link in the chain, connecting supply to markets, and found that knowledge of existing infrastructure and planning for new infrastructure capacity could fall short of meeting market needs. Sufficient natural gas midstream infrastructure, including gathering systems, processing plants, transmission pipelines, storage fields, and LNG terminals, is crucial for efficient delivery and functioning markets. Insufficient infrastructure, can contribute to price volatility, delivery bottlenecks, stranded gas supplies, and reduced economic activity.
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This study has examined infrastructure for both natural gas and crude oil in North America and concluded that expansion and regional change in supply sources will require new infrastructure development over the next several decades, including more than 30,000 miles of long-distance natural gas pipelines and up to 600 Bcf of natural gas storage capacity, a scale of expansion that is consistent with historical rates of system growth. Market signals and existing regulatory structures have been effective in bringing about appropriate infrastructure expansions. In particular, regulatory frameworks implemented by the Federal Energy Regulatory Commission (FERC) in the United States and the National Energy Board in Canada have supported expansion of natural gas storage and pipeline systems in recent years, and should facilitate prudent development of new infrastructure expansions in the future. As these agencies do not oversee oil pipeline permitting, developers must navigate multiple jurisdictions to construct new crude oil pipelines. Permitting has usually been completed without undue delay, but large-scale pipelines needed to supply markets from new or growing supply sources such as in Alaska or Alberta will require a more integrated approach. New infrastructure will be required to move natural gas from regions where production is expected to grow to areas where demand is expected to increase. Not all areas will require new gas pipeline infrastructure, but many (even those that have a large amount of existing pipeline capacity) may require new investment to connect new supplies to markets. In recent years, natural gas producers and marketers have been the principal shippers on these new supply push pipelines. These anchor shippers have been willing to commit to long-term, firm contracts for natural gas transportation service that provide the financial basis for moving forward with these projects. Looking ahead, producers should continue to be motivated to ensure outlets for their gas supplies via pipelines. Abundant and geographically diverse shale gas contributes to a competitive natural gas market if connected to adequate storage and delivery systems. A recent Interstate Natural Gas Association of America (INGAA) Foundation study on North American Midstream Infrastructure through 2035 found that the United States and Canada will require 52
annual average midstream natural gas investment of $8.2 billion per year, or $205.2 billion (in real 2010 dollars) total, over the nearly 25-year period from 2011 to 2035 to accommodate new gas supplies, particularly from the prolific shale gas plays, and growing demand for gas in the power-generation sector. This capital investment requirement includes mainlines, laterals, processing, storage, compression, and gathering lines.
Key Findings
y There is significant potential for sustained production at current or higher levels for natural gas and oil in the United States and Canada resulting from recent developments in technologies and increased understanding of the resource base. Declines in production, expected until fairly recently, would come as a result of policy choice, not as a consequence of resource limitations. Growth is now a real opportunity, particularly in natural gas production. Prospects for mitigating overall oil declines are improving and, if access for development and delivery improves, new sources of North American oil supply could be developed. y The public and policymakers need to be better informed on the scale of resources available and the implications to security, competitiveness, and commercial opportunity, to help reverse the longstanding perception that North American oil and natural gas is in decline or unavailable for development. y Natural gas and oil producing plays and new supply resource opportunities provide a rich and diverse portfolio of options to support North American oil and gas markets for decades to come. A portfolio approach to resource development requires sustaining current and near-term sources of production, while creating the conditions for longer-term options to be exercised with technology advances, and when environmental practices and market conditions are right. It would be a mistake to neglect segments of the portfolio because nearterm production from a current source is strong. y Much higher assessments of recoverable natural gas resources in the United States and Canada, now totaling around 3,000 Tcf or more, have given this region the opportunity to be largely self-sufficient in natural gas for many years. A portfolio of options exists, including: sustaining current large-scale
gas production from the Gulf of Mexico and from onshore conventional and unconventional gas, while also opening access; crafting appropriate regulatory frameworks; and developing technologies and production techniques to enable new sources of supply, including from Arctic exploration, new offshore areas, and methane hydrates. Importantly, the newly identified large natural gas resources appear to have a moderate cost of supply, underpinning the competitiveness of natural gas with other energy sources. y U.S. and Canadian oil production, despite its high levels, currently falls well short of satisfying demand in the region. The North American oil supply potential discussed here does not indicate U.S. and Canadian oil production could grow sufficiently to bridge this gap, unless there are also significant declines in demand for oil. Energy security considerations must, therefore, be met by openness to trade and investment with a diversity of crude oil producers around the world. However, a strong portfolio of U.S. and Canadian oil development options exists to cover current and near-term production and long-term development prospects. If these options are exploited, there are grounds for optimism that North America can continue to be a major crude oil producer to 2050 and beyond, meeting a significant proportion of its market needs. In a reasonably unconstrained case, the United States and Canada could produce up to 1518 million barrels per day by 2035, potentially a much higher proportion of regional demand than today. However, if future development were constrained it is likely that production would fall even further below market needs, requiring greater dependence on imports. Near and medium term production potential comes from the offshore Gulf of Mexico, U.S. and Canadian conventional onshore oil production, the Alberta oil sands and the emerging production from tight oil plays. In the medium to long term, significant development options have been identified in new offshore areas, the Arctic, and possibly U.S. oil shale and oil sands. y Higher end supply potential ranges described in this study must meet four prerequisites: Sound and prudent development practices that balance responsible environmental impact risk management and mitigation with the economic and energy security benefits of hydrocarbon production.
Access to the resource, where the industry can demonstrate that sound and prudent development practices will be deployed in all cases. This includes creating and sustaining a framework for access in itself as well as the terms and conditions of access such as length of leases and other lease stipulations. Predictable regulatory regimes that can evolve with advancing technology and best practices to allow long-term investment decisions within a predictable framework. Onshore, the federal government should defer to robust state regulations, recognizing that state regulators are often more familiar with regional geology and environmental conditions. Offshore, the federal government should seek input from the natural gas and oil industry in development of any new regulations, since industry expertise can inform the regulatory process and avoid unintended consequences such as delays in bringing needed supply online. Sustained technology development and deployment, appropriate for each resource type and geographic and geologic setting, covering development and production techniques and environmental risk management. Oil and natural gas companies are able to develop appropriate technologies for accessible, prospectively commercial areas, while longer term resource opportunities may require partnership with government agencies and academic institutes to ensure sustained technology development efforts occur.
Summary of Scope and Objectives

To summarize the scope and objectives of this chapter as they have been discussed earlier, the fundamental question here is how the oil and gas resources in the United States and Canada can be developed to meet long-term market needs, using a development model that ensures energy security and prudent environmental risk management, while bringing the benefits of continued and expanded development of significant resources within the region. This chapter focuses on the hydrocarbon development potential in the United States and Canada. Demand issues and operational management and environmental questions are addressed in separate chapters of the report.
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This work examines the principal oil and gas producing areas within the United States and Canada and new areas or types of oil and gas resource that could become available for development and production by the middle of the century. These include: y The Arctic (U.S., Canadian, and Greenland Arctic regions) y Offshore U.S. and Canada (non-Arctic) y Onshore natural gas y Onshore conventional oil (including EOR operations and opportunities) y Unconventional oil (including Canadian and U.S. oil sands, oil shale, and tight oil) y Methane hydrates. The scope of this work includes studies of current and future infrastructure needs for both oil and natural gas, as hydrocarbon development can only proceed if there is a way to transport produced volumes to market. Therefore, we have examined the current pipeline system for crude oil between the major U.S. and Canadian producing regions and the major refining centers, analyzed future pipeline needs, and described the regulatory and investment framework necessary for future pipeline development. This covers the major crude oil pipeline systems that deliver to refineries, but does not cover refined product pipeline systems downstream of the refining facilities. For natural gas, the analysis covers major interstate transmission pipeline infrastructure, as well as gas storage and processing facilities, but does not address lower-pressure local utility natural gas pipeline distribution systems. Natural gas liquids infrastructure needs are also included within the scope of this analysis. Although LNG is discussed in one of this studys topic papers, it is not a major focus of this work. However, LNG is referenced within this chapter, both as a source of imported natural gas as well as a potential future option for developing export capacity. The objectives of this chapter are to: y Describe the current best level of understanding of the technically recoverable resource base for U.S. and Canadian oil and natural gas available for development in the first half of this century. 54
y Describe the range of production potential until 2035 for each of the identified oil and gas resource types and regions. This range sets out to encompass a reasonably unconstrained production pathway, in which technological and development choices facilitate development and todays regulations are not significantly tightened, down to a reasonably constrained production pathway in which regulatory choices, access limitations, or a slower pace of technological development create barriers to development. Expected development pathways lie between these two limits. y Describe the key current and future advances in technologies that will allow development and production of this regions oil and gas resources, and comment on the role of innovation led by the U.S. oil and gas sector and public research initiatives in expanding global oil and gas resource potential. y Assess current and future major infrastructure requirements to support oil and gas development and describe the key factors that could either enable or delay new infrastructure or modification of existing pipeline delivery systems and natural gas storage facilities. y Describe how oil and gas production potential could develop to 2050 and beyond, through technological improvement and/or access to new resource types. y Frame the implications of the oil and gas resource development potential identified for investors and policymakers. The contents of this chapter are supplemented and completed by a set of detailed topic papers on each of the major study areas, available on the NPC website.
Summary of Methodology
The NPC constituted a task group within the broader scope of this study to specifically focus on oil and gas resources and productive potential within North America. The Resource & Supply Task Group divided the work among nine specialized subgroups, each focusing on a specific portion of the study. The subgroups are as follows: y Oil and gas resources and resource assessments y Analysis of data and studies collected for the purpose of this study y Arctic oil and gas (onshore and offshore)
y Offshore (non-Arctic) oil and gas y Onshore gas y Conventional onshore oil, including EOR y Unconventional oil y Oil infrastructure y Natural gas infrastructure. In addition, smaller groups or individuals were tasked with researching and writing focused white papers on particular subjects that were not included within the framework of the main subgroups. These white papers cover the following topics: y LNG y Methane hydrates y Mexican oil and gas supply y Natural gas liquids (NGLs). In order to develop a sound assessment of the range of possible outcomes for North American oil and gas resources and production, together with the key challenges and enablers to this development, two approaches were taken in parallel analysis of existing public studies and a confidential survey of private, proprietary studies. There are numerous public, government, and industry organizations that have made macroeconomic and energy demand, supply, and infrastructure outlooks assessments. While some have made available to the public, many companies develop their own internal analysis as a support for their long-term investment strategies. The Resource & Supply Task Group established a data and studies subgroup to collect and analyze as much accessible existing resource data as possible. Their objective and evaluation methodology was designed to capture the wide spectrum and range of outlooks, including the underlying assumptions and supply challenges identified by various organizations. This subgroup also designed and conducted a confidential survey of private organizations, primarily oil and gas companies and consulting groups, using an auditable procedure to capture respondents and industries views and insights. The auditable process protected the proprietary data of survey respondents and survey results were aggregated to ensure confidentiality (individual responses couldnt be directly attributed to any particular source). The survey results added important
data and insights to the public studies record. Government organizations such as the Energy Information Administration, the U.S. Geological Survey, the Bureau of Ocean Energy Management, the National Energy Board of Canada, and the International Energy Agency also contributed data and time to this work. The resources and resource assessment team established appropriate resource definitions to be used in the study, described the sources for resource assessments, and commented on the differences between resource assessments coming from different organizations. This team studied a range of resource assessments from government, academic, and private sector sources. Understanding the nature of resource assessments and the range of resource potential is considered a crucial component for the development of long-term national energy policy, and this subgroup set out to document and explain the best current understanding of this area. Oil and gas development potential and driving forces can vary significantly between regions and resource types. For this reason, the NPC study established specialized subgroups for each of the major resource types (Arctic, offshore, onshore gas, conventional oil, and unconventional oil). Each subgroup was staffed by expert contributors, specialized in that particular resource area, from the oil and gas industry, academia, government, and consultancies. The subgroups developed a set of complete and credible estimates of current production and future production potential of each area based on specific technologies, resource size estimates, hydrocarbon development practices and regulatory frameworks as applicable in each resource type and area. Thus the individual teams developed a consistent and credible view of supply potential that could in most cases go into more depth and detail than the information provided through the data and studies analysis. Finally, two subgroups were established to discuss current and future oil and natural gas infrastructure development. The oil infrastructure subgroup analyzed the crude oil pipeline system, from major North American producing basins to major refining centers. The natural gas infrastructure subgroup analyzed major interstate pipeline systems, natural gas storage capacity, and gas processing plants, and discussed natural gas liquids infrastructure to the extent that this may influence natural gas development. Both infrastructure groups were tasked with describing current infrastructure networks as well as the ability of the
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Framing Questions
The Resource & Supply Task Group (as with the work of the study as a whole) was designed to answer a set of framing questions. The questions were formulated early in the study process, tested and refined with input from the study leadership, and then became the basis to guide the specific work processes and outputs from each of the specialized subgroups. The framing questions were also used over the course of the study as a test to determine whether newly identified issues were within the overall scope and objectives of the work. The following framing questions were used to guide the research and analysis of the Resource & Supply Task Group. y What is the scope of technically recoverable conventional and unconventional oil and gas resources available in the United States and Canada, according to most recent estimates? y How much of these oil and gas resources can be translated into productive capacity by 2050 under reasonable technical and economic assumptions? y What are the main drivers or assumptions behind existing North American oil and gas supply projections? y What factors could significantly increase or decrease the productive potential of these resources (e.g., geology, geography, access, technology, non-environmental regulation, etc.)? y What could be the particular contribution of each of the major types of oil and gas resource considered in this study and what specific development challenges may they face? y How will sufficient infrastructure (gathering systems, gas processing plants, crude oil, gas pipelines, and gas storage) be developed to link these resources to the market? The framing questions have allowed this supply analysis to focus on the key areas of resource scope, hydrocarbon development pathways, production potential, technology and innovation, and the diverse set of enablers and challenges that can help achieve the potential of the domestic oil and natural gas resources available or constrain their development below their potential contribution.
system to evolve to meet future needs, either because of expansion of supply or because of regional shifts in supply patterns across North America. Each subgroup was asked to structure its work to respond to a set of framing questions defined early in the study (see Framing Questions in Text Box). Subgroups met regularly at focused meetings or workshops with wider participation to advance their research and analysis and to formulate conclusions and implications. Subgroup leaders and/or their representatives participated in Task Group meetings to share and review progress and to comment on broader aspects of the study. Each subgroup prepared a topic paper specific to its area, which explores issues in greater detail than can be included in this summary chapter. The topic papers are available on the NPC website. The remaining sections of this chapter explore the analysis and evidence that has led to these findings, and give more detail on the specific enablers and challenges relevant to each component of North American oil and gas supply and its supporting infrastructure. 56
NORTh AMeRICAN OIl AND NATURAl GAS ReSOURCe eNDOwMeNT

The objective of this section is to provide detailed background about resource assessments, described in the section above; define the hydrocarbon related terms prevalent in the assessments; summarize the finding of the key public assessments; and set down key findings from the material.
Hydrocarbon Resource Assessment Uses and Definitions

Use of Resource Assessments
Oil and natural gas resource assessments serve a variety of fundamental needs of consumers, policymakers, land and resource managers, investors, regulators, industry planners, and others. Governments utilize resource assessments to exercise responsible
stewardship on public lands, to estimate future revenues to the government, and to establish energy, fiscal, and national security policies. The petroleum industry and the financial community use resource estimates to establish corporate strategies and make investment decisions. Regulatory organizations such as government energy ministries, corporation commissions, and the Bureau of Land Management and Bureau of Ocean Energy Management of the U.S. Department of the Interior utilize resource estimates in designating acreage for leasing and drilling.
the proportions of the two major commodities (oil or gas). An oil accumulation is commonly defined as having a GOR of less than 20,000 cubic feet of gas per barrel of oil at standard temperature and pressure; a gas accumulation is defined as having a GOR equal to or greater than 20,000 cubic feet of gas per barrel of oil. Reserves are those quantities of petroleum anticipated to be commercially recoverable by application of development projects to known accumulations from a given date forward under defined conditions (such as prevailing economic conditions, operating practices, and government regulations). Reserves must satisfy four criteria: they must be discovered, recoverable, commercial, and remaining based on the development project(s) applied. Reserves are further subdivided as Proved, Probable, or Possible, also commonly referred to as P1, P2, or P3, respectively, in accordance with the level of certainty associated with the estimates and their development and production status. Resources are those quantities of petroleum estimated, as of a given date, to be potentially (or technically) recoverable from known or undiscovered accumulations, exclusive of Reserves. Such resources are classified by some as Contingent or Prospective Resources depending on whether the accumulation is known or undiscovered, respectively. In-Place and Technically Recoverable Resources oil and gas reserves and resources in known or yet to be discovered accumulations represent at a given time only the technically recoverable portion of the in-place oil or gas endowment. Failure to clearly characterize an announced resource estimate as in-place, technically recoverable, or economically recoverable is a common occurrence of which users of resource estimates must always be wary. Developments in technology as well as geologic understanding of a reservoir or commodity can make previously uneconomic resources economic and commercially viable. Examples of such progress include the development of coalbed gas, tight gas and shale gas reservoirs, shale oil reservoirs, deeper conventional targets, and offshore deepwater development. In addition, improvement of recovery factors can take place over time, thus growing the resource estimate for a given reservoir. Undiscovered Resources are postulated to exist outside of known accumulations on the basis of geologic knowledge and theory. Examination of size characteristics of known accumulations, together with an analysis of how many have already been discovered, is
Hydrocarbon Definitions
Petroleum is a collective term for hydrocarbons in the gaseous, liquid, or solid phase; in other words natural gas, crude oil, NGLs, and bitumen. The hydrocarbon resource endowment includes crude oil, natural gas, and NGLs. Following are definitions for the different forms of petroleum:1 y Crude Oil is defined as a mixture of hydrocarbons that exists in a liquid phase in natural underground reservoirs and remains liquid at atmospheric pressure after passing through surface separation facilities. y Natural Gas is a mixture of hydrocarbon compounds existing in the gaseous phase or in solution with oil in natural underground reservoirs at reservoir temperature and pressure conditions and produced as a gas under standard temperature and pressure conditions. Natural gas is principally methane, but may contain ethane, propane, butanes, and pentanes, as well as certain non-hydrocarbon gases, such as carbon dioxide, hydrogen sulfide, nitrogen, and helium. y Natural Gas Liquids are those portions of the hydrocarbon resource that exist in the gaseous phase when in natural underground reservoir conditions, but are liquid at surface conditions (that is, standard temperature and pressure conditions: 60 F/15 C and 1 atmosphere) or at higher pressure and/or lower temperature conditions. The NGLs are separated from the produced gas and liquefied at the surface in lease separators, field facilities, or gas processing plants. Oil and gas accumulations are usually treated separately in the assessment process. Gas-to-oil ratios (GOR) are calculated for each accumulation to identify
1 American Petroleum Institute, Standard Definitions for Petroleum Statistics, 1995.
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used to project numbers and sizes of those which may remain to be discovered. This is the general manner in which conventional, undiscovered resources are estimated or assessed. Often, when there are few or no data for the basin or region under study, analogs to known petroleum regions, including their characteristics and properties, are used to estimate resources. The predicted volumes to be found in the undrilled population of potential accumulations reflect estimated undiscovered resources. These estimates must take into account the average prospecting success rate, number of undrilled remaining prospects, and the predicted size characteristics for the future discoveries. The results of such analyses carry a much greater uncertainty (wider range of volumetric outcomes) than the uncertainty associated with remaining reserves in existing fields because there are fewer data on which to base the estimate. It must always be kept in mind that resource estimates are snapshots in time. Since the earth has a finite endowment of liquid hydrocarbons, from which we produce more and more each year, the logical conclusion would be that the estimates for what remains to be found should be going down, but this is not the case. Usually, resource estimates conducted by an individual organization tend to increase over time owing to some combination of the availability of more and better data, new acreage that was previously inaccessible or incorrectly considered non-prospective, or new play types (such as shale gas or subsalt oil) made feasible by technological progress. Conventional and Unconventional Hydrocarbon resources. In most contemporary definitions, a primary difference between conventional and unconventional liquids is viscosity, that is, a fluids resistance to flow. Enormous deposits of potentially productive liquid hydrocarbons exist in nature that cannot flow under either reservoir or surface conditions an unconventional resource. This category includes huge deposits of low viscosity oil and bitumen deposits (oil sands) in western Canada. The volumetric potential of these deposits may dwarf that of conventional accumulations. The following definitions reflect these viscositybased differences, and other relevant differences: y Conventional Oil: Petroleum found in liquid form flowing naturally or capable of being pumped without further processing or dilution. 58
y Unconventional Oil: Heavy oil, very heavy oil, oil shale, and oil sands are all currently considered unconventional oil resources. Most have a high viscosity and flow very slowly (if at all) and require processing or dilution to be produced through a wellbore. However, not all unconventional oil is heavy. The definition of unconventional oil can also include such resources as tight oil, which has low viscosity, but which is not produced using conventional techniques. Some unconventional oils may also require special transportation and refining technology. y Heavy Oil: Heavy crude oils are understood to include only those liquid or semiliquid hydrocarbons with a gravity of 20o API or less. These include fuel oils remaining after the lighter oils have been distilled off during the refining process. y Very Heavy Oil: Very heavy oil is defined as having a gravity of less than 10o to 12o API. y Oil Shale: A fine-grained sedimentary rock containing kerogen, a solid organic material. The kerogen in oil shale can be converted to oil through the chemical process of pyrolysis. (Oil shale is unrelated to liquid petroleum produced from wells drilled into more thermally mature shales, that is sometimes called shale oil.) y Oil Sands: Also referred to as bituminous sands, oil sands are a combination of sand, water, and bitumen. Bitumen is a semisolid, degraded form of oil that will not flow unless heated or diluted with lighter hydrocarbons. y Continuous Type Resources (e.g., shale gas, tight gas, coalbed methane): Some organizations, such as the USGS, use the term continuous accumulation to define those unconventional oil and gas resources that are economically produced but are not found in conventional reservoirs such as coalbed gas, tight gas sands, shale gas, and many of the tight oil plays. Continuous accumulations are petroleum accumulations (oil or gas) that have large spatial dimensions and indistinctly defined boundaries, and which exist more or less independently of the subsurface water column. Another key difference between conventional and unconventional accumulations is that some of these (shales and coals) are both source rock and reservoir rock.
North American Hydrocarbon Resource Classification Systems

Several different classification systems have been developed to systematically describe and label measured and estimated hydrocarbon resource volumes according to two or three of the principal uncertainties (primarily geologic and economic uncertainty, and sometimes commercial status). Though these systems have many similarities as well as overlaps, each was developed with its own intended estimation focus. Each also has its own terms that do not always have exact equivalents in the other systems lexicons. The principal systems in use are the following, and each is described in detail in Topic Paper #1-1, Oil and Gas Geologic Endowment, which is available on the NPC website. y The Potential Gas Committee classification system, introduced in 1964 y The McKelvey system, dating from 1972 y The United Nations system, adopted by the United Nations in 2004 y The Petroleum Resources Management System, developed by several collaborating organizations and approved by the Society of Petroleum Engineers in 2007.
Pennsylvania during the mid-1800s, would soon end owing to lack of sufficient resources. Instead, major finds in other places soon proved them wrong, such as the 1901 discovery of Spindletop Field in the Texas Gulf Coast region, and the 18901920s discoveries of several large fields in Californias Los Angeles and San Joaquin basins. y Many believed in the early 1940s that oil and gas either did not exist in, or could not be produced from, the open ocean until 1947 that is, when Kerr-McGee used a platform-plus-barge combination to drill the first successful well out of sight of land in the Gulf of Mexico. y Similarly pessimistic views that production from the large California oil fields would dwindle to a trickle due to resource exhaustion have been repeatedly negated by technological advancements. Such advances include the introduction of waterflooding prior to the 1960s and, more importantly, the application of thermal recovery methods to heavy oil reservoirs since the 1960s. y Few experts held out hope that oil and gas could exist in deep water (over 5,000 feet) at great subseabed depths (on the order of 30,000 feet total vertical depth) until Shells 1986 Mensa prospect discovery proved they did. y The late 1980s advent of large-scale coalbed methane production was virtually unheralded, and therefore unanticipated. y The late 1990s advent of large-scale natural gas and NGLs production from massively hydraulically fractured organic-rich shales, initiated in the Barnett Shale of Texas Fort Worth Basin, was also unanticipated. y Although small-scale hydraulic fracturing of oilbearing shale formations such as Californias Monterrey Formation began in the 1980s, the adaptation of combined horizontal drilling and massive hydraulic fracturing as originally developed for gas in the Barnett Shale, to productive development of the oil-bearing Bakken Formation of Montana, North Dakota, Saskatchewan, and Manitoba, was also unheralded and unanticipated until its rapid adoption and expansion began in 2001. This long and continuing history of unanticipated good resource-related surprises begs the question as to what currently ignored and discounted
Uncertainty
Significant uncertainties are an inherent part of resource estimation. The best-constructed methodologies have two key elements: (1) they directly address the resulting estimates principal uncertainties; and (2) they are transparent regarding the assessment methodology. These factors are critical for users to understand exactly what the assessments represent. What constitutes a resource has changed over time. Twenty years ago, coalbed methane was not a viable part of the U.S. energy mix. It now accounts for about 8% of domestic natural gas production. Technological developments and developments in geologic and engineering understandings continually move the edge of what makes a resource a reserve. The history of the petroleum industry is replete with instances of overly pessimistic predictions and good resource-related surprises. Salient U.S. examples include: y Experts predicted at the beginning of the last century that the modern domestic oil era, initiated in
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oil and gas resources might have the potential to provide similar surprises in the future. Given historys lessons about scientific and technological progress, perhaps consideration ought be given to establishment of a small but highly competent effort dedicated and resourced specifically to (1) identify and characterize those oil and gas resources not yet being quantitatively estimated (using both open-source and disclosure-protected proprietary data and information), and (2) identify, analyze, summarize, and status-assess ongoing and/or needed R&D activities, basic or applied, that may hold promise for rendering these resources technically and then economically producible at some time well into the future. Possibilities include enhanced recovery of residual oil (both bypassed and diffuse) from old fields, oil shale conversion, and methane hydrate production, all of which are already being researched to varying degrees. This study includes a formal recommendation along these lines (see Executive Summary, Core Strategies).
y Canada-Newfoundland and Labrador Offshore Petroleum Board y Canadian Association of Petroleum Producers y Alberta Energy and Utilities Board y Alberta Energy Resources Conservation Board y National Association of Regulated Utility Commissioners y Advanced Resources International y ICF International (input to MIT study on the Future of Natural Gas).
Key Findings and Observations

Resource estimates for North America vary widely across a broad spectrum of resources and reserves. There are good reasons for the differences, including studies with different purposes, and also include factors such as use of different methodologies, inclusion or exclusion of reserves growth, inclusion of only selected basins or reservoirs, inclusion of different types of hydrocarbons (e.g., crude oil only vs. all liquids), variations in assumptions about technology and economics (e.g., including current technology vs. assuming future advances in exploration and completion technology), and differing minimum field sizes. Resource assessments are conducted by government agencies, the private sector, and academic and professional organizations in the United States and Canada. Only the government agencies provide a comprehensive set of assessments, covering oil and gas, onshore and offshore, conventional and unconventional, and so on. Significant uncertainties are inherent in resource estimation. The best-constructed methodologies directly address the resulting estimates principal uncertainties, and transparency regarding the assessment methodology and assumptions underlying the estimates is critical for users to understand exactly what they represent. A better understanding of reserves growth is required for all types of oil and gas resources, especially those that are emerging. Small changes in recovery efficiency (percentage of oil in place that will ultimately be produced), individually and cumulatively, will continue to have a
Overview of Recent and Current North American Oil and Gas Resource Assessments
Resource assessments are conducted by government agencies, the private sector, and academic and professional organizations in the United States and Canada. Only publicly available (i.e., nonproprietary) assessments were examined by the Resources Subgroup. Most assessments were robust, transparent, and well documented. Each had a slightly different purpose or focus, and therefore provided a unique perspective on North American resources. Resource estimates for North America span the spectrum of resources and reserves. The principal resource assessments evaluated for this study were the following: y Minerals Management Service (now Bureau of Ocean Energy Management, Regulation and Enforcement) y IHS Energy y Potential Gas Committee y U.S. Geological Survey y USGS Circum-Arctic Resource Appraisal y Geological Survey of Canada y Canada-Nova Scotia Offshore Petroleum Board 60
significant impact on the size of technically and economically recoverable resources. Present and future R&D could also result in additional production from older fields. In addition, support of field trials of new and advanced technologies is critical to advancing new methods needed to grow North American oil and gas supply. Mature onshore areas in the United States and Canada have some, but limited, conventional opportunities. CO2 EOR, assuming anthropogenic sources are available, has the potential for substantial additional oil production. Offshore North America conventional resources still have significant potential, especially the Gulf of Mexico. There is potential, as well, in the offshore Atlantic and Pacific. The Arctic holds very large potential, undiscovered resources. The role of unconventional resources in the North American energy endowment will continue to have a growing and profound impact on the future energy supply outlook. Onshore unconventional resources, in particular, will be very important. Shale gas, Canadian oil sands, tight gas, tight oil, gas hydrates, and possibly oil shale are expected to provide further scope for additions to reserves. There are many unknowns regarding unconventional, offshore, and Arctic sources. Additional data and information are required to make informed policy and commercial decisions about these potential resources.
The objective of the Data and Study Analysis Team was to understand and interpretthe: y Uncertainty surrounding the size of North Americas conventional and unconventional oil and natural gas resource base, as reflected in published analyses and proprietary data and forecasts y Challenges and enablers to convert this resource endowment into production and supply volumes that can help meet the future energy needs of North America. The Data and Study Analysis Team comprised diverse skill sets, experiences, and expertise from participants from large integrated energy companies (e.g., Chevron, ExxonMobil, Shell); major independent oil and gas producers with representatives of the American Natural Gas Alliance (e.g., Encana, Questar); large industry service companies (e.g., Halliburton); consultant companies (e.g., ICF International, Nehring Associates, Wood Mackenzie); and U.S. and Canadian government agencies. In conducting a study of studies, the Team evaluated a broad, diverse range of energy outlooks. The study scope was limited to North America with focus on the 20102050 time frame. Data were collected from public, government, industry, and consultant sources. Approximately 50 publicly available energy outlooks were examined. The U.S. and Canadian governments provided integrated energy outlooks e.g., the Energy Information Administration, the National Energy Board of Canada, the International Energy Agency, the United States Geologic Survey, and the Bureau of Ocean Energy Management, Regulation and Enforcement. More than 80 energy and consultant companies received a request to complete a comprehensive resource, production, and supply chain survey/ template. More than 25 industry and consultant templates were returned, and then aggregated to maintain the confidentiality of the individual companys proprietary data. The aggregation resulted in 12 unique outlook cases compiled for this study. The current North America oil resource and supply situation is relatively straightforward. Canada and Mexico are currently exporting oil into the U.S. markets and the only question is whether their resource base/supply capacity can continue to be meet internal demand while also enabling exports. U.S. production, plus Canadian exports to the United
ANAlYSIS OF ReSOURCe AND PRODUCTION OUTlOOkS AND STUDIeS Overview

As was clear in the previous sections, an important element of the work done for this study was to collect and analyze data and outlooks published by governmental agencies, independent forecasting groups, industry associations, or others, as well as data supplied on a confidential basis by individual companies. This section presents a detailed view of the ranges of outlooks for future North American oil and gas supply that were analyzed in this process and the insights gained.
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States, have not been sufficient to meet the more than 20 million barrels a day that are consumed today. Therefore, the analysis focused on whether the resource base and future production capacity could reach internal demand levels, and/or how large the domestic/import supply gap could grow to in the future. The results suggest that North American production capacity will likely not grow fast or large enough to meet the growing needs for oil in the region. The North American gas resource and supply situation has changed in recent years. The industrys relatively recent application of horizontal drilling combined with hydraulic fracturing has led to a greater understanding of the potential magnitude of the U.S. and Canadian recoverable resource base, now believed to have grown considerably (perhaps two and a half times or more over estimates from as recently as 2003). In the last decade, there was a perception that domestic supplies could not meet internal demand requirements and significant volumes of LNG imports would be required to satisfy demand. Thus, our goal was to assess if there are sufficient, affordable domestic gas resources that can be utilized to meet all potential demand scenarios. The spread in demand outlooks for the gas (20 to 40+ Tcf/yr) reflect: y Low side cases low economic growth and/or curtailing energy use to minimize carbon emission and other environmental impacts y Mid cases that reflect a historical percentage share in the overall fuel mix and moderate economic growth consistent with historical rates y High side cases that contemplate increased penetration in the power and even transportation sectors. This also would likely improve the resultant environmental impact for these demand growth scenarios and/or reduce the liquid import gap that has both economic and energy security advantages for the United States. The supply outlooks studied here seem to fall into three general types of future scenarios: (1) There are constrained supply cases corresponding to a more stringently regulated industry environment, and/or curtailment of access/development of new opportunities; (2) The vast majority of the outlooks (spectrum of mid cases) reflect iterations of industry, public, and government business as usual cases, where economic growth and product prices will be the primary determinants of market needs and investment in new supply; 62
(3) The high production cases will require considerable alignment among industry, government, and public stakeholders towards a common, shared, long term vision for the future direction of the energy sector. The oil cases require significant long-term commitments to diversifying the portfolio of North American supply areas; early and increased data collection to understand the new play areas (some currently in moratoria areas); research and technology to assess the commercial viability and development of large Rockies unconventional oil resources; and a new long-distance pipeline network (targeting U.S. Gulf Coast refiners or for crude oil export to Asia Pacific via a Western Canadian facility/port) to support the growth potential of Canadian oil sand production. The low and mid gas supply cases are likely to be driven by similar conditions to the oil outlooks described above; however, the high gas production scenarios are associated with natural gas serving an increasing gas share of the overall energy mix in the United States and Canada including in the power and transportation sectors. We have assessed the industry requirements and fundamentals to achieve this possible paradigm shift for gas, and while we believe it is feasible from a resource base and industry capability standpoint, considerable alignment and cooperation between industry, government, and public stakeholders will be required to ramp up production rapidly and sustain 30 to 40 or more Tcf/yr production levels for future decades.
A Range of Assessments
Given the wide range of assessments from diverse groups, made over a number of years and covering various geographic areas, developing a view of potential resources and development potential is a critical and complex process. Confidence is gained by comparing resource estimates to better understand the data available and the input assumptions. Those that assessed onshore oil may use different assumptions from those assessing offshore gas; those that made an assessment five years ago may have different data than an assessment done a year ago. Furthermore, some assessments may include conventional and unconventional hydrocarbons while others may not. The estimates and assumptions can be further verified by comparison with industry activity and performance. A promising resource that attracts little interest or activity may be either optimistically assessed or
activity is restricted because of policy or operational constraints. Greater confidence in resource estimates leads to greater confidence in future energy supplys potential from the different sources studied. Estimating a future resource is challenged by the fact that most of the resource is hidden deep in the subsurface, often in deep water or even beneath Arctic ice. Some areas have moratoria on drilling or the collection of seismic data such that even rudimentary estimates are difficult to achieve. That said, much of the worlds thick sequences of sediments do contain oil and gas, and therefore, by analogue with producing areas, we can project at least the existence of oil and gas, if not their quantities even in unexplored areas. Where known commercial accumulations occur we can identify additional, on-trend, undrilled features that are likely to be productive, but even here the full extent of the hydrocarbon province and accumulation sizes are far from precisely known. In existing fields where the volumes of in-place oil or gas is better understood, there are complicating factors such as variations in permeability, communication with the borehole and reservoir energy issues that make the amount that is recoverable uncertain. Industry activity and performance is another leading indicator of the underlying assumptions and fundamentals associated with the existing resource estimates. In addition to these below ground uncertainties there are many above ground factors such as demand, cost, infrastructure, policy, environmental factors and the rate of technology development that may limit or enable the beneficial extraction of the resource. For these reasons, resource outlooks and forecasts vary on the nature and amount of available resources. The tables and charts included in this section capture this uncertainty by stating ranges as observed in the data collection from academic, industry, and governmental sources. The ranges attempt to capture 80% of the values presented; therefore, there are outliers that extend beyond what is shown here. These ranges represent irreducible uncertainty due to the inherent variability of the assumptions rather than variations in fundamental data. These resource estimates are further qualified by observations of what the industry can do and is doing now. These resourceindustry activity comparisons have three categories: 1. Robust resource estimate and demonstrated commerciality (for example: shale gas, Gulf of
Mexico oil, oil sands and possibly tight oil). Interrupting development of these resources means going to less robust, more technically challenging and more expensive resource types. 2. Less robust resource estimate with limited or no industry access (e.g., Arctic, Pacific, Atlantic, and Eastern Gulf of Mexico). These areas need sufficient study and data collection to understand their potential. Seismic surveys and drilling will enable more accurate resource estimates, which may be much smaller or greater than currently known. Industry first needs to fully demonstrate its readiness and capability to explore and develop that resource in ways that protect workers, safeguard the environment, and provide a positive return on capital. Only when industry has won the confidence of government and public is this possible and, even then, may depend on other considerations of political process. 3. Least robust resource estimate, wherein industry has access but little activity (e.g., kerogen oil shale to oil, EOR using anthropogenic CO2, deep offshore gas). These are more uncertain. They may be the next big resource opportunity or they may always be just one step away from being a commercial reality. Government and industry need to develop policies and technologies that increase the probabilities of these potential resources contributing to future production. From this analysis, it is likely that some resources will dominate early because of their abundance, access, availability, and relative cost, while others will play a supporting role and be available for later development. Usually lower cost natural gas and oil resources are developed before moving to higher cost resources as lower cost sources are depleted, within the constraints of access and the availability of appropriate and cost-effective technology.
Natural Gas
With abundant supplies in the United States and Canada, North America is amply supplied with natural gas to meet domestic demand over the next several decades even at growing production levels. This is largely driven by recent advances in horizontal drilling and hydraulic fracturing that have allowed gas to be extracted from shale and low permeability formations. As a result of these advances, estimated future resources are large and growing. Currently
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the range is 1,500 to 4,000 Tcf for the United States and 500 to 1,250 Tcf for Canada. These numbers have grown rapidly in recent years (from 100s of Tcf) and may grow further as more of these new plays are tested. This potential is being realized as seen in recent production increases. There may be opportunities to augment these supplies with Arctic natural gas if infrastructure is developed. Another possible upside to gas supply may come from offshore exploration in the little explored moratorium areas and in the long term, methane hydrates. Overall natural gas supply is driven by unconventional shale gas and tight gas (without these, natural gas production would still be in decline). But other important resources will be important contributors in the longer term.
While U.S. crude oil production peaked in the early 1970s at around 9.6 million barrels per day, except for the start-up of Prudhoe Bay and periods of high oil prices, it has been on a downward slope (44% from the peak) since 1985 (Figure1-7). In total, the United States imports about half its petroleum liquids consumption of nearly 20 million barrels per day equivalent to about a quarter of the worlds liquid demand. Current and recent data and studies indicate that the remaining North American resource base is likely to be in excess of 500 billion barrels. In the U.S. resource base table (Table 1-1), we have included three industry cases that represent the range of remaining resource estimates received from industry, plus the most recent EIA-released data, as of the time of this study. The industrys assessment of the United States remaining resource base ranged from 106 to 270 barrels, which is almost entirely contained in conventional reservoirs at this point. The United States remaining technically recoverable conventional resources are only 6% of the worlds total. The United States has produced about 200 billion barrels of its original oil in place. To date, that is about 17% of all oil produced in the world. There are still remaining North American resources that can provide significant recoverable totals if technical and environmental issues can be addressed (Table 1-2). The largest remaining North American oil resource potential is the unconventional Canadian oil sands (150300+ billion barrels of recoverable resources) and U.S. Rockies shale kerogen plays (over 1 trillion barrels in place). The U.S. unconventional Rockies oil plays, while having significant in place volumes, need considerable research, experimentation, technology advancements, and the resolution of above ground environmental challenges before technically recoverable resources can be realized. Moreover, these issues all need to be addressed to assess the commercial viability before proceeding with large-scale production projects that could materially impact the oil supply situation. This is not expected until after 2030. In 2010, Canadian oil sands were already contributing around 1.5 million barrels per day and could grow to over 5 million barrels per day out beyond 2030, which could represent approximately 4050% of all U.S. and Canadian crude oil production. Infrastructure expansion to transport this heavy crude to suitable upgrading facilities and refineries will be necessary to achieve these large growth aspirations.
Crude Oil
Oil production has been in long-term decline, but Canadian oil sands, deepwater Gulf of Mexico oil, and, with less certainty, tight oil could help slow or even arrest the decline as seen over the last year or two. Onshore U.S. conventional discoveries peaked in 1938 and the industry has adapted by moving to the Arctic, offshore, oil sands and now tight oil. Oil sands have the largest upside, as only 70 of the 170 billion barrels of oil potential are currently under development. Additional oil resources may come from enhanced oil recovery. For example, the 35 to 80 billion barrels of oil onshore U.S. is largely due to new advances in EOR. A larger and longer-term upside resource may come from heating kerogen shale deposits (sometimes called oil shale). This requires heating the rock to accelerate maturation of organic material and converting it to oil and gas.
Crude Oil
Resource Estimates
The United States oil resource base has increased over time due to technology enhancements and a greater understanding of new frontiers. The U.S. oil in place endowment (the broadest possible definition of the resource) for conventional reservoirs is about 11% of the worlds total, while the countrys unconventional reservoirs are 23%. Adding in Canadas unconventional bitumen endowment, thought to be in excess of two trillion barrels, would increase this percentage. 64
Figure 1-7. U.S. Crude Oil* Productions Downward Trend
Figure 1-7. u.s. Crude oil* productions downward trend

16 MILLION BARRELS PER DAY
OIL IMPORTS FROM ELSEWHERE OIL IMPORTS FROM MEXICO OIL IMPORTS FROM CANADA U.S. OIL PRODUCTION
12
1970
1975
1980
1985
1990 YEAR
1995
2000
2005
2010
* Crude oil and condensate. Sources: Energy Information Administrations AEO2010 Reference Case and International Energy Outlook 2009.
The Gulf of Mexico is a world-class petroleum system with approximately 50 billion barrels of remaining potential. A considerable amount of this potential is located in the lower permeability, Paleogene play (with commercial viability/attractiveness still uncertain) and in a number of new play types that have less overall total potential than the current Miocene deepwater play. The Miocene play producing fields are the
largest contributors to the current 1.5million barrels per day production level in the Gulf of Mexico. Future supply outlooks from the Gulf of Mexico range from 1 to 3 million barrels per day and largely reflect the uncertainty regarding industry drilling activity levels and acreage availability in future lease sales that has arisen since the tragic Macondo oil spill in the deepwater Gulf of Mexico. While there is significant
Table 1-1. oil resource Base (Billion Barrels)

EIA AEO2011 lower-48 offshore Conventional alaska (onshore and offshore) lower-48 onshore Conventional unconventional (tight oil) shale Kerogen oil sands U.S. Total Remaining 57 48 80 34 219 Low Scenario 40 25 35 5 0 1 106 NPC Study Mid Scenario 65 40 50 10 0 2 167 High Scenario 100 55 85 15 10 5 270
sources: energy Information administrations annual energy outlook 2011 (aeo2011); and npC Industry survey, aggregated data.
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Table 1-2. high potential north american oil resources

Resource Type Canadian oil sands Resource Potential recoverable resource potential = 150310 billion barrels; future production levels possibly in excess of 5+ million barrels per day recoverable resource potential = 4060 billion barrels; future near- and mid-term production levels of 1.53.0 million barrels per day? recoverable resource potential = 1020 billion barrels; future north american production levels possibly in excess of 1+ million barrels per day recoverable resource potential = 80100 billion barrels; mid-term (e.g., u.s. West Coast) and longer-term (e.g., arctic) production levels in excess of several million barrels per day Resource Development Enablers long-distance pipeline and infrastructure project to u.s. Gulf Coast or Canadian West Coast? resumption of pre-Macondo deepwater drilling activity levels; paleogene reservoir performance and commerciality hydraulic Fracturing; resource intensive people, equipment, materials; how much is crudeoil/condensate (refined transportation products) vs. natural gas liquids opening of moratoria areas and data collection; timely exploration/development program approvals
u.s. Gulf of Mexico oil
u.s. and Canadian tight shale liquid plays
new u.s. lower-48 offshore & u.s. and Canadian arctic areas
near- to mid-term potential in other lower-48 offshore areas (e.g., world class petroleum system offshore California) and the U.S. and Canadian Arctic (80100 billion barrels overall), new regulatory and permitting requirements plus acreage access will drive activity levels in these areas. Finally, the liquid-rich areas in the shale plays and the Bakken/Three Forks and Monterey tight oil reservoirs have been actively pursued by industry over the last five years. Production has grown to around 400 thousand barrels a day from these plays. The current resource assessment of the tight oil plays is 634 billion barrels. Production levels could grow significantly, to 23 million barrels per day in the future. Additionally, it is still unclear how much crude oil and condensate versus natural gas liquids will ultimately be recovered from the shale gas plays. The individual crude oil and condensate production rates for new wells are relatively low after the steep initial decline in the first year of production; however, they are profitable and contributing to growth in the lower-48 onshore sector. As the U.S. onshore conventional oil field production levels continue to decline, the increased tight oil activity may partially offset this decline in the next 10 to 20 years. The only other area that could contribute material volumes to offset natural field declines in the mature U.S. lower-48 onshore, which is producing around 66
3 million barrels a day, is from enhanced oil recovery resulting from injecting carbon dioxide (CO2) into the reservoir. The industry has been successful in recovering additional oil from older fields by applying this technology and utilizing natural sources of CO2. There is considerable debate as to how much additional oil can be recovered from the fields that havent been flooded with CO2 as some of these are not suitable, while others are currently not connected to a natural source of CO2, requiring infrastructure development in these fields. While anthropogenic (man-made CO2) capture, transportation, injection and storage for enhanced oil recovery is another potential source of CO2, there is significant uncertainty regarding the cost of supply, regulatory requirements, and construction of new onshore CO2 pipelines necessary for commercial project viability. More detail on the regional and play-type oil resource profiles can be found in oil-related topic papers, including Topic Paper #1-2, Data and Studies Evaluation, available on the NPC website.
Production Outlooks
In addition to published outlooks, the Data and Study Analysis Team obtained a wide range of industry and consultant views on oil resources and production supply capacity to develop its outlook on
production. In this section, we examine both government and industry outlooks and assumptions to provide perspective on the future. The total U.S. production volumes in the EIA reference case and the industry mid case were relatively similar by 2035, as seen in Figure 1-8. The industry/ consultant mid case oil total production forecasts were lower by 1 million barrels per day than the EIAs Annual Energy Outlook (AEO) 2011 forecast in 2035. Consequently, the industrys oil production compound average growth rate (CAGR) from 2009 until 2035 was 0.1% versus 0.3% in the AEO2011 Reference Case. Generally, the industrys median case showed lower growth for the onshore sector than the EIAs reference case. The industry was more bullish for the offshore; however, there is uncertainty regarding assumptions for future activity levels in the offshore (lower-48 and Arctic) following the Macondo oil spill in the deepwater Gulf of Mexico in April 2010. The 2011 EIA reference case and industry views were relatively similar for growing production in the Arctic. This likely represents general alignment on the relatively high
supply costs anticipated for future exploration and development projects in the Arctic and the perceived challenges associated with offshore drilling. The industrys high case U.S. production levels were significantly greater than the EIAs AEO2011 reference case, with a 2.3% CAGR. In this case, industry cited big production gains in Alaska and offshore, no doubt based on the assumption of increased acreage access in areas that are currently under moratoria. Consultant studies on the behalf of various U.S. government agencies suggested there are between 30 and 50 billion barrels that are inaccessible to industry. Finally, we also compared the range of industry cases with the IEA World Energy Outlook Current Policies case. The IEA production output levels generally coincided with the low industry case. NGL production may be an increasingly important source of liquids produced in the United States and Canada, particularly as shale gas focused companies shift activity towards some of the more liquids-rich gas plays. The Data Study Analysis Team obtained some industry/consultant U.S. NGL outlooks. The
Figure 1-8. U.S. Oil Production by Type: Industry High/Med/Low Survey Responses versus AEO2011 Reference Case
Figure 1-8. u.s. oil production by type: Industry high/Med/low survey responses versus aeo2011 reference Case
KEROGEN CONVENTIONAL OFFSHORE CONVENTIONAL ONSHORE ARCTIC
2009
2025 AEO2011
MED HIGH LOW 2025 INDUSTRY
2035 AEO2011
LOW
MED HIGH 2035 INDUSTRY
Sources: Energy Information Administrations AEO2010 Reference Case and International Energy Outlook 2009.
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industrys mid (2.3 million barrels per day) and high (2.9 million barrels per day) forecasts in 2030 span either side of the AEO2011 forecast of 2.7 million barrels per day, while the industrys low (2.0 million barrels per day) forecast is relatively flat through 2030. The study team received a wide range of industry/ consultant views regarding future Canadian oil production. The industry mid case oil total production forecasts were lower than EIAs forecast, and also below IEAs forecast total in all years. At 1.9%, industrys median Canadian oil production CAGR from 2009 until 2030 was just slightly less than IEA at 2.0%, but well below the EIAs Reference Case Canadian oil production CAGR at 2.9%. The industry/consultant high scenario provided a 2.8% CAGR, just below EIAs reference case CAGR estimate. In all the cases, conventional oil production from the onshore and offshore was projected to decline due to the high field decline rates and relatively small remaining potential in both Western Canada and the offshore (Atlantic). Moreover, no significant production was anticipated in the Canadian Arctic, probably a result of the high supply
cost of these large, remaining resources, along with the absence of infrastructure or cost-effective transportation mechanisms to get these remote resources into the marketplace. The major differences between the cases in Figure 1-9 are predominantly due to the range of production levels for the Canadian oil sands. The industrys median case is only 3.6million barrels per day a significant 600 thousand barrels per day below the agency forecasts of commercially available resource plays in North America. Even the industrys high case at about four million barrels per day is below both the EIA and IEA cases at 4.2 million barrels per day. Clearly, industry is more conservative about overcoming the above ground challenges to rapidly increase production, especially in light of the additional pipeline infrastructure that will be required to either bring additional volumes down the refiners on the U.S. Gulf Coast (e.g., the currently proposed Keystone XL project) or consider exporting crude oil to Asia Pacific, which would require a new infrastructure network from Alberta to the Canadian west coast, and export facilities.
Figure 1-9. Industry Forecast of Canadian Oil Production by Type versus EIA and IEA Totals
Figure 1-9. Industry Forecast of Canadian oil production by type versus eIa and Iea totals
6
INDUSTRY OIL SANDS INDUSTRY CONVENTIONAL OFFSHORE INDUSTRY CONVENTIONAL ONSHORE INDUSTRY ARCTIC EIA TOTAL OIL IEO 2010 IEA TOTAL OIL WEO 2010*
1.4
2.0
2.1
2.1
2.2
2.8
2.8
2.4
3.2
3.4
2.6
3.6
4.0
0 ACTUAL 2009 LOW MID HIGH 2015 LOW MID HIGH 2020 LOW MID HIGH 2025 LOW MID HIGH 2030
* New Policies Case. Sources: Energy Information Administration (EIA) Annual Energy Outlook 2010 (AEO2010) and International Energy Outlook 2010 (IEO 2010); International Energy Agency (IEA) World Energy Outlook 2010 (WEO 2010).
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In summary, the future of North American future oil supplies in the near to medium term is heavily dependent on the U.S. offshore (40100 billion barrels economically recoverable resources) and Canadian oil sands (150310 billion barrels of economically recoverable resources). Existing oil production from Alaska also delivers a significant near-term contribution amounting to over 10% of U.S. crude oil production, and maintaining this production has an important role in the time until Arctic exploration can deliver new oil supply. Production from EOR, tight oil, shale oil, and liquids from coal or natural gas will contribute some growth volumes. More importantly, if U.S. federal government regulation prevents access to the U.S. offshore resources, or constrains transport of Canadian oil sands production, then North American oil production could decline. The U.S. and Canadian combined total conventional oil production (Figures 1-10 and 1-11) has undulated from 8.4 million barrels per day in 1995, to 7.5 million barrels per day in 2005, to 8.1 million barrels per day in 2010. The EIA is forecasting that conventional oil sectors will slowly trend down to 7.3 million barrels per day in 2035. However, EIA shows Canadian oil sands production growing significantly and driving total North American oil production to over 11 million barrels per day by 2035. When comparing EIAs U.S. and Canada oil production forecast with IEAs and the industrys, the EIA case is the most optimistic, with the exception of the industrys high case. The IEA is forecasting 2030 U.S. and Canadian production 1.5 million barrels per day lower than EIA. The industrys median case ends up being about the same in 2030 as IEAs, whereas its low case forecasts only 7.3 million barrels per day, a full 3.6 million barrels per day lower than EIAs forecast.
the emergence of the recent game changing shale gas plays, the gap between U.S. demand and production is closing rapidly and likely to reduce greatly the future need for LNG imports (see Figures 1-12 and 1-13). North America contains both conventional and unconventional oil and gas resources. Until the last decade, most oil and gas resource estimates largely included conventional in place and recoverable volumes. The vast majority of historical production from North America has been from conventional reservoirs and our understanding of both the in-place and ultimate recoverable volumes is more mature than for unconventional accumulations. While the size of the North American conventional resource base is relatively well understood, our knowledge of the unconventional gas endowment is growing rapidly given increased industry activity and focus on shale and tight gas. The gas assessments of the ultimate, technically, commercially, remaining recoverable resource base for both Canada and United States vary considerably (Table 1-3). This is largely a function of the vintage of the assessments and whether they included the most recent data and insights from the unconventional gas sector, especially shale gas. The ultimate remaining recoverable resources for the United States ranged from 1,000 to 4,500 Tcf of gas, while Canada ranged from 500 to 1,250 Tcf of gas. The United States has produced around 1,140 Tcf, which suggests it has consumed around 20 to 40% of the total domestic gas endowment based on the range of collected data. Canada has produced around 175 Tcf, which is around 10% to a quarter of its total gas resource base. If Canada used its domestic supplies for only internal demand requirements at current consumption rates, this would be equivalent to 140 to 360 years of domestic supply. The U.S. conventional, remaining recoverable resource base is approximately 25 to 40% of the total remaining natural gas volumes in the United States and ranges from 515 to 1,160 Tcf of gas. The current EIA (2011 reference case) assessment of over 1,000 Tcf of gas is at the upper end of the industry estimates and may suggest a difference of views regarding the technical and commercial viability of some of the remaining conventional resource base. The EIA and industry have a relatively similar view of the conventional onshore, with the low and mid cases for industry ranging from 215 to 290 Tcf and
Natural Gas
Resource Estimates
Historically, North American gas production has generally kept pace with growing consumption requirements. Canadian production has continued to exceed demand, while just in the past decade the United States and Mexico have received LNG imports in addition to the pipeline gas from within North America to supplement their domestic supply base. As a result of drilling technology advances and
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Figure 1-10. U.S. and Canadian Oil Production Forecast
Figure 1-10. u.s. and Canadian oil production Forecast

CANADIAN UNCONVENTIONAL PRODUCTION CANADIAN CONVENTIONAL PRODUCTION* U.S. CONVENTIONAL PRODUCTION U.S. + CANADA CONVENTIONAL
12
0 1980
1990
2000
2010 YEAR
2020
2030
2040
* Includes condensate, natural gas liquids, and re nery gain. Source: Energy Information Administrations International Energy Outlook 2010.
Figure 1-11. U.S. and Canadian Oil Production Cases
Figure 1-11. u.s. and Canadian oil production Cases

14 12 MILLION BARRELS PER DAY 10 8 6 4 2 0
IEA* U.S. + CANADA OIL PRODUCTION INDUSTRY HIGH OIL PRODUCTION INDUSTRY MEDIAN OIL PRODUCTION
INDUSTRY LOW OIL PRODUCTION EIA U.S. + CANADA* OIL PRODUCTION
2010
2015
* Includes condensate, natural gas liquids, and re nery gain. Sources: International Energy Agency (IEA) World Energy Outlook 2010; Energy Information Administration (EIA) Annual Energy Outlook 2010.
2020 YEAR
2025
2030
70
FIgure 1-12. U.S. Natural Gas Production and Consumption
Figure 1-12. u.s. natural Gas production and Consumption
DRY GAS PRODUCTION CONSUMPTION
TRILLION CUBIC FEET PER YEAR
20
10
0 1981 1986 1991 1996 YEAR 2001 2006 2011
Source: Energy Information Administrations AEO2011 Reference Case.
Figure 1-13. Canadian natural Gas production and Consumption
Figure 1-13. Canadian Natural Gas Production and Consumption
6 TRILLION CUBIC FEET PER YEAR
DRY GAS PRODUCTION CONSUMPTION
0 1980
1985
1990
1995 YEAR
2000
2005
2010

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Table 1-3. natural Gas resource Base

(Trillions of Cubic Feet) produced u.s. total remaining arctic lower-48 offshore Conventional lower-48 onshore Conventional tight Gas shale (lower-48) Coalbed Methane 616 (687) 99 (159) 2,074 (2,170) 194 869 2,543 290 446 352 455 862 138 NEB 2010 produced Canada total* remaining offshore Conventional arctic onshore Conventional tight Gas shale Gas (neB doesnt include Montey) Coalbed Methane
* low-high range based on spread of all data. sources: potential Gas Committee (pGC) 2008 and 2010; energy Information administrations annual energy outlook 2011 (aeo2011); national energy Board of Canada (neB) 2010; and npC Industry survey, aggregated data.
PGC 2008 (2010)
EIA AEO2011
Low Scenario* 1,140 1,500 130 160 215 200 700 90 Low Scenario* 175
Mid Scenario*
High Scenario*
2,300 210 260 290 350 1,000 120 Mid Scenario*
4,000 345 375 440 550 1,800 150 High Scenario*
1,027 100 116 115 104 82 (+>200 400+) 34
500 85 45 100 40 200 30
900 100 75 145 70 400 80
1,250 105 125 185 100 600 140
the EIA (2011 reference case) was 290 Tcf. This is probably the most mature exploration and production area in North America. The industry remaining recoverable resource range for the offshore region was 160375 Tcf and the EIA (2011 reference case) was at the upper end at 320 Tcf. The vast majority of the remaining resources are located in the Gulf of Mexico with estimates ranging from 200 to 300+ Tcf, with the Pacific and the Atlantic Coast each around 20 to 30+ Tcf. The 2011 EIA reference case had the highest estimate of the Arctic remaining recoverable gas of 418 Tcf, which exceeded the 72
industrys range of 130345 Tcf and the Potential Gas Committee (2008) assessment of 194 Tcf. The largest remaining recoverable resources in the Arctic are located in the Alaska North Slope and include the approximately 35+ Tcf already discovered, plus additional exploration and growth potential bringing the total potential to over 100 Tcf. The Chukchi Outer Continental Shelf (OCS) (~90 Tcf), Beaufort (~30 Tcf), and Bering Shelf (~20 Tcf) also may contain material gas resources. Finally, various consultants (ICF International 2008, Science Applications International Corporation/Gas Technology Institute
[SAIC/GTI] 2010), at the request of the U.S. government agencies, have estimated between 100 and 300 Tcf of the remaining recoverable gas in the United States is located in moratoria areas, with 100+ Tcf in the lower-48 offshore and onshore (largely Rockies) and up to 20+ Tcf in the Arctic. The offshore and Arctic gas resources that have so far been estimated in the moratoria areas are all in conventional reservoirs. The United States unconventional, remaining recoverable resource base is around 60 to 75% of the total remaining gas volumes in the United States and ranges from 990 to 2,305 Tcf of gas. The most recent EIA estimate for remaining unconventional recoverable gas is over 1,000 Tcf with industrys mid scenario around 1,400 Tcf. The U.S. lower-48 is estimated to have in-place coalbed methane resources of 700 Tcf, of which the remaining, economically resource base ranges from 70 to 150 Tcf with an expected value/most likely estimates of 100120 Tcf. Coalbed methane is a relatively small component of the total unconventional gas resource base. The vast majority of the coalbed methane recoverable resources are located in the Rockies (5090 Tcf) in the San Juan and Powder River basins; with the East Coast, Gulf Coast, and Mid-Continent regions ranging from 5 to 10+ Tcf each. The tight gas remaining recoverable resources in the EIA 2011 reference and mid industry scenarios are around 350 Tcf, with a range of 200 to 520 Tcf. Approximately 120 Tcf of tight gas has been produced, which leaves anywhere from 65 to 85+% of the resource base that is yet to be developed and can contribute significant annual supply volumes towards future North America gas demand. The largest remaining resources are in the Rockies (with expected value/most likely estimates around 200+ Tcf), largely in the Greater Green River, Uinta, Piceance, and San Juan basins. There is also material (in excess of 50+ Tcf) resource potential in the Gulf Coast (e.g., Mesozoic plays in East Texas and South Texas Tertiary plays), East Coast (e.g., Appalachia), and Mid-Continent (e.g., Granite Wash) regions. U.S. shale gas is a potential game changer, with most recent industry resource estimates ranging from 700 to 1,800 Tcf (Table 1-4), with the EIA reference and industry mid case at about 1,000 Tcf (Table 1-3).
Shale gas has been the predominant driver in renewed optimism about the U.S. gas resources and supplies for the future. The Canada conventional, remaining recoverable resource base is approximately a third of the total remaining gas volumes in Canada and ranges from 230 to 415 Tcf of gas (see Table 1-3). The industry mid scenario and the NEB (reference) cases were very similar (approximately 325 Tcf). The range for the offshore region is relatively narrow at 85105 Tcf and almost all of the resources are located in the Atlantic. The range for the onshore region for the industry scenarios was 100185 Tcf, with relatively close agreement between the industry low and mid cases with the NEB reference case of 115 Tcf. The remaining onshore gas volumes are located almost entirely in Western Canada. The greatest uncertainty for the conventional sector lies in the Arctic region. The NEB estimate of 116 Tcf was at the high end of the industry range of 45125 Tcf. The Arctic areas identified with the largest remaining potential include the Mackenzie Delta/Canadian Table 1-4. u.s. shale Gas Most likely (Mean, average, etc.) recoverable resources
Range for Navigant 2008, PGC 2008, EIA AEO2011, ANGA2010Estimates 70613 90350 110205 4575 177546 34251 2068 26168 2152 1228 1121
Regions & Plays
east Coast Gulf Coast Mid-Continent rockies Marcellus haynesville eagle Ford Barnett (Fort Worth Basin) Fayetteville (ark. & okla.) Woodford (ark. & okla.) Mancos (uinta)
sources: americas natural Gas alliance (anGa) 2010 studies; energy Information administration (eIa) aeo2011; navigant Consulting for the american Clean skies Foundation: north american natural Gas supply assessment, July 2008; and potential Gas Committee (pGC) 2008.
73
Beaufort (~60 Tcf) and the Arctic Islands/ Sverdrup Basin (~35 Tcf). The Canada unconventional, remaining recoverable resource base is approximately two-thirds of the total remaining gas volumes in Canada and ranges from 270 to 840 Tcf of gas. The NEB and industry believe there is around 150 Tcf of remaining recoverable resources in coalbed methane and tight gas reservoirs in the mid/reference cases. Additionally, the incremental upside for coalbed methane plus tight gas in the industry high scenario was less than 100 Tcf. These plays types are located almost entirely in Western Canada close to the existing infrastructure network. Canadian shale gas is another potential game changer. The industry estimate of remaining recoverable resource potential estimates of 200600 Tcf could be almost half of the remaining gas resource potential for Canada. These plays are in the early development phase and thus we can expect the mean or most likely values and the range to be better delineated as we get additional well and production performance data over the next decade. Whereas in conventional reservoirs where as much as 95% of the natural gas can be recovered, the ultimate recoverable volume from shale reservoirs may reach up to 2030% of the in-place resource, with recovery from some less rich reservoirs down below 10%. Cretaceous, Jurassic, Triassic, Mississippian, and Devonian shales are potential targets with the largest resource potential located in Western Canada. In summary, the outlook for North America natural gas production has changed dramatically in just the past few years. The gas resource base in both the United States and Canada is believed to have increased significantly and will have profound impacts on the North American energy market from an economic, energy security and environmental standpoint. The gas resource base does not appear to be a limiting factor on bringing new North American supplies to market. Estimates of technically recoverable shale gas are highly likely to change over time as new information is gained through drilling, production, and technological and managerial development.
(Figure 1-14). The amount of new conventional gas wells required to simply maintain production levels continues to increase over time and industry has been focusing its capital in lower cost and/or higher productivity wells in other sectors (e.g., unconventional and offshore supply regions). Recent exploration discovery sizes have been small, wildcat success rates have been low, and much of the remaining resource potential is in small field fractions in the U.S. lower-48 onshore conventional sector. There is a wide range in the future productive capacity of the lower-48 offshore, with current production levels of around 2.5 Tcf/yr falling to 1.5 Tcf/yr in 2035 in the low-side cases and rising as high as 3.2 Tcf in the high-side cases. While initial flow rates from offshore wells can exceed 50 million cubic feet per day (MMcf/d), these wells have steep decline rates and thus active drilling programs to replenish supplies are needed to maintain and grow production. We interpret the outlooks for decline in U.S. lower-48 offshore production levels in the cases we collected from industry to reflect concerns about the resumption of historical drilling activity levels in the Gulf of Mexico and the timing of access to new areas in the Gulf, Pacific, and Atlantic. The Arctic (Alaska) region currently is producing less than 0.3 Tcf/yr; however, there are considerable discovered (in excess of 35+ Tcf) and additional undiscovered resources that could supply in excess of 2+ Tcf/yr if the necessary infrastructure was in place to move gas into the U.S. lower-48 markets. As with the Mackenzie project in the Canadian Arctic, the timing of the Alaska pipeline project continues to slip and most outlooks now question whether these supplies will be entering the market before 2035, a major deviation from past studies that foresaw Arctic gas online as early as this decade. By the 2020s, more than 60% of the total U.S. gas supplies are likely to come from domestic, unconventional resources. The studies indicate that the smallest unconventional resource contributor will be coalbed methane, with current production levels around 2 Tcf/yr, and future production capacity ranging from 1.5 to 2.5 Tcf/yr by 2035. Three quarters of the current production is from the Rocky Mountains, with the lions share from the San Juan and Powder River basins. The majority of regional data for the coalbed methane sector suggested the approximately 0.5 Tcf/yr of production from the Gulf Coast, East
Production Outlooks
Only in the most optimistic, high-side cases were the outlooks for U.S. conventional production levels forecast to increase above the current 10 Tcf/yr 74
Figure 1-14. Representative U.S. Conventional Gas Production Cases
Figure 1-14. representative u.s. Conventional Gas production Cases
ARCTIC CONVENTIONAL OFFSHORE CONVENTIONAL ONSHORE
ACTUAL 2009
LOW MID HIGH 2015
LOW MID HIGH 2020
Source: NPC Industry Survey, Aggregated Data.
LOW MID HIGH 2025 YEAR
LOW MID HIGH 2030
LOW MID HIGH 2035
Coast, and Mid-Continent regions will likely be difficult to sustain till 2035. The vast majority of the remaining resource potential is situated in the Rockies. The San Juan and Powder River basins have been producing for more than 25 years and most of the readily accessible resources have been developed. Coalbed methane developments are not without above ground challenges, including the disposal of water removed from the producing wells, the surface footprint/impact on landowners and local communities and unintended loss of methane into the atmosphere (e.g., underground mining). Fortunately, these issues can be monitored and have been managed to minimize their impact. Industry and the government agencies continue to evaluate new technologies and approaches to protect the environment and maximize operational best practices. Tight gas reservoirs are currently producing more than 6 Tcf/yr and almost all the outlooks indicated that supplies could grow from this sector. Although the lowest cost, tight gas sweet spots have been developed, there are still considerable field in-fill and additional exploratory opportunities that can
be pursued and relatively easily tied into the existing regional infrastructure. In 2008, the Rockies and Gulf Coast each produced around 2 Tcf/yr, while the Mid-Continent contributed around 1 Tcf/yr. Most outlooks anticipate Gulf Coast tight gas production will decline in the future, with the largest possible increases by 2035 from the Rockies. Operators have been actively developing tight gas fields for over 1015 years and working with the government (state and federal) agencies and local communities to address issues that arise. The primary focus area is continued environmental protection, with water use and management being the most pressing issue from industry, public, and government perspectives. U.S. and Canadian tight and shale gas are likely to make up more than 60% of the remaining total resource base and will be the driver for gas production growth and energy self sufficiency/security objectives in the future. U.S. shale gas production has grown from about 1 Tcf/yr in 2006 to currently in excess of 4 Tcf/yr. Continued shale gas exploration and development over the next 510 years will help further
75
reduce the current uncertainty over the long term for the U.S. and Canadian resource base. While conventional, coalbed methane and tight gas developments are becoming increasingly costly and/or complex, lower cost shale developments provide potential to grow U.S. and Canadian production. If the higherend recoverable resource estimates are affirmed, a robust production plateau can be maintained for many decades. In the mid and high industry cases in Figure 1-15, shale gas production is anticipated to grow to more than 10 Tcf/yr by 2035. The main challenges associated with large-scale shale gas developments are potential concerns about water use/management associated with the hydraulic fracturing applications required to produce commercial quantities of gas from shale reservoirs, and other surface impacts. In all cases studied, the Canadian onshore conventional sector production output is expected to decline over the next 20 years (see Figure 1-16) and continue the trend of declining production (in excess of 1 Tcf/yr) over the last 10 years. These supplies are almost entirely in Western Canada, and we anticipate
industry will continue to maximize ultimate recovery from these plays; however, most new additions will be small pool sizes around existing fields or infill drilling projects. The rate of decline in the existing reservoirs/fields in Western Canada is greater than 10% per annum. Without large, new discoveries, it will be impossible to reverse this trend. Deep, high pressure, and/or sour gas remaining resources/opportunities are likely to be higher cost developments and may not attract investment in light of lower cost unconventional plays in the area. Future gas production capacity from the Canadian offshore (Atlantic) is believed to be relatively small (less than 0.2 Tcf/yr). Unless large new discoveries are made in the Atlantic (e.g., Orphan basin), this area is unlikely to have a material impact on Canadas conventional production capacity. The only area that can provide substantive new conventional gas volumes is the Canadian Arctic; however, there is considerable diversity of views as to when this generally higher cost gas will enter the market. The anticipated Mackenzie gas project
Figure 1-15. representative u.s. unconventional Gas production Cases

30
SHALE GAS COALBED METHANE TIGHT GAS
Figure 1-15. Representative U.S. Unconventional Gas Production Cases
20
10
ACTUAL 2009
LOW MID HIGH 2015
LOW MID HIGH 2020
LOW MID HIGH 2030
LOW MID HIGH 2035
76
Figure 1-16. representative Canadian Conventional Gas production Cases

4
ARCTIC CONVENTIONAL OFFSHORE CONVENTIONAL ONSHORE
Figure 1-16. Representative Canadian Conventional Gas Production Cases
0 ACTUAL 2009 LOW MID HIGH 2015 LOW MID HIGH 2020 YEAR LOW MID HIGH 2025 LOW MID HIGH 2030
timing has slipped considerably since the first NPC North America gas study in 1999, largely a result of the challenges associated with building a large export pipeline from the discovered fields (with significant follow-up potential in the Arctic) to existing Western Canada infrastructure. Unconventional gas production is expected to offset the overall decline for the conventional sources in Canada (Figure 1-17). Shale gas is the potential game changer and is anticipated to grow from the 0.1 to 1.5 Tcf/yr (low) to 2.4 Tcf/yr (high) by 2030. Coalbed methane production is anticipated to be between 0.3 Tcf/yr and 0.6 Tcf/yr in the above scenarios by 2030. While it is difficult to distinguish the transition from conventional to tight and shale gas reservoirs in Western Canada, the perception is that there is more remaining resource potential to exploit tight and shale gas in the study time frame than conventional sources. All the outlooks collected indicated that Canadian gas production will exceed even the largest internal demand requirement scenarios (up from 2.8 to
4 Tcf/yr), and, therefore, the main driver for Canadian output will be pull from the United States and other export markets. Most outlooks suggested that without shale gas and in some instances Arctic gas production, Canadian gas production is likely to continue its decline from historical levels. Both the industry mid and reference cases indicate that Canadian conventional, tight gas, and coalbed methane supplies would likely decline to around 4 Tcf/yr by 2025. The industry view was more optimistic about the contributions likely from shale gas plays, whereas the NEB saw the Arctic gas and pipeline coming into play earlier than industry. The combined outlooks from all sources for U.S. and Canadian production potential over the next two and a half decades (as seen in Figure 1-18) indicate reasonable scope for continued growth in production to the high 30s Tcf level. Clearly, actual growth rates will depend just as much on market factors as on supply potential, but the outlooks show there would be scope for supply to support quite significant market expansion, which would bring economic and energy security as well as greenhouse gas benefits.
77
Figure 1-17. Representative Canadian Unconventional Gas Production Cases Figure 1-17. representative Canadian unconventional Gas production Cases 5
SHALE GAS COALBED METHANE TIGHT GAS
ACTUAL 2009
LOW MID HIGH 2015
LOW MID HIGH 2025
LOW MID HIGH 2030
Figure 1-18. Industry Estimates of Potential Natural Gas Production from North American Supply Sources
Figure 1-18. Industry estimates of potential natural Gas production from north american supply sources
40
CANADA SHALE HIGH CANADA SHALE MID U.S. ARCTIC MID U.S. SHALE HIGH U.S. LOWER 48 SHALE MID U.S. LOWER 48 CONVENTIONAL + TIGHT + CBM MID 2010 AEO LG DEMAND 2010 WEO FP DEMAND
30
20
10
0 2000
2005
2009
2015
YEAR
2020
2025
2030
2035
Notes: CBM = coalbed methane; LG = low growth; FP = future policies; WEO = World Energy Outlook. Sources: Energy Information Administrations AEO2010 Reference Case; and International Energy Agencys WEO 2010.
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Development Challenges and Enablers

While the gas base resource is large, there are challenges to delivering U.S. and Canadian gas production growth. A long-term approach is necessary to address the energy trade-offs that will provide the optimal solution for North Americas energy future. Following is a brief discussion of these challenges at various stages along the value chain. All were identified by respondents to the confidential data survey as issues of concern. A typical development path is outlined in Figure 1-19. Resource Access is essential to sustaining and growing production. Since most unconventional gas plays are on private rather than government held acreage, several issues pertain: many conventional offshore opportunities in the lower-48 states and Alaska are currently not available to industry; recent proposed lease sales in the Gulf of Mexico have been delayed and cancelled in the Alaska OCS; and the lease expiry clock is winding down on currently held acreage. Consultant studies done on the behalf of the various U.S.
government agencies have estimated that between 100 and 300 Tcf are currently in moratoria areas inaccessible to industry. Opportunity Identification/Research & Technology Development is the enabler to unlock future opportunities. Industry will typically focus its resources (people, funding) in the areas it believes will have the most commercial impact. For example, although the Atlantic, Pacific, and some Arctic offshore is currently inaccessible, modern methods of seismic data collection and interpretation would help improve our understanding of their resource potential and the commercial viability of these areas, which can only help shorten the time between opening them up and the production of oil and gas. In the E&P Project Planning and Execution area, permitting and compliance with all regulatory requirements is becoming increasingly difficult and time consuming. In the offshore sector, industry is actively seeking to begin operating again in the Gulf of Mexico deepwater and pursue exploratory activities on leases in the Arctic. However, significant delays are
Figure 1-19. a typical production pathway
Figure 1-19. A Typical Production Pathway
IDENTIFICATION OF TECHNICALLY VIABLE ENERGY RESOURCES
ASSESSMENT OF RESOURCE BASE SIZE AND COMMERCIAL VIABILITY/DOABILITY
RESOURCE OPPORTUNITY, ACREAGE, ETC. ACCESS
EXPLORATION VALIDATE; QUANTIFY; DECISION POINT TO TRIGGER LARGE DEVELOPMENT INVESTMENTS
PROJECT DEVELOPMENT INDUSTRY CAPACITY PEOPLE, MATERIALS, EQUIPMENT, ETC.; CAPITAL AVAILABILITY; PROJECT MANAGEMENT PRACTICES; PERMITTING
INFRASTRUCTURE/TRANSPORTATION TO END USERS AVAILABILITY; TIMING OF NEW TRANSPORTATION ROUTES/NETWORKS
PRODUCTION OPERATIONS BEST PRACTICES

79
being encountered, likely delaying future production volumes. A timely solution is needed and cooperation between government officials, industry, and the public that can accelerate resolution to this challenge would be welcomed. Since an increasing share of future production will be from shale and tight oil and gas opportunities that require hydraulic fracturing, all permitting/operational/regulatory concerns regarding unconventional gas and tight oil must be addressed in a timely manner to continue allowing volumes to grow from these large resources. Water cycle management is one of the most important focus areas that will enable exploratory and development activities. In addition to providing a clear, timely process to drill and complete wells, industry and other stakeholders should continue to explore innovative ways to reduce water use and improve recycling and disposal technology/practices. Additional surface, air, and other areas are being studied by industry and government agencies. However, there is a need to apply the most cost-effective solutions that help reach an optimal balance for economic, environment, and energy security considerations. Industry Capacity needs to be evaluated on a total energy system basis, since increased activity in any one sector or area may only result in a shift in resources, rather than a material increase in the oil and gas industrys ability to grow total supplies. As originally noted in the 2007 NPC Hard Truths report, the oil and gas industry is facing a considerable human resource challenge. Nearly 50% of the workforce will be eligible for retirement in the next 10 years and fewer university graduates have entered the workforce over the past generation. Industry and government have roles to play in helping to rebuild the science and engineering capabilities and communicating the benefits of employment with oil and gas companies. An increased focus on training younger employees is essential, especially if activity levels continue to increase, with an emphasis on operational best practices, safety and environmental protection in order to address the retirements of many highly experienced industry personnel. While growth in the gas sector can be partially offset by shifting resources from other parts of the industry, the system could become stretched or incapable of meeting a high growth scenario in the unconventional gas and tight oil areas, Canadian oil sands, expansion of E&P in the offshore and Arctic, and finally resource 80
intensive plays like oil shale in the Rockies. Growth in all these areas would put a large strain on people, materials, and equipment. Industry/Government/Public Cooperation can be the linchpin to work through obstacles and/or challenges to our energy future. The most rapid and effective way to resolve issues is to work together to understand the fundamentals; quantify the benefits and concerns; openly discuss the trade-offs with all concerned stakeholders; and then jointly support and proceed with a solution to accelerate energy gains (that should include increased efficiency/reduction in energy use, increased supply, increased environmental protection, and increased energy security). One way to improve the data sharing and knowledge of the fundamentals would be to work through existing organizations to develop a more systematic process for governments, industry, and public to collect, discuss and share data that would be kept in a wellmanaged repository. Improving full-cycle, energy value chain modeling (tools, data, interpretation, and workshops) could expand a more rounded discussion of alternative energy visions, strategic directions, and overall energy policy options. Periodic studies by the industry, government committees, and public institutions are both helpful and useful.
PROSPeCTS FOR NORTh AMeRICAN OIl DevelOPMeNT Overview

Both the United States and Canada are major oil resource-holding and -producing countries on a global scale and have been for many years. However, since the United States is also a large oil importer, the focus of attention has been on reducing imports and improving energy security by demand-side measures, such as efficiency standards for vehicles, rather than supply-side measures, such as enabling domestic oil supply development in new areas. This section of the report sets out the opportunities for continued North American oil development and production activities at scale. Major producing areas now contributing significant volumes of crude oil to North American supply are profiled, such as the offshore Gulf of Mexico, the Alberta oil sands, and the multiple producing basins focusing on conventional oil distributed across the United States and Canada. Opportunities for sustaining and growing these sources are examined and
assessed. In addition, emerging and new sources of crude oil in the region are examined. These include new exploration in the Arctic regions of the United States and Canada, the emerging tight oil plays, the potential from offshore zones where access has been under development restrictions, and the potential emergence of new unconventional oil sources such as U.S. oil shale. Each major heading in this section describes one segment of this portfolio of current and future oil supply, and includes an overview of the context and production history, where applicable. Also included are the key technologies required for development, the potential production pathways to 2035 and beyond, and an outline of the key findings. The section concludes with an overview of the crude oil pipeline network required to deliver this supply to market. Each of these topics is described in more detail in the topic papers to this report, available on the NPC website.
densate production was around 2.5 million barrels or nearly 7,000 barrels per day. That figure peaked at around 600 million barrels in 2002 or 1.64 million barrels per day, accounting for 29% of total U.S. crude oil and condensate production. A surge in Gulf of Mexico deepwater oil production led to an increase of OCS crude oil production to around 591 million barrels in 2009 or 1.62 million barrels per day; accounting for 30% of total U.S. oil production. Figure 1-20 shows offshore oil production as a percentage of total U.S. production from 1960 to 2009. The move to deep water was made possible by continuous advancements in technologies that permitted drilling and development in these environments. Examples of these advancing deepwater technology firsts in the Gulf of Mexico include the first fixed platform, Cognac installed in 1979 at water depth of 1,023 feet, while the tallest steel jacket Bullwinkle, considered the economic limit for this fixed platform type, was installed in 1989 at water depth of 1,353 feet. The first tension leg platform, Joliet was installed in 1989 at water depth of 1,760 feet, followed by Neptune, the first Spar/Subsea platform installed in 1997 in a water depth of 1,930 feet. On the ultra-deepwater front, Herschel/Na Kika/Fourier was the first Floating Production System installed in water depth of 6,950 feet in 2003. The first Floating Production Storage and Offloading system in the Gulf of Mexico is scheduled for first production in 2011 at the Cascade and Chinook prospects in 8,800 feet of water. According to the Minerals Management Service (MMS) report on deepwater Gulf of Mexico, in February 1997, there were 17 producing deepwater projects, up from only 6 at the end of 1992. Since then, industry has been rapidly advancing into ultradeepwater, and many of these anticipated fields have commenced production. At the end of 2008, there were 141 producing projects in the deepwater Gulf of Mexico, up from 130 at the end of 2007.2 In March of 2010, Shell started production at the Perdido Spar complex in the Western Gulf of Mexico, and overtook the Independence Hub by setting the record for production in the deepest water. Moored 170 miles offshore in 7,817 feet of water, with subsea wells in up to 9,627 feet of water, peak production should achieve 130 thousand barrels of oil equivalent per day.
2 Richardson et al., Deepwater Gulf of Mexico 2008: Americas Offshore Energy Future, U.S. Department of the Interior, Minerals Management Service, 2008, OCS Report MMS 2008-013.
Offshore
Development and Production History and Context
U.S. Lower-48 Offshore
Offshore oil and gas development and production have been on the rise in North America over an extended period. In the U.S. lower-48, federal OCS oil production has increased its contribution to total U.S. production from less than 1% in 1954 to more than 30% in 2009. The expansion of offshore development and production is ascribed overall to technological progress keeping pace with more challenging offshore environments leading to larger field discoveries in ever-increasing water depths. Currently, U.S. lower-48 offshore oil and gas production is restricted to the Gulf of Mexico, with a minor contribution from the Pacific OCS region (about 4% of U.S. offshore production). Much of the Eastern Gulf of Mexico is expected to be restricted to drilling until the year 2022, and the Pacific and Atlantic OCS areas were restricted from leasing consideration up until 2008. For the purposes of this study, oil and gas development on the Alaska OCS is included as part of the Arctic region, rather than in the U.S. offshore region. From its beginning in late 1940s, the U.S. federal offshore oil and gas industry has grown tremendously. In 1954, federal offshore crude oil and con-
81
Figure 1-20. Federal Outer Continental Shelf (OCS) Oil as a Percentage of (oCs)U.S. Production, 19602009 Figure 1-20. Federal outer Continental shelf Total oil
as a percentage of total u.s. production, 19602009
FEDERAL OCS
FEDERAL OCS PERCENTAGE OF TOTAL U.S. PRODUCTION
OIL PRODUCTION MILLION BARRELS PER DAY
1.6
30
1.2
0.8
10 0.4
0 1960
2 3
4 5
6 7
1965
1970
1975
1980
1985 YEAR
1990
1995
2000
2005
0 2010
1 1961 First subsea well completed 2 1988 Deepest xed platform installation Bullwinkle 3 1989 First U.S. tension leg platform Jolliet at 1,760 feet 3D seismic processing begins Subsalt drilling begins 4 1996 First SPAR completed Neptune 5 1997 Longest tieback constructed Mensa
6 2002 Deepest pipeline constructed at 7,209 feet 7 2003 Discoverer Deep Seas drillship hits rst well deeper than 10,000 feet 8 2006 Installation of Independence hub in Gulf of Mexico 9 2010 Completion of construction of rst oating production storage and o oading in Gulf of Mexico
Development of the deepwater frontier (water depth greater than 1,000 feet) is responsible for increasing overall OCS crude oil and natural gas production since 2000. In fact, the year 2000 marks a transition from predominantly shallow water oil production to deepwater production. In 2000, annual deepwater crude oil production amounted to 271 million barrels, while shallow water production was 252 million barrels. By 2007, annual crude oil production from the shallow water had dropped to 140 million barrels while in deepwater regions of the Gulf of Mexico production rose to 328 million barrels. Since 2005, the deepwater Gulf of Mexico has contributed about 70% of the total Gulf of Mexico OCS crude oil production. This trend is expected to continue as more discoveries and drilling activities occur in the deepwater and ultra-deepwater areas of the Gulf of Mexico. 82
Given this history, the deepwater area of the Gulf of Mexico represents an important part of U.S. oil supply, and it is viewed as one of the most important world oil and gas provinces. All this has been made possible by means of technological breakthroughs that have allowed oil and gas companies to operate out in these harsh and challenging environments. The advent of drill ships capable of drilling in water depth up to 10,000 feet and deeper reservoirs, along with the subsea completion technology and the Hub system have greatly contributed to the expansion of offshore oil and gas development and production. Subsea tieback technology coupled with innovative subsea technology also increase the ability of the industry to develop and produce more oil and gas in fields that would not otherwise be economical. Accounting for approximately 290 productive wells in deep water, subsea systems continue to be a key
PERCENT
20
component in the success of the industry in deepwater regions of the Gulf of Mexico. Additional development potential exists in areas that have largely been under exploration and development moratoria for most of the past two decades, in particular the Eastern Gulf of Mexico and the Atlantic and Pacific OCS. Estimates of the undiscovered technically recoverable resources of crude oil in U.S. offshore moratoria areas vary from 18.2 to 63.0 billion barrels. In contrast, the BOEMRE mean estimates of total U.S. lower-48 offshore undiscovered technically recoverable oil are 59.3 billion barrels.3 Although these estimates include a wide range of assumptions, their sheer magnitude demonstrates that a significant resource base remains available for future offshore oil production.
ural gas and oil being produced in Nova Scotia and Newfoundland offshore. In offshore Newfoundland, production in the Jeanne dArc Basin of the Grand Banks started in 1997 with the Hibernia field followed by the Terra Nova and White Rose fields in 2002 and 2005, respectively. From an initial annual production of 1.3 million barrels in 1997, production reached 97.7 million barrels in 2009, with a peak production of 134.5 million barrels in 2007. In 2009, average daily production was 340 thousand barrels per day. Cumulative oil production reached 1,125 million barrels in April 2010 (Figure 1-21). While Canadian offshore production and development plans are confined to the Newfoundland and Nova Scotia sectors of the Atlantic margin, exploration activities (seismic and drilling) are planned in both areas and their less explored domains (Laurentian, Sydney, Orphan, and Flemish Pass sub-basins) that are under the Canada-Nova Scotia Offshore Petroleum Board (CNSOPB) or Canada-Newfoundland and Labrador Offshore Petroleum Board (CNLOPB) rules.
Canada Offshore
In Canada, offshore hydrocarbon production comes exclusively from its Atlantic margin, with nat3 Minerals Management Service, Assessment of Undiscovered Technically Recoverable Oil and Gas Resources of the Nations Outer Continental Shelf, 2006, February 2006.
Figure 1-21. total Monthly oil production offshore newfoundland and labrador
14 12 10 MILLION BARRELS 8 6 4 2 0 1997
NORTH AMETHYST WHITE ROSE TERRA NOVA HIBERNIA
Figure 1-21. Total Monthly Oil Production O shore Newfoundland and Labrador
1999
2001
2003
2005
2007
2009
2011
Source: Canada-Newfoundland and Labrador O shore Petroleum Board.

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The Gulf of St. Lawrence has been recently evaluated to host an in-place best estimate (P50) of 41 Tcf of gas and 2,500 million barrels of oil, largely in Carboniferous reservoirs. A significant gas discovery (77 Bcf) was made in this basin in 1970. Except for restricted zones under the jurisdictions of CNSOPB or CNLOPB, most of the Gulf area is under a de facto moratorium. The non-regulated area is currently the subject of jurisdiction discussions between the federal and provincial governments. Areas under the jurisdiction of the CNSOPB and CNLOPB are, however, open for exploration. Seismic acquisition is planned in the CNLOPB area in 2011. The Georges Bank area (offshore Nova Scotia) is evaluated to host 3,500 million barrels of in-place oil resources. The area is currently under an exploration moratorium, which has been recently extended to 2015. The Pacific margin of western Canada is under a de facto moratorium, though no official legislation has been put in place. There have been no discoveries in this area, and the best estimate (P50) indicates the presence of in-place resources of 43.4 Tcf of gas and 9,800 million barrels of oil. Of all the areas under legislated or de facto moratoria, the Gulf of St. Lawrence is the one most likely to be opened for exploration in the next 5 to 10 years.
Energy Outlook are based on scenarios and sensitivities with expanded offshore access, accelerated technology deployment and high oil price environments. Production of oil in U.S. lower-48 offshore increases from 1.7 million barrels per day in 2010 to 2.3 million barrels per day in 2035, in the high oil price case, according to the final results of AEO2011 (Figure 1-22). The bulk of the expected increase in U.S. offshore oil production is likely to come from new discoveries in deepwater and ultra-deepwater regions of the Gulf of Mexico, such as the Lower Tertiary trend. The Lower Tertiary is recognized as a huge resource with the potential for long-life projects of up to 30 to 40 years and the opportunity to enhance recoveries through advancing technology. The AEO2011 Low Oil Price case provides insight into the lower or more constrained development pathway. Production of oil decreases from 1.8 million barrels per day in 2010 to 1.4 million barrels of oil per day in 2035. That level could be even lower if more restrictive operational safety requirements and legislative policies were passed and implemented, following the 2010 Macondo oil spill in the deepwater Gulf of Mexico. This occurrence would affect the rate of development and production of deepwater and ultra-deepwater oil and gas prospects in general, and the lower tertiary trend in particular. The overall effect would be to increase drill times along with exploration and development costs, and thus slow significantly expected production over the next 10 years and dampen long-term output from the U.S. offshore. Production could be 20% lower by 2035 if long-term moratoria were reinstated as a result of the Macondo oil spill in the deepwater Gulf of Mexico and no development takes place outside the central and western Gulf of Mexico.
Production Pathways
Potential production from the offshore areas can be influenced by a variety of factors including technology progress, access to offshore leases, the economic environment, infrastructure development, environmental risk management capabilities, and geology. Here we set out a reasonably unconstrained production potential and contrast it with a more constrained view, thus defining the range for U.S. lower-48 offshore oil production. The unconstrained case is characterized by a favorable economic environment with buoyant oil demand, increased access to offshore lands, and accelerated technological progress. Conversely, the constrained case assumes lower oil demand, limited access to offshore zones, and slower technological improvement. In particular, alternate cases published in the Energy Information Administrations Annual 84
Key Offshore Technologies

Over the past 100 years, the petroleum industry has demonstrated an ability to develop breakthrough technologies that made a significant impact on finding and producing oil and gas. Drilling rigs, wireline logging, logging while drilling, geophysical surveys, subsea systems, and enhanced oil recovery, to name a few, have fueled an incredible century of progress. They provide diverse examples of effective existing, emerging, and future technologies that will expand
Figure 1-22. projection u.s. lower-48 offshore oil production

2.5
Figure 1-22. Projection U.S. Lower-48 O shore Oil Production
AEO2010 REFERENCE CASE 2010 AEO2011 REFERENCE CASE 2011
AEO2011 HIGH OCS 2011 AEO2011 REDUCED OCS ACCESS 2011)
2010
2015
2020
YEAR
2025
2030
2035
Note: OCS = Outer Continental Shelf. Sources: Energy Information Administrations AEO2010 Reference Case and AEO2011 Reference Case.
the frontiers of exploration and production. Certainly each of them continues to play a critical role in increasing production growth in North America. But industry is now faced with continuing and even growing challenges in the offshore, trying to grow production in deep water, often with poor subsurface images, in remote areas with limited infrastructure, in deeper, often hostile, high pressure high temperature environments, and finally doing all of this in a basin that is becoming more mature. The Gulf of Mexico is one of the most important regions in the United States for energy resources and infrastructure, accounting for just under 30% of total U.S. oil production and 13% of total natural gas production. Figure 1-23 illustrates that over 70% of that offshore oil production in the Gulf comes from deep water, accounting for almost a quarter of U.S. oil production and the amount is rising. Future, successful exploration and development in both maturing open and currently restricted OCS areas will be critical to maintain North Ameri-
can oil and gas production. Operations must be conducted with improved safety measures while controlling costs. Tackling these challenges will involve continued use of existing technologies. To improve success and increase production and recovery, especially in the Gulf of Mexico Lower Tertiary, development of new technologies will be necessary to ensure challenges are overcome. Topic Paper #1-3, Offshore Oil and Gas Supply, associated with this report, builds off the excellent commentary made in the two technology topic papers that accompanied the 2007 NPC study Hard Truths: Facing the Hard Truths about Energy. The first of these papers, Exploration Technology, identified five technology areas in which future developments have the potential to significantly impact exploration results over the next 25 years. The second, entitled Deepwater, identified four top priority deepwater-specific technological challenges most important to future deepwater development. The following is a summary of the key technologies from the papers.
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Figure 1-23. annual oil production trend from offshore shallow and deepwater outer Continental shelf
500
DEEPWATER GULF OF MEXICO OIL PRODUCTION SHALLOW WATER GULF OF MEXICO PRODUCTION
Figure 1- 23. Annual Oil Production Trend from O shore Shallow and Deepwater O shore Outer Continental Shelf
VOLUME MILLIONS OF BARRELS
400
300
200
100
0 1978 1980
1985
1990
1995 YEAR
2000
2005
2010
Source: Bureau of Ocean Energy Management, Deepwater Gulf of Mexico 2009: Interim Report of 2008 Highlights, OCS Report MMS 2009-016.
Exploration Technology Topic Paper4 y Core Technology Areas: Seismic Controlled Source Electromagnetics (CSEM) Interpretation Technology Earth Systems Modeling Subsurface Measurements. y Auxiliary Technologies Future developments or applications that have the potential to significantly impact exploration results by 2030: Drilling Technology Nanotechnology Computational Technology.
4 Cassiani et al., Exploration Technology, Topic Paper, National Petroleum Council Study, Hard Truths: Facing the Hard Truths about Energy, 2007.
Deepwater Technology Topic Paper5 y Top Priority Deepwater-Specific Challenges: Reservoir Characterization Extended System Architecture High-Pressure and High-Temperature (HPHT) Completions Systems Metocean Forecasting and Systems Analysis. y Related topics discussed in other reports: Subsalt imaging Gas to Liquids Arctic. y Other Important Deepwater Technologies Considered: Infrastructure life extension
5 Conser et al., Deepwater, Topic Paper, National Petroleum Council Study, Hard Truths: Facing the Hard Truths about Energy, 2007.
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Virtual prototyping Unconventional options. These papers also provided suggestions and options for accelerating development and use of technology and identified two issues critical to successful development of oil and gas resources in ever-harsher environments. These are: (1) future marine technology leadership and (2) valuing technology to enable access. The Offshore Oil and Gas Supply topic paper accompanying this report (available on the NPC website) evaluates technologies that will enable growth of offshore production for the next 40 years, based on discussion among the Offshore Subgroup members, colleagues within our respective companies and organizations, as well as extensive literature search, including the 2007 NPC study Hard Truths Technology Topic Papers. To prioritize technologies, two surveys were submitted to professionals in the various key disciplines of geology, geophysics, petrophysics, reservoir engineering, drilling engineering, completion, and production engineering for feedback. The first survey asked the participants to rate oil and gas production capacity growth challenges and enablers that are included in the 2010 NPC Petroleum Resource Template. The second survey was based on the 2007 NPC Hard Truths topic papers and asked participants for feedback on the previously identified core technologies listed above and any additional ones that would significantly impact growth in production, concluding with a ranking of the technologies. Not surprisingly, the surveys showed that many of the priorities have not changed from the previous topic papers and the differences of note are due primarily to the focus on offshore deep water. Key changes from the 2007 report include moving Drilling and Computational Technology from the auxiliary level to the core level and the addition of Improved and Enhanced Oil Recovery, where a large target of recoverable remaining oil in place exists. Extended Architecture is central to any discussion on the growth of oil and gas production and is discussed together with including Completions and Digital Fields. High-Pressure High-Temperature (HPHT) Completions Systems certainly remains a key technology category, but in this report will be tackled as HPHT environment in the various core technologies that it impacts. The only technology no longer on the
core list is CSEM. Although that tool can reduce the exploration risk in CSEM-suitable settings, it was not ranked at the level of the other core technologies and would now be included at the auxiliary level. Of final note, a brief update on the status of industry plans for containment is included under the Drilling Technology section of the Offshore topic paper. As such, the updated list of core technologies that will be critical to oil and gas capacity growth offshore are: y Seismic Utilization of man-made acoustic waves to image the subsurface geology has been a game changer, allowing industry to unlock the exploration potential of the deepwater Gulf of Mexico and optimize the development of discoveries. Technical advances in imaging algorithms, processing flows and acquisition geometries are underway that could make improvements in imaging necessary to expand existing and emerging hydrocarbon bearing trends as well as identify new ones. y Computational Technology A key enabling technology. While not invented by the oil and gas industry, studies have concluded that this industry has propagated digital technologies, altered its management and organization, and changed the way people connect to the data far more than any other industry. The value delivered from the accompanying technologies in this list would not be possible without it. y Interpretation Technology Has played a significant role in the impact of 3D seismic on success rates. With the adaptation of tools used in other industries, such as medical imaging, interpreters are now able to visualize and interpret data much faster. They are not limited to thinking in 3D, but literally can visualize in 3D, or climb into the data set. y Earth-Systems Modeling Encompasses geology, hydrology, climatology, and other applied sciences involved in studying the earth as an integrated system. Earth systems modeling joins basin and petroleum system modeling together to quantitatively model a sedimentary basins deposition, erosion, and heat flow history together with essential elements of the Petroleum System (source, overburden, reservoir, seal) and critical processes (trap formation, generation and migration, accumulation, preservation) during the evolution of a sedimentary basin.6
6 L. B. Magoon and W. G. Dow, The petroleum systemFrom source to trap, American Association of Petroleum Geologists Memoir 60, Tulsa, Oklahoma, 1994.
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y Drilling Industry has come a long way from the days of dropping a heavy bit down the hole to chisel away the soft rock formations. In 1909, the twocone rotary bit unlocked the full potential of the rotary drilling system, allowing for the efficient drilling of wells in much deeper, harder rock environments. Further advances followed with directional and horizontal drilling, top drives, and rotary steerable assemblies. The trend for conventional oil and gas discovery has been to drill in environments that were previously inaccessible. Traditionally this means drilling deeper into hotter and higher-pressure zones and to do so in ever more extreme environments such as ultra-deepwater. Historically the only way to access these zones is to get bigger rigs, stronger steel, and more durable tools and there is little reason to believe this trend will not continue. New rigs coming out are capable of drilling in up to 12,000 feet of water and 40,000 feet total depth. y Subsurface Measurements At the turn of the 20th century, oil industry pioneers began to search for ways to obtain information about what the drill bit was encountering. This led to development of core sampling and mud-analysis of the wellbore cuttings (mud logging) that came to the surface. Beginning in 1978, one of the most influential technologies for drilling and subsurface measurement occurred when Teleco introduced the first commercial measurement while drilling (MWD) tool, enabling operators to know the location of their well while drilling. Within a decade, Schlumberger introduced the other critical technology, logging while drilling, or LWD, which allowed geoscientists to get petrophysical measurements, similar to openhole wireline logs, immediately after the bit drilled the formation. This information can then be viewed essentially in real time on the rig and back onshore in the office, allowing for more timely decisions. y Reservoir Characterization Involves building a high-resolution geologic model of the reservoir that incorporates characteristics key to reservoir storage and production of hydrocarbons. It consists of a geometric description of the boundary surfaces, faults, bedding geometries, and a 3D distribution of reservoir properties such as permeability and porosity. Robust reservoir characterization is critical to predicting and monitoring the production behavior in increasingly complex reservoirs with fewer more costly direct well penetrations. 88
y Extended System Architecture In shallower water, options for developing the extremities of fields not reachable by directional drilling from an existing platform or where costs would not justify the installation of one or more platforms, drove the development of subsea well systems and their accompanying tiebacks. In deep water, this led to the development of Tension Leg Platforms (TLPs), semi-submersible floaters and spars that act as hubs to collect production from multiple subsea well systems for processing and transportation via pipeline to shore. Today the term extended system architecture applies to the combination of these facilities and includes flow assurance, well control, power distribution, and data communications to improve recovery and extend the reach of production hubs to remote resources. y Improved and Enhanced Oil Recovery Boosting the recovery factor of worlds fields just 1% has the potential to cover three years of worldwide production. This increased productivity of hydrocarbons is known as Enhanced Oil Recovery (EOR) and Improved Oil Recovery (IOR). Technology for these types of recovery processes is already in place at many fields around the world, with EOR primarily onshore. Techniques for IOR include: waterflood; subsea processing and pumping such as sea floor separation, gas lift, multiphase pumps, and electric submersible pumps; horizontal and multilateral drilling to expose more of the formation or multiple formations to the open hole; improved perforation and stimulation methods; advanced logging procedures; and optimal placement of wells.7 y Metocean Forecasting and Systems Analysis Integrated models to predict both above and below surface weather and engineering system response. The ability to characterize and predict the behavior of the oceans is essential for safe conduct of exploration and production operations offshore. The ability to predict near term conditions for the seas and currents is necessary to plan and conduct safe drilling and production operations in the marine environment and to respond to any hydrocarbon spill incident.
Key Findings
y Oil development and production in the U.S. lower-48 offshore is significant, and the expectation is that a production growth trend will extend
7 S. A. Ali, Mature Field Revitalization, Technology Focus: Journal of Petroleum Technology, January 2009.
to the year 2050. The Offshore Subgroup expects offshore oil production to increase to the year 2035 by an average annual growth rate range of 0.2% to 0.9%. y According to the AEO2011, crude oil production in the U.S. lower-48 offshore is expected to rise up to 2.3 million barrels per day in 2035 in the high oil price case. y Beginning around 2020 and extending to the year 2050, the bulk of oil production in the U.S. lower48 offshore is expected to originate from the deepwater Gulf of Mexico, in the emerging Lower Tertiary trend and the extension of existing and new trends into areas that are currently poorly imaged. Also, we expect additional impacts on production from increased access to the Pacific, and the Atlantic offshore regions. y Government policies favorable to accessing more U.S. lower-48 offshore lands are needed to allow for the occurrence of the oil and gas development and production growth rates mentioned above. y A slowdown and a postponement of offshore oil and gas development and production are expected if more stringent operational safety requirements and environmental policies are implemented in the OCS following the Macondo oil spill in the deepwater Gulf of Mexico. y Technological progress and innovation are the key factors that would enable development and production of oil and gas in new frontier regions located in deep water and in deeper reservoirs. Most notably, technologies adapted to the high-pressure hightemperature (HPHT) environment, delivery rates, and reduction of drilling costs are the key drivers for the huge oil and gas resources hosted in the Gulf of Mexico Lower Tertiary formations. These formations have potentially greater than 15 billion barrels of recoverable oil reserves, some of which is located in areas of at least 60 miles from the nearest infrastructure. The challenges of this environment cross multiple disciplines and advances in technologies associated with seismic imaging, completion and casing design, subsea production equipment, subsea processing, and high integrity pressure protection systems, while underway, need to continue, if not accelerate. HPHT applications to 10 thousand pounds per square inch (ksi) and 250oF are common in todays market and the envelope has pushed out to 15 ksi and 400oF, with some limited
gaps. However, now the envelope is being pushed even further to 2030 ksi and >400oF in the shallow water gas play of the Lower Tertiary trend. y Seismic innovative technologies that allow for better imaging of the subsalt horizons in the Gulf of Mexico are pivotal to the expansion of hydrocarbon resources via additional newer discoveries. These include imaging algorithms, acquisition geometries, and inclusion of more azimuths in processing and retention of high frequencies. y An extrapolation of the top 500 supercomputer performance lists predicts Exascale computing capability with a 1,000-fold increase in processing capability within 10 years. With some seismic vendors today approaching the level of computing capability seen with the national computers on the top 500 list, it will be exciting to see what challenges can be conquered with the Exascale computing level, such as near real-time seismic imaging. y There is a need to reduce drilling costs so that many more exploration wells can be drilled, allowing companies to test more concepts and perhaps encourage more improved and enhanced oil recovery programs. Dual gradient drilling is one such concept scheduled to be implemented in the deepwater Gulf of Mexico this year. y Subsea technology and extended architecture systems will boost production of offshore oil in remote and challenging environments of the deepwater and ultra-deepwater areas, which lack the basic infrastructure needed to produce and to transport the hydrocarbons to shore. y The offshore field of the future, which we are not far from today, will have multiple satellite fields produced via subsea completions and long tiebacks to hub facilities. The subsea manifolds will be equipped with remote power and communication ability, so remote surveillance and control functions are available at the hub as well as the onshore production center. Smart equipment will be deployed on the seafloor and downhole that will accept commands from the offshore hub or onshore center to improve reservoir production efficiency. Sophisticated models of the reservoir, well, and processing systems will be kept up to date and running online, so surveillance is a manage by exception process. Field optimization will be regularly reviewed and based on analysis so that asset managers can make decisions when opportunities are encountered, instead of producing to a plan that may be months to years old.
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y There have been significant advances in subsurface measurement over the last decade, but the demand for increased resolution and data will require improved real-time transmission methods. The need to improve downhole fluid characterization and reservoir parameter data for in situ properties, and to monitor wells down-hole for longer periods will be critical to predicting field performance in more challenging environments. y Improved and enhanced oil recovery techniques could reach an additional 44 billion barrels of oil equivalent left in discovered fields at abandonment. This is based on data from more than 80 fields and 450 reservoirs developed in the Deepwater Gulf of Mexico Research Partnership to Secure Energy for America project 07121-1701, entitled IOR of the Deepwater Gulf of Mexico. y In the U.S. lower-48 offshore, newer geologic plays and trends such as the Lower Tertiary and deeper reservoirs are expected to contribute to current and near future production of crude oil and natural gas. y Canadian offshore production of oil is lower in comparison to the U.S. lower-48, and is confined to the eastern shore in Newfoundland and Nova Scotia.
Removal of the imposed and the de facto moratoria will provide better opportunities for increasing offshore oil development and production in offshore Canada.
Arctic
History and Context
For the purposes of this study, the Arctic is defined as those areas in Alaska, Canada, and Greenland subject to ice and permafrost conditions, rather than simply those areas north of the Arctic Circle. Greenland is included, even though it is a territory of the kingdom of Denmark, as any future oil production from Greenland would very likely be supplied to the U.S. and/or Canadian oil markets. The map in Figure 1-24 shows the areas in Alaska, Canada, and Greenland covered in this portion of the study, within the red dotted line. The Arctic study area is estimated to contain over 7 billion barrels of discovered undeveloped and over 90 billion barrels of mean, risked, technically recoverable undiscovered volumes of oil and NGLs. These
Figure 1-24. Arctic Subgroup Study Area
Figure 1-24. arctic subgroup study area

NORTH GREENLAND SHEARED MARGIN CHUKCHI BEAUFORT BERING SHELF NORTH ALASKA MACKENZIE DELTA/ CENTRAL BEAUFORT ARCTIC ISLANDS/ SVERDRUP BASIN EAST GREENLAND RIFT BASINS WEST GREENLAND
CENTRAL ALASKA SOUTH ALASKA PACIFIC MARGIN
EAST CANADA LABRADOR NEWFOUNDLAND
CANADA NORTH ONSHORE BASINS
ARCTIC CIRCLE
U.S. CANADA GREENLAND STUDY AREA ARCTIC CIRCLE INTERNATIONAL BOUNDARY Sources: Bureau of Ocean Energy Management, Regulation and Enforcement; Canada-Newfoundland O shore Petroleum Board; IHS Inc.; National Energy Board of Canada; and United States Geological Survey.
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Figure 1-25. Arctic Oil and Natural Gas Liquids Resources
Figure 1-25. arctic oil and natural Gas liquids resources

1.4 0.2 9.9 0.1 1.3 0 0.2 0.1 16.7 0.7 0.8 0 1.7 0
BBO + BBNGL BBO BBNGL INTERNATIONAL BOUNDARY DISPUTED ZONE Notes: Discovered undeveloped plus mean risked, technically recoverable, undiscovered volumes by basin. Prospective basins highlighted in green for Alaska, in yellow for Canada, and in blue for Greenland. BBO = billion barrels of oil; BBNGL = billion barrels of natural gas liquids.
15.4 0.7 9.2 0.2
8.9 8.1 5.9 0.9
4.7 0
0.6 0
A R C TI C CIR C LE
2.7 0 4.8 0.7
volumes are highlighted on the map in Figure 1-25, which indicates their location by basin, and are described in Finding 1 later in this section. Additional information can be found in Topic Paper #1-4, Arctic Oil and Gas, available on the NPC website. Figure 1-26 shows how the crude oil resources described above are distributed among Alaska, Canada, and Greenland and highlights the amount of undiscovered oil resources that lie in areas currently under moratoria or otherwise unavailable for leasing. These are world-scale resources, which will need to be validated by exploration and development drilling activity in order to enable production from the 20252050 time frame. The long history of onshore and offshore oil and gas leasing/licensing and exploration drilling in the Arctic region has resulted in discovery of significant oil and gas reserves, some of which have been developed and produced, most notably the giant oil and gas field at Prudhoe Bay on the Alaska North Slope and the large oil and gas fields (onshore and offshore) in Cook Inlet, Alaska, as well as numerous stranded
discoveries (no development/production facilities or pipelines). Experts expect the region to contain significant yet-to-be-found volumes, based on numerous government agency estimates and supported by industry interest (leasing/licensing, historical 2D seismic and modern but limited 3D seismic, and renewed attempts to secure regulatory permission to drill particularly in the offshore). Most of these volumes are expected to be offshore, beneath the continental shelf. Following is a brief summary of the development and production history for the most significant of the main Arctic areas under consideration.
North Alaska Onshore

Exploration of this region began in 1909 with discovery of active oil seeps in the Cape Simpson area of what is now the Northwest National Petroleum ReserveAlaska (NPR-A). In 1945, the first exploration drilling resulted in non-commercial finds until the discovery of the giant Prudhoe Bay Field in 1968 (15 billion barrels oil and 27 Tcf gas recoverable).
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Figure 1-26. Split of Arctic Oil Potential (not Including Natural Gas Liquids)
Figure 1-26. split of arctic oil potential (not Including natural Gas liquids)
ALASKA'S TOTAL SHARE 55% GREENLAND UNAVAILABLE 2% ALASKA AVAILABLE 37% GREENLAND'S TOTAL SHARE 19%
GREENLAND AVAILABLE 17% ALASKA MORATORIA AREA 13%
ALASKA POTENTIALLY AVAILABLE FOR LEASE 4%
CANADA UNAVAILABLE 6%
CANADA AVAILABLE 20%
CANADA'S TOTAL SHARE 26%

Note: Discovered undeveloped plus undiscovered (mean risked, technically recoverable).
Prudhoe Bay helped drive the construction of the Trans-Alaska Pipeline System (TAPS), completed in 1977, and ushered in a new era of exploration. Over 400 exploration wells have been drilled in this region, mostly in the North Slope Coastal Plain, and have resulted in the discovery of numerous fields, many of which are currently producing. The northern discoveries are primarily oil and gas, while the southern discoveries are largely non-associated gas with some possibility of oil. Natural gas is not exported due to the lack of a gas pipeline and most of the gas is re-injected back into producing reservoirs to enhance oil recovery. Prospective areas outside the North Slope Coastal Plain (NPR-A, North Slope Foothills, and the Arctic National Wildlife Refuge, 1002 Area [ANWR 1002]) are significantly underexplored.
in 1979. This and subsequent OCS lease sales, the most recent of which was held in 2007, have allowed access to waters beyond the three-mile limit. Exploratory efforts since 1970 (~90,000 miles of 2D seismic and 30 exploration wells) have yielded four discoveries that have been deemed capable of production and have been termed significant discoveries by BOEMRE and the Alaska Division of Oil & Gas. Three of these discoveries, Hammerhead (Sivulliq), Sandpiper, and Liberty, are completely in OCS waters but have not yet been developed. The fourth discovery, Northstar, underlying both federal and state waters, has been developed and producing oil since 2001. With respect to the Chukchi Sea, in the early 1980s, BOEMRE (formerly MMS) determined that this area had a large resource potential and that long-term oil pricing would support exploration and development. BOEMRE held the first lease sale (Sale 109) covering this prospective area in 1988, offering more than 25 million acres. Industry drilled five exploration wells from 1989 to 1991, and demonstrated a working petroleum system with strong affinities to
North Alaska Offshore

Exploration drilling in the federal portion of the Beaufort Sea area began in earnest following the 1968 discovery of the Prudhoe Bay Field (onshore) and the completion of TAPS in 1977. The first offering occurred in a joint federal/state lease sale held 92
the North Slope and Beaufort Sea regions. Four of the five wells contained reservoirs with oil and gas pay, as defined by BOEMRE, and the fifth welldemonstrated oil and gas shows. These wells were drilled 60 miles or more off of the coast in water depths ranging from 137 to 152 feet. Although none of the prospects were deemed commercial at the time, existence of a working petroleum system was demonstrated.
Canadian North
In the Canadian North, oil and gas exploration dates back to the recognition of oil seeps in the 1700s and the 1920 discovery of the Norman Wells oil field (0.3 billion barrels oil recoverable). The late 1940s and 1950s saw increased exploration in the southern portion of the Northwest Territories. Exploration then moved northward above the Arctic Circle, first into the Mackenzie Delta in 1960, then the Arctic Islands and Sverdrup Basin in 1961 and the Canadian Beaufort Offshore in 1972. Many significant oil and gas fields (Parsons Lake, Taglu, Niglintgak, Drake Point, Adlartok, Tarsiut, Issungnak, Amauligak, and Kopanoar accumulations) were found. These discoveries were the result of an extensive exploration effort that resulted in 213 wells drilled in the onshore Mackenzie Delta, 174 wells in the Arctic Islands/Sverdrup Basin, and 87 wells in the offshore Canadian Beaufort. Drilling activity in these areas subsided in the late 1980s, but high global energy prices in 20042008 combined with the proven occurrence of oil and gas renewed industrys interest in this region. Canadian Beaufort licensing rounds in 20072010 drew significant industry interest. Six exploration licenses covering three million acres were issued to ExxonMobil/Imperial, BP, ConocoPhillips, and Chevron for working commitment of 1.89 billion Canadian dollars. Exploration activities commenced in 2008-2009 with the acquisition of 3D seismic data and exploratory drilling may commence as soon as 2014.
tion in this offshore region began in 1966. Wildcat drilling started in 1971 and continued through 1984. Discoveries along the Newfoundland portion of this margin yielded significant oil and gas reserves in the Jeanne dArc Basin including the giant Hibernia (1979), Hebron/Ben Nevis (1981), Terra Nova (1983), and White Rose (1984) fields. Development of the Hibernia field, as well as the Terra Nova and White Rose fields, has resulted in the cumulative production of 1 billion barrels of oil as of 2009 and development of Hebron/Ben Nevis is planned. In 2004, a second wave of licensing and exploratory drilling began in this region in the Flemish Pass and Orphan Basin areas. Several wells have been drilled with an announced discovery in the Flemish Pass area. Another promising area, described below, is the Canadian portion of the Baffin Bay region, an area shared with Greenland.
Greenland
The West Greenland-East Canada Province includes the offshore region of eastern Canada and western Greenland from approximately latitude 63 north to 80 north. Oil seeps have been sampled and described from Nuussuaq Peninsula, Disco Island, and Fossilik outcrops on the west coast of Greenland and have been reported at Scott Inlet on the Canadian side. Thirteen exploration wells (three wells on the Canadian and ten on the Greenland side) have been drilled in this area and several have demonstrated the presence of hydrocarbons. Licensing of numerous tracts has continued on the Greenland portion of the basin with the most recent licenses being awarded in 2010. Cairn Oil drilled three exploration wells on their offshore licenses in 2010 and announced that two wells had encountered thermal gas and that one well encountered oil. Cairn has returned to this region in 2011, and is currently drilling additional exploration wells on their licenses. The East Greenland Rift Basin also looks very promising, based on a recent USGS assessment. Greenland intends to hold the first licensing round for this offshore region in 2012. Licenses in this region will feature a 16-year term.
Canadian East
The Labrador-Newfoundland Shelf region offshore is one of two promising areas within the Canadian East. It contains the Saglek, Hopedale, Hawke, Orphan, Jeanne dArc, and Flemish Pass offshore basins. These basins reside along the Continental margin in water depths ranging from less than 100 meters to greater than 3,000 meters. Explora-
Technology
Hydrocarbon resources identified in the Arctic region are mainly conventional oil and gas for which exploration, appraisal, and production technologies
93
are well understood and widely available for regions residing in shallow water (less than 100 meters) and those areas not impacted by significant icebergs (such as the continental shelves of the Alaska OCS and the Canadian Beaufort and Grand Banks region). Technology has not been a limiting factor in the development of the Alaska North Slope, (both onshore and in State waters), in Cook Inlet in southern Alaska (onshore and offshore), offshore on the Newfoundland-Labrador shelf, and for exploration activity in the Chukchi and Beaufort Seas and offshore Greenland. In the Arctic, however, as in other regions, the deployment of technology particularly needs to take into account the protection of sensitive ecosystems from an environmental standpoint. Awareness of environmental imperatives has led to significant technological advances by the oil industry, in order to achieve safe resource extraction with minimal disturbance to the environment. To cite two examples among many: the oil and gas industry developed the Rolligon that allows heavy loads to be carried across the Arctic tundra with minimal ground pressure and disturbance; and horizontaland extended-reach drilling technology that makes it possible to drill multiple wells from a single pad at less cost and with a smaller environmental footprint than the traditional multiple pad approach. The certainty that technology and related practices to prevent and mitigate environmental risks associated with the Arctic will continue to be enhanced led the Arctic Subgroup to conclude that technology is not likely to limit onshore or offshore exploration and development, except in regions where water depths exceed 100 meters or where significant iceberg management is necessary. Near-term advances in offshore pipeline trenching will be important across the Arctic, especially in deepwater conditions (over 100 meters of water depth) such as the Continental Slope region of the Canadian Beaufort, Labrador, or Greenland. Advances in iceberg management will also be important for Greenland and portions of the Canadian Atlantic offshore. The history of the region indicates that innovation will continue as new challenges are identified. There are many Arctic producing fields on land today, and safe development and production of offshore Arctic reserves has occurred since the late 1960s (Cook Inlet and Northstar Field, Alaska; Hibernia, Canada; and Sakhalin, Russia) demonstrating that resource extraction can occur in the midst of sensitive ecosystems. 94
Since the Arctic region is primarily defined by harsh ice conditions that affect drilling operations and environmental risk management, the Arctic Subgroup undertook an assessment of the severity and impact of ice conditions across the various Arctic basins studied here. The study draws on the experience of over 450 existing wells offshore in the western Arctic, as seen in Figure 1-27. Offshore basins where this activity has taken place experience all three dominant types of ice conditions (land-fast ice, pack ice, and icebergs). Table 1-5 summarizes the key characteristics of each basin. Ice conditions impact most aspects of exploration and development activities and technology, including seismic acquisition, drilling equipment, well design, and support fleet (including oil spill response capabilities). The study team used these parameters to develop a comparison across all Arctic basins, including those located north of Norway and Russia, of the technology and development challenges associated with ice-regime impacts. This comparison is summarized in Figure 1-27. Figure 1-28 illustrates the wide range of technical and operational challenges that are present throughout the major global Arctic basins. This assessment shows that these challenges have been met at both the exploration and development phase. Arctic offshore exploration is centered in North America and the industry has demonstrated its ability to function through the full range of Arctic operating conditions with more than 450 existing offshore wells. Experience in the Arctic spans a period from the 1960s to the present day, and so it comes as no surprise though for many in the general public it may that industry has accomplished a wealth of successful operating experience in diverse Arctic offshore conditions. The strength of experience gained in challenging operating environments such as in the Canadian Beaufort Sea and the Labrador Sea (Canada) should build confidence that industry has the tools, procedures, and know-how to operate safely throughout the offshore Arctic. Arctic offshore production history reflects the same level of success as demonstrated through the drilling of over 450 exploration wells. While this screening assessment only cites major production centers such as the Grand Banks (Canada) and Sakhalin (Russia), there are other examples such as the Cook Inlet region (south Alaska) and the various near-shore production
Figure 1-27. Wells Drilled in the O shore Arctic
Figure 1-27. Wells drilled in the offshore arctic
1 2 3 4 5 6 7
CHUKCHI SEA 5 WELLS U.S. BEAUFORT SEA 58 WELLS CANADIAN BEAUFORT SEA 89 WELLS CANADIAN ARCTIC ISLANDS 160 WELLS LABRADOR 29 WELLS GRAND BANKS 129 WELLS SOUTHWEST GREENLAND 6 WELLS ~450 ARCTIC OFFSHORE WELLS
58 129 89 29 160
Figure 1-28. Ice regime development Comparison Figure 1-28. Ice Regime Development Comparison
INCREASING DEGREE OF DIFFICULTY
GRAND BANKS
SAKHALIN BARENTS SEA
CHUKCHI SW SEA GREENLAND
KARA SEA
LAPTEV LABRADOR BEAUFORT NW NE SEA SEA GREENLAND GREENLAND
Notes: Signi cant levels of oil and gas production are already being produced from Arctic basins such as the Grand Banks (Canada) and Sakhalin (Russia) in both pack ice and pack ice/iceberg operating environments. Signi cant operating experience has been successfully gained in several of the more challenging Arctic basins (i.e., U.S. Chukchi and Beaufort, ~35 wells in open water to pack ice; Canadian Beaufort, ~90 o shore wells in both open water and pack ice; and Labrador, ~30 o shore wells in pack ice and pack ice/iceberg operating environments. A strong history of successful exploration and production operations across a wide range of Arctic operating conditions and challenges has demonstrated that industry can explore and develop oil and gas safely in the Arctic.
95
96 Table 1-5. selected Characteristics of offshore arctic Basins

U.S. Chukchi
6 50 Mid-June early nov. Julydec yes yes 1.5 8 5 10 1.2 5 1.5 yes, occasional no yes yes, occasional 1.2 6 na yes yes 1.4 10 4 8 30 30 6 6 30 25 2 2 yes yes yes yes Mid-July early oct Mid-July early oct usually year round usually year round 100 1,500 1,000 150 1,100 1,000 late July Mid-oct. yes yes 1.6 8 5 10 3.5 3.5 11.4 11.7 7 7.9
U.S. Beaufort Labrador
Canadian Beaufort
Grand Banks
SW Greenland
NW Greenland
NE Greenland
5 500 year-round Ice presence yes yes 2 25 6 30
Significant Wave Height, Annual Max (m)
Max Water Depth of Lease Areas (m)
Open Water Season
Near-shore Land-Fast Ice Present?
Pack Ice Present?
First-Year Level Ice Thickness, Average Annual Max (m)
First-Year Keel Draft Depths, Average Annual Max (m)
Multi-Year Level Ice Thickness, Average Annual Max (m)
Multi-Year Keel Draft Depths, Average Annual Max (m)
Icebergs, Time ofYear
rare Ice Islands + Fragments Juneoct rare Ice Islands + Fragments Julyoct Very rare 0.53 50 Very rare 0.52.5 50
rare Ice Islands + Fragments Julyoct Very rare 25 50
Icebergs all year Moderate 27 250
Icebergs aprilJuly low 1-2 150
Icebergs all year Very high 38 300
Icebergs Frequency
Typical Max Gouge Depth Below Seabed (m)
Max Water Depth at Max Gouge Depth Below Seabed (m)
facilities along the U.S. Beaufort Sea coastline (Northstar). These projects have demonstrated the ability for industry to design production facilities in keeping with the regulatory and environmental challenges that existed in these areas, and thus allow the safe and efficient production of oil and gas reserves from the Arctic offshore. Fifty years of oil and gas development history in the offshore Arctic marks a period of continuous improvement and development that has guided safe, successful Arctic operations in all the major Arctic offshore ice environments. Offshore Arctic operating capability is a North American success story that is poorly understood and appreciated, despite the fact that it has been ongoing for over half a century.
The three cases each outline a different production scenario for major current or future developments. Large, remote severely stranded resources (e.g., Canadian Arctic Islands, NE Greenland Rift Basin, etc.) are not included. The most likely production outlook for the Arctic indicates a 2035 production potential of 0.77 million barrels per day (282.5 million barrels per year). This includes a normal decline of current Alaska North Slope production to 0.28 million barrels per day, augmented by new discoveries on the North Slope, in the Chukchi and Beaufort Seas, and in Alaska state waters, totaling 0.3 million barrels per day. Arctic Canada would provide a further 0.2 million barrels per day, split between Grand Banks production and new discoveries in the Canadian Beaufort and Mackenzie Delta areas. The constrained case outlook assumes that new exploration activity would not occur because of a variety of restrictions on access and permitting, and the only remaining production would be from currently producing fields that will be in decline over this period. Total remaining production in 2035 would be just 0.33 million barrels per day (120 million barrels per year), split between the Alaska North Slope (if the TAPS pipeline is still in operation) and the Grand Banks area of Canada. Further declines post-2035 would ultimately lead to the closure of the TAPS oil pipeline as available supply falls below the assumed operational minimum volumes of about 200 thousand barrels per day. It is
Potential Production Pathways

Given that no overall North American Arctic supply outlooks could be found in the public domain (although there are a few basin-specific analyses for portions of Alaska and the Canadian Arctic), the Arctic Subgroup developed three consensus cases: Reasonably Constrained, Most Likely, and Reasonably Unconstrained (Table 1-6). The adjective reasonably is used with care; it does not imply that all constraints are either turned on or turned off at either end of the scale. These cases represent the Subgroups informed view of what may happen to Arctic development through 2050, given economic, regulatory, and environmental constraints that either are less or more favorable to such development.
Table 1-6. three potential arctic oil production pathways

Reasonably Constrained Case no Chukchi, Beaufort oCs, or Canadian Beaufort production Most Likely Case north alaska onshore, Chukchi and Beaufort oCs, and Canadian Beaufort production; 15% resource developed by 2050 taps ~300 thousand barrels per day Grand Banks oil slow decline few satellites developed no east Canada Baffin Bay or West Greenland oil Reasonably Unconstrained Case north alaska onshore, Chukchi and Beaufort oCs, and Canadian Beaufort production; 25% resource developed by 2050 taps ~500 thousand barrels per day Grand Banks flat oil production east Canada Baffin Bay and WestGreenland oil; 10% resource developed by 2050
trans-alaska pipeline system (taps) offline 2030+/Grand Banks oil current decline only hebron developed no east Canada Baffin Bay or West Greenland oil
97
estimated that this could occur around 2045, making any subsequent development reliant on new infrastructure. In the upside case, with a higher level of resource development in the new offshore areas of the Arctic, particularly offshore the Alaska North Slope, total production by 2035 could be as high as 0.88 million barrels per day (322 million barrels per year). Half a million barrels per day of this could come from high potential developments in the Beaufort and Chukchi seas. It should be noted that the Arctic Subgroups oil production forecast for Alaska may be conservative, as compared to a published analysis by Northern Economics that suggests the U.S. Beaufort and Chukchi OCS regions are capable of significant production, collectively exceeding 1.0 million barrels per day (~399 million barrels per year) in 2035 (Table 1-7 and Figures 1-29 and 1-30), if the undiscovered hydrocarbon resource assessment reported by BOEMRE is validated by future exploration and appraisal drilling.
This study supports the idea that action by the U.S. federal government is warranted, if these critical resources are to be validated and safely developed in a prudent manner for Americas benefit. Or, to put it in more specific terms, the main consequence common to the majority of the following findings and recommendations is that the huge resource base, as described by the U.S. Geological Survey, Bureau of Ocean Energy Management, Regulation and Enforcement, National Energy Board of Canada, Geological Survey of Canada, and the various State and Provincial government resource agencies for the North American Arctic region, will not be available when needed in the 20252050 time frame or afterwards if the status quo is maintained. Finding 1: The North American Arctic (United States, Canada, and Greenland) has a large (world scale) discovered undeveloped hydrocarbon resource base (6.4 billion barrels oil, 0.9 billion barrels natural gas liquids, and 73 Tcf gas)8 and a very large undiscovered resource base (80.1billion barrels oil, 11.1 billion barrels natural gas liquids, and 595 Tcf gas).9 Development lead times are very long (historically, 10 to 20 years or longer from discovery to first production).10 Recommendation 1: To ensure the future energy security of the United States, near- and medium-term exploration drilling by industry should be promoted by the U.S. government to validate the resource estimates and identify the most promising regions. Finding 2: Exploration and development technology, both onshore and offshore, is not expected to be a limiting factor in future development of conventional U.S. Arctic resources, within the time frame of this study. Areas for further innovation and technological advances will be required in areas where water depths exceed 100 meters or regions that require iceberg management capability (Greenland).
8 Mean, discovered, technically recoverable volume estimate. These discovered volumes are remote to existing development and production infrastructure. References for all quoted volumes cited in Sections IV, V, VI, and VII of Topic Paper #1-4, Arctic Oil and Gas. 9 Mean, risked, technically recoverable, undiscovered, yet-to-find volumes. References for all quoted volumes cited in Sections IV, V, VI, and VII of the Arctic topic paper. 10 Thomas et al., Alaska North Slope Oil and Gas: A Promising Future or an Area in Decline? Addendum Report, 267 p, U.S. DOE/NETL/Arctic Energy Office, April 2009. Tables 2.5 and 2.6.
Key Findings and Recommendations

This section summarizes the main findings and recommendations of the Arctic Subgroup and applies primarily to the U.S. Arctic. Despite its remoteness and harsh operating conditions, safe development of the Arctic region is possible and essential for meeting U.S. energy goals. Finding 1 describes the huge portion of Americas energy that resides in the Alaskan Arctic, but exploration needs to occur now in order to arrest the production decline that could threaten viability of the existing Trans-Alaska Pipeline for crude oil. Findings 2 and 4 note that the limiting factor in recovery of the Arctics vast energy resources is not necessarily technology, but rather regulatory uncertainty and risk of litigation from groups opposing drilling and development activity (especially in the United States). Finding 3 describes specific U.S. challenges associated with carrying out an effective and safe exploration and appraisal program in the Arctic, given the present 10-year lease terms, since only 70105 days (offshore) and 70150 days (onshore) are realistically available for such activities each calendar year. Other findings discuss the impact of the Jones Act, lack of infrastructure, and how the United States is falling behind other nations. 98
Table 1-7. summary of alaska oCs development scenarios and oil and Gas production Forecasts
Beaufort Resource Size (Mean) oil and condensates (billion barrels) Gas (trillion cubic feet) Exploration exploration/delineation Wells exploration rig seasons Development no. of offshore production platforms offshore/onshore pipelines (miles) Shore Bases/Facilities Marine terminal liquefied natural Gas (lnG) Facility production Facility support Base Production year 1st oil Flows year 1st Gas Flows no. of producing Fields Total Cumulative Volume Produced (through 2057) oil & Gas (billion barrels of oil equivalent) oil & Condensates (billion barrels) Gas (trillion cubic feet) Daily Peak Production oil & Condensates (barrels per day) Gas (million cubic feet per day) 1,165,707 883 565,472 1,421 105,074 661 6.34 5.10 6.96 6.16 4.79 7.78 1.29 0.39 5.08 13.69 10.18 19.82 2019 2029 7 2022 2036 4 2021 2022 2 13 yes no yes yes yes no yes yes yes yes yes yes 7 235 4 680 2 300 13 1,215 47 31 43 27 10 8 100 66 5.97 15.94 8.38 34.43 0.71 7.65 15.06 58.02 Chukchi North Aleutian Total
note: northern economics resource size estimates are from the 2006 Minerals Management service resource assessment. the numbers shown in the table are the mean undiscovered economically recoverable resource estimates, assuming resource commodity prices of $60 per barrel of oil and $9.07 per thousand cubic feet of natural gas. source: northern economics in association with the Institute of social and economic research, university of alaska, economic analysis of Future offshore oil and Gas development: Beaufort sea, Chukchi sea, and north aleutian Basin, prepared for shell exploration and production, March 2009.
99
Figure 1-29. u.s. Beaufort sea outer Continental shelf production Forecast
1,000 BARRELS OF OIL AND CONDENSATE PER DAY THOUSANDS 1,000
OIL AND CONDENSATE GAS
Figure 1-29. U.S. Beaufort Sea Outer Continental Shelf Production Forecast
800 800 600
600
400
400
200
200
0 2017
0 2022 2026 2030 2034 2038 YEAR 2042 2046 2050 2054 2058
Source: Northern Economics, Inc. estimates based in part on Minerals Management Service (MMS) scenarios in Beaufort Sea Planning Area Oil and Gas Lease Sales 186, 195, and 202: Final Environmental Impact Statement. OCS EIS/EA MMS 2003-01, February 2003.
Figure 1-30. u.s. Chukchi sea outer Continental shelf production Forecast
600 BARRELS OF OIL AND CONDENSATE PER DAY THOUSANDS
GAS OIL
Figure 1-30. U.S. Chukchi Sea Outer Continental Shelf Production Forecast
1,600 MILLION CUBIC FEET OF GAS PER DAY
1,200
400 800 200 400
0 2017
2022
2026
2030
2034
2038 YEAR
2042
2046
2050
2054
0 2058
Source: Northern Economics, Inc. estimates based in part on Minerals Management Service (MMS) scenarios in Chukchi Sea Planning Area, Oil and Gas Lease Sale 193 and Seismic Surveying Activities in the Chukchi Sea: Final Environmental Impact Statement. Volume I: Executive Summary, Sections I through VI. OCS EIS/EA MMS 2007-026.
100
MILLION CUBIC FEET OF GAS PER DAY
There are numerous Arctic producing fields on land and safe development and production of offshore Arctic reserves has occurred globally since the late 1960s, which collectively demonstrates that resource extraction can occur in the midst of sensitive ecosystems. Innovation will continue as new challenges are identified. Recommendation 2: Industry has always risen to the challenge, and if allowed, they will continue to advance elements of Arctic exploration and development technology to reduce the operational footprint and safely produce oil and gas. We recommend a reasonable set of policies and regulations that allow industry to continue prudent exploration and development in the Arctic and to proceed with technology advances. Near-term advances in offshore pipeline trenching will be important across the Arctic especially in prospective regions with deepwater conditions (>100 meters) such as the Continental Slope region of the Canadian Beaufort or Greenland. Advances in iceberg management will also be important for Greenland and portions of the Canadian Atlantic offshore. Finding 3: The existing 10-year lease terms are not long enough to ensure sustained exploration and appraisal of material Arctic oil and gas resources in the U.S. Arctic basins. Infrequent lease sales, lengthy, multifaceted permitting procedures, a high incidence of litigation and a required sequential set of data-gathering and permitting activities coupled with short drilling windows (onshore winter and offshore summer) reduce the ability to identify, appraise, and develop economic volumes in this short time span. Recommendation 3: Adopt a licensing system for Alaska that is similar to, but improves upon, Canada or Greenlands system in recognition of the limited seasonal operating period, particularly for the U.S. federal offshore areas (70105 days per year). Canada offers large tracts (versus 3-square mile blocks) with a work commitment bid that covers 9 years if a well is drilled within the first 5 years (still problematic and should be extended given the challenges of the Arctic and the new regulatory requirements), and is extended indefinitely if producible hydrocarbons are discovered on the tract. Greenland offers similarsized tracts and exploration terms and is extending the initial license term to 16 years for its NE Greenland offshore round that will be held in 2012.
Finding 4: There is no clear, dependable, regulatory path for gaining approval of submitted exploration or development permit applications. This is due to a multitude of U.S. government agencies/regulatory bodies that have overlapping authority, and each have their own independent permit review and approval schedule. Recommendation 4: Streamline regulatory permitting processes and promote collaboration and coordination of the numerous federal agencies/ regulatory bodies, to avoid redundant analyses and jurisdictional overreach. A coordinated approach would provide predictable project scheduling and a more efficient use of human resources within the federal government and industry. Finding 5: The Merchant Marine Act of 1920 (the Jones Act, codified in 2006) was established to regulate cabotage (the coastal shipping of cargo and passengers) within the United States. The Act requires cabotage in U.S.-flagged, constructed, owned and operated vessels. The Jones Act rules on tankers and support vessels mandate largely unavailable and uncompetitively priced ships, unduly increasing the cost of operations in the U.S. Arctic. Few U.S.-flagged, ice-classed vessels are available for U.S. Arctic offshore operations, so either exemptions are required to allow the use of foreign-flagged vessels that are able to meet U.S. Arctic shipping standards, or excessive delays and costs (three times the capital and operating expense dollars to build and operate a U.S.-flagged fleet) will be incurred to comply with this statute. Recommendation 5: Continue to provide exemptions to the Jones Act for the non-U.S.-flagged, ice-class vessels used in U.S. Arctic exploration and appraisal operations. This will ensure that iceclass vessels are available at competitive rates given the long lead times required for Arctic offshore operations. Finding 6: Alaska Coastal communities only receive tax revenue from onshore facilities related to oil and gas development in the onshore and State waters areas of Alaska, which leads to local opposition of OCS exploration and development in the U.S. Arctic. Recommendation 6: The U.S. should consider a federal revenue sharing program for the Alaska state and local coastal governments of potentially impacted communities, perhaps initiating a program similar in
101
mechanism to the Gulf of Mexico Energy Security Act in which 37.5% of the revenue from new Gulf of Mexico leases after 2007 is distributed to local coastal political subdivisions.11 Finding 7: Oil tanker transport from the Arctic to consumer markets is currently a viable export method. Year-round tankering of crude oil from the Arctic to market will likely be a viable cost-effective alternative to pipeline transport in the future. Tankering offers greater flexibility of evacuating crude oil from multiple onshore or offshore development facilities than new pipelines. Lower transport costs increase the economic viability of projects, and therefore, increase the production potential. Recommendation 7: Prepare for this transportation option in the future. The United States needs to catch up with, and then expand, technological advances, which when combined with the possibility of more open seas later within the time frame of this study, will provide for Americas energy needs. In the long term, America may lose the TAPS due to diminishing flow (2030 to 2045 time frame) unless immediate efforts are made to find and develop more oilfields to stem the decline in oil production and maintain adequate flow in the pipeline. Failure to act will result in the loss or serious deferment of any oil potential until well beyond the 2050 horizon.
at levels higher than would have otherwise occurred. Figure 1-31 illustrates the total production trend and contribution of EOR projects. The outlook for future oil production in the lower48 onshore region is dependent upon both primary and EOR resource development. Expanded oil production from oil-bearing shale and low permeability formations, especially those not yet under development, is critical to mitigating the general decline in onshore production. The development and application of advanced EOR technologies to mature fields enables the extension of field economic life with minimal exploration risk, adding additional supply at the margin. Although the onshore segment accounts for only 36% of 2010 U.S. oil production, it accounts for only 52% of the traditional U.S. oil resource base. The onshore lower-48 is estimated to hold only 14% of total U.S. undiscovered oil resources, with the remaining 86% located in Alaska, the U.S. offshore, and unconventional (tight oil) reservoirs. These estimates, summarized by region in Table 1-8, illustrate the exploration maturity of the conventional onshore relative to other segments of supply. About one quarter of the onshore lower-48 resource base consists of undiscovered oil resources, indicating that the onshore lower-48 resource base has been largely discovered and produced. Total U.S. oil production peaked in 1970 at 9.6 million barrels per day, which at that time came mostly from onshore lower48 oil fields. Thus, future oil production in the lower48 onshore region will depend heavily on the degree to which oil can be recovered from existing and abandoned oil fields. Further recovery of oil from these fields will largely depend upon the economic viability of incremental development and enhanced oil recovery, which are driven by oil price, technology, and regulatory policy. Table 1-8 estimates do not include potentially producible oil resources that exist below the oil-watercontact point where a formation holds mostly oil and a little water to a deeper layer holding mostly water and little oil. These deeper zones are called oil-towater transition zones and residual oil zones. Residual oil zones (ROZ) have not had a long history of production testing at a commercial scale (nine are in ongoing field tests), but have physical properties similar to oil-bearing zones that have been produced through primary and secondary techniques.
Onshore Oil
Development and Production: History and Context
U.S. Lower-48 Onshore
In 2010, the U.S. lower-48 onshore produced 3.1 million barrels of crude oil and condensate per day, or about 56% of total U.S. oil production. Between 1990 and 2005, production declined at about 4% per year. Starting about 2004, higher oil prices incentivized higher levels of investment activity and production subsequently flattened and then increased somewhat. In some regions, enhanced oil recovery technologies (also known as tertiary recovery or EOR), particularly steam-injection and gas-injection, have maintained oil production rates in mature fields
11 Bureau of Ocean Energy Management, Regulation and Enforcement, Gulf of Mexico Eneregy Security Act, http:// www.boemre.gov/offshore/GOMESARevenueSharing.htm.
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Figure 1-31. U.S. Lower-48 Onshore Oil Production, 19862010
Figure 1-31. u.s. lower-48 onshore oil production, 19862010

6
ENHANCED OIL RECOVERY TERTIARY PRIMARY AND SECONDARY OIL PRODUCTION
0 1986
1988
1990
1992
1994
1996
1998 YEAR
2000
2002
2004
2006
2008
2010
Sources: U.S. Energy Information Administration and the Oil & Gas Journals Biennial Enhanced Oil Recovery surveys.
Conservatively, these ROZs hold tens of billions of barrels of oil in place and provide additional targets for recovery using EOR technology. EOR oil production has increased as primary and secondary production has declined (Figure 1-32). In 1986, EOR production accounted for only 10% of onshore lower-48 oil production. From 2000 through 2008, EOR averaged about 20% of the total. Figure 1-32 and Table 1-9 illustrate the contribution of specific technologies to enhanced recovery production over time. Thermal EOR has historically been the most significant due to the very successful application of steam injection to the large, heavy oil fields in Southern California. However, thermal production continues to decline as these reservoirs deplete. Chemical EOR has not had widespread application to date; the fields using other gases are predominantly in the Arctic and offshore arenas. In contrast to these technologies, production from CO2 EOR has steadily increased as projects have been implemented or expanded. The conventional oil fields in the onshore United States started out with about 500 billion barrels of oil in place. After primary and secondary produc-
tion, over 300 billion barrels still remain as targets for EOR and incremental field development projects. Volumes in the ROZ provide additional targets. The CO2 component appears most promising for significant expansion of production from this large target, but will require new sources of pure and affordable carbon dioxide. Most CO2 currently used in EOR is from natural sources with limited growth opportunities. Major volumes from man-made or anthropogenic CO2 sources would be needed to realize the potential of this resource in a large way.
Canada
Canada onshore conventional (light/medium) oil production, including condensates and enhanced oil recovery production, has steadily declined in recent years, dropping from about 1.1 million barrels per day in the 1990s to 0.7 million barrels in 2010. This accounts for about 20% of total Canadian oil production, which is increasingly dominated by oil sand operations. Volumes include a small amount of tight oil production from extension of the Bakken play into Canada and application of that technology in other areas of the country. Figure 1-33 provides the
103
Table 1-8. u.s. technically recoverable oil resources as of January 1, 2009 (Billion Barrels)
Region Onshore Conventional Oil northeast Gulf Coast Mid-Continent southwest rocky Mountains West Coast Subtotal tight & shale oil Onshore Lower-48 Subtotal alaska & offshore lower-48 U.S. Total Conventional Onshore Lower-48 as a Percentage of Total U.S. 0.2 1.5 1.2 4.8 2.5 2.6 12.7 na 12.7 7.8 20.6 62% 0.2 3.1 7.1 23.4 6.7 7.3 47.6 2.5 50.1 12.4 62.5 76% 0.7 6.5 5.4 2.6 2.1 2.3 19.5 31.6 51.1 84.7 135.8 14% 1.1 11.0 13.6 30.7 11.3 12.1 79.9 34.1 113.9 105.0 218.9 36% 64% 59% 40% 8% 18% 19% 24% 93% 45% 81% 62% Proved Reserves Inferred Reserves Undiscovered Resources Total Percent Undiscovered
notes: na = not available; shale and tight oil proved reserves are included in the regional proved reserve volumes. Crude oil resources include lease condensates but do not include natural gas plant liquids or kerogen. undiscovered oil resources in areas where drilling is officially prohibited are not included. For example, this table does not include the arctic national Wildlife refuge undiscovered oil resources of 10.4 billion barrels. undiscovered resources in this table are technically recoverable, which is the estimated volume of oil that can be produced with current technology. proved reserves are those reported to the security and exchange Commission as financial assets. Inferred reserves are expected to be produced from existing fields over their lifetime, but which have not been reported as proved reserves. source: u.s. energy Information administration, annual energy outlook 2011 projections.
recent historical trend and a projection indicating few changes are expected in the components of this supply area. Light/medium crude oil resources remain concentrated in the traditional producing provinces in western Canada with potential reserves estimated in the range of 7 to 8 billion barrels (Table1-10). Past Canadian EOR production has contributed only modestly to onshore conventional oil production. In 2010, EOR volumes totaled about 65,000 barrels per day, accounting for 9% of conventional onshore 104
production. EORs share, however, could grow if EOR production either remains constant or grows and if non-EOR conventional production continues to decline. Production from both carbon dioxide and chemical flooding has increased in recent years with the Weyburn CO2 and Pelican Lake polymer projects making significant contributions. Original oil in place for onshore conventional light/medium was about 80 billion barrels. Of this, some 50 to 60 billion barrels are expected to remain after primary and secondary production and provide a target for EOR development.
Figure 1-32. total u.s. enhanced Oil Recovery Production, 19862010 Figure 1-32. Total U.S. Enhanced oil recovery production, 19862010
1,000
OTHER GASES CARBON DIOXIDE CHEMICAL/POLYMER THERMAL
800 THOUSAND BARRELS PER DAY
600
400
200
0 1986
1990
1994
Sources: Oil & Gas Journals Biennial Enhanced Oil Recovery surveys.
1998 YEAR
2002
2006
2010
Figure 1-33. 20052025 Canada Onshore Light/Medium Oil Production by Province, Plus Pentanes and Condensates
Figure 1-33. 20052025 Canada onshore light/Medium oil production by province, plus pentanes/Condensates
HISTORICAL PROJECTED
PENTANES AND CONDENSATES OTHER ONSHORE
1.00
SASKATCHEWAN ALBERTA
0.50
0 2005
2010
2015 YEAR
2020
2025
Source: Canadian Association of Petroleum Producers, Canadian Crude Oil Production Forecast 20112025, June 2011.
105
Table 1-9. u.s. enhanced oil recovery production, 20002010 By technology Category (thousand Barrels per day)
EOR Technology Category Thermal Injection EOR steam In situ Combustion hot Water Total Thermal EOR Chemical Injection EOR polymer/Chemicals other Total Chemical EOR Gas Injection EOR hydrocarbon Miscible and Immiscible Co2 Miscible Co2 Immiscible nitrogen Total Gas EOR Total U.S. EOR Production Total Onshore Lower-48 EOR Production Total Onshore Lower-48 Oil Production Total Onshore Lower-48 Oil Production, excluding EOR EOR Percentage of Total Onshore Lower-48 Oil Production 125 189 negligible 15 329 752 626 3,078 2,452 95 187 negligible 15 297 668 574 2,758 2,184 97 206 negligible 15 318 663 566 2,628 2,062 96 235 3 15 349 653 557 2,660 2,103 81 240 9 20 350 644 563 2,769 2,206 81 272 9 9 371 663 582 3,087 2,505 2 negligible 2 0 negligible negligible 0 negligible negligible 0 0 0 0 0 0 negligible* 0 negligible 421 418 3 366 2 3 371 340 2 3 345 287 13 4 304 275 17 2 294 273 17 2 292 2000 2002 2004 2006 2008 2010
20%
21%
22%
21%
20%
19%
* a table entry of negligible indicates that the production volume was less than 0.5 thousand barrels per day. all hydrocarbon miscible and immiscible enhanced oil recovery (eor) production is located either in alaska or the offshore Gulf of Mexico and was subtracted from u.s. total to calculate onshore lower-48 eor oil production. Based on total onshore lower-48 eor production, which excludes hydrocarbon eor production. sources: oil & Gas Journals Biennial enhanced oil recovery project surveys; and u.s. energy Information administration.
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Table 1-10. Canada potential light/Medium Conventional oil resources, as of 2006

Region Light/Medium Crude Oil (Billion Barrels) 5.7 0.5 1.1 7.3 Percentage of Total 65% 6% 13% 84%
Production Pathways
To develop boundaries of a supply range for conventional onshore oil and enhanced oil recovery, relevant technologies and issues were grouped into categories. For each of these, scenarios for limited and high potential cases were developed. A production profile for each pathway was developed qualitatively to get a directional view of that boundary over the next 25 years. For the United States, production categories of primary plus secondary, CO2 EOR, and other EOR were considered separately, and then summed. For Canada, conventional light oil was considered as a total production stream made up of existing (virtually all primary + secondary) and new CO2 EOR. Adjustments were made to exclude tight oil production as this is addressed in the unconventional supply section. The factors that were considered for the high potential pathway are shown in Table 1-11. And the factors driving the limited potential case are shown in Table 1-12. Figure 1-34 illustrates the estimated supply fairway for onshore conventional oil for the U.S.
alberta British Columbia saskatchewan Subtotal Onshore eastern offshore Total Canada
1.4 8.7
16% 100%
source: natural resources Canada, Canadas energy outlook: the reference Case 2006, ottawa, Canada, 2006, page 35. table us1.
Figure 1-34. Supply Fairway for North American Onshore Conventional/Enhanced Oil Recovery
Figure 1-34. supply Fairway for north american onshore Conventional/enhanced oil recovery
5
REFERENCE CASE ACTUAL HIGH POTENTIAL PATH LIMITED POTENTIAL PATH
GAP DUE TO UNCONVENTIONAL ADJUSTMENT
0 2005
2010
2015
2020 YEAR
2025
2030
2035
Note: Reference Case based on Energy Information Administration and Canadian Association of Petroleum Producers data, reduced for estimated unconventional production.
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Table 1-11. Factors Considered for the high potential Case

Technology or Issue Technology (1) y reservoir characterization, stimulation, and management y sweep efficiency gains y downhole monitoring and horizontal well diagnosis y technology transfer enabled y Impacts both primary/secondary and enhanced oil recovery Description existing tools for reservoir characterization, simulation and overall management practices continue to be implemented, increasing project inventory in existing fields. there is continued improvement in sweep efficiency, translating to higher oil recovery and better use of injectants such as carbon dioxide, steam and chemicals. Gains in downhole monitoring are made, allowing data analysis that adds to recovery process improvement. Importantly, diagnosis of horizontal well performance improves, allowing those wells to produce to their ultimate potential. public/private partnerships grow, enabling technologies to develop and be shared among operators and resource owners. Widespread movement to digital formats for public data continues, improving cycle time for project screening and development. Institutions at all levels encourage job market entrants to consider technical roles in the industry. advanced well operations of horizontal drilling and fracturing continue their growth throughout the united states with appropriate regulatory intervention and minimal local opposition. Incremental technology improvements are developed which allow additional resource plays to be exploited prudently and economically. low/residual oil zones are widely recognized by industry and government as potential targets for both hydrocarbon production and carbon storage. state and federal geological agencies undertake systematic assessments of low oil saturation zones that have been drilled but largely overlooked in the past. results from projects currently underway in the permian Basin become models for other areas. Focused efforts (either public or private) to develop new alternative technologies to Co2 flooding in these zones progress. Mechanisms to share these throughout the industry are in place. Carbon Dioxide Includes greenhouse gas, capture costs, and legal framework an aggressive carbon capture and sequestration (CCs) effort develops, in which worldwide and u.s. policies are implemented, which incent capture and storage of large Co2 volumes. Co2 eor is qualified as storage within a clear legal and regulatory framework. transportation issues are resolved and a pipeline infrastructure develops; Co2 price to oil producers is affordable. eor is seen as one piece of a near-term bridge to large-scale capture and storage throughout the united states. oil prices remain strong relative to gas prices, driving operators to focus on oil opportunities. power, steam, and Co2 prices remain reasonable due to lower underlying natural gas prices. tax policy to encourage higher risk/cost activities is implemented to maintain activity through price cycles. these include a revamp of the eor tax credit and allowances for marginal or low rate wells. regulators in alberta remain cognizant of royalty rate and adjust as needed to maintain activity. Flexible plugging regulations become widespread to avoid premature abandonment and loss of wellbore access for improved oil projects. solid economics drive operators to implement projects that require more engineering work. the Interstate oil and Gas Compact Commission recommendations on Co2 transportation, storage, and other regulatory items are widely adopted, providing operators more certainty. Institutions that provide support and knowledge to all operators continue their growth, enabling application to a wide variety of fields and reservoirs throughout the united states.
Technology (2) advanced well operations
Low Oil Saturation Zones
Economics & Policy y Impacts to profitability y ability of smaller operators or smaller fields to implement eor/ infill
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Table 1-12. Factors Considered for the limited potential Case

Technology or Issue Technology (1) y reservoir Characterization, stimulation, and Management y sweep efficiency Gains y downhole monitoring and horizontal well diagnosis y technology transfer enabled y Impacts both primary/secondary and enhanced oil recovery Description there is limited use of existing reservoir management applications combined with few new tools, meaning investment opportunities are slow to be developed. sweep efficiency continues at status quo, so unit costs go up, causing additional wells to be shut in. little progress in downhole monitoring means data analysis remains spotty; lack of understanding of flow characteristics in horizontal wells causes abandonment prior to full extraction of initially established reserves. existing public data remains in paper or legacy formats, causing long cycle times and loss of projects. there is limited technology transfer activity; it takes longer for new techniques to permeate industry operations. limited new personnel enter the industry with fewer growth opportunities. regulations around hydraulic fracturing that are restrictive rather than progressive increase costs and delays, decreasing use. technology development slows with less activity and only the most prolific opportunities can afford the technology. there is limited recognition or development of the potential of low oil saturation zones and information on them is spotty and tightly held. no alternatives to Co2 flooding are pursued and carbon storage in these reservoirs is not considered by policymakers. Worldwide and u.s. policies are implemented which discourage oil (and coal) production and use of Co2 injectant; existing incentives are removed and regulations around operations (production, plant processing and pipeline) are increased significantly; fees and taxes are also increased substantially. Canadian CCs plans are shelved. this results in new investment drying up; existing operations move to a decline mode. oil prices are weak relative to gas prices, driving focus away from oil production. existing tax incentives are phased out and no new incentives are added. additional or punitive taxes are enacted; higher risk and cost activities are avoided by operators. regulations requiring accelerated abandonment come into play so numerous fields are abandoned and future advanced recovery projects in these locations are limited. operators and resource owners have little incentive to pursue projects involving higher amounts of engineering, instead funding a smaller number of opportunities that are drilling based.
Technology (2) advanced Well operations
Low Oil Saturation Zones
Carbon Dioxide Includes greenhouse gas, capture costs, and legal framework
Economics & Policy y Impacts to profitability y ability of smaller operators or smaller fields to implement enhanced oil recovery/infill
lower-48 and Canada. The high potential case would suggest an annual growth rate of slightly greater than 1% over the next 25 years. The growth would be gradual, typical of a steady stream of production from a diverse resource base.
The limited potential case indicates a steady decline in the range of 4% annually over the next 25 years. Not dissimilar to the decline realized for much of the past 25 years, this suggests an environment of relatively low prices and significant costs relative to those prices.
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The midpoint within the range is close to current production, suggesting potential exists for this resource to continue as an important portion of North American oil supply.
reduce the human interface will provide increased reliability and reduced costs. y Recovery Process Improvement Oilfield development relies on a given recovery process, be it primary production, water flooding, or an enhanced process like carbon dioxide flooding. Technology leading to improved sweep efficiency is critical to maximizing production from existing operations and in developing some of the multi-hundred billion barrel oil target remaining in existing fields or in other low oil saturation targets. y Application to New Resources Because of the natural decline of existing conventional oil production, it is critical to find new resource targets to maintain or grow production. Technologies targeting low oil saturation zones can impact supply. More detail of these areas of technology can be found in Topic Paper #1-5, Onshore Conventional Oil Including EOR, available on the NPC website. Because of the interest in increased use of carbon dioxide in EOR operations, both to contribute to incremental hydrocarbon recovery and as a sink for storage of CO2, there follows a summary of the most important aspects of this opportunity. Carbon dioxide EOR is an established technology used in the United States since the 1970s. A key requirement for a carbon dioxide project is a dependable source of high purity and affordable CO2. For this reason, most development to date has occurred in west Texas and southeast New Mexico, where candidate oil fields and naturally occurring CO2 source fields are close enough to provide CO2 at a reasonable cost. In other locations, a few projects have been implemented where a candidate oilfield was close to a relatively pure industrial source, where man-made (anthropogenic) carbon dioxide is captured for EOR use. In the United States, most opportunities for using naturally occurring CO2 are already exploited, leaving growth potential primarily to be met from anthropogenic CO2 sources. The most likely projects are those where a relatively pure CO2 source already exists, since capture and transport are cost effective. Separation of CO2 from natural gas is a good example of this. Certain industries, including cement, ammonia, lime, iron, and steel also produce relatively pure CO2
Key Conventional Onshore Technologies

Oil field development and production are complex operations that involve application of hundreds of technologies across many disciplines. Several of these technologies are most likely to influence the supply picture through 2030, again due to their potential impact on production from known oil accumulations. They are contained within some broad processes required to manage oil development and producing operations: y Design Involves planning for locations, numbers, and types of wells needed to produce and manage the reservoir. It also involves sizing and design of surface facilities to handle produced or injected fluids, plus transportation and disposal of some products. Besides project specifications, production expectations are developed which support investment decisions. Within this area, reservoir characterization and performance simulation are critical to establishing the initial project feasibility and subsequent management of the producing formations. y Implementation Involves the installation and field operation of wells and equipment, including drilling and well stimulation. Advanced well operations (especially those involving horizontal drilling and hydraulic fracturing) are considered important. Technologies that reduce environmental footprint and improve operational safety are also critical to the petroleum industrys rightto-operate in sensitive locations. y Operation and Monitoring The life of a producing oilfield lasts a minimum of several years and sometimes for a century, so efficient operating and maintenance practices are important to maximizing recovery and economic benefit. Among myriad activities, data from operations must be collected and analyzed so that operational improvements and incremental investments can be made to profitably maximize production and reserves. Downhole monitoring, especially in complex recovery processes or horizontal wells, is important to success. In addition, advanced control systems that 110
streams as a byproduct. Over time, CO2 from additional gas processing and certain other sources is expected to be used in EOR applications. The category of CO2 supply with the most volume potential is the most challenging. These are projects where carbon dioxide is captured from dilute streams, typically large point source flue gas emissions at power plants. Since this category will require a substantial amount of fiscal and regulatory support, use will ultimately depend on U.S. and Canadian policy decisions. To be viable, the price of delivered CO2 would have to be at a level where investments in EOR projects offer adequate returns. As CO2 prices are negotiated between sellers and purchasers in various contractual arrangements, the price can vary widely based on location, contract vintage, etc. However, minimum prices discussed for CO2 into EOR are usually less than $1 per Mcf ($10 to $15 per metric ton) and maximum prices are typically in the range of $2 to $3 per Mcf ($40 to $60 per metric ton). With expected costs of capture and transport from dilute sources well above this level, policies that provide financial support to reduce delivered CO2 pricing would be required for a viable supply to use in EOR applications.
ducing wells, operating in areas with existing infrastructure. Activity increases or decreases with profitability measures and is enabled by a high level of regulatory predictability and certainty. The timing of production impact varies depending upon the type of activity. Development drilling or well enhancement can add volumes within a few months; development of an EOR project may not add volumes until several years after project initiation. In uncertain policy or price environments, short-term resource investments are favored over long-term EOR projects. Recommendation 1: Some recommended areas for consideration are as follows: y Direct Financial Support or Investment Implement tax credit program for low volume wells to improve ultimate recovery and retain fields and infrastructure for potential future EOR projects. Review/enhance the federal EOR tax credit to make it more relevant in the current price environment; consider simplification of calculations. y Support, Technology, or Institutional Programs Support of organizations that disseminate best practices or technology applications (e.g., Research Partnership to Secure Energy for America and the Petroleum Technology Transfer Council). Finding 2: Production from enhanced oil recovery projects, specifically those relying on carbon dioxide (CO2) injection, is a critical source of longterm future production from lower-48 onshore conventional resources. State and federal policies will determine whether this supply stream declines, has healthy incremental growth or reaches new plateaus. The production wedge from CO2 EOR is one of the largest variables in conventional oil production projections, with estimates ranging from 0.3 to over 2.0 million barrels of oil per day by 2030. y Because new field discoveries are now smaller and generally decline faster, EOR projects provide very stable, long-term sources of oil reserves.
Key Conventional Onshore Findings and Implications

Finding 1: Industry reacts quickly to viable economic returns on investment in conventional onshore and EOR opportunities, and production increases often follow. This ability to respond requires consistent, stable regulation. Longer-term investments requiring large capital infrastructure are especially sensitive to stable policy. Sustained, incremental improvements in technology, regulations, and EOR injectant supply would stem the historical decline and contribute large volumes over time as gains compound annually. y In the mid-2000s, higher activity resulted in approximately 1.0 million barrels of oil per day of increased conventional oil production in the onshore U.S. It was triggered by strong prices, incremental technology advances, and regulatory certainty. This production resulted largely from projects targeting developed fields and known resources. y This represents the activity of thousands of operators over several hundred thousand pro-
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y The resource target for all EOR is estimated at several hundred billion barrels, though this number is very dependent on oil price, CO2 price and availability, and specific field and wellbore conditions. y EOR projects often have high fixed and variable costs, making EOR production the marginal barrel in many markets, often just below prevailing oil price expectations. y A reliable, affordable, and growing supply of carbon dioxide will be a key determinant of future EOR production. y Skills needed to design and operate EOR projects are not always readily available and many operators do not have experience in EOR. y For some fields, there is a limited window of opportunity to implement EOR projects due to aging infrastructure and rapidly declining production volumes over which to spread fixed costs. Delays in development could mean loss of potential reserves, with ultimate impacts dependent on the regulatory environment, available technology and economics. y There are a number of areas where additional regulations and policy actions would negatively affect EOR production. Following are some examples of areas where progressive regulations may influence future oil supply. Recommendation 2: Some recommended areas for consideration are as follows: y Proactive Regulation Ensure flexible well plugging rules exist to avoid premature abandonment of candidate oil fields. Provide regulatory certainty for well design/ construction standards, re-abandonment of existing wells, CO2 capture/storage credits, generation and use of greenhouse gas offsets and CO2 pipeline permitting. Maintain class II well design where it is initially injected for EOR purposes. Develop a clear regulatory framework for converting an initial EOR project into a CCS project that can claim financial or emission allowance incentives. Codify long-term liability rules for CO2 stored in reservoir after EOR. 112
y Current Practices Affirmed New regulations around the handling and use of carbon dioxide are limited. Example: new rules from the Environmental Protection Agency regarding CO2 as hazardous. The regulatory framework in states with existing CO2 operations are exported to new areas. Example: CO2 pipelines no need to reinvent the wheel. Projects that incidentally store CO2 should not be harmed by new regulations targeting storage projects pursued for financial purposes. y Direct Financial Support or Investment Support conversion of public oil and gas data from paper/film legacy systems to digital format to improve project development capability and efficiencies. Tax policy to incentivize new computer hardware/ software, because EOR projects are complex and require a great deal of additional engineering and geologic characterization and often require an upgrade to a companys information technology hardware to evaluate the subsurface potential. Rapid amortization for site characterization or other front end costs. Review/enhance the federal EOR tax credit to make it more relevant in the current price environment; consider simplification of calculations. y Support, Technology, or Institutional Programs Support of research in the areas of reservoir characterization, reservoir modeling and sweep efficiency improvement. Consider public/ private partnerships (e.g., Research Partnership to Secure Energy for America) to provide appropriate prioritization of topics. Finding 3: A large increase in CO2 supply from dilute anthropogenic sources will be required over the next 10 to 15 years to extend EOR production levels. The complex factors affecting this supply include carbon capture and sequestration (CCS) deployment, involving substantial government fiscal and policy action. y Estimates of oil supply resulting from projects using dilute CO2 sources range up to more than two million barrels of oil per day.
y The cost of CO2 from dilute sources is dominated by high capture costs; support will be required to build demonstration projects for supply and as test sites for technology evolution. y Lack of significant progress in CCS projects appears to be a function of low economic returns available to those who would deploy the technology. Costs need to decrease substantially to create market interest, which may require step-changes in technology. y EOR is compatible with CCS should it move forward; EOR projects are seen as a win-win for those advocating early adoption of CCS. y Permanent carbon sequestration during EOR will be part of the justification for these projects; the legal framework to delineate post-closure liability must be put in place. Additional considerations include pore space ownership, new well design standards, and potential re-abandonment of existing wells. These issues are already well discussed among various government agencies and industry groups. State support is important even if financial incentives are small; it helps to provide greater regulatory certainty and remove barriers that arise in any new project development. y Canada may be ahead of the United States in this area with a combination of policy and funding. Recommendation 3: Some recommended areas for consideration are as follows: y Proactive Regulation A program is implemented which incentivizes emission reductions while recognizing CO2 EOR as a CCS option. Framework and regulations are developed that allow operators to understand and manage post-closure liability from the outset of project conceptualization. States without clear processes regarding CO2 EOR use Interstate Oil and Gas Compact Commission guidance or another source to develop needed regulations; dont reinvent the wheel. Comprehensive Environmental Response, Compensation, and Liability Act/Resource Conservation and Recovery Act exemptions for storage in qualified sites.
Price premium for low-carbon power, akin to renewable pricing, or credit for CO2 storage via EOR. Ability to generate offsets for CO2 captured from sources outside regulatory jurisdiction. y Current Practices Affirmed New rules do not hinder projects that are operating or in permitting phase. CO2 transportation regulations, currently under discussion for CCS are not onerous for EOR users. Maintain a flexible approach that allows both common-carrier and private CO2 pipeline models. Avoid considering CO2 a pollutant; reinforce with regulators that CO2 is not hazardous, and is not corrosive in the absence of free water and with proper metallurgy. y Direct Financial Support or Investment Direct investment or funding of carbon capture and EOR+Storage projects for demonstration purposes. Express backstop of long-term liabilities arising from storage may be necessary, including trust fund models. Enhanced tax credits for CO2 EOR+Storage projects with exemptions from liability under Alternative Minimum Tax provisions. y Support, Technology, or Institutional Programs Increased funding for National Energy Technology Laboratory Carbon Sequestration Partnerships. Finding 4: Substantial petroleum resources occur naturally or remain after primary and secondary recovery in low oil saturation zones. Increased understanding of these zones is necessary for extensive development, whether by carbon dioxide flooding or another technology. y A sizable portion of the 300+ billion barrels expected to remain unrecovered in existing oilfields are in zones of low oil saturation. y There are additional low oil saturation zones (often referred to as residual oil zones or ROZ) that occur naturally. These are not well characterized, but are estimated to hold at least 80 billion barrels. These zones provide a new set of targets in addition to already produced or developed fields.
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y Carbon dioxide flooding is the only applicable process currently deployed on a commercial scale to recover these resources. As such, the new target zones offer additional storage potential should CCS advance. y Technology development and demonstration in these zones will be focused in areas with existing infrastructure and CO2 supply options. y At this point, no non-CO2 alternative EOR process has been developed capable of supporting substantial commercial ROZ development. Water floods that include chemical additives seem to have the greatest application and promise. Recommendation 4: Some recommended areas for consideration are as follows: y Proactive Regulation Ensure flexible well plugging rules exist to avoid premature abandonment of candidate oil fields. y Direct Financial Support or Investment Consider separate tax credit to incent ROZ development. y Support, Technology, or Institutional Programs Support work to describe the ROZ resources at various levels, including state agencies, universities, U.S. Department of Energy, Research Partnership to Secure Energy for America, and the U.S. Geological Survey. Support open access research in alternative recovery processes, focusing on chemical flooding. Need both basic and applied research. Finding 5: Horizontal drilling and advanced hydraulic fracturing technologies are important to developing opportunities in the conventional oil area much as they are in unconventional oil and onshore gas development. Techniques to monitor and understand horizontal well performance will improve as these wells proliferate. y These technologies offer new tools to profitably develop conventional oil and EOR reservoirs. They also allow new hydrocarbon targets to be developed, that were previously thought unproducible or uneconomic. y Horizontal wells accounted for more than 50% of wells drilled in the United States during 2010. 114
y Given the increasing reliance on horizontal wells for reserve development, it will be critical to understand fluid flow in a given well to optimize production and maximize reserves and recovery efficiencies. y Horizontal drilling and hydraulic fracturing technologies depend on materials that may be in short supply or are used extensively in other industries. Recommendation 5: Some recommended areas for consideration are as follows: y Current Practices Affirmed New regulation on hydraulic fracturing should endeavor to maintain current regulatory effectiveness to avoid loss of opportunities. Maintain ability to comingle multiple formations where conservation principles are not compromised. y Support, Technology, or Institutional Programs Support research in the areas of downhole monitoring of wells, especially horizontals and those used in EOR. Working group of industry and government to identify potential material shortages and actions to mitigate impact.
Unconventional Oil
In this study, unconventional oil includes Canadian oil sands, Canadian heavy oil, and U.S. and Canadian tight oil, all currently producing significant quantities of oil, and potential future unconventional resources in U.S. oil shale and U.S. oil sands, not yet currently contributing production. These resources are located in the onshore arenas of U.S. and Canada, but are distinguished from the conventional oil discussed in the previous section by different hydrocarbon characteristics, geologic occurrences, and production techniques. The extra heavy oils (also referred to as bitumen) are extremely viscous sometimes nearly solid. They often contain high concentrations of sulfur and metals such as nickel and vanadium. These properties make them difficult to produce and process. Massive accumulations exist in the Canadian oil sands of Alberta and in smaller accumulations in the United States.
However, not all unconventional oils are heavy. A growing source of unconventional supply is tight oil produced from low-permeability siltstones, sandstones, and carbonates. The produced oil has similar properties (e.g., density, sulfur content) as conventional oil. Historically, the oil was locked in the formations and could not flow through the tight formation rock. However, recent advances in horizontal drilling and well fracturing technologies now enable production of tight oil. Notable plays include the Bakken (spanning Saskatchewan, Manitoba, Montana, and North Dakota), the Eagle Ford play in Texas, the Cardium play in Alberta, and the Miocene Monterey play in California. For the largest tight oil play, the Bakken, the produced oil is sweet and light, and only the geology and oil extraction techniques are unconventional. Unconventional oil is also contained in U.S. oil shale deposits. The petroleum component of the oil shale (kerogen) is less mature, not yet fully transformed into oil or natural gas. Therefore, unlike conventional oil and gas operations, kerogen in oil shale cannot be pumped directly from the ground or refined with traditional techniques. Rather, oil shale must be heated to high temperatures to transform the kerogen into an upgraded hydrocarbon. In these categories, oil in place is estimated at more than 3.5 trillion barrels. However, the reserves, or the amount of oil that can be economically produced, make up approximately 5% of this total (Table 1-13). Even though the recoverable oil is a small part of total oil, it is still significant.
In terms of production, unconventional oil supply in North America has been growing reaching 2 million barrels per day in 2009 or equivalent to about 10% of crude oil processed in U.S. refineries. The following sections discuss each of the main components of current and future unconventional oil supply in North America.
Canadian Oil Sands

History and Context
Canadas oil sands are one of the worlds largest hydrocarbon accumulations (see map, Figure 1-35). Located in the Province of Alberta, they are semiliquid hydrocarbons with gravity of 10o API or less. In 2009, the Alberta Energy Resources Conservation Board (ERCB) estimated the initial volume of oil in place of crude bitumen in Albertas oil sands as 1,804 billion barrels. The ERCB reported that 7% of the oil in place, 131 billion barrels, is contained in shallow deposits, generally less than 215 feet to the top of the oil sands zone. All of the shallow oil sands (amenable to surface mining) are located in the Athabasca oil sands area. Surface mining and bitumen extraction technologies are used to recover crude bitumen from these shallow deposits. The remaining 93% of the oil in place, 1,673 billion barrels, is contained in deeper deposits. In situ recovery techniques are used to recover crude bitumen from the deeper deposits. The ERCB estimated approximately 10% of the oil in place is recoverable with about 22% of the recoverable volume located in shallow deposits that will be
Table 1-13. size of north american unconventional oil resources (Billion Barrels)
Oil in Place u.s. oil shale (Green river formation only) Canadian oil sands Canadian heavy oil u.s. oil sands tight oil Total 1,500 1,804 35 63 n/a Greater than 3,500 Resources (Includes Reserves) 0 169.8 (reserves) 1 0 5.5 to 10 (resources) Greater than 177 Ultimate Potential 800 308 n/a n/a n/a Greater than 1,100
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Figure 1-35. Albertas Oil Sands Areas

MAJOR OIL SANDS PROJECTS IN SITU MINING MINEABLE REGION PEACE RIVER THE ENTIRE OIL SANDS REGION PEACE RIVER, ATHABASCA, AND COLD LAKE IS ROUGHLY THE SIZE OF THE STATE OF NEW YORK. THE PROVINCE OF ALBERTA IS SIMILAR IN SIZE TO THE STATE OF TEXAS. THE MINEABLE OIL SANDS REGION IS SLIGHTLY SMALLER THAN THE STATE OF RHODE ISLAND.
Figure 1-35. albertas oil sands areas
OIL SANDS AREA FORT MCMURRAY
ALBER
TA
CANADA
UNITED STATES COLD LAKE
Note: Comparisons to U.S. states are to the total areas of the states, including land and water. Source: IHS Cambridge Energy Research Associates, 2009.
developed using surface mining and 78% located in deeper deposits that will be developed using in situ recovery. To year-end 2009, about 4% of the initial established reserves had been produced with about 65% produced using surface mining and 35% produced using in situ recovery. The ERCB estimates the ultimate potential of crude bitumen recoverable by in situ recovery methods from Cretaceous sediments to be about 210 billion barrels and from Paleozoic carbonate sediments at about 37 billion barrels. Nearly 70 billion barrels is expected from within the surface-mineable boundary. The total ultimate potential of crude bitumen is, therefore, about 315 billion barrels, of which 7billion barrels has been produced, leaving 308 billion barrels remaining. As of 2009, oil sands production has reached 1.49 million barrels per day of crude bitumen, 826 thousand barrels per day from surface mining, and 664 thousand barrels per day from in situ projects. In 2009, the oil sands industry represented approximately 50% of Canadas total oil production. 116
Historical bitumen production over the last 15 years is illustrated in Figure 1-36. To remove contaminants and improve the value of oil sands crude, a large portion of Albertas bitumen production is upgraded to synthetic crude oil (SCO) and other products before shipment to market. After upgrading, supply of SCO (including other products) and non-upgraded crude bitumen totaled 1.34 million barrels per day in 2009 (766 thousand barrels per day of SCO and 570 thousand barrels per day of non-upgraded crude bitumen). The 2010 production was 1.47million (660 thousand barrels per day of SCO and 810 barrels per day of non-upgraded crude bitumen).
Key Development and Production Technologies

The hydrocarbon component of the oil sands, crude bitumen, must be separated from sand, other mineral materials, and formation water before it is delivered to downstream upgraders or refineries. Shallow oil sands deposits, generally less than about 215 feet to the top of the oil sands zone, are usually exploited
using surface mining to recover ore-grade oil sands, then delivered to an extraction plant for separation of bitumen from the sand, other minerals, and water. Deep oil sands, greater than about 215 feet to the top of the oil sands zone, are exploited using in situ recovery techniques, whereby the bitumen is separated from the sand in situ and produced to the surface through wells. Established oil sands mining and extraction technologies are based on truck and shovel mining techniques. Trucks capable of hauling up to 400 tons of material are loaded by electric- and hydraulic-power shovels with bucket capacities up to 58 cubic yards. The trucks transport oil sands ore to preparation facilities where it is crushed and prepared for transport to an extraction plant (where bitumen is separated from the sand). The ore is mixed with water to create slurry that can be pumped to the extraction plant (this method is known as hydrotransport). At the extraction plant, bitumen is separated from the sand, water, and other minerals using a hot water extraction process. Developing oil sands mining and production processes to improve recovery performance, reduce envi-
ronmental impact, and reduce costs include the following: y Mine-face crushing and slurry preparation to eliminate the use of heavy-hauler trucks y Counter Current Drum Separator extraction process (Bitmin process), developed to replace hot water extraction and produce relatively dry tailings sand y Mine-face extraction, a process that uses cyclones to separate bitumen from the sand at the mine face. Established in situ bitumen recovery technologies have been developed to deal with the heavy, viscous nature of the bitumen, which means that it will not flow under normal reservoir temperature conditions. For recovery of bitumen from deep deposits, viscosity must be reduced in situ to increase the mobility of bitumen in the reservoir. This enables flow to wellbores that bring bitumen to the surface. Bitumen viscosity can be reduced in situ by injecting steam to increase reservoir temperature, injecting solvents, injecting air, or using electric heating. Steam-based thermal recovery is the dominant recovery technique
Figure 1-36. Canadian Bitumen Production, 19982009 Figure 1-36. Canadian Bitumen production, 19982009 1,600 80 PERCENTAGE OF BITUMEN PRODUCED BY MINING
IN SITU PRODUCTION SURFACE MINING PRODUCTION PERCENTAGE MINED
THOUSAND BARRELS PER DAY
1,200
60
800
40
400
20
0 1998 1999 2000 2001 2002 2003 2004 YEAR 2005 2006 2007 2008 2009
Source: Alberta Energy Resources Conservation Board (ERCB).

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used at Athabasca, Cold Lake, and Peace River. The industry also conducts field tests of other in situ recovery methods including solvent-based recovery, co-injection of steam and solvents, co-injection of steam and non-condensing hydrocarbons, in situ combustion and electric heating. Compared to surface mining, in situ bitumen production does not produce tailings that require disposal, requires less water due to higher recycle rates, and has a smaller surface footprint. Primary recovery or cold production occurs where bitumen can flow under normal reservoir conditions without additional stimulation. This approach has been used successfully in the Wabasca area of Athabasca and in the Peace River Oil Sands Area. Secondary recovery, where production is stimulated by water or polymer injection, has been used successfully in the Wabasca area. Most in situ bitumen production has been enabled using steam-based thermal recovery techniques, such as cyclic steam stimulation or steam-assisted gravity drainage (SAGD). These techniques, developed since the 1980s and 1990s, are now well established, and play a significant role in overall expansion of oil sands production. In addition to improvements to these existing technologies, new in situ recovery processes are being developed to reduce energy requirements, reduce water use, lower costs, improve recovery factors, and reduce environmental impacts. These include: y Hybrid steam-solvent processes y Solvent only processes y In situ combustion y Electric heating.
day, and by 2015 productive capacity is projected to approach about two million barrels per day. Several new projects have recently come on stream, several are under construction, and many more are proposed. As of early 2011, industry had proposed projects representing about 7.7 million barrels per day of new bitumen productive capacity. Based on our review of available resources, the status of the industry, and the challenges it faces, it is our view that the Canadian oil sands industry has the high potential to provide up to 6 million barrels per day of SCO and raw non-upgraded bitumen supply by 2035. This high case assumes a concerted effort by Canada and the United States to address challenges associated with unconventional oil development in general and oil sands in particular (e.g., energy and water intensity, tailings reduction and remediation, export capacity, and other constraints). The most likely case we have examined would see oil sands output grow to around 4.5 million barrels per day by 2035. This assumes that: y Supply continues to be driven by market demand y The current Canada/U.S. free-trade relationship remains y Oil prices remain sufficient to justify new project investments y Sufficient pipeline transportation capacity is built to move products to market y Public acceptance of oil sands development is maintained by continual environmental performance improvements y At this growth level, no undue restrictions are expected on capital availability, availability of engineering services, skilled labor supply, or material and equipment supply. A constrained case would see oil sands growing only to about 3 million barrels per day by 2035. This case assumes governments implement stronger clean energy policies that create additional challenges for oil sands developments. Strong policies to limit greenhouse gas (GHG) emissions encourage expansion of alternative forms of energy, while regulatory oversight of oil sands tightens further, particularly to address the impacts of oil sands development on air and water quality and land use. The intersection of increasing costs and declining oil demand and oil prices (lower oil demand stems from
Development potential of productive capacity to 2035 and beyond has been reviewed by examining industrys historical success in growing production, known plans for new development and expansion of existing projects, and the expected contribution of new areas and new technologies. We have developed a most likely case, a constrained case, and a reasonably unconstrained case. As stated earlier, the Canadian oil sands industry is well established. Large-scale commercial production began more than 40 years ago. In 2009, production reached 1.34 million barrels per 118
government clean energy policies) raises economic hurdles and deters significant oil sands developments after 2020.
Canadian Heavy Oil

History and Context
Most Canadian conventional heavy oil comes from a region termed the heavy oil belt. The heavy oil belt straddles the border of Alberta and Saskatchewan, just south of the oil sands Cold Lake region. Generally, heavy oil projects north of township 53 in Alberta are classified as oil sands and projects south are classified as conventional heavy oil. In Saskatchewan, all heavy oil production (including production north of the Alberta cutoff) is categorized as conventional heavy oil. Because of the technological and geographic overlap between bitumen produced from in situ oil sands and Canadian conventional heavy crude, Canadian conventional heavy oil is included within the unconventional oil category of this study. Alberta defines heavy oil as all oil under 25.7 o API south of township 53, while Saskatchewan production data use a cutoff of under 20 o API for heavy oil.
In 2009, production of Canadian conventional heavy oil was 382 thousand barrels per day with production in decline (5% per year on average over the past 5 years). Combined production from Alberta and Saskatchewan peaked in 1997. Recent declines are attributed to the maturity of easy oil and the shift in industry focus towards oil sands (Figure 1-37).

Today, heavy oil uses similar production technologies as in situ oil sands, such as: y Cold heavy oil production with sand (CHOPS) Recovery factors range from 3% to as highas 12%. y Horizontal well technologies Typically applied to areas of the heavy oil belt with lighter gravity crudes, similar recoveries to CHOPS. y Secondary recovery Water and polymer flooding are used in lower viscosity reservoirs. y Thermal (cyclic steam stimulation and steam drive) Oil recovery has reached60%.
Figure 1-37. Canadian heavy oil production, 19882009

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ALBERTA HEAVY OIL
Figure 1-37. Canadian Heavy Oil Production, 19882009
DAILY FLOW THOUSAND BARRELS PER DAY
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SASKATCHEWAN HEAVY OIL
100
0 1988
1991
1994
1997
YEAR
2000
2003
2006
2009
Note: Alberta production heavy oil includes all oil under 25.7 API, while Saskatchewan production data is all production under 20o API cuto for heavy oil. Sources: Alberta Energy Resources Conservation Board (ERCB) and Saskatchewan Ministry of Energy and Resources.
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Similar to in situ oil sands, new methods have been developed and applied to improve recovery factors and extend the life of these resources. These technologies include: y Thermal steam-assisted gravity drainage (SAGD) y Hybrid steam/solvent and solvent only processes y In situ combustion y Enhanced cold flow recovery.
commonly known as oil shales, which refers to oil or kerogen rich shales that are either heated in situ and produced or if surface accessible mined and retorted. The most notable tight oil plays in North America include the Bakken play in the Williston Basin, the Eagle Ford play in Texas, the Cardium play in Alberta, and the Miocene Monterey play of Californias San Joaquin Basin (see map, Figure 1-38). Starting in the mid-2000s, advances in well drilling and stimulation technologies combined with high oil prices have turned tight oil resources into one of the most actively explored and produced targets in North America. In terms of oil resources the tight oil plays are significant. Total estimated resources of the tight oil plays identified by this report range from 6 to 34 billion barrels, and are based on reports for both producing and prospective tight oil plays. It is likely that this estimate significantly underestimates the amount of recoverable oil when new tight oil techniques are applied to these deposits. The NPC Resource and Supply Data survey, analyzing a wide set of studies and private industry outlooks, provided the high side estimate of 34 billion barrels. Among the producing tight oil plays, the Bakken play is currently considered the largest, with estimates of recoverable resources or resources ranging from 3.65 billion barrels of oil to 4.3 billion barrels. With respect to the prospective tight oil resources, it has been calculated that the Tuscaloosa Marine Shale play of central Louisiana and southern Mississippi may hold resources of 7.0 billion barrels. According to the North Dakota Department of Mineral ResourcesOil and Gas Division, production from the Bakken Formation in North Dakota has increased from approximately 20 thousand barrels per day in 2007 to more than 220 thousand barrels per day in 2010. From the information available at the time of this study, the Bakken accounts for most of the current tight oil production, almost 350 thousand barrels per day including U.S. and Canadian production. However, recent development within the Niobrara and Eagle Ford plays suggest that their productivity may be comparable to that of the Bakken within a few years.
By 2035, we estimate Canadian heavy oil producing in a range of 135 thousand barrels per day (constrained case) up to 350 thousand barrels per day (relatively unconstrained case). The most likely, or expected, case is for 2035 production of 250 thousand barrels per day, assuming an ongoing 4% decline per year to 2035 for cold flow production. The amount of production using steam method increases from about 30 thousand barrels per day currently to 130 thousand barrels per day. Further steam injection projects are limited as few portions of the resource are thick enough to apply steam methods. The high, or reasonably unconstrained, case is for 2035 production of 350 thousand barrels per day, with technological innovation enabling upside from the expected case. Between 2025 and 2035 successful and economic pilots of both combustion and heavy EOR) with gas reinjection could be demonstrated in the heavy oil belt. By 2035, these two innovations would add another 100 thousand barrels per day to production. The low, or constrained, case is for 2035 production of 135 thousand barrels per day, assuming an ongoing 4% decline per year to 2035 for cold flow production. The amount of production from thermal methods does not increase substantially, as new thermal projects are limited to the more economic oil sands deposits to the north.
Tight Oil
History and Context
The term tight oil refers to crude oil or condensate found in sedimentary rock formations characterized by very low permeability. This resource should not be (but often is) confused with resources that are 120

Horizontal drilling technology, combined with advances in well completion and hydraulic fracture stimulation methods, has opened up domestic tight
Figure 1-38. Producing and Prospective Tight Oil Plays in the United States and Canada
Figure 1-38. producing and prospective tight oil plays in the united states and Canada
CARDIUM SHALES, AB 660 MMBO BAKKEN SHALE, CANADA 30 MMBO GREEN POINT SHALE, ME
EXSHAW SHALES, MT 30 MMBO HEATH/BAKKEN SHALES, MT BAKKEN SHALE, ND 4,000 MMBO
MARCELLUS SHALE, NY
MOWRY SHALE, WY MOWRY/ NIOBRARA SHALE, WY
WATTMAN SHALE, WY 11 MMBO NIOBRARA SHALE, CO 240 MMBO ATOKA CHEROKEE SHALES, CO 146 MMBO PENN SHALE, OK MANCOS SHALE, NM 75 MMBO BARNETT/ WOODFORD SHALES, NM BARNETT SHALE, TX 70 MMBO TUSCALOOSA SHALE, MI 7,000 MMBO EAGLE FORD/MIDWAY/ WILCOX FORMATIONS, TX
UTICA SHALE, OH
MOWRY/NIOBRARA SHALE, WY
GOTHIC SHALE, UT
ANTELOPE SHALE, CA 700 MMBO
MONTEREY SHALE, CA 17.5 MMBO
TIGHT OIL PLAY STATUS EAGLE FORD SHALE, TX 13 MMBO
PROSPECTS
PRODUCING
Notes: Estimated recoverable resources. MMBO = million barrels of oil
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oil production in North America. The successful production of tight oil relies on a detailed understanding of potential pathways to unlock hydrocarbons from low permeability and low porosity formations that may contain natural fracture networks. Application of specific technologies and drilling strategies, especially with respect to well completion and stimulation techniques, almost certainly differs from play to play, and often even within a play. The Bakken play is an example of this. The exploitation approach for the Bakken evolved from early vertical wells perforated across the entire thickness of the formation to horizontal drilling of the upper shale, then to the horizontal drilling of the middle Bakken (which is not typically shale, but may be composed of silts, sands, or carbonates) utilizing single stage fracturing. The current trend of horizontal drilling involves multistage fracturing of the middle Bakken. The horizontal drilling approaches in the Bakken have also included a host of multilateral well types drilled in various orientations to optimize the influence of natural fracture networks and natural stress and strain forces on productivity. The current trend in the Bakken is towards single well pad locations with various horizontals (up to 12) drilled from one location covering two 1,280-acre spacing units. This significantly reduces surface disturbance and can save capital associated with multiple rig mobilization and demobilization.
development of more known plays, could result in a 50% increase in the 2035 estimate, to 3 million barrels per day from this resource type. In a constrained development case, production and development could be limited by restrictions on hydraulic fracturing by state and federal regulatory agencies; limited availability of water for hydraulic fracturing; or changes in the tax rules for oil exploration and production activities that reduce the financial incentive to produce tight oil resources. These types of constraints could limit production from tight oil in 2035 to around 600 thousand barrels per day.
U.S. Oil Shale

History and Context
Oil shale consists of rock and a solid organic sediment called kerogen. This naturally occurring source of hydrocarbon has not yet undergone the full transformation to oil and gas by heat and pressure over long periods of geologic time, creating a unique development and production challenge. Oil shale represents one of the worlds largest unconventional hydrocarbon deposits with an estimated 8 trillion barrels of oil in place. Approximately 6 trillion barrels of oil in place is located in the United States, with the most concentrated deposits found in the Green River Formation in Colorado, Utah, and Wyoming. This formation contains about 1.5 trillion barrels of oil in place. About 80% of this resource lies under U.S. federal lands. There is a limited history of oil shale production in the United States, dating back to the 1970s and early 1980s, following the Arab oil embargoes. When oil prices fell in the 1980s, oil shale production activities were halted although research into development and production technologies continued. This includes efforts by the U.S. federal government, which awarded six research, development and demonstration (RD&D) leases in Colorado and Utah in 2006 and offered more leases in 2009. In addition, companies, like Shell, have undertaken oil shale development research projects on private land. Because of the long time cycle and high capital requirements of an oil shale project, broad and consistent government support would be required to develop a commercial oil shale industry. Supportive government policy and regulatory certainty are
By 2035, production from tight oil plays across the United States and Canada could range between 600 thousand barrels per day up to as high as 3 million barrels per day, with a most likely estimate of around 2 million barrels per day. The most likely estimate involves the application of knowledge gained during successful development of the Bakken towards other tight oil plays over this period. Bakken production is expected to be between 400 and 600 thousand barrels per day by 2035. If levels of Bakken production from Saskatchewan and Montana are each about half the North Dakota production, and similar productivity is realized from just three other large tight oil plays (for example the Eagle Ford, Niobrara, and Cardium) then more than 2 million barrels per day of production from tight oil formations in North America in 2035 is likely. In the reasonably unconstrained case, continuing improvement in recovery technologies, as well as 122
crucial for private industry to assess risks and to commit the billions of dollars of required investment. Commercial scale technologies with economically attractive recovery efficiency and acceptable environmental impacts will be required. Because the road to commercialization is measured in decades not years a long time horizon will allow development to continue through boom and bust oil and gas price cycles.
If these barriers and challenges are not met, there is a plausible low, or constrained, case in which there could be zero oil shale production by 2035. However, in the most likely case, we assume that three to five projects can emerge from the existing lease program and develop commercial production from the early 2020s, after conversion of RD&D leases to commercial leases around the middle of the current decade. This should lead to production rates of around 250 thousand barrels per day by 2035, with prospects for considerable growth in subsequent decades. In the high, or relatively unconstrained case, more rapid technological progress and a supportive market and regulatory environment could allow the industry to develop larger projects earlier. Large projects in the 100200 thousand barrels per day output range would take 35 years for development and 57 years to reach sustainable production. In this scenario, total production could reach as high as 1 million barrels per day by 2035.

Oil shale production technologies fall into two broad categories: in situ and ex situ. In an in situ development, the resource is converted to oil and gas without mining the oil shale ore. In ex situ development, the ore is mined and transported to a surface retort where it is heated and converted into oil and gas. The rich accumulations in Colorado may be best developed by in situ technologies because of high mining costs associated with thick overburden covering the resource. The shallow accumulations in Utah are generally not as thick as the Colorado deposits and may be developed using ex situ mining and surface retort technologies near the resource outcrop. Several development approaches are underway, mainly focusing on in situ techniques. Some of this work is proceeding on federal RD&D leases. The main technologies are the following: y Heating kerogen with electric heaters down the wellbore to achieve pyrolysis of the kerogen and conversion to oil and gas, which can then flow to the surface y Fracturing and chemical conversion of kerogen y Mining and surface retorting to recover hydrocarbons. Several decades of continuing sustained research will be necessary to prove, demonstrate and deploy effective technologies to achieve material production of oil and natural gas from oil shale deposits. Such a sustained effort will require long-term commitment from companies and a supportive fiscal, leasing, access, and research regime from the U.S. government.
U.S. Oil Sands

History and Context
U.S. oil sands resources show some important differences from the Canadian oil sands, discussed previously. Factors such as more varied land ownership, more complex and challenging oil sand composition, and geographical dispersion add to the challenges faced by U.S. oil sands development. Of the estimated 5463 billion barrels of original bitumen in place, the resource in the Utah is the largest, at about 20 billion barrels, and the best understood. Covering nearly 1 million acres, or 150 square miles, 11 major deposits are designated as Special Tar Sand Areas (STSA) within the state of Utah. An important difference between Canadian and U.S. oil sands (principally Utah) is that the U.S. sands are oil-wet rather than water-wet. Oil-wet U.S. sands lack the film of water layered between the sand grain and the bitumen in Canadian water-wet sands. The oil-wet nature of U.S. oil sands leaves the deposits more highly consolidated (typically 3-4 times the compressive strength), making initial mining and ore conditioning operations more energy intensive than in Canadas oil sands.
Many technical, environmental, and regulatory challenges will need to be met before oil shales become a significant contributor to North American oil supply.
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At the time of this report, there is no commercial bitumen production from the U.S. oil sands. There are three small pilot scale operations in Utah, operating on surface mineable deposits.

It is expected that variations of technologies used in the Canadian oil sands region can be applied in the United States; however, they will need to be adapted to fit the oil-wet nature of U.S. resources and will require smaller scale operations, given the greater resource dispersion. Surface mining techniques would be used for early development, with in situ technologies, adapted to Utah conditions, deployed later. Oil-wet and highly consolidated oil sands deposits, like those in Utah, do not necessarily require radical technology changes, but innovation and adaptation based on known technologies from Alberta.
Experts working on this study estimated most likely 2035 production of about 25 thousand barrels per day. This assumes that one of the current research and pilot projects achieves technology successes allowing it to step up to commercial-scale operations. In the low, or constrained, case 2035 production is estimated at 10 thousand barrels per day, again assuming that one project can move to commercial scale, but the pace of development would be constrained by environmental and financial barriers. In the high, or reasonably unconstrained, case it is assumed that enhanced policy, access, and fiscal support for resource development will encourage additional private capital to enter this play, and that production could grow to 150 thousand barrels per day by 2035, continuing on a slow growth curve thereafter.
A U.S. Department of Energy Task Force on Strategic Unconventional Fuels, reporting in 2007, envisioned the potential for U.S. oil sands production to grow from zero to 350 thousand barrels per day by 2035 (with a more aggressive scenario of 500 thousand barrels per day). This outlook appears optimistic given the status of resource development, investment, and current policy and regulatory frameworks.
Overall North American Unconventional Oil Production Outlooks

Table 1-14 summarizes the potential production pathways for the sources of unconventional oil production analyzed in this section. Most Likely Unconventional Oil Supply Projection (7 million barrels per day by 2035). The projection assumes steady growth from existing supply
Table 1-14. production potential from north american unconventional oil* (Barrels per day)
2009 Actual u.s. oil shale Canadian oil sands Canadian heavy oil u.s. oil sands tight oil Total 0 1,350,000 382,000 0 265,000 2,000,000 2035 Limited 0 3,000,000 135,000 10,000 600,000 3,700,000 2035 Likely 250,000 4,500,000 250,000 25,000 2,000,000 7,000,000 2035 High 1,000,000 6,000,000 350,000 150,000 3,000,000 10,000,000
* the total unconventional production is weighted for the two sources of supply that are not currently commercial (oil shale and u.s. oil sands). If one reaches its full potential, it is likely the other one would not. therefore, both projections are weighted 50% in the production capacity roll-up, all others are relatively independent of each other and have 100% weightings. the production of bitumen is 1.49 million barrels per day, but after upgrading part of the bitumen to synthetic crude oil, some volume is lost, and overall supply is lower.
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sources and successful development of new, gradually implemented technologies. U.S. oil sands and U.S. oil shale require the largest innovations, and commercial methods for production must be deployed. Other supply sources require ongoing improvements to existing extraction methods. Unconventional oil production is projected to reach 7 million barrels per day by 2035. Limited Unconventional Oil Supply Projection (3.7 million barrels per day by 2035). The low projection assumes production growth is slowed by a number of factors. For sources of supply with no current production (U.S. oil sands and U.S. oil shale), barriers to development include limited access to acreage, and minimal financial incentives and investment capital to pursue research and eventual commercial development. For sources of supply with current production, challenged economics (higher environmental costs and environmental limits) ultimately constrain growth. High Unconventional Oil Supply Projection (10million barrels per day by 2035). The projection assumes a set of circumstances that would accelerate production growth. Major innovations in unconventional extraction occur, solutions minimize environmental effects, and strong government support in the United States and Canada fosters development. New technology is developed and rapidly deployed. Physical constraints are the main limits to growth requirements to build pipeline capacity, time to build infrastructure, reasonable time to learn and ramp up capacity, water constraints, labor constraints, manufacturing equipment or drilling constraints. In this projection a true stretch case for unconventional supply production reaches 9 million barrels per day by 2035.
years. If the goal is to increase domestic oil supply and increase energy security, unconventional resources will surely need to be tapped. These types of resources necessitate supportive government policy. Finding 1: Conflicting information on environmental impacts of unconventional supply, including the relative GHG emission intensity of oil sands development or water quality impacts from tight oil production, could lead to misinformed or ineffective policy. As unconventional supply has a larger environmental footprint, the environmental effects associated with production growth should be considered and planned for. Recommendation 1: Provide access to independent and accurate information to support the formation of policy. Establish a Federal Advisory Committee Act (FACA) team to provide an independent forum to research and clarify aspects of unconventional supply. This will identify areas of uncertainty and illuminate facts ensuring that government initiatives are both informed and effective. The FACA committee could also contribute to the development of early, long-range planning that considers the environmental effects associated with future unconventional supply growth. Finding 2: For unconventional sources with no production, specifically U.S. oil shale and U.S. oil sands several ingredients that have been critical to the successful development of the Canadian oil sands are currently not in place. Limited Access Corporations and individuals are constrained in the ability to assemble contiguous leases with large resources. Without certainty in resource size, there is less incentive for companies to risk capital. Additional Fiscal Measures to Spur Growth Canadian and Alberta government participation in oil sands included broad-based science and technology research, pre-commercialization investments, favorable fiscal terms, loan guarantees, and direct financial investment over decades. The U.S. government provides vital funding for basic research, but these ideas must move from the laboratory into the field the next critical step in resource development; funding is often an issue for entrepreneurial firms, which sometimes struggle to finance high-risk field pilots. Unconventional royalties are another opportunity to
Key Findings and Recommendations

For each source of unconventional oil supply, the path to eventual production will be unique. In some cases, the advance of broadly applicable oil and gas technology could lead to surprisingly rapid production growth potentially the case for tight oil. However, development of tight oil technology is likely to be the exception, not the norm. Unconventional resources require new techniques to extract the oil. Learning from the Canadian oil sands example, the yardstick for measuring the successful development and deployment of new technologies is decades not
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Natural Gas liquids

The shale gas revolution could take production of natural gas liquids (NGLs) supplies to unprecedented levels. If natural gas production rises to more than 100 billion cubic feet per day by 2035 as predicted, an NGL supply increase of 60% or greater above 2010 levels could occur. This sharp rise in anticipated NGL production has broad implications for demand, infrastructure, and import/export opportunities. NGLs are ethane, propane, normal butane, isobutene, and natural gasoline (pentanes+), produced when wellhead natural gas is processed for delivery to market. NGLS, in gaseous form at the wellhead, are extracted by chilling the natural gas to very low temperatures, a process that liquefies the gases. In some cases, NGL extraction is required to produce a natural gas stream that meets required pipeline or industrial specifications. In other cases, when the price of NGLs is higher than that of natural gas, NGLs are extracted for economic reasons. The difference between crude oil and natural gas prices is a key driver in NGL prices. As the oil to gas price ratio grows, the value of NGLs relative to gas also increases. Rising NGL prices have been a factor in recently increased rig activity in oil and liquids-rich natural gas plays such as in the Permian, Williston, and Eagle Ford basins. Each component of an NGL barrel has a unique supply/demand profile. Ninety percent of ethane comes from natural gas processing plants. Demand for ethane is from petrochemical plants, which transform ethane into ethylene, an essential component of plastic. Ethane is uneconomic and difficult to export so demand is constrained to North America. Sixty percent of propane comes from natural gas processing plants. A third goes to petrochemical demand and two-thirds goes to home heating demand. Weather, ethylene prices, and export economics drive the demand for propane. The motor fuels market drives demand for the remaining NGLs: normal butane and isobutane and natural gasoline. Natural gas processing plants produce 45% of the n-butane and 60% of the isobutane. Ninety percent or more of the butanes are used in motor fuels. Natural gas processing plants also make most of the natural gasoline. Petrochemical plants use a third of it and refineries use two-thirds for fuels. Current NGL infrastructure may not be large enough or interconnected enough to handle potential production growth. The market will likely respond with new investment, allowing NGL markets and their customers to gain significant advantages in domestic and global markets. To date, there have been announcements for an additional 7.8 billion cubic feet per day of processing capacity in the United States, an increase of 12%. These projects, built close to shale development, are needed even though processing plants along the Gulf Coast have 3050% open capacity. Several projects are also underway to expand fractionation capacity by 438 thousand barrels per day by 2014. Transportation and storage capacity is also expected to increase. Two NGL pipelines have been proposed to take NGLs from the Bakken to market.
incentivize development. Current U.S. royalties are 12.5% the same level as lower risk, established conventional oil production. Recommendation 2: Create an environment that fosters innovation and results in production growth; access to acreage with sizable oil resources and longterm stable fiscal regime with federal measures to support the industry. Ideally the fiscal environment stretches over multiple decades, in order to provide the certainty to develop unconventional resources in 126
an economically viable, socially acceptable, and environmentally responsible manner. Fiscal measures could include loan guarantees, severance tax incentives, lower royalties, accelerated capital depreciation, and job creation programs (including retraining and financial support). Other ideas include up-front investments to pursue technology deployment and creative oil and gas royalty and fiscal structures that consider the higher operating and capital costs of unconventional production.
Finding 3: For unconventional supply with production, primarily Canadian oil sands, develop new technologies that lower the environmental footprint and offer higher, more sustainable, oil production levels. For instance, Canadian oil sands have about 515% higher GHG emission per barrel than the average crude oil consumed in the United States. Development of new technologies to lower GHG emission intensities would help to close this gap. In turn, these technologies could be implemented domestically to improve the environmental footprint of new U.S. unconventional resources (oil shale and U.S. oil sands). Investments in low or possibly zero-carbon emitting energy such as low-energy extraction methods or small-scale nuclear generation to fuel extraction, or CCS all hold potential for reducing GHG emissions. Recommendation 3: Continue to participate in international and bilateral activities such as the Energy Partnership of the Americas Heavy Oil Working Group. Identify technology areas of mutual interest between the United States and Canada areas that target more environmentally sustainable methods of production. New technologies could result in economic opportunities for U.S. firms, while increasing energy security. New technologies will most likely advance the development, and reduce the environmental impact, of U.S. oil shale and U.S. oil sands supply and may ultimately prove useful to other extractive industries.
2. United States Gulf Coast (part of PADD III) 3. Midwest (northern part of PADD II) 4. Rocky Mountain (the same as PADD IV) 5. Western Canada including Washington State (Washington State is currently part of PADD V) 6. Eastern Canada 7. California (currently part of PADD V) 8. Alaska (currently part of PADD V) Figure 1-39 shows the geographical extent of the PADDs (Petroleum Administration for Defense Districts) in the United States, often used to define regional petroleum logistics and market issues. PADDs have been used to define the oil pipeline regions covered in this study. As of 2009, the United States had approximately 55,000 miles of crude oil trunk lines (typically 824 inches in diameter) connecting North American supply and market regions. This number does not include tens of thousands of miles of gathering lines used to move crude oil from production fields to trunk lines, refined products lines to move products from refinery to market, and LPG/NGL lines used to move other commodities such as propane and ethane. Since the last NPC study on oil pipelines, conducted in 19871989, the United States has seen significant shifts in supply and demand for crude oil. Total imports of foreign crude into the United States have nearly doubled from just over 4.7 million barrels per day in 1987 to roughly 9 million barrels per day in 2009. This is a continuation of the trend of domestic U.S. production falling over most of the period, while oil demand increased. One of the most significant changes in the dynamics of U.S. crude oil transportation has occurred over the past decade as the United States trended away from its reliance on waterborne imports, towards imports from Western Canada. Since the 1987 NPC report, U.S. imports of Canadian crude oil have tripled to nearly 2.5 million barrels per day, with nearly 40% of that growth occurring since 2000. The most direct impact of this shift is highlighted by changes in the Midwest and Rocky Mountain regions. In the Midwest, many pipeline networks were originally established to supply domestically
Crude Oil Pipeline Infrastructure

Overview
Oil infrastructure is critical to the North American energy supply chain that has evolved over the last century. For the purposes of this paper, oil infrastructure is limited to pipeline transportation infrastructure available for crude oil in North America. While marine, rail, and trucking operations can be important infrastructure components, the vast majority of North American oil supply is moved via pipeline. A detailed regional analysis of the crude oil pipeline system is included in Topic Paper #1-7, Crude Oil Infrastructure, which is available on the NPC website. The regions covered are as follows: 1. Mid-Continent (currently part of PADD II [Petroleum Administration for Defense Districts])
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Figure 1-39. u.s. petroleum administration for defense districts (padd)

PADD I: EAST COAST PADD II: MIDWEST PADD III: GULF COAST PADD IV: ROCKIES PADD V: WEST COAST, AK, HI
Figure 1-39. U.S. Petroleum Administration for Defense Districts (PADDs)
Source: Energy Information Administration, Oil Market Basics, Appendix A, Map of Petroleum Administration for Defense Districts.
produced light crude oil from Texas and the U.S. Gulf Coast region to large refining hubs in PADD II. Northbound corridors from Cushing, Oklahoma and St. James, Louisiana, once formed the backbone of the crude oil pipeline infrastructure in the MidContinent, U.S. Gulf Coast, and Midwest regions. Now, they are increasingly secondary to the growing demand for southbound capacity. A similar situation is occurring in the Rocky Mountain region, where a growing surplus of light Rocky mountain crude oil supply, coupled with increasing availability of Canadian supply and lower refinery demand, has overwhelmed takeaway pipeline capacity on the Rockies to Midwest Interregional Corridor. Also, growth of crude oil supplies in the U.S. MidContinent, coupled with growth in Canadian production, is causing an imbalance in the traditional market dynamics around the Gulf Coast region. The expected surge in future offshore domestic production combined with Canadian imports and the capacity of current infrastructure will likely reduce the need for the Gulf Coast to increase foreign crude import capability. 128
Like the PADD I region, the West Coast Region, consisting of PADD V excluding Alaska, remains a largely separate market from the rest of the United States and faces a unique set of issues. California has no intraregional or interregional pipelines. An interregional pipeline corridor operated when the 1987 NPC study was completed, but the system has since been converted to natural gas service, a result of declining production and dwindling throughput. Regional crude oil production has fallen to less than half of what it was in the 1980s and is now less than 1.3 million barrels per day. With little historical need for waterborne import infrastructure, and the age of some facilities approaching 50 years, the California Energy Commission has forecasted a need for significant expansion of waterborne import facilities and tankage by 2030 to accommodate imports. In spite of shifts in market dynamics since the previous NPC study, the Mid-Continent region, specifically Cushing, Oklahoma, remains the nexus of North American crude oil supply and movements. As of 2008, Cushing holds 510% of total U.S. crude oil
inventory and it remains the price settlement point for the benchmark West Texas Intermediate on the NYMEX. Several major pipeline corridors service the Cushing hub, including supply from the Western Canadian Sedimentary Basin, making the Cushing hub and surrounding region strategic importance to North American market dynamics. In addition to evolving market dynamics, pressing issues for the network of crude oil pipelines across North America include the age of existing infrastructure, combined with encroachment from urban development leading to concerns about public safety. Together these issues will likely lead to an increasingly stringent regulatory environment, and additional capital will be required to enhance the safety and securing of oil infrastructure. The overarching trend in oil infrastructure is the requirement to respond to shifting market dynamics caused by changing sources of domestic supply and evolving transfer corridor capacity requirements. Emerging alternative crude oil sources in the Western Canadian Sedimentary Basin and North Dakotas Bakken play are pushing Midwest and Mid-Continent pipelines to realign existing infrastructure to back out traditional imports from the Gulf Coast in favor of growing supply from the north.
tions in corridor capacity between supply regions and demand hubs and demonstrate how the commodities markets determine infrastructure needs. The last 25 years has been a period of punctuated market development. Regions that had produced a relatively stable supply of crude oil began to slow. In the latter half of 2010 and the beginning of 2011, West Texas Intermediate priced at Cushing, Oklahoma, was for the first prolonged period ever priced at a significant discount to Brent and other worldwide benchmark crudes. This shows how changes in balance between markets can impact crude oil pricing. Where market inefficiencies occur, industry continues to act as an effective balancing mechanism by identifying an economic opportunity and developing infrastructure to rebalance the market. Public policy should continue to support existing market mechanisms and encourage the market to respond to infrastructure needs emerging in the foreseeable future. This is the case for newly constructed or expanded infrastructure, and also when underused pipelines need to be reversed, idled, or undergo changes in type of service.
Energy Security
Energy security is protected when markets and the industry are encouraged and able to respond swiftly to economic drivers. There is no better example of this than todays changing North American supply and demand landscape. Rapidly growing production from Northern Albertas vast energy reserves is met with ample pipeline export capacity to the United States, allowing crude oil to flow to major refining districts in the Midwest, Mid-Continent, and ultimately the Gulf Coast. The robust energy supply position for North America will support energy security for the United States, as long as the necessary pipeline corridors are in place to continue to link production and markets. While changes in supply patterns across North America will favor expansion of certain corridors, declining use may merit capacity in others. Market forces will continue to support U.S. energy security even where use determines some corridors may become unnecessary. Though changing supply patterns are shifting towards a predominantly NorthSouth flow from Canada into the Midwest and MidContinent, some degree of import capacity from the
Key Findings
As a whole, the petroleum pipeline industry and infrastructure network will face a number of common challenges over the next 50 years. Industry, policymakers, and regulatory bodies must be mindful of these challenges to ensure a balance of diligence and efficiency that will best serve the interests of petroleum producers and consumers.
Changing Market Dynamics and Public Policy

Since the 1987 NPC oil pipeline study, the petroleum transportation industry has responded to the needs of a changing North American crude oil market landscape. Declining crude oil production in regions such as PADDs III and V has been offset by offshore imports, or U.S. imports from western Canada. Refinery rationalization and Canadian imports in recent years have led to increased reliance on PADD II refinery hubs in Chicago and Wood River. Such shifts have been met with expansions or reduc-
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U.S. Gulf Coast into those regions should remain available. Economics and pricing dynamics dictate that the throughput on those corridors will continue to act as a balancing mechanism for pricing hubs. This will ensure that imports from the Gulf Coast or the Strategic Petroleum Reserve will be available to the Mid-Continent and Midwest even if the majority of supply originates in the Western Canadian Sedimentary Basin or the Bakken play.
If and when a decision is made to idle or abandon a pipeline, determinations about the remediation of the asset must be made. From an environmental and social perspective it may or may not be in the publics interests to remove a pipeline and fully remediate a right of way. Such decisions will be dependent on the specific region or environment and the local municipalities.
Aging Infrastructure
Much of the pipeline infrastructure in North America was laid well before the last NPC oil pipeline study was conducted in 1987. In 2010, several existing systems are already 50 years old with no plans to be decommissioned based on asset age alone. On systems where asset integrity remains high, and market demand still necessitates infrastructure, there is no reason to retire assets so long as adequate maintenance and integrity programs can guarantee system safety. Asset integrity cannot be directly predicted by age alone, but, as time passes, overall infrastructure and integrity issues could become more common with age. Among age-related challenges are: y Internal and external pipeline coating issues y External corrosion y Third-party damage y Weld seam failures y Specific integrity issue around flash welded pipe. These challenges are cause for concern not only because of public safety risk, but because of heavy reliance on pipeline infrastructure in the North American economy. The U.S. relies on a small number of key pipeline transportation corridors. Mitigation and integrity programs are in place, but these programs may result in increased operating and maintenance costs. Downtime for planned maintenance will increase and be accompanied by an increased risk of apportionment on key pipelines.
Existing Infrastructure Use

Changing market dynamics between regions impacts existing infrastructure use. For most of the past 50 years, pipeline infrastructure was oriented in a south-north alignment. However, increasing supply from Canada coupled with falling supply from traditional production regions is causing a reversal to north-south orientation. This shift, along with other changes in market dynamics resulting from shifting crude oil supplies, has resulted in a number of reversals, conversions, and idling of existing systems. For some pipelines, this means using existing infrastructure with commodities for which they were not originally designed. While this is not a significant issue, it is important for the industry to be responsive to how a pipelines original design parameters combine with its current operation. In other regions, supply and demand shifts have resulted in significantly underused lines. Situations have emerged where one or two shippers will continue to rely on a pipeline, but capacity demand remains consistently below the pipelines economic threshold. In cases where demand on an existing pipeline falls below optimal flow rates, the question begs whether the asset ought to remain in service at a sub-optimal flow rate with potentially prohibitive operating economics, or whether the asset ought to be idled entirely. In these instances the pipeline service provider is left in a challenging predicament. Economics around a particular asset may no longer be favorable to continued operation, but the provider is left open to shipper and regulatory scrutiny for the adverse impact the assets idling or abandonment may have on another business. Such cases need to be carefully examined in Canada and the United States and the benefit to one party must be weighed carefully against the harm to another. 130
Regulatory Challenges
Development of new or greenfield pipeline projects often faces procedural challenges because of a complicated regulatory environment in the United States. The lack of overarching federal oversight in the oil pipeline permitting process leaves potential projects subject to a patchwork of required state level environmental, regulatory, and commercial approvals.
Mexico Oil and Gas

Mexico has been, and continues to be, an important trading partner with the United States for energy. In particular, of most relevance to this study, there is long-standing trade in crude oil and natural gas to the benefit of both countries. In 2010, Mexico exported 1.15 million barrels per day of crude oil to the United States. As such, the country was the second largest crude oil supplier to the United States, after Canada (and ahead of Saudi Arabia, Nigeria, and Venezuela). This underlines Mexicos importance as a North American crude oil producer and supplier. Mexicos crude oil production in 2010 was 2.96 million barrels per day. This has declined in recent years (from its highest level of 3.82 million barrels per day in 2004) as large fields, particularly the offshore Cantarell field in the Bay of Campeche, have begun to decline, and output from newer fields has not grown sufficiently to offset this decline. Even so, newer developments, such as the nearby Ku-Maloob-Zaap fields, now produce more than Cantarell. Onshore developments, such as the Chicontepec fields, have been considered as a future source of production growth potential, but have not yet become large contributors to Mexicos crude oil production. Prospects for continuing availability to the United States of significant crude oil supplies from Mexico will depend on Mexicos ability to reverse the recent decline in overall crude oil production, at a rate which also exceeds Mexicos own internal market needs. With regard to natural gas, Mexico is a net importer, mainly by pipeline from the United States, although, in recent years, Mexico has added capacity to import LNG from international marIn some cases, the public benefit of a project is clear on the national level, but less so at the state level. For example, an oil pipeline connecting supply in one region to demand in another may easily travel through one or more states without any intermediate receipts or deliveries. However, states between the origin and destination may see no immediate economic benefit to residents or businesses. At the state level it may be determined that with no immediate and primary benefit to local residents, regulatory and kets, with terminals both on its east coast and west coast. In 2010, Mexicos net natural gas imports from the United States were 0.83 billion cubic feet per day, representing almost 12.5% of Mexicos gas demand. Mexico has significant, and growing, natural gas production, which in 2010 totaled 5.3 billion cubic feet per day. However, Mexicos natural gas demand is growing at a faster rate than its production, leading to an increased need for imports, of which the United States supplies the most significant share. There is a well-established set of natural gas pipeline interconnections between the United States and Mexico, allowing this trade to continue and expand. However, recent trends in Mexican oil and natural gas production and consumption indicate that the relationship between the United States and Mexico will be quite different in the future. Significant recent declines in Mexican oil production alongside rising domestic demand will likely restrict Mexicos ability to export oil to the United States in the medium and long term. Increasing internal Mexican demand for natural gas, mostly as a result of rising electricity demands, will raise Mexican demand for imported natural gas from the United States and for liquefied natural gas from other countries. These market dynamics will take place in a context where the Mexican government will be assessing its long-standing framework for hydrocarbons production that restricts private investment in the sector. However, even important energy sector liberalization in Mexico is unlikely to lead to quick change in Mexican oil and natural gas production trends, as the lag time between investment and production can be quite long. environmental approvals should not be provided. In these cases, federal mandate is required to show that the project serves the publics interests, albeit at a national rather than state level. State permitting processes multiply the number of separate and unique approvals required for each individual project. This increases the costs and time required for the development of new projects and introduces significant commercial risk that one state
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may approve a project while another firmly disapproves it. As infrastructure demands from continental regions such as the oil sands grow and aging infrastructure requires replacement, a streamlined federal level permitting process will be of greater value.
Public Perceptions
With continued urban growth, a growing percentage of pipeline right-of-way is in close proximity to residential and commercial development. As this trend continues it will be crucial to ensure public awareness of the facilities and to manage public perceptions around leak detection. Challenges in the oil transportation industry have highlighted vulnerabilities in leak detection technology and reminded home and business owners of the facilities in their area. As the average age of North Americas pipeline network rises, it is important to work with municipalities to ensure emergency response plans are up to date and to educate individuals and businesses near pipeline facilities of the importance of Call Before You Dig programs and who to notify if they suspect a leak.
ral gas supply, and includes an overview of the context and production history, where applicable, the key technologies required for development, potential production pathways to 2035 and beyond, and an outline of the key findings. The section concludes with an overview of the natural gas infrastructure system required to deliver this supply to market. Each of these topics is described in more detail in topic papers that are available on the NPC website. Unlike oil, natural gas from the United States and Canada has supplied the vast majority of market needs in the region over the past 50 years. Both nations are large natural gas producers, but production and development activities have been almost exclusively directed towards serving the North American market. With one exception (Alaska LNG, operational since 1969), only recently have serious proposals been put forward regarding the potential to export North American gas into global markets. Indeed, this was preceded by several years in which facilities to import LNG were developed on a large scale, in anticipation of domestic supply falling short of meeting market growth in the United States and Canada. Onshore natural gas, from both conventional and unconventional reservoirs, forms the vast majority of current and future supply potential. Supply prospects have been transformed in recent years as natural gas companies have applied technology to develop gas supplies that could not previously be produced in economic quantities, particularly from shale gas basins. In addition, large actual and potential producing natural gas supplies from offshore and the Arctic are discussed below.
Security and Protection of Pipeline Assets

In 2009, there were approximately 55,000 miles of crude oil trunk lines (typically 824 inches in diameter) and tens of thousands of miles of additional feeder lines, gas lines, and natural gas liquids pipelines in the United States. The challenges around pipeline surveillance and the volume and volatility of the liquids transported through pipelines place them at a high risk for severe social and environmental fallout should pipeline integrity be compromised accidentally or intentionally. Beyond the immediate physical consequences of a severe pipeline disruption, the economic ramifications of taking a major pipeline corridor offline even temporarily could be far reaching and result in crude oil shortages, refinery shutdowns, and market disruptions.
Offshore
The offshore has been an active and important contributor to North American natural gas and oil supply, as described in a previous section. Natural gas activity has been almost exclusively located in the central and western zones of the Gulf of Mexico, although significant resources and production potential are known to exist in other offshore areas.
PROSPeCTS FOR NORTh AMeRICAN GAS DevelOPMeNT Overview

Each major heading in this section describes one segment of this portfolio of current and future natu132
Natural gas production from the federal offshore grew from about 0.06 Tcf in 1954 to a maximum of around 5.2 Tcf in 1997, accounting for just over 25% of total U.S. natural gas production at that time. Since then, federal offshore natural gas production has declined to around 2.4 Tcf in 2009, or 11% of total U.S. gas production. Figure 1-40 shows gas production as a percentage of total U.S. production from 1960 to 2009. Currently, U.S. lower-48 offshore oil and gas production is restricted to the Gulf of Mexico and the Pacific OCS shelf regions. Much of the eastern Gulf of Mexico is expected to be restricted to drilling until 2022, and the Pacific and Atlantic OCS areas were restricted from leasing consideration up until 2008. For the purposes of this study, oil and gas development on the Alaska OCS is included in analysis of the Arctic region, rather than the U.S. offshore region.
As with oil, a shift in development focus from the shallow water Continental Shelf of the Gulf of Mexico to the deepwater frontier zones (with water depths greater than 1,000 feet) began in the mid-1990s, and accelerated after 2000. This trend is expected to continue as more discoveries and drilling activities occur in the deepwater and ultra-deepwater areas of the Gulf of Mexico. Beginning around 2000, the Gulf of Mexicos shallow water gas production has markedly declined while deepwater production has increased. Deepwater natural gas production rose from 382 Bcf, or 7.5%, of total Gulf of Mexico production in 1997 to around 1.4 Tcf in 2004, or 35%, of total Gulf of Mexico natural gas production. Apart from the central and western zones of the Gulf of Mexico, other offshore areas in the U.S. lower-48 were subject to congressional moratoria from 1982 to 2008. After these moratoria expired,
Figure 1-40. O shore Gas Production as a Percentage of Total U.S. Production, 19602009
Figure 1-40. offshore Gas production as a percentage of total u.s. production, 19602009
6 30
20 PERCENTAGE
2
FEDERAL OUTER CONTINENTAL SHELF OCS FEDERAL OCS PERCENTAGE OF TOTAL U.S. PRODUCTION
1 2 3
10
0 1960
1965
1970
1975
1980
1985 YEAR
1990
1995
2000
2005
0 2010
1 1980 First ve-year leasing program initiated 2 1981 OCS moratoria begins 3 1982 Onset of area-wide leasing
4 1995 Passage of deepwater Royalty Relief Act 5 2008 Expiration of OCS leasing moratoria
Sources: Total U.S. production data obtained from the Energy Information Administrations Monthly Energy Review and federal o shore data obtained from the O ce of Natural Resources Revenue; Bureau of Ocean Energy Management, O shore Stats and Facts.
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the administration proposed leasing strategies that would include selected new areas, such as an expanded eastern Gulf of Mexico zone and areas off the mid and south Atlantic coastline. However, these plans were reconsidered in the aftermath of the Macondo oil spill in the deepwater Gulf of Mexico. There are currently no plans for new leasing outside the central and western Gulf of Mexico. Estimates of undiscovered technically recoverable natural gas resources in the U.S. offshore moratoria areas vary from 77 to 231 Tcf. This is a significant proportion of the Bureau of Ocean Energy Management Regulation and Enforcement mean estimates of total U.S. lower-48 offshore undiscovered technically recoverable natural gas of 288 Tcf.12 A significant resource base remains available for future offshore natural gas production. Figure 1-41 shows oil and gas resource estimates in areas formerly under moratoria or considered offlimits to OCS oil and gas production.
12 Minerals Management Service, Assessment of Undiscovered Technically Recoverable Oil and Gas Resources of the Nations Outer Continental Shelf, 2006, February 2006. MMS Fact Sheet RED-2006-01b.
Canada Offshore
In Canada, offshore hydrocarbon production comes exclusively from its Atlantic margin; natural gas and oil are produced in Nova Scotia (Figure 1-42) and Newfoundland offshore, respectively. Commercial offshore natural gas production has been centered on the Sable Island sub-basin of the Scotian shelf. Natural gas is also produced offshore Newfoundland, in the White Rose and Jeanne dArc basins, but here it is reinjected into the fields. Gas production from the Sable Offshore Energy Project comes from five shallow marine fields (25 to 75 meters) that commenced production between 1999 and 2004. In 2009, 459 MMcf/d was produced at the Sable Offshore Energy Project. In April 2010, cumulative gas production reached 1.6 Tcf. Gas is piped onshore where it is distributed to market through the Maritimes & Northeast Pipeline. Also in Nova Scotia, the Deep Panuke gas field in the Scotian Shelf should commence production in 2011. The field is estimated to contain up to 900 Bcf of gas with a planned daily production of 300 MMcf/d.
Figure 1-41. estimates of oil and Gas resources In u.s. offshore areas Formerly under Moratoria
Figure 1-41. Estimates of Oil and Gas Resources in U.S. O shore Areas Formerly under Moratoria
70 60 BILLION BARRELS OF OIL 50 40 30 20 10 0

OIL GAS
250
150
100
50
MEAN ARI
HIGH ARI
MIDDLE API
ALTERNATIVE API
MEAN UTRR MMS
MEAN UTRR NARUC
Notes: ARI = Advanced Resources International; API = American Petroleum Institute; MMS = Minerals Management Service; UTRR = undiscovered, technically recoverable resources; NARUC = National Association of Regulatory Utility Commissioners. Sources: American Petroleum Institute, 2005; National Association of Regulatory Utility Commissioners, 2010.
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TRILLION CUBIC FEET OF GAS
200
Figure 1-42. Monthly O shore Gas Production Nova Scotia
Figure 1-42. Monthly offshore Gas production nova scotia

20
SOUTH VENTURE ALMA NORTH TRIUMPH VENTURE THEBAUD
16 BILLION CUBIC FEET PER MONTH
12
0 2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Source: Canada-Nova Scotia O shore Petroleum Board Sable O shore Energy Project.
and a reasonably constrained production outlook, or As in the U.S. lower-48, other offshore areas in Canada are subject to moratoria and other similar limited potential case, have been examined. These restrictions on exploration and development activity. reflect the enablers and challenges to offshore develThese are discussedThis gure replaces the version found in 8/24 draft per Thierno Sow; subgroup and by in the oil offshore section above. opment identified by the NPC expert respondents be found survey. could not recreate original art, source could notto the data by author The high potential pathway is characterized by a favorable economic environment, with increased access to offshore lands, accelerated technological progress, and favorable government policies towards offshore development. Conversely, the limited potential pathway assumes more limited access to offshore zones, slower technological improvement, and a more stringent policy and regulatory environment. As with offshore oil supply outlooks, alternate cases published in the EIAs Annual Energy Outlook have examined environments of expanded offshore access, accelerated technology deployment, and high prices that would affect prospects for natural gas (see Figures 1-43, 1-44, and 1-45). These characterize the high potential offshore natural gas production pathway. Production of natural gas in U.S. lower-48 offshore trends from a minimum of 2.4 Tcf in 2010, in the reference case, to a maximum of
Offshore oil and natural gas resource development has been characterized by continuous technology development and innovation, appropriate for moving into greater water-depths, high-pressure, high-temperature subsurface environments, and complex geological settings. Because most of these technologies are developed and deployed for both oil and natural gas production, discussion of them is included in the offshore oil potential section of this chapter.
Production Potential Pathways

For the U.S. lower-48 offshore, a reasonably unconstrained production pathway, or high potential case,
135
Figure 1-43. projection of u.s. lower-48 offshore Gas production Impact of reduced access
5
AEO2010 REFERENCE CASE 2010 AEO2011 REFERENCE CASE 2011 AEO2011 REDUCED OCS ACCESS 2011
Figure 1-43. Projection of U.S. Lower-48 O shore Gas Production Impact of Reduced Access
2010
2015
2020
YEAR
2025
2030
2035
Figure 1-44. Projection of U.S. Lower-48 O shore Gas Production High Natural Gas Production Pathway
Figure 1-44. projection of u.s. lower-48 offshore Gas production high natural Gas production pathway
5
AEO2010 REFERENCE CASE 2010 AEO2011 REFERENCE CASE 2011 AEO2011 HIGH PRICE CASE 2011 AEO2011 HIGH OCS RESOURCE CASE 2011
4
2010
2015
2020
YEAR
2025
2030
2035
136
Figure 1-45. Projection of U.S. Lower-48 O u.s. lower-48 offshore Gas production Figure 1-45. projection of shore Gas Production Low Natural Gas Production Pathway
limited natural Gas production pathway
5
AEO2010 REFERENCE CASE 2010 AEO2011 REFERENCE CASE 2011 AEO2011 LOW PRICE CASE 2011 AEO2011 HIGH OCS COST CASE 2011
2010
2015
2020
YEAR
2025
2030
2035
3.8 Tcf in 2035 in the high price case, according to the AEO2011. That translates into an annual growth rate range of 0.4 to 0.7%. Similar to oil, much of the expected increase in U.S. offshore natural gas production is likely to come from new discoveries in the Gulf of Mexico, such as the Lower Tertiary trend. The extent of the effects of the Lower Tertiary trend on expansion of offshore gas resources is exemplified by the McMoRan discovery of the Davy Jones field, located in 20 feet of water at a total reservoir depth of nearly 30,000 feet. Although shallower, conventional horizons of the Gulf of Mexico Shelf have been heavily produced, only a small percentage of wells have been drilled to more than 15,000 feet below the mud line. McMoRans Davy Jones prospect is believed to hold at least 1 Tcf of gas. This discovery demonstrates that hydrocarbonsaturated Lower Tertiary formations exist not only in remote, deepwater locations, but also closer to shore, where development requires less time and money, and infrastructure is in place. A number of other Lower Tertiary play prospects, scheduled to come online between 2010 and 2020, hold the promise of a significant increase in natural gas production in the
Gulf of Mexico providing the technical challenges are overcome. With respect to the limited potential production outlook, the EIAs low price case is an indicator of the impact of the multiple factors that could affect production. Natural gas production forecasts vary from 2.6 Tcf in 2010, in the low oil price Case, to 4.3 Tcf in 2035, in the AEO2010 reference case. Results of the AEO2011 show gas production ranging from 2.4 Tcf in 2010 to 2.1 Tcf in 2035, in the low oil price case. That trend translates into a growth rate range of negative 1.1% per year in the Gulf of Mexico and negative 0.6% per year in the Pacific region. The reference case of the AEO2011 shows natural gas production increase from 2.4 Tcf in 2010 to 3.1 Tcf in 2035. That trend represents an annual growth rate of 0.4% in the Gulf of Mexico and 3.5% in the Pacific region. Overall, the range of annualized growth rate of natural gas production in the constrained case path is negative 1.1% to positive 0.4%. As in the case of oil, if widespread long-term offshore development moratoria are reinstated, leading to no development offshore outside of the central
137
and western zones of the Gulf of Mexico, overall natural gas production could be 20% lower than this outlook.
ultra-deepwater environments that lack basic infrastructure needed to produce and to transport the hydrocarbons to shore. y Canadian offshore production of natural gas is low in comparison to the U.S. lower-48, and is confined to the eastern shore in Newfoundland and Nova Scotia. Removal of the formal and de facto moratoria will provide opportunities to increase natural gas development and production in offshore Canada.
Key Findings
Comprehensive review of North American offshore oil and gas facts and prospects has led us to the following findings: y Natural gas development and production in the U.S. lower-48 is significant, and may deliver positive production growth to 2050. Annual growth rate of offshore natural gas production is expected to range from negative 1.1% to positive 0.7% through 2035. y According to the AEO2011, natural gas production in the U.S. lower-48 offshore is expected to decline from 2.4 Tcf in 2010 to 2.1 Tcf in 2035 in the low price case. Overall, U.S. lower-48 offshore natural gas production is also expected to rise from 2.4 Tcf in 2010 to 3.8 Tcf in 2035 in the high oil price case. y Beginning around 2020 and extending to 2050, we expect the bulk of natural gas production in the lower-48 offshore to originate from the deepwater Gulf of Mexico, the Gulf of Mexico Lower Tertiary formations, and the Pacific and the Atlantic offshore regions. y Government policies favorable to accessing additional U.S. lower-48 offshore lands are needed to reach natural gas development and production growth rates stated above. y We expect a slow down and a postponement of offshore natural gas development and production if unduly constraining operation safety requirement and stringent environmental policies are implemented in the OCS following the Macondo oil
Arctic
History and Context
The section on Arctic oil, earlier in this chapter, describes the geographical scope of the Arctic as used for this study and includes a map of the region studied. This section of the work looked at the regions of Alaska, Canada, and Greenland subject to ice conditions that impact hydrocarbon exploration and development activities. As with oil, this Arctic region contains very substantial natural gas recoverable resources that can justifiably be termed as a world-scale natural gas resource region. The discovered undeveloped and technically recoverable undiscovered volumes from Alaska, Arctic Canada, and Greenland are currently estimated at about 670 Tcf, on a mean, risked basis. This estimate is roughly equal to the oil resource on an energy equivalent basis. Figure 1-46 shows how this resource is distributed across the major basins of the region. And Figure 1-47 shows how this resource is proportionately split between Alaska, Arctic Canada, and Greenland, including those areas under drilling moratoria or otherwise unavailable for leasing. The long history of onshore and offshore oil and gas leasing, licensing, and exploration drilling in the Arctic region has resulted in the discovery of significant oil and gas reserves. Some reserves have been developed and produced, most notably the giant oil and gas field at Prudhoe Bay on the Alaska North Slope and the large oil and gas fields (onshore and offshore in Cook Inlet, Alaska). There are also numerous stranded discoveries (no development/production facilities and/or pipelines) such as the Burger discovery in the U.S. Chukchi Sea. This region also is believed to contain significant undiscovered volumes, based on numerous government agency estimates and supported by industry interest
spill in the deepwater Gulf of Mexico.

y Technological progress and innovation are the key factors that would enable development and production of natural gas in new frontier regions located in deep water and in deeper reservoirs. y Seismic innovative technologies that allow clearer imaging of the subsalt horizons in the Gulf of Mexico are pivotal to the expansion of hydrocarbon resources via additional newer discoveries. y Subsea technology and an extended architecture system will boost production of offshore natural gas in remote and challenging deepwater and 138
Figure 1-46. Arctic Gas Potential by Basin
Figure 1-46. arctic Gas potential by Basin
10.2
86.2
90.8 19.6 112.1 8.5 25 8.2 2
33.5 40 76.1
41.2 33.7
ARCTIC CIRCLE
66
TRILLION CUBIC FEET OF GAS INTERNATIONAL BOUNDARY DISPUTED ZONE Note: Discovered undeveloped plus mean risked, technically recoverable, undiscovered resources.
Figure 1-47. Split of Arctic Natural Gas Resource Potential
Figure 1-47. split of arctic natural Gas resource potential

ALASKA'S TOTAL SHARE 45% GREENLAND UNAVAILABLE 1% ALASKA AVAILABLE 38% GREENLAND'S TOTAL SHARE 22% GREENLAND AVAILABLE 21%
ALASKA MORATORIA AREA 5%
CANADA UNAVAILABLE 5%
CANADA AVAILABLE 28%
ALASKA POTENTIALLY AVAILABLE FOR LEASE 2%
CANADA'S TOTAL SHARE 33%

Note: Discovered undeveloped plus undiscovered (mean risked, technically recoverable) resources.
139
(leasing/licensing, historical 2D seismic and modern but limited 3D seismic, and renewed attempts to secure regulatory permission to drill particularly in the offshore). Most of the significant yet-to-befound volumes are believed to be contained in the offshore, beneath the continental shelf. Unlike oil, there has not been major natural gas production in the Arctic, except within the Cook Inlet region of Alaska, mainly as the large proved reserves under the Prudhoe Bay and Point Thomson fields on the Alaska North Slope and the fields on the Mackenzie Delta have been unable to access the market as a result of lack of pipeline infrastructure. Following is a brief summary of the development and production history for the most significant of the main Arctic areas under consideration.
in 2010 following the Macondo oil spill in the deepwater Gulf of Mexico. The combined BOEMRE and USGS total mean estimate of risked, undiscovered, technically recoverable natural gas resources for the Beaufort Sea is 33.5 Tcf gas. The Chukchi Sea is also significantly underexplored but is estimated to hold 76.8 Tcf of risked, undiscovered, technically recoverable resources of natural gas. Previous offshore exploration wells have demonstrated the occurrence of natural gas, as described by BOEMRE, in both of these basins (Burger, Kuvlum, Hammerhead, Sandpiper, Seal, and Tern).
Central Alaska Onshore

This region contains several basins of possible interest (Yukon Flats and Nenana Basin) but lacks significant subsurface data. Various assessments suggest that this region could contain natural gas (511 Tcf).
North Alaska Onshore

Exploration drilling in this region began in 1945 and discovered only non-commercial hydrocarbons until the discovery of the giant Prudhoe Bay field in 1968. This field contained recoverable reserves of 15 billion barrels of oil and 27 Tcf of natural gas. Oil has been produced from this field since 1977, but the produced associated natural gas has not been commercialized due to the lack of a gas pipeline, and the bulk of the produced gas has been and still is reinjected back into the producing reservoir to enhance ongoing oil recovery. Significant stranded gas (~8Tcf) has also been discovered at Pt. Thomson Field along the coastal plain near the ANWR 1002 area. Many of the more than 400 exploration wells drilled on or around the North Slope coastal plain have shown non-associated gas, particularly in the southern part of the region. In addition, prospective areas outside of the North Slope Coastal Plain (NPR-A, North Slope Foothills and the ANWR 1002 area) are significantly underexplored. Further, it is expected that the NPR-A and North Slope Foothills region may have a higher endowment of gas than oil.
South Alaska Onshore and Cook Inlet

The Cook Inlet Basin covers some 15,000 square miles; almost half are offshore. The Cook Inlet onshore and state waters area has more than 300 exploration wells and numerous mature fields, both onshore and offshore, that have produced oil and gas since the early 1900s. New exploration in this basin waned after the 1968 giant Prudhoe Bay Field discovery in north Alaska. The basin is generally considered a mature province. The mean, risked, undiscovered, technically recoverable resources for the Cook Inlet area are 25 Tcf of natural gas. The other basins in this region (Aleutian Peninsular [onshore Bristol Bay and State Waters], Gulf of Alaska [onshore and State waters], and Copper River) are believed to have undiscovered reserve potential but lack a modern resource assessment. Exploration wells have been drilled in these basins (Aleutian Peninsular, 36 wells; Copper River, 11 wells; and Gulf of Alaska onshore and state waters, 55 wells) but have not so far yielded a commercial discovery.
North Alaska Offshore

There are 186 active leases in the Beaufort Sea, most of which were issued following U.S. federal lease sales held in 2005 and 2007. In the Chukchi Sea, 487 leases were issued following a U.S. federal lease sale in 2008. However, these leases had not yet been drilled as of mid 2011, as a result of issues outside the control of lessees, up to and including the suspension of authorizations for Arctic drilling 140
South Alaska Offshore

The Bering Shelf, North Aleutian Basin and Pacific Margin have been assessed as very prospective for natural gas resources. The Bering Shelf has 19.6 Tcf of technically recoverable natural gas resources including 8.6 Tcf on the Aleutian shelf, while the Pacific Margin has a further 8.2 Tcf. The Aleutian Shelf planning area was considered for leasing within the 2007
2012 5-Year Leasing Program. However, OCS Sale 214, scheduled for 2011, was removed from the sale schedule by the Secretary of the Interior in the spring of 2010 and the area is now under a Presidential withdrawal from lease sales till June 2017.
Canadian North
The Canadian North region contains onshore basins in British Columbia, Yukon, Northwest Territories, and Mackenzie Delta region, as well as the offshore Canadian Beaufort Sea area, Arctic Islands/ Sverdrup Basin area. The National Energy Board of Canada estimates the mean, risked, undiscovered, technically recoverable resources for the Canadian North Onshore basins as containing 1 Tcf gas. The NEB estimates the mean, risked, undiscovered, technically recoverable resources for the Mackenzie Delta/Canadian Beaufort Basin area as containing 52 Tcf gas. The NEB estimates mean, risked, undiscovered, technically recoverable resources for the Arctic Islands/Sverdrup Basin as containing 28 Tcf gas. In addition, the USGS has assessed the Canadian Beaufort Outer Continental Slope region (outboard of the Canadian Beaufort and Arctic Islands/Sverdrup Basin areas) and estimates mean, risked, undiscovered, technically recoverable resources of 15.1 Tcf.
ventional oil and gas potential resides in immediately offshore basins with little potential in the adjacent onshore areas. No quantitative assessments have been conducted for the south and southeastern offshore margin of Greenland. The offshore acreage in Greenland is administered by the Greenland Bureau of Minerals and Petroleum.
Technology
From the perspective of hydrocarbon exploration, development, and production, natural gas activities in the Arctic are subject to similar considerations as those for oil, described in the Arctic oil section of this chapter. Natural gas development in the Arctic faces the additional challenge of required long-distance pipelines to access markets in Canada and the United States. Natural gas is not currently exported off the North Slope, Mackenzie Delta/Canadian Beaufort, Arctic Islands/Sverdrup Basin, or Labrador Shelf because there is no gas pipeline infrastructure to transport the gas to markets. Alternatives such as tankering gas in the form of LNG or building a gasto-liquids plant which could convert the natural gas to a higher density liquid product for transport through the TAPS system have reportedly been studied, but until recently have not been deemed economically competitive. Recent activity has been directed toward developing the concept of a natural gas pipeline to move natural gas to market, as witnessed by the Denali, TransCanada and Mackenzie Valley gas pipeline proposals of recent years. Until export capabilities are developed for the Alaska North Slope, the majority of the gas will continue to be reinjected into the producing reservoirs to enhance oil production, and used locally for energy and heating. Meanwhile, Mackenzie Delta and Canadian Beaufort gas remains unproduced.
Canadian East
The Canadian East region is divided into the Canadian Baffin Bay area (adjacent to the West Greenland) and the Labrador/Newfoundland Shelf. The southern limit of the study area excludes the Scotian Shelf and associated developments at Sable Island, where natural gas has been produced over the last decade. The Canadian Baffin Bay area is estimated to have a mean, risked, undiscovered, technically recoverable natural gas resource of 33.7 Tcf, based on ascribing 45% of the USGS analysis of the West Greenland-East Canada Baffin basin to the Canadian portion of this region, while the Labrador-Newfoundland shelf is estimated to hold 57 Tcf of natural gas.
Potential Production Pathways

Given that no overall North American Arctic supply outlooks could be found in the public domain (although there are a few basin-specific analyses for portions of Alaska and the Canadian Arctic), the Arctic Subgroup developed three consensus cases: Limited Potential (reasonably constrained), Most Likely, and High Potential (reasonably unconstrained). The adjective reasonably is used with care; it does not imply that all constraints are either present or removed. It represents the Subgroups informed view of what may happen to Arctic development through
Greenland
The natural gas resources on the Continental margin offshore Greenland are estimated as follows; West Greenland 41.2 Tcf, North Greenland 10.2 Tcf, and the East Greenland Rift Basins 86.2 Tcf, based on ascribing 55% of the USGS analysis of the West Greenland-East Canada Baffin Basin to the Greenland portion of this region. The USGS believes most of the con-
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Table 1-15. three potential arctic Gas production pathways

Limited Potential Case no alaska gas pipeline no Mackenzie gas pipeline no north alaska, Chukchi or Beaufort oCs, or Canadian Beaufort production Most Likely Case alaska gas pipeline; 4.5 Bcf/d, 2025 Mackenzie gas pipeline; 1.2 Bcf/d, 2025 north alaska, Chukchi & Beaufort oCs, and Canadian Beaufort production; 15% resource developed by 2050 no arctic Islands/sverdrup Basin, labrador, or Grand Banks gas HIgh Potential Case alaska gas pipeline expansion; 5.9 Bcf/d, 2035 Mackenzie gas pipeline; expansion; 1.8 Bcf/d, 2035 north alaska, Chukchi, and Beaufort oCs, and Canadian Beaufort production; 25% resource developed by 2050 labrador and Grand Banks gas; 10% resource developed by 2050
no arctic Islands/sverdrup Basin, labrador, or Grand Banks gas
2050, given economic, regulatory, and environmental constraints that are less, or more, favorable to such development. The three cases each outline a different production scenario for major current or future developments. Large, remote severely stranded resources (e.g., Canadian Arctic Islands, NE Greenland Rift Basin) are not included. Table 1-15 summarizes the assumptions specific to natural gas in these three scenarios. The most likely case is expected to lead to Arctic production of 2 Tcf/yr (5.5 Bcf/d), based on pipelines being developed in both Alaska and the Mackenzie Delta/Canadian Beaufort to take gas to market by around the middle of the 2020s. On the Alaska side, this would amount to 1.6 Tcf/yr, with a further 0.4 Tcf from the Mackenzie Delta and Canadian Beaufort Sea. In the Limited Potential case, these sources of gas would remain stranded, assuming that the required infrastructure development would not occur with continuing economic and regulatory challenges acting as a disincentive to the project proponents. In the High Potential case, it is assumed that a higher pace of resource development activity in Alaska, including new offshore areas and the Mackenzie Delta/Canadian Beaufort, would justify expansions of the two pipeline systems by 2025, allowing increases in production to a total of 2.9 Tcf/yr (almost 8 Bcf/d), of which about 2.2 Tcf would be from Alaska and the remainder from the Canadian north. 142
It should be noted that the Arctic Subgroups gas production cases for Alaska may be conservative, as compared to a published analysis by Northern Economics suggesting that the U.S. Beaufort and Chukchi OCS regions are capable of significant natural gas production if the reported undiscovered hydrocarbon resource assessment by the BOEMRE is validated by future exploration and appraisal drilling. The Northern Economics gas production forecast is contained in Table 1-7 and Figures 1-29 and 1-30 (pages 99-100).
Key Findings
The key findings and recommendations relative to Arctic development are included in the Arctic oil section earlier in this chapter. There are no further specific findings and recommendations relating only to Arctic natural gas.
Onshore Gas
Production History and Context
The onshore natural gas component of North American supply includes both conventional and unconventional gas as developed and produced in onshore basins in the United States and Canada, with the exception of onshore Arctic basins. Currently, onshore gas from Canada and the United States supplies over 95% of the natural gas consumed in both these nations. Overall U.S. production has increased significantly since 2005, with U.S.
dry natural gas production reaching an average of 57.8 Bcf/d in 2010. This dry production level represents an increase of 16% from the recent historic low of 49.7 Bcf/d in 2005, and is the highest overall U.S. production rate since 1973. Production of natural gas from shale as a category is largely responsible for the overall production increase in the United States, having grown the most in both absolute and percentage terms since 2000. In 2000, shale gas production was approximately 1.0 Bcf/d, or about 2% of the U.S. supply mix. Shale production had grown to approximately 11.6 Bcf/d by 2010, representing approximately 20% of the 57.8 Bcf/d of estimated dry U.S. production (Figure 1-48). Production from tight formations has also increased in both absolute and percentage terms, increasing from 12.0 Bcf/d in 2000 to 19.9 Bcf/d in 2010, or from 23% to 34% of the total over the period. When adding U.S. coalbed methane production, also considered unconventional, production from unconventional sources has more than doubled in the United States since 2000 increasing by 19.2 Bcf/d, from 17.2 Bcf/d in 2000, to 36.4 Bcf/d in 2010. Shale gas production has also
begun in Canada, most notably in the Montney (siltstone) and the Horn River basin, but has not as yet arrested the decline in overall production there.
U.S. (Bcf/d dry) and Canadian (Marketable) Production Mix Conventional and Unconventional Sources 20002010
Unconventional production has increased from approximately one-third of the total U.S. supply mix in 2000, to nearly two-thirds in 2010, or from 33 to 63% of the total (Figure 1-48). The increase in U.S. production since 2005 is almost entirely due to shale gas. Growth from this source alone exceeds total U.S. production growth over this period. Shale gas and coalbed methane represent a growing percentage, currently approximately 11%, of overall production in Canada. U.S. lower-48 and non-Arctic Canada onshore gas production in 2009 is estimated at 24.1 Tcf/yr. The focus on unconventional resource plays tight gas, coalbed methane, and shale gas has also arrested a previous decline in average well productivity, increased reserves per well drilled, and lifted the
Figure 1-48. u.s. and CanadianProduction Mix, 20002010 Figure 1-48. U.S. and Canadian production Mix, 20002010
80
CANADIAN CBM CANADIAN SHALE
CANADIAN CONVENTIONAL AND TIGHT
U.S. CBM U.S. TIGHT
U.S. SHALE U.S. CONVENTIONAL
60
40
20
2000
2002
2004
YEAR
2006
2008
2010
Note: CBM = coalbed methane. Sources: Energy Information Administration; National Energy Board of Canada; and Wood Mackenzie.
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reserve life index. Shale gas plays are dominating the unconventional spectrum, although both tight gas and coalbed methane continue to contribute to this trend of increased productivity. As shown on an annual basis in Figure 1-49, total North American gas production reached a new high of 27.3 Tcf in 2009 following a period of approximately flat production over the previous nine years, despite a 57% increase in the well count. The upturn in production since 2005 coincides with the rapid development of unconventional gas within North America, particularly shale gas. Figure 1-49 includes production and well counts from the Gulf of Mexico, as the offshore component was not identified separately within this particular 20-year data set. The Gulf of Mexico accounts for about 10% of produced volumes. Production and reserves from newly drilled wells have increased since 2006, suggesting that not only do these newly drilled wells replace natural declines in rates and reserves in historical wells but they add considerably more incremental rate and reserves per well. Such a reversal of historical gas production
and reserve trends should be expected, as tight gas and shale gas production profiles exhibit substantially higher initial production rates and recoverable reserves than conventional wells. Although unconventional wells are fewer in number, their prolific production and reserve additions have reversed a declining trend. The first widespread deployment of new drilling and completion technologies focused on shale gas was concentrated in the Barnett Shale play, in northeast Texas. The play, in active development since the early 1990s, grew in importance from the mid-2000s. Breakthroughs in technology transformed the play into a prolific producing area starting in 2005. Peak month production in the Barnett shale play increased by at least 60%, or by more than 500 Mcf/d per well, in the 20052009 period, compared to 19902000. While the Barnett Shale was an early success in shale gas development, other plays are still being discovered, with the Eagle Ford, Montney (siltstone), Horn River, and the Marcellus Shale still in early, but rapid development (Figure 1-50). Additional
Figure 1-49. north american Gas production and operating Gas Wells
1,000 30 800 WELL COUNT THOUSANDS
NORTH AMERICAN ANNUAL GAS PRODUCTION
Figure 1-49. North American Gas Production and Operating Gas Wells
600
NORTH AMERICAN GAS WELLS
20
400 10 200
0 1989
0 1995 2000 YEAR 2005 2010
Note: Gulf of Mexico gas production and well count is included in North American data. Sources: Wood Mackenzie; U.S. Energy Information Administration.
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TRILLION CUBIC FEET
Figure 1-50. Production by Shale Play: Growing Beyond the Barnett Figure 1-50. production by shale play:Growing Beyond the Barnett
12 BILLION CUBIC FEET PER DAY
BARNETT MARCELLUS
FAYETTEVILLE EAGLE FORD
WOODFORD HORN RIVER
HAYNESVILLE MONTNEY AND DUVERNEY
0 2000
2001
2002
2003
2004
2005 YEAR
2006
2007
2008
2009
2010
Source: Wood Mackenzie.
shale resource plays, including the Duvernay, Utica, Collingwood, and others, wait in the wings, providing a large future resource base for North American natural gas supplies.
Key Technology Commercialization of Shale as a Resource

Shale gas production can be traced back to the mid-1800s, but until recently was a rather insignificant source of energy. Once considered only a marginal producer, a source rock for hydrocarbons, or as an impermeable barrier or seal for conventional reservoirs, it is now a primary target for commercial drilling. These ultralow-permeability reservoirs are routinely exploited. This is made possible through a combination of technologies, directional drilling, seismic, lateral wellbores (horizontal wells), and hydraulic fracturing. Without these technologies, most shale reservoirs would not be commercial today. Hydraulic fracturing is the most critical advance for natural gas supply for North America.

Development of natural gas has recently been dominated by the application of new technology, especially the development of cost-effective fracture stimulation in horizontal wellbores. Both horizontal drilling and fracture stimulation have been in use for decades. Fracture stimulation was first implemented in a gas field in 1947 in the Hugoton gas field and gas from shale has been produced for more than a century. Experimentation with horizontal drilling goes back as far as the 1920s, although the first commercial application didnt take place until the mid-1980s in the Austin Chalk formation. Following are some key milestones in development and application of technologies to unlock North Americas natural gas resources follow.
Key Technology Hydraulic Fracturing

First implemented for natural gas production in 1947 in the Hugoton gas field, fracturing increases the contacted surface area within a reservoir. Reservoir rock is fractured by pumping high-pressure water with a sand slurry that props the fractures open. Because
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the first fracturing treatment included no propping agent to maintain conductivity within the induced fractures, it proved unsuccessful. By 1949, hydraulic fracturing was successfully implemented in the Woodbine sands in East Texas and became commercially viable.13 Since then, many improvements have been made to reliability and safety. By hydraulically fracturing a gas reservoir, the effective permeability, or capacity to flow, can be significantly increased. In fact, with no stimulation treatment, many currently producing reservoirs would be considered impermeable. Successful stimulation treatments can increase permeability by five to six orders of magnitude.14 By 1955, more than 3,000 fracturing treatments were pumped each month. Throughout the 1960s and 1970s, fracturing became better understood and could be optimized for a particular formation.15 Operational efficiency improvements resulted in cost savings, making more plays economic. Today, coil tubing fracturing technology has resulted in shorter time requirements per fracture induced, and multiple zone fractures can be completed in a short time. According to the Independent Petroleum Association of America, approximately 90% of new gas well production relies on hydraulic fracturing.
It was not until the 1980s that notable commercial horizontal wells were drilled in North America in the Austin Chalk, Bakken, and Niobrara formations.17 As technology improved, horizontal drilling enabled previously, non-commercial formations to become economic.18 By the 1990s, more than 1,000 horizontal wells had been drilled throughout the world.19 After initial commercialization of the technique, efficiencies continued to improve, yielding longer lateral lengths per well and ultimately continuing to decrease surface disturbance. In 1987, the first horizontal wells in the Bakken Shale were of relatively modest lengths of approximately 1,000 feet. By the 1990s, as technology improved, lateral lengths of 3,000 to 4,000 feet were possible, and today wells are routinely drilled with lateral lengths of 10,000 feet.
Key Technology Modern (3D) Seismic Technology

The increase in activity during the 1980s was also spurred by the advent of 3D seismic technology. The exploration success rate increased, resulting in previously uneconomic plays becoming tenable. Today, seismic data is processed using computer algorithms that assist in identifying anomalies in the data. These anomalies may be identified as hydrocarbon deposits. From 1990 through 2001, the overall costs of 3D seismic imaging decreased by a factor of five. Surveys conducted by The American Oil and Gas Reporter as well as the Petroleum Technology Transfer Council indicate that seismic technology has been highly beneficial to the industry.20 Modern seismic imaging techniques allow for improved recognition of formation types and characteristics. The use of modern seismic technology has allowed wells to be drilled while avoiding
17 Flores, C. P., Technology and Economics Affecting Unconventional Reservoir Development, Masters Thesis, Texas A&M University, December 2008. 18 Joshi, S. D., Cost/Benefits of Horizontal Wells, SPE paper 83621 for SPE Western Regional/AAPG Pacific Section Joint Meeting, Long Beach, California, 2003. 19 Energy Information Administration, Drilling Sideways A Review of Horizontal Well Technology and Its Domestic Application, Contract No. DOE/EIA-TR-0565, U.S. DOE, Washington, DC, April 1993. 20 Ammer, James, Tight Gas Technologies for the Rocky Mountains, GasTIPS, Spring 2002, pages 1823.
Key Technology Horizontal Drilling

In horizontal well drilling, a well is drilled parallel to the formation, exposing more reservoir rock than would be possible using a conventional vertical completion technique.16 By increasing the length of the horizontal portion of the well, multiple vertical well locations were replaced with a single horizontal well for a fraction of the cost, minimizing surface disturbance. As early as 1927, the concept of drilling horizontally through the producing formation was tested in North America; however, many of the techniques early advances were made in Bashkiria, Russia.
13 Economides, M. J. and K. G. Nolte, Reservoir Stimulation, third edition. (West Sussex: Wiley, 2000), page 367. 14 Economides et al., Petroleum Production Systems (New Jersey: Prentice Hall, 1994), page 600. 15 Holditch, S. A., and N. R. Tschirhart, Optimal Stimulation Treatments in Tight Gas Sands, SPE Paper 96104 for SPE Annual Technical Conference and Exhibition, Dallas, Texas, 2005. 16 Sheikholeslami et al., Drilling and Production Aspects of Horizontal Wells in the Austin Chalk, SPE Journal of Petroleum Technology, July 1991, pages 773779.
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potential water zones and areas of high faulting. Although much work is still needed in this area, this technology has increased the likelihood of drilling locations of high productivity while decreasing the chances of drilling low productivity wells.
Key Technology The Personal Computer

Technological improvements in computer processing power have also resulted in tremendous efficiency gains. Prior to the widespread use of personal computers, simulations and other rigorous mathematical modeling required mainframe computer time. This proved both cost and time prohibitive. Personal computers have become ubiquitous in the industry, allowing engineers and geologists to routinely execute complex mathematical models to simulate reservoirs and basins. This has been reflected in metrics that track worker productivity, as shown in Figure 1-51. The personal computer led to increases in worker efficiency and has enabled a host of other products. Computer-aided design (CAD) software packages are used in conjunction with computer numerical control machining to produce sophisticated
tools to exact specifications. Because of advances in computer numerical control milling technology, production times have been significantly reduced. Downhole equipment is also more robust. Robotic controllers are now used, especially in high-pressure high-temperature environments. Prior to these advances in electronic technology, many hydrocarbon reservoirs were effectively inaccessible.
Advancing Technologies
The following areas of ongoing research associated with natural gas production will result in improved recoveries and operational efficiencies in the near term: y Fracturing technology y Surface disturbance minimization y Super-pad drilling y Slim-hole completions y Fit-for-purpose Coiled Tubing Drilling y Multilateral wells.
Figure 1-51. U.S. Total Well Count per Employee
Figure 1-51. u.s. total Well Count per employee

400
NUMBER OF EMPLOYEES THOUSANDS OIL AND GAS WELLS DRILLED PER EMPLOYEE X 1,000
8
PRODUCING OIL AND GAS WELLS PER EMPLOYEE
300
200
100
EMPLOYMENT IN EXPLORATION AND PRODUCTION OIL AND GAS WELLS DRILLED/EMPLOYEE X 1,000 PRODUCING WELLS PER EMPLOYEE
0 1970
0 1980 1990 YEAR 2000 2010
Source: Bureau of Labor Statistics, 2010.

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Future Technology
Of natural gas production in the United States in 2008, approximately 40% of the wells required hydraulic fracturing stimulation to produce at economic rates.21 According to the Independent Petroleum Association of America, approximately 90% of new gas wells rely on hydraulic fracturing to produce.22 Without both hydraulic fracturing and horizontal drilling, future production growth in onshore natural gas cannot be achieved and any reservoir termed unconventional would be uneconomic. The EIA has modeled natural gas supply for a scenario with no additional tight gas production. In this scenario, natural gas production from onshore North America falls by 39%. From these estimates it can be seen that the future of natural gas supply in North America will rely upon future availability and continuous improvement in fracturing tight gas and shale gas formations.
For the production pathways analyzed here, the NPC team used the resource data supporting the Massachusetts Institute of Technology energy initiatives (MITei) report. The data provide a reasonable range of estimates in a format useful for scenario building. MITei uses the North American supply model developed by ICF, which provides for a highmedium-low look using current technology and the same for an advanced technology case, resulting in six different model outputs for consideration. It should be noted that current refers to technology applied in 2007 or earlier. Given recent breakthroughs, todays application of technology renders the Advanced Technology cases more relevant today. For the purposes of this study, it was decided to focus upon three onshore, non-Arctic resource size cases: y Case One MITei/ICF Mean Resource Base, Current (2007) Technology, Remaining Recoverable Resource 1,901 Tcf, Estimated Ultimate Recoverable Resource 2,996 Tcf. The consensus view of the NPC team is that this case is conservative and it is highly probable that it will be surpassed. y Case Two MITei/ICF Mean Resource Base, Advanced Technology, Remaining Recoverable Resource 2,890 Tcf, Estimated Ultimate Recoverable Resource 3,985 Tcf. The consensus view of the NPC team is that this case is also rather conservative and it is probable that it will be surpassed. y Case Three MITei/ICF High Resource Base, Advanced Technology, Remaining Recoverable Resource 3,561 Tcf, Estimated Ultimate Recoverable Resource 4,656 Tcf. The consensus view of the NPC team is that this case is reasonable today and could readily be surpassed. Figure 1-52 illustrates the supply cost stack for these three cases. This figure shows gas resource volumes on the horizontal axis plotted against cost of supply ($/MMBtu) on the vertical axis. The scale is truncated at $30/MMBtu. Historical cumulative gas production rose above 1,000 Tcf in 2006. The estimated ultimate recoverable gas resources for the three cases are plotted in Figure 1-52. The additional resources that might be recoverable at costs above $20/MMBtu appear to be relatively small, so comparisons among the cases can be made at this level. Ultimate recoverable resources, including cumulative production to date, range
Potential for future production of onshore gas has been transformed by development and application of the technologies described in the previous section. A number of studies have quantified the resource base and these assessments are included in Table 1-16. The most important realization from these studies is that in less than a decade, estimates of the North America resource base have grown by more than 150%. The most recent study sponsored by Americas Natural Gas Alliance includes a comprehensive geological and engineering based model of 32 unconventional plays, including shale gas, tight gas sands, and coalbed methane formations. These unconventional plays alone were projected to have recoverable reserves over 2,600 Tcf. This recent study, in combination with the consistent trend of resource growth, provides a compelling argument that the resource base is large. With sufficient confidence in the underlying resource base, the focus can shift to questions regarding supply and rates of development.
21 Energy Information Administration, (2010a) Annual Energy Outlook 2010 With Projections to 2035, (2010b) Natural Gas U.S. Data. Retrieved from http://www.eia.doe.gov/oil_gas/ natural_gas/info_glance/natural_gas.html. 22 Tiemann, Mary, Congressional Research Service, June 2, 2010. Safe Drinking Water Act (SDWA): Selected Regulatory and Legislative Issues, page 22.
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Table 1-16. estimates of remaining resource*

United States OFS 308 276 245 184 1,452 397 397 1,849 1,408 230 190 742 961 863 693 904 508 627 1,020 174 174 631 385 1,268 1,091 1,321 1,836 1,857 1,830 211 238 245 204 508 627 1,020 1,185 2,850 2,100 1,500 1,118 907 602 1,026 800 460 1,532 2,074 2,102 2,034 52 35 1,238 1,163 Conventional Tight Shale CBM AK Total Total Total L48 Proved Reserves All U.S. ONS NonArctic OFS + Arctic Total North America OFS NonArctic North America Total Canada
Organization
Date
usGs/MMs/eIa
npC
657 454 881 691
pGC
1997 2009 1999 2003 2001 2006 2008 2009 2008 2009 2010 2,338 4,035 2,900 1,960
50 71 74 58 98 166 163 65 65
1,015 801 1,252 974 840 1,127 1,642 1,563 1,528
223 362 303 294 251 194 194 294 302
ICF InGaa neB CsuG MItei Canada p10
3,561 2,890 1,901 4,524
MItei u.s. p10 MItei pmean MItei u.s. p90 MItei Canada p90 rstG oGC 3 rstG oGC 2 rstG oGC 1 anGa GtI Current GtI advanced npC high npC Medium npC low 375 260 160 120 120 120 692 958 1,002 440 290 215 294 484 530 345 210 130 3,253 1,805 2,058 3,660 2,230 1,495 245 inc? inc? inc. inc. inc. 523 523 523 438 223 337 550 350 200 1,658 1,198 514 1,759 32 53 1,800 1,000 700 142 142 142 70 49 77 150 120 90 2,443 1,983 1,299 2,959 1,321 1,528 3,315 2,020 1,365 3,498 1,805 2,058 3,660 2,230 1,495
Q2 2010 Q2 2010 Q2 2010 Q2 2010 Q2 2010 Q3 2010 Q3 2010 Q3 2010 Q1 2010 2010 2010 Q4 2010 Q4 2010 Q4 2010 1,025 695 370
230 175 130
1,255 870 500
4,915 3,100 1,995
3,965 2,455 1,575
* no adjustments have been made for interim production between years.
MIteis figures as published.
npC rstG onshore Gas subgroup, sourced from detailed dataset from MItei report prepared by ICF; $20/mcf supply cost cut-off assumed; high advanced (2007) tech Case.
npC rstG onshore Gas subgroup, sourced from detailed dataset from MItei report prepared by ICF; $20/mcf supply cost cut-off assumed; Mean advanced (2007) tech Case.
npC rstG onshore Gas subgroup, sourced from detailed dataset from MItei report prepared by ICF; $20/mcf supply cost cut-off assumed; Mean Current (2007) tech Case.
# sum of u.s. and Canada; but not really a valid statistical function.
notes: oFs = offshore; CBM = coalbed methane; l48 = lower-48; aK = alaska; ons = onshore; usGs = united states Geological survey; MMs = Minerals Management service; eIa = energy Information administration; npC = national petroleum Council; pGC = potential Gas Committee; InGaa = Interstate natural Gas association of america; neB = national energy Board of Canada; CsuG = Canadian society for unconventional Gas; MItei = MIt energy Initiative; rstG oGC = resource & supply task Group onshore gas case; anGa = americas natural Gas alliance; GtI = Gas technology Institute; inc. = included.
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Figure 1-52. Onshore Natural Gas Recoverable Resource Cases versus Cost of Supply at the Wellhead WAS Figure Cases Figure 1-52. onshore natural Gas recoverable resourceES-2 versus Cost of supplyatthe Wellhead WELLHEAD SUPPLY COST (DOLLARS PER MILLION BTU) $30
100 YEARS OF CONSUMPTION AT CURRENT RATES
$20
CUMULATIVE PRODUCTION THROUGH 2010
2,996
3,985
4,656
$10
CASE ONE CASE TWO CASE THREE
$0
1,000
2,000 3,000 4,000 5,000 ULTIMATE RECOVERABLE RESOURCE (TRILLIONS OF CUBIC FEET)
6,000
Note: See page 107 for case de nitions. Sources: Energy Information Administration and MIT Energy Initiative (MITei)/ICF International.
from ~3,000 Tcf in Case One up to ~4,700 Tcf with advanced technology in Case Three. With this understanding of the potential resource base, we analyzed implications for supply potential for the onshore non-Arctic segment of North American gas under several scenarios. y Flat Supply Scenario at a constant 24 Tcf/yr, equal to current production rates, until beginning of decline, the variation in remaining resource estimates has a significant effect on the duration of plateau supply length. As illustrated in Figure 1-53, approximately five to nine decades at this production level are possible, followed by significant postplateau supply. y Supply Growth Scenario An increased rate of supply scenario, whereby supply is assumed to increase approximately 50% from 24.1 Tcf/yr to 36.5 Tcf/yr. The increase takes place to achieve this higher supply plateau in approximately one decade. This plateau could be maintained for between two and four decades after 2020, based on the resource estimates used, as illustrated in Figure 1-54. 150
(Should market needs be greater over this time period, other supply sources, such as offshore gas, Arctic gas, or imported LNG would also be called upon to complete the supply mix.) y Restricted Supply Scenarios Here assumptions are analyzed to estimate the effects of various possible restrictions or constraints (such as limitations on fracturing and resource access) on industrys ability to supply onshore gas. Two of these scenarios are illustrated in the following figures: from extreme limitations to supply (Figure 1-55) to moderate limitations to supply (Figure 1-56). Clearly, these assumptions would have a drastic effect on the ability to supply North America gas domestically. The remaining resource would be reduced by over 70% compared to the unrestricted Flat Supply scenarios, and potential plateau supply would be eliminated entirely under the most extreme restrictions, such as disallowing hydraulic fracturing. Plateau (flat) supply would be reduced from the approximate 8090 years, to approximately 4050 years by assuming 33% restrictions on unconventional supply.
Figure 1-53. Flat supply scenario Figure 1-53. Flat Supply Scenario
40 TRILLION CUBIC FEET TCF PER YEAR
HISTORY CASE ONE CASE TWO CASE THREE
30
0
YEARS FLAT CONSUMPTION 54 78 90 1,400 TCF TERMINAL DECLINE VOLUME 4,656 TCF ULTIMATE RESOURCE
20
HISTORY 600 TCF TERMINAL DECLINE VOLUME 1,000 TCF TERMINAL DECLINE VOLUME 3,985 TCF 2,996 TCF ULTIMATE ULTIMATE RESOURCE RESOURCE
10
Sources: Canadian Association of Petroleum Producers; Cedigaz; Energy Information Administration; National Energy Board of Canada; and United States Geological Survey.
0 1900 1920 1940 1960 1980 2000 2020 2040 2060 2080 2100 2120 2140 2160 2180 2200 YEAR
Figure 1-54. supply Growth scenario

Figure 1-54. Supply Growth Scenario
YEARS FLAT CONSUMPTION 0 20 31 33 1,500 TCF TERMINAL DECLINE VOLUME 900 TCF TERMINAL DECLINE VOLUME 2,996 TCF ULTIMATE RESOURCE 2,100 TCF TERMINAL DECLINE VOLUME
HISTORY CASE ONE CASE TWO CASE THREE
30
1.4 TCF/YR GROWTH
20
HISTORY
3,985 TCF ULTIMATE RESOURCE 4,656 TCF ULTIMATE RESOURCE
10
0 1900 1920 1940 1960 1980 2000 2020 2040 2060 2080 2100 2120 2140 2160 2180 2200 YEAR
Note: Supply Growth Scenario 5% growth per year to 100 billion cubic feet per day. Sources: Canadian Association of Petroleum Producers; Cedigaz; Energy Information Administration; National Energy Board of Canada; and United States Geological Survey.
151
Figure 1-55. Extremely Restricted Supply Scenario Extreme
Figure 1-55. extremely restricted supply scenario
30
HISTORY CASE ONE CASE TWO CASE THREE YEARS FLAT CONSUMPTION 04 TCF TERMINAL DECLINE VOLUME 600 824 1,013 TCF ULTIMATE RESOURCE 1,919 1,787 2,108
20
10
0 1900 1920 1940 1960 1980 2000 2020 2040 2060 2080 2100 2120 2140 2160 2180 2200 YEAR
Notes: Extremely restricted supply scenario fracturing impact, no shale technology enabled. Year-end 2009 cumulative = 1,095 TCF. Cases Two and Three have immediate terminal decline. Sources: Canadian Association of Petroleum Producers; Cedigaz; Energy Information Administration; National Energy Board of Canada; and United States Geological Survey.
Figure 1-56. Moderately Restricted Supply Scenario
Figure 1-56. Moderately restricted supply scenario

40
TRILLION CUBIC FEET TCF PER YEAR
HISTORY CASE ONE CASE TWO CASE THREE YEARS FLAT CONSUMPTION 0 37 49 54 HISTORY TCF TERMINAL DECLINE VOLUME 600 1,000 1,400 TCF ULTIMATE RESOURCE 2,587 3,283 3,789
30
20
10
0 1900
1920
1940
1960
1980
2000
2020
2040
2060
2080
2100
2120
2140
2160
2180
2200
YEAR Notes: Moderately restricted supply scenario fracturing impact, 67% tight/coalbed methane/shale technology enabled. Year-end 2009 cumulative = 1,095 TCF. Sources: Canadian Association of Petroleum Producers; Cedigaz; Energy Information Administration; National Energy Board of Canada; and United States Geological Survey.
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Figure Mean Resource Base, Advanced supply scenarios: Mean resource Base, 1-57. Comparison of three Technology, and 2007 Cost Index advanced technology, and 2007 Cost Index
Figure 1-57. Comparison of Three Supply Scenarios:
TRILLION CUBIC FEET TCF PER YEAR
40
HISTORY FLAT SUPPLY
SUPPLY GROWTH EXTREMELY RESTRICTED SUPPLY
30
20
10
0 1900 1920 1940 1960 1980 2000 2020 2040 2060 2080 2100 2120 2140 2160 2180 2200 YEAR
Note: Year-end 2009 cumulative = 1,095 TCF. Sources: Canadian Association of Petroleum Producers; Cedigaz; Energy Information Administration; National Energy Board of Canada; and United States Geological Survey.
Figure 1-57 provides a summary of Flat Supply, Supply Growth, and Extremely Restricted Scenarios using the mid-range estimate of recoverable resources (Case Two), and as such provides a guide to the potential for reasonably unconstrained, most likely, and constrained production pathways. To further test the reasonableness of these potential production pathways, the study team analyzed the magnitude of input requirements needed. Details of the methodology and results are described in Topic Paper #1-8, Onshore Natural Gas, available on the NPC website. Here we summarize the indicative requirements of rigs, industry personnel, tubular (steel) tonnage, proppant, and fracture stimulation water usage required to support both the Flat Supply and Supply Growth scenarios. Based on expectations of relative economics of the major natural gas types, it was assumed that increases in drilling would primarily target shale gas, and to a lesser extent tight gas. Conventional gas and coalbed methane drilling were assumed to remain essentially flat at around current levels over the period to 2050. To avoid a disproportionate
draw on any particular resource type, the potential amount of natural gas that would be produced over the lifetime of the wells drilled between 2010 and 2050 was checked against public estimates of recoverable resources by type. The estimated production by resource type and pace of onshore natural gas drilling to maintain combined U.S. and Canadian production at current levels of roughly 66 Bcf/d for the Flat Supply Scenario is indicated in Figures 1-58 and 1-59. Increasing output of shale gas rises to about 60% of the total and is able to offset declines in conventional and coalbed methane production to maintain production. As shale gas wells produce at higher rates than many of the conventional, coalbed methane, and tight gas wells relied on previously, the absolute number of new onshore gas wells required to maintain current production remains less than 60% of the peak 2006 level. To achieve significant increases in combined U.S. and Canadian production to roughly 100 Bcf/d by 2020, and maintain that level thereafter, would
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Figure 1-58. onshore north american Gas production in Flat supply scenario
Figure 1-58. Onshore North American Gas Production in Flat Supply Scenario
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Figure 1-59. Projected Wells Required in Flat Flat supply scenario Figure 1-59. projected required Wells required in Supply Scenario 60
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involve higher levels of drilling. As indicated in Figures 1-60 and 1-61, shale gas again is projected to account for about 60% of the production from 2020 onward. By 2050, the requirement for new onshore natural gas wells would be projected to reach over 80% of the 2006 peak. While the absolute number of new onshore natural gas wells remains below previous peaks, the numbers may not be strictly comparable since shale gas wells tend to require greater amounts of labor, equipment, and materials to drill and complete than earlier generations of onshore natural gas wells. To test the level of inputs required for drilling under the scenarios examined, the study team looked at such items as fracture stages, water use for fracturing, proppant, steel, and manpower. The following charts illustrate the requirements derived from the level of activity analyzed. The first figure set (Figure 1-62) illustrates the activity-related input requirements for U.S. lower-48 and non-Arctic Canada onshore gas supply; namely rigs (total and high horsepower), direct employment, well capital, and steel for well tubulars. This level of
activity is generally consistent with historical levels. Employment would increase. High horsepower rigs (1,500 horsepower or more) are estimated at approximately 25 to 33% of the total gas rig count. Figure 1-63 illustrates the fracture stimulation activity-related input requirements for U.S. lower-48 and non-Arctic Canada onshore gas supply, including fracture stimulation stages, fracture proppant, and initial water (without differentiation between primary and re-used water) required for fracture stimulation. The Flat Supply scenario is expected to require historically similar overall numbers of fracture stimulation stages and proppant compared to recent levels. The Supply Growth scenario would require approximately 50% greater fracture stimulations overall by 2050 than recent history. Water (primary and re-use) for fracture stimulations would increase, depending upon scenario, by approximately 50125% overall by 2050 compared to recent levels. Local increases in water use could be greater. Nonetheless, even in the Supply Growth scenario in 2050, estimated total annual water used for fracture stimulations at 2.5 billion barrels is still less than 0.2% of the U.S. daily consumption in 2000 (excluding hydroelectric
Figure 1-60. onshore north american Gas production in supply Growth scenario
Figure 1-60. Onshore North American Gas Production in Supply Growth Scenario
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Figure 1-61. projected Wells required in Supply Growth Scenario Figure 1-61. Projected Wells Required in supply Growth scenario
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utilization) of 213 billion gallons per day (1.85 trillion barrels per year).23 Advances by the industry to reuse stimulation water and use non-potable water will likely substantially reduce actual water use below this estimate. Natural gas can continue to be a significant contributor to the continents energy supply and security. Ample natural gas is available in North America to supply current consumption levels for decades and to support significant growth into other sectors as well. New techniques, including cost-effective multiple-stage fracture stimulation in horizontal wellbores, have enabled vast resources never before considered economic at any reasonable price. Input resource requirements (e.g., rigs, people, fracture stimulation proppant, and water) are significant yet manageable, and achieving these levels of supply is within industry capabilities. Extreme restrictions
23 Susan S. Hutson et al., Estimated Use of Water in the United States in 2000, U.S. Geological Survey Circular 1268, 15 figures, 14 tables. (2004, revised April 2004, May 2004, and February 2005).
on critical inputs (particularly fracture stimulation, water disposal, and land access) on a national level will cause natural gas supply rate to decline.
Key Findings
y Recent technology advances have enabled development of large-scale tight gas and shale gas resources in North America. y Estimates of remaining resources, particularly of shale gas, have increased significantly in recent years and in all resource studies. Horizontal drilling coupled with multi-stage fracture stimulation plays a key part in this increase, enabling greatly increased production of shale gas and tight gas. y The remaining recoverable gas resource (as of January 2010) is estimated to be between 1,900 and 3,600 Tcf. Further advances in technology and play delineation beyond the current level are expected to further increase this quantity.
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Figure 1-62. Activity-Related Drilling Input Estimates
Figure 1-62. activity-related drilling Input estimates

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Figure 1-63. Indicative Estimates of Well stimulationrelated Inputs Figure 1-63. Indicative estimates of Well StimulationRelated Inputs 600 WELL FRAC STAGES
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Legislative and regulatory constraints (particularly on fracture stimulation) on development activity could drastically reduce the available recoverable resource. y Between five and nine decades of flat supply at 2009 levels is estimated to exist, even accounting for substantial (6001,400 Tcf) resource being produced on a decline following the plateau. y Onshore gas supplies can support increased use of this resource. Up to three decades of supply is esti-
mated to be available at 50% greater supply levels than today, even accounting for a decade ramp up and decline volumes. y Supply costs should remain moderate as long as development and production is not overly restricted or unduly burdened. y Requirements to support this resource development are achievable based upon high level scoping: Directly employed personnel could increase 1025% over 40 years.
liquefied Natural Gas Overview

Liquefied Natural Gas (LNG) is a small but growing part of the global gas market. LNG consumption in 2009 was 23.5 Bcf/d or 8.2% of total world demand for natural gas, according to the BP Review of World Energy. LNG demand has grown 67% per year for the last two decades, far faster than the overall 24% growth in the total global natural gas market. Liquefied natural gas is created by cooling natural gas to -161oC. At that temperature, natural gas becomes a liquid and volume drops by a factor of approximately 600. That decrease in volume allows natural gas to be economically transported by specialized ships to distant markets. The United States began importing LNG in 1971 to a regasification terminal in Massachusetts but importation had a fitful start. By 1982, four other import terminals had opened and three of them had closed. Reliance on imports picked up in the 1980s when proved U.S. gas reserves declined as domestic demand continued to rise. The inoperative terminals reopened and eventually expanded. By 2003, a report on LNG by the Energy Information Administration (EIA) cited 11 different domestic regas projects and listed seven more in the Bahamas, Canada and Mexico that were designed to supply natural gas to U.S. markets. The projects enabled import growth to 2.11 Bcf/d in 2007, 3.3% of total U.S. consumption. However, the difference between U.S. LNG pricing and global LNG pricing complicates import efforts. The price of LNG globally is linked to the primary alternative fuel, oil. In the United States, LNG is linked to the domestic price of gas. When oil prices are high and U.S. natural gas prices are low, LNG providers prefer to ship supply to Asia or Europe. The expected need for LNG imports continued to drive U.S. expansion activities. In 2007, the United States had 5 operating terminals and 24 projects approved for construction: 19 onshore and 5 offshore. In addition, 14 more projects had been formally proposed. About that time, however, it became apparent that U.S. proved reserves of natural gas were rapidly growing due to development of tight gas sands and coalbed methane reserves. Promising results from the Barnett play were just becoming public. By 2008, the assumption that the United States had to import large quantities of LNG to meet rising demand was called into question. Expectations for LNG imports plummeted by the end of the decade and a number of projects were suspended or cancelled. Today, the 18.3 Bcf/d of terminal regas capacity is expected to operate at low load factors for the foreseeable future. Three factors abundant domestic supply, low prices and anticipated flat natural gas demand through 2035 have turned the focus to exports. Apache and EOG are developing the Kitimat LNG project in British Columbia once intended for imports with plans to supply the planned 700 MMcf/d from the Horn River play. Cheniere is developing a liquefaction facility in Louisiana that could produce up to 2.6Bcf/d from four trains. Freeport LNG and Macquarie Energy have announced plans to construct 1.4 Bcf/d of liquefaction from four trains at the existing 1.65 Bcf/d Freeport LNG terminal in Freeport, Texas. All three projects have applied for export permits.
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The rig count required is manageable and within historical levels, although a higher level of high horsepower rigs is anticipated. Well capital and steel needed for pipelines, tubing and casing is similarly manageable and comparable to recent historical levels. Proppant needed for fracture stimulation may double or treble versus 2010 estimates (flat to double versus 2008) over 40 years. Water (including primary and re-use) needed for fracture stimulation could increase 50150% to approximately 2.5 billion barrels of water annually, less than 0.1% of U.S. water withdrawal in 2000 (less than 0.2% of U.S. water withdrawal in 2000 excluding hydroelectric use).
Natural gas transmission pipelines transport natural gas from production areas to market areas. Transmission pipelines receive gas from gathering or processing facilities and deliver it to end users, local distribution companies, or other transmission pipelines for further transportation to market. FERC is charged with approving construction and operation of interstate natural gas pipeline facilities. Currently, there are approximately 220,000 miles of interstate pipeline in service in the United States. In addition, the EIA estimates that there are over 76,000 miles of intrastate pipeline in operation. Construction and operation of intrastate pipelines is regulated by the states in which the pipelines are located. In addition to FERCs responsibility to review and authorize interstate natural gas and storage facilities in the United States, multiple other federal statutes affect the construction of interstate natural gas pipelines and storage facilities. These include the Clean Air Act, the Clean Water Act, the Endangered Species Act, the Coastal Zone Management Act, the Fish and Wildlife Coordination Act, the Historic Preservation Act, the Rivers and Harbors Act, the Mineral Leasing Act, the Federal Land Policy Management Act, and the Wild and Scenic Rivers Act. Additional state and local agencies provide approvals for gathering and processing facilities, and may present additional requirements for pipeline and storage projects. Natural gas storage facilities help meet gas demand peaks when demand exceeds production and longhaul pipeline throughput levels. When cold weather or other market conditions create more demand for gas than domestic production or imports can satisfy, gas in storage makes up the difference. When supplies of natural gas exceed demand (e.g., between seasonal peak demand periods), storage allows gas producers to continue production without interruptions. This lowers the need to cut back on production or to shut in wells, which could damage their integrity. In North America, gas is typically injected during the summer (April to October) and withdrawn in the winter (November to March). Storage can also be used for seasonal system supply or for peak intraday demands, in particular where high deliverability storage is needed to supply gas-fired power generation activated for peak electric power loads. FERC has jurisdiction over underground storage sites owned and operated by interstate pipelines, as well as independently operated storage sites that offer services in interstate commerce. EIA reports
Natural Gas Infrastructure

History and Context
The U.S. natural gas infrastructure system comprises a network of buried transmission, gathering and local distribution pipelines, natural gas processing, LNG, and storage facilities. Natural gas gathering and processing facilities are necessarily located close to sources of production. They gather gas from producing wells and remove water, volatile components and contaminants before the gas is fed into transmission pipelines, which transport natural gas from producing regions to consuming regions. Storage facilities are located in both production areas and near market areas, subject to geological limitations and market forces. North American natural gas infrastructure has developed over the past 30 years to link regions of supply with regions of demand. Major production basins in the Gulf of Mexico, Appalachia, Western Canada, and the Rocky Mountains connect to population centers in the Northeast, Upper Midwest, West Coast, and Southeast markets. Natural gas gathering and processing infrastructure collects natural gas from producers, processes it to meet the specifications of pipeline quality gas, and delivers it into the pipeline grid. There are currently 38,000 miles of gas gathering infrastructure in the United States and approximately 85 Bcf/day of gas processing capacity. Gathering and processing facilities are generally subject to oversight by state regulators. 160
Methane hydrates
Gas hydrate is a solid naturally occurring substance consisting predominantly of methane gas and water that occurs throughout Arctic regions and beneath the outer continental shelves throughout the world. In hydrates, water molecules form an open, solid lattice that encloses methane. Many scientists believe gas hydrates are one of the largest storehouses for carbon on the planet. The U.S. Geological Survey first assessed technologically recoverable gas volumes in 2008 and estimated 85 Tcf of gas could be recovered from Alaskas North Slope. A 2009 Minerals Management Service (MMS) assessment reported more than 21,000 Tcf of gas in place in hydrate form in the Gulf of Mexico with a mean, statistical estimate of more than 6,700 Tcf. Its still unclear whether gas can be commercially developed from hydrates, though field tests in Korea, India and China have been promising. Field production test experiments in the United States are still pending with the first planned for the Alaska North Slope. Looking forward through 2050, scenarios suggest production from gas hydrates in the United States could range from 10 Bcf/yr to 10 Tcf/yr. There are several technological challenges to producing gas hydrates. Hydrates are found only in deep waters or the arctic. The disassociation of the hydrates once removed from its temperature/pressure regime requires development of specialized equipment to recover and preserve the gas. Domestically, research into hydrates as a resource is primarily conducted by federal agencies and academia. Global R&D efforts suggest that gas hydrates found in sand reservoirs are the best target for early production due to higher methane saturation levels and the suitability of sand to well development. After the MMS report on hydrates in the Gulf of Mexico, the gas hydrates Joint Industry Project conducted logging-whiledrilling operations at seven wells at three sites with the intent of discovering sand reservoirs with gas hydrates. Six of the seven wells confirmed predictions of sand with gas hydrates, most of them at high saturation levels. Research on production technologies in the United States and Japan is focused on production via well bores. Researchers have ruled out surface dredging or shallow-subsea mining. The environmental harm is too great and the energy in such deposits is likely too small to be of value. Of the various well-based approaches proposed, reservoir depressurization and chemical exchange are the most promising. Depressurization breaks the gas hydrate into gas and water components. Both are driven to the well bore and produced to the surface. Chemical exchange CO2 for CH4 offers the potential to sequester CO2 while releasing the gas. The challenge is that CO2 immediately forms into a hydrate when it reaches water in the formation, creating the potential for only limited injection of CO2 and production of methane. To further evaluate the potential for exchange, DOE is collaborating with Conoco Phillips to conduct a short field trial in Alaska this year. Gas hydrates have strong climate implications. The findings to date suggest gas hydrates can play a significant role in large, acute and global climate events such as those that occurred in the Earths ancient past.
there are 401 active underground natural gas storage fields with a total working gas capacity of approximately 4.2 Tcf. Of that amount, 2.6 Tcf serves interstate commerce.
Infrastructure Development Issues

Gathering and Processing
The rapid growth of shale gas production and its transformative effect on North American gas supply is changing the gathering and processing industry.
Existing infrastructure will come under pressure in some regions, particularly regions with higher supply costs that are unable to maintain or grow production in competition with lower cost shale gas. Shifting gas supply will result in the closing of some processing facilities and may drive business closures and consolidations in some regions. In other regions, new infrastructure will be required, including gathering pipelines and processing plants in producing regions, and possibly new pipelines to transport ethane and other natural gas liquids.
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Shale gas production will be an increasingly important source of new production. The growth in shale gas development also has increased the recognized reserves of NGLs in the United States. However, the growth in liquids from all gas shale plays is not uniformly distributed across the country. The NGL-rich gas plays are the Barnett in Texas, the western portion of the Marcellus in Pennsylvania, the Woodford in Oklahoma, the Eagle Ford play in southern Texas, and the Niobrara play in Colorado, Nebraska, and Kansas. The Fayetteville in Arkansas, the Haynesville in Louisiana, and the Horn River in Western Canada are dry by comparison. Shale gas basins in new regions, such as the Marcellus in the Northeast and mid-Atlantic, will require an entirely new set of NGL pipelines to connect to markets. The public in some areas of this region is not accustomed to, and may be actively opposed to, production and processing facilities. Effective public outreach and consultation will be necessary for successful development.
state pipeline to transport Marcellus shale basin gas are under construction, 449 miles are pending, and almost 1,000 miles of potential projects have been announced. An interesting characteristic of the Marcellus Basin area pipelines is that while the total capacity proposed will be large, the mileage will be seemingly small when compared to long haul pipelines in the west. This is due to the proximity of this supply to highly populated east coast markets. Another important potential source of gas supply for the lower-48 states is the North Slope of Alaska, with approximately 35 Tcf of gas reserves. Beginning with the passage of the Alaska Natural Gas Transportation Act in 1976, projects have been considered to transport Alaskan gas. In 2004, Congress passed the Alaska Natural Gas Pipeline Act with the objective to facilitate the timely development of an Alaskan natural gas transportation project to transport natural gas from the North Slope of Alaska to the lower48 states. The Act also confirmed the Commissions authority to authorize a pipeline to transport Alaskan natural gas to the lower-48 states and designated the Commission to be the lead agency for processing the National Environmental Policy Act documentation. The TransCanada Alaska Pipeline project is a joint venture of TransCanada Alaska Company LLC and ExxonMobil. This project is designed to transport up to 4.5 Bcf/d of Alaskan North Slope gas to the AlaskaCanada border, approximately 750 miles. The project has a Canadian affiliate proposing to construct facilities from the Alaska-Canada border to existing facilities in Alberta. From Alberta, the gas would be transported through existing facilities to delivery points in the United States. However, based on the apparent economics of Alaskan gas versus shale gas, it seems unlikely that Alaskan gas will be delivered to the lower-48 states in the foreseeable future. The United States used an average of 66.1 Bcf/d of natural gas in 2010. This is far lower than the interstate capacity of 183 Bcf/d. Nearly half the capacity we have today has been built since 1972. Because pipeline systems must be sized and designed for peak capacity rather than average capacity, much of apparent overcapacity is reflected in these numbers. Although this redundancy creates a robust and reliable transmission system, it is not evenly distributed across North America. Pockets of constraints and areas of overcapacity still exist because of local supply and demand factors.
Transmission Pipelines
Since 2000, FERC has approved over 16,000 miles of interstate pipeline and nearly five million horsepower of compression. These projects can be categorized either as greenfield pipelines (new pipelines in new rights-of-way) or as enhancements (i.e., looping of an existing pipeline, addition of compression, or extensions or laterals of an existing system). About 14,000 miles of interstate pipeline and 4.6 million horsepower of compression have also been placed into service. Recent development of shale gas basins in the southeast U.S. has spawned a boom in transmission pipeline construction in that part of the country. Shale gas supplies have been connected, via new pipelines, to the traditional long-line pipelines that transport natural gas from the Gulf of Mexico to the mid-Atlantic and northeast U.S. Over 2,400 miles of interstate pipeline has been approved to move southeast U.S. shale gas. Looking to the future, pipeline construction will continue in the southeast U.S. to access shale gas deposits. However, a major build-out of interstate pipeline capacity in the mid-Atlantic and northeast U.S. will be needed to transport gas from the Marcellus basin to markets. In fact, 201 miles of inter162
Storage
FERC has authorized almost 970 Bcf of new underground storage capacity either as expansions of existing storage fields or as new storage sites since 2000. Since 2002, 416 Bcf of new capacity has actually gone into service. Similar to historical pipeline expansion, storage development has mainly occurred in the south central U.S. to first accommodate the expected increase in imported liquefied natural gas, and, more recently, to store the gas produced from shale basins. This trend in the location of storage facilities is expected to continue. Storage field development is limited by the challenges of finding sites with the appropriate combination of geological features, pipeline proximity, and the ability to obtain land, rights, and permitting. Large portions of the United States, including much of the Northeast, do not have geological structures conducive to underground gas storage. Strong growth in gas demand for power generation has increased demand for flexible, highdeliverability storage that can be cycled several times annually. Most of the value that these facilities create comes from short-term price volatility rather than the summer/winter price spreads that have underpinned traditional storage development.
umes of new gas supply to the existing pipeline grid. The requirement for new gas processing infrastructure will be driven by the large volumes of new gas production that are expected to be connected over the forecast period, and by the expectation that relatively strong oil prices will encourage investment in the extraction of natural gas liquids. The June 2011 INGAA Foundation study on North American natural gas infrastructure needs through 2035 projects a cumulative need for almost 414,000 miles of gathering pipelines, including individual well connections, for a cumulative investment requirement (in nominal dollars) of about $50 billion. The same study projects a need for 32 Bcf/d of gas processing capacity additions through 2035 for a total investment of $22 billion (in nominal dollars). This may need to be supplemented by new NGL pipelines, in particular from the Marcellus region to markets in the Midwest or Gulf Coast.
New Transmission Pipeline Requirements

Future pipeline infrastructure expansion will be driven by a shift in production from mature basins to areas of unconventional (i.e., shale) natural gas production. Regions with unconventional production growth, such as the Marcellus basin in the Appalachian region of the northeast U.S., will experience the greatest infrastructure investment. A demand-side factor that will influence construction of more transmission pipeline is the expected increase in gas-fired electric generation as coal-fired generation is affected by expected environmental and carbon regulation. Gas-fired generation, given the amount of domestic shale gas, is likely to be relatively cheaper than in previous years and has approximately half the emissions of coal-fired generation. The INGAA Foundation 2011 study estimates that by 2035 the expanded market will require about 36,000 miles of transmission pipelines and a further 14,000 miles of shorter lateral pipelines needed to connect new gas-fired power generation capacity, gas storage, and processing plants. This would require cumulative investments of nearly $130 billion (in nominal dollars) by 2035.
Future Natural Gas Infrastructure Requirements

Estimating levels of needed infrastructure growth requires consideration of future supply and demand for natural gas. Fluctuating levels of supply and demand within an integrated market produces price signals that elicit an infrastructure investment response. For example, if supply develops in a region without sufficient pipeline capacity, a price difference develops between the supply area and downstream demand centers. If this difference is high enough, it signals a need for new pipeline capacity to allow more gas to flow. When seasonal price spreads develop, a signal is sent to the market to store gas in lower priced periods and extract it when prices are higher. In addition, price volatility signals value for more storage capacity to provide a physical tool for shorter term balancing.
New Gathering and Processing Requirements

The requirement for new gas gathering infrastructure will be driven by the need to connect large vol-
New Storage Requirements

Very few states have suitable depleted reservoirs, aquifers, and salt formations available for storage
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development. Areas without much storage potential include Nevada, Idaho and Arizona, the Central Plains states, Missouri and almost the entire East Coast (except for portions of western New York, western Pennsylvania, and West Virginia). Any target storage formation must first be reasonably close to a major pipeline before storage development can be considered. Salt cavern storage is expected to dominate new storage development, essentially doubling over the forecast period. The 2011 INGAA Foundation study estimates approximately 590 Bcf of new storage capacity is required by 2035 to meet market growth for a cumulative investment of about $5 billion (in nominal dollars).
NORTh AMeRICAN OIl AND GAS PRODUCTION PROSPeCTS TO 2050

Preceding sections of this chapter describe the most significant current and potential sources of North American oil and natural gas production available over the next several decades. There are many plausible permutations of the mix and timing of development of these resources and their translation into productive capacity. Factors that enable or constrain supply capacity development, be they geologic, technical, or the result of public policy choice, can play out in many different ways, so this report does not present a definitive vision of North American oil and gas production in either 2035 or 2050. The ranges of production pathways shown earlier in this report suppose either a reasonably smooth path of development, surmounting the barriers which may exist, or a more limited outlook, in which barriers significantly constrain production capacity. Such enablers and challenges will, of course, exist beyond 2035, out to 2050 and beyond. However, if North America finds itself on the constrained pathway as 2035 approaches, it would be unwise to assume that it is possible to change course and expect to recover productive capacity by 2050, given the long lead times and development challenges involved in activating resources which have not already been the focus of attention. With this perspective, it is reasonable to assume continuity in the trends to 2035 under either development case. In a development-constrained world, some supply sources would have declined to zero or a low number as existing reservoirs continue their natural decline and are not replenished by new drilling activity. This would be the case with the Arctic, for example, relying on a single pipeline to enable crude oil production to occur and be transported to market. Without further exploration, the pipeline will be shut down when flows fall below operational minimum rates, which would probably occur at some time during the 2040s. Offshore oil and gas output would also have declined to low production rates by 2050 if development is confined to the Gulf of Mexico. Just as existing production would be subject to decline, new sources would likely not be developed in the constrained world. New Arctic exploration would not be deemed viable, other offshore areas would probably remain restricted to development, and onshore conventional and unconventional oil supplies would
Key Findings
y Growing shale gas supply will create a significant requirement for new gathering, processing, and pipeline infrastructure. y New storage requirements for the growing natural gas market are relatively modest. y Strong oil prices relative to gas prices are driving development to liquids-rich areas and creating a need for new processing infrastructure. y New pipelines may be required to move natural gas liquids from producing areas to established markets. y Development of shale supply from new basins will put pressure on existing infrastructure in high cost supply regions. y Existing infrastructure should be used, when practical, to reduce capital requirements and environmental impacts. y Development of a pipeline from Alaskas North Slope to the integrated North American market would require significant investment. y The growing gas infrastructure grid can support significant switching from coal to gas in electric generation and underpin the use of natural gas as a transport fuel. y The development of shale gas supply further increases the reliability of the natural gas infrastructure by increasing production from regions not prone to hurricanes, and by geographically diversifying natural gas supply. y Governments should ensure that efficient siting and other regulatory processes are in place to underpin necessary infrastructure investment. 164
be faced with increasingly stringent challenges. Methane hydrates and oil shale development would also be seriously at risk from prolonged access and development constraints. In the case of natural gas, conventional resources that do not depend on hydraulic fracturing would be mostly played out well before 2050 leaving the North American gas market to be largely supplied by imports. The additional demand for global natural gas supplies would probably amplify the supply/demand stresses in the global market with potentially serious consequences for the economy and for energy security. In contrast, if prudent development, in all its senses, is enabled over the long-term, through 2050 and beyond, a large contribution to North Americas oil and natural gas market requirements can be met from domestic production. The natural gas resource
can support supplies for decades to come and by 2050, given sustained technology development, it is likely that currently assessed resources will be augmented by methane hydrates from the Arctic and the Gulf of Mexico. The size of this potential resource could reasonably be expected to supply the North American natural gas market into the next century, and provide opportunities for deployment of those technologies in other regions of the world where methane hydrate resources are identified. On the oil side, vast Canadian oil sands resources could enable continued growth in production through 2050, allowing Canada to remain one of the largest oil producing countries, with considerable benefits for the North American economy and energy security. Oil shale from the Colorado and Utah kerogen deposits could become a very significant supply of oil again, if technology development and access is sustained in the interim period.
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Chapter Two
Operations and Environment

Abstract
Expanded natural gas and oil resources have dramatically improved the North American energy supply outlook. However, prudent production and delivery of these resources presents operational and environmental challenges. Technological advances have made shale gas, tight oil, deepwater offshore, oil sands, and other resources economically recoverable. If these resources are to be available and economic for development, continuous attention to reducing risks is essential to ensure pollution prevention, public safety and health, and environmental protection. These outcomes are important in their own right, but also in order to enjoy access to the resources for extraction and ultimate satisfaction of consumers energy demand. Given the importance of these issues, they have strongly influenced the study process. This chapter examines the major environmental and safety issues that must be addressed in order to safely produce and deliver North American natural gas and oil resources; examines the historical context of environmentally responsible development and improvements in technology, regulation, and environmental management; and describes the variation in natural gas and oil resources and the resulting variation in environmental impacts and issues. The main focus of this chapter is to consider ways in which industry and government can improve environmental performance, reduce risk, engage with stakeholders, and develop and communicate important information on environmental impacts. The outline of the Operations and Environment chapter is as follows: y Introduction and Summary y Resource Play Variations and Associated Environmental Challenges y History of Innovation in Environmental Stewardship y History of Natural Gas and Oil Environmental Laws y Sustainable Strategies and Systems for the Continued Prudent Development of North American Natural Gas and Oil y Offshore Safety and Environmental Management y Key Findings and Policy Recommendations.
IntroductIon And SuMMArY Environmental Challenges

Expanded potential of natural gas and oil resources has dramatically improved the North American energy supply outlook. The increased use of natural gas is likely to reduce the overall carbon intensity of
energy use, benefit the economy, and improve energy security. Prudent production and delivery of these resources presents operational and environmental challenges. Through technological advances, tremendous new natural gas and oil supply sources have been identified in the North American resource base. These advances make shale gas, deepwater offshore, tight oil, oil sands, and other resources economically
CHAPTER 2 OPERATIONS AND ENVIRONMENT
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recoverable. Continuous attention to reducing risks is essential to ensure pollution prevention, public and worker safety and health, and environmental protection. These are essential outcomes in order to enjoy access to the resources for extraction and ultimate satisfaction of consumers energy demand. Due to the importance of these issues, their influence on the study process has been significant. Risk to the environment exists with natural gas and oil development, as with any energy source. Local, state, and federal governments have developed a mix of prohibitions, regulations, and scientific study to reduce potential environmental impacts of natural gas and oil development. Parties discussing energy policy can be missing a common vocabulary and set of references to have a constructive conversation and make educated decisions. No form of energy comes without impacts to the environment. An appropriate framework for discussing energy sources is necessary. Environmental challenges associated with natural gas and oil development vary by location, such as onshore versus offshore, and by the methods employed to extract the resource. Although each well involves drilling into the crust of the earth and constructing well casing using steel pipe and cement, differences arise from the affected environment, resource type, regional and operating conditions, and proximity to environmental receptors. The public, policymakers, and regulators have expressed the following environmental concerns about onshore operations: y Hydraulic Fracturing Consumption of freshwater (volumes and sources), treatment and disposal of produced water returned to the surface, seismic impacts, chemical disclosure of fracture fluid additives, potential ground and surface water contamination, chemical and waste storage, and the volume of truck traffic. y Water Management Produced water handling and disposal has created apprehension about existing water treatment facilities and the ability to treat naturally occurring radioactive material, adjust salinity, and safely discharge effluent. y Land Use Encroachment The encroachment into rural and urban areas results in perceived changes to quality of life, especially in newly developed or redeveloped natural gas and oil areas. y Methane Migration Methane in domestic drinking water wells, either naturally occurring or from natural gas development. 168
y Air Emissions Emissions generated from combustion, leaks, or other fugitive emissions during the production and delivery of natural gas and oil present challenges regarding climate change and human health impacts. Offshore operations environmental challenges are somewhat different than onshore due to the sensitivities of the marine environment, harsh operating conditions, remote locations in the case of the Arctic, and advanced technologies employed. These challenges include: y Prevention of and Response to a Major Release The pressures and temperatures associated with remote wellhead locations that are difficult to access on the bottom of the ocean floor, and high flow rate of deepwater wells, make the containment of a subsea release challenging. y Safety Offshore natural gas and oil drilling practices, called into question by the recent Deepwater Horizon incident, have resulted in a weakened public perception of offshore process and worker safety. The limited operating space coupled with significant production volumes can create a higher-risk work environment. y Marine Impacts Seismic noise generated by offshore natural gas and oil exploration activities is recognized as a concern for whale populations and other marine life, including fish. y Arctic Ice Environments Responding to an oil spill in seasonal subzero temperatures with the presence of broken sea ice and 24-hour darkness is difficult and presents challenges not faced in other marine environments. The development of oil sands poses unique environmental challenges that differ from those associated with other onshore oil resources, including: y Water Consumption Large volumes of water have generated public and regulatory issues associated with water sourcing, groundwater withdrawals, and protecting water quality. y Land Disturbances Removal of overburden for surface mining can fragment wildlife habitat and increase the risk of soil erosion or surface runoff events to nearby water systems, resulting in impacts to water quality and aquatic species. y Greenhouse Gas (GHG) Emissions Transportation fuels produced solely from oil sands result in
well-to-wheels life-cycle GHG emissions 5% to 15% higher than the average crude oil refined. The carbon intensity of oil sands can vary based on extraction, refining and transport method. And, in 2009,
well-to-wheel emissions from oil sands processed in the United States were only 6% higher than the average crude oil consumed in the United States. Over time, incremental efficiency improvements,
Hydraulic fracturing is the treatment applied to reservoir rock to improve the flow of trapped oil or natural gas from its initial location to the wellbore. This process involves creating fractures in the formation and placing sand or proppant in those fractures to hold them open. Fracturing is accomplished by injecting water and fluids designed for the specific site under high pressure in a process that is engineered, controlled, and monitored. drilling goes through shallower areas, with the drilling equipment and production pipe sealed off using casing and cementing techniques. y The technology and its application are continuously evolving. For example, testing and development are underway of safer fracturing fluid additives. y The Interstate Oil and Gas Compact Commission (IOGCC), comprised of 30 member states in the United States, reported in 2009 that there have been no cases where hydraulic fracturing has been verified to have contaminated water. y A new voluntary chemical registry (FracFocus) for disclosing fracture fluid additives was launched in the spring of 2011 by the Ground Water Protection Council and the IOGCC. Texas operators are required by law to use FracFocus. y The Environmental Protection Agency concluded in 2004 that the injection of hydraulic fracturing fluids into coalbed methane wells poses little or no threat to underground sources of drinking water. The U.S. Environmental Protection Agency is currently studying hydraulic fracturing in unconventional formations to better understand the full life-cycle relationship between hydraulic fracturing and drinking water and groundwater resources. y The Secretary of Energys Advisory Board is also studying ways to improve the safety and environmental performance relating to shale gas development, including hydraulic fracturing.
Interstate Oil and Gas Compact Commission, Testimony Submitted to the House Committee on Natural Resources, Subcommittee on Energy and Mineral Resources, June 18, 2009, Attachment B. U.S. Environmental Protection Agency, Office of Water, Office of Ground Water and Drinking Water, Evaluation of Impacts to Underground Sources of Drinking Water by Hydraulic Fracturing of Coalbed Methane Reservoirs (4606M) EPA 816-R-04-003, June 2004.
Fracturing Facts
y Hydraulic fracturing was first used in 1947 in an oil well in Grant County, Kansas, and by 2002, the practice had already been used approximately a million times in the United States.* y Up to 95% of wells drilled today are hydraulically fractured, accounting for more than 43% of total U.S. oil production and 67% of natural gas production. y The first known instance where hydraulic fracturing was raised as a technology of concern was when it was used in shallow coalbed methane formations that contained freshwater (Black Warrior Basin, Alabama, 1997). y In areas with deep unconventional formations (such as the Marcellus areas of Appalachia), the shale gas under development is separated from freshwater aquifers by thousands of feet and multiple confining layers. To reach these deep formations where the fracturing of rock occurs,
* Interstate Oil and Gas Compact Commission, Testimony Submitted to the House Committee on Natural Resources, Subcommittee on Energy and Mineral Resources, June 18, 2009, Attachment B. IHS Global Insights, Measuring the Economic and Energy Impacts of Proposals to Regulate Hydraulic Fracturing, 2009; and Energy Information Administration, Natural Gas and Crude Oil Production, December 2010 and July 2011.
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as well as new technologies, such as the application of solvents to mobilize oil in situ (as an alternative to heat) are expected to continue to reduce the GHG intensity of unconventional operations. The natural gas and oil industry today is notably active. The rig count, for example, has doubled in the United States in the last 10 years, largely as a result of deep shale and other unconventional natural gas and oil resources. This has increased the need for regulators to respond in an appropriate and timely fashion and companies to engage with local communities and ensure that responsible and effective environmental management practices are used. This heightened level of activity, especially in shale gas development, exists within a context shaped by: y Public Awareness of Industry Operations The public has been disappointed by low performance of some operators, creating a sense of alarm about technologies and practices with which they may not be familiar, such as hydraulic fracturing. y Location Development is occurring in areas where there has not been significant activity in decades. y Transparency Questions have arisen regarding the transparency of the industry from policymakers, nongovernmental organizations, and stakeholders. y Regulatory Responsibilities There is increased pressure on the regulatory agencies to oversee the growing activity, be knowledgeable about the technological developments, and administer regulatory programs during times of extraordinary budget pressures. y Complex Regulatory Framework There is increased environmental regulatory complexity at the federal, state, and local levels. To address public concerns, some in the industry have made efforts to be more transparent by voluntarily disclosing information about chemical additives and practices, initiating expansions of training and information exchange programs, investing in research and development efforts, and embarking on extensive community and government outreach programs. Furthermore, emphasis on safe and environmentally responsible performance, coupled with environmental sustainability, has been or has recently become part of the business principles in many companies. In 2009, the U.S. natural gas and oil industry spent about $14.6 billion on the environment, including 170
over $4.3 billion for implementing new technologies and other environment-related expenditures in the exploration, production and transportation sectors.1
Prudent Development
Prudent development of natural gas and oil resources in North America reflects concepts related to achieving a broadly acceptable balance of several factors: economic growth, environmental stewardship and sustainability, energy security, and human health and safety. Prudent development necessarily involves tradeoffs among these factors. Consideration of the distribution of costs and benefits is a key part of prudent development. Environmentally responsible development is another key element of prudent development, underpinning environmental stewardship and sustainability. In the context of recovering natural gas and oil resources while protecting public health and the environment, environmentally responsible development requires: y Thorough predevelopment planning y Development of effective regulatory approaches y A commitment to continuous improvement y A commitment to implementing planned actions y Evolution of development concepts and practices. Predevelopment Planning Appropriate planning includes identifying and mitigating risks to public health, worker safety, and the environment, conserving natural resources, using technologies appropriate to the task, and incorporating engagement with parties impacted by the development of a resource. Due to the diversity of areas with natural gas and oil resources, the specific requirements associated with prudent development vary between locations.
1 American Petroleum Institute, Environmental Expenditures by the U.S. Oil and Natural Gas Industry: 1990-2009, February 2011. The estimates in this annual report are derived from survey data. The number of survey responses can vary each year, and many companies do not track environmental spending directly. As such, the aggregate estimates for specific industry sectors may either over or underestimate environmental expenditures, and do not represent the expenditure patterns of any individual company. With increased emphasis on corporate environmental performance and the implementation of recently proposed or promulgated regulations, aggregate industry environmental expenditures may be substantially higher in future years.
Effective Regulatory Approaches Environmentally responsible development requires regulatory approaches that are protective of environmental systems, land uses, human safety and health, and the development interests of surface and mineral right owners. In the context of federal and state or provincial jurisdictional relationships, prudent regulation involves assigning the various responsibilities for different aspects of development and protection to the level of government that can most effectively administer them. Continuous Improvement Continuous improvement of operations and regulations involves adherence to standards and adoption of improved practices based on advances in science, technology, methods for improved risk management, and lessons learned. Planned Actions Environmentally responsible development includes a commitment by all parties to follow through on planned actions to accomplish agreed-upon goals. The commitment of the chief executive officer or appropriate leader is critical to success. This will be evident, in part, by the leader acting as a visible and active champion and recognizing the time and effort involved in development and integration. In the end, all levels of the organization must be committed to and involved with the implementation. Development Concepts and Practices Societal expectations and understanding of the environment have changed over time. This must be reflected in the evolution of development concepts and specific practices that constitute environmentally responsible development. Past practices considered acceptable at one time may be inadequate now and in the future particularly due to competition for finite or constrained land, water, air, and other resources.
tional natural gas and oil resources, such as shale gas, tight oil, deepwater offshore natural gas and oil, and oil sands, will require even more proactive efforts to successfully implement safe and environmentally responsible development. However, many in and outside of the natural gas and oil industry understand that inferior practices could undermine public trust. The result could be that parts of the natural gas and oil resource base become or remain off limits for development. Maintaining access to the resource does not depend on changing public perception so much as earning public confidence with excellent performance. This is crucial to realizing the full potential of North Americas abundant natural gas and oil resources. With that in mind, the following key topics should be considered to ensure that excellent environmental performance is the norm in all places where natural gas and oil development occurs. For each of these topics, findings and recommendations have been derived from the analysis, summarized in this chapter and discussed more fully in the Key Findings and Policy Recommendations section.
Environmental Sustainability and Community Engagement

The concept of environmental sustainability is often used to refer to the objective of a government, company, industry, or organization to set and work towards achieving goals related to improving society, protecting the environment, and driving economic success. The long-term goal of achieving environmental sustainability is often aspirational in nature. In addition, there is not one correct approach to encouraging or implementing environmental sustainability within a company or industry. It can be accomplished by individual companies adopting business strategies and activities that meet the needs of the company and stakeholders while protecting environmental sustainability and enhancing human and natural resources for the future. A number of natural gas and oil companies already have environmental sustainability goals incorporated into their business. Providing information to the public is not enough. Community engagement involves both speaking and listening. Natural gas and oil companies should work with the community and seek ways to reduce the negative impacts of development. This includes predevelopment planning to identify issues such as noise and traffic and seek ways to mitigate them.
Major Findings: Assuring Prudent Development

The history of natural gas and oil development includes continual technological advances, improved systems management, and improved regulatory processes. This has allowed for the production of new and more challenging resource plays while improving environmental performance. The industry has demonstrated great innovation and success in addressing technological needs and environmental issues involved in accessing and developing conventional resources. Future development of the most promising unconven-
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Community engagement needs to be a core value of companies. Even though a company may believe its environmental performance is at the highest level, it must nevertheless maintain transparency regarding issues important to public stakeholders. Industry needs to explain its production practices and environmental, safety, and health impacts in non-proprietary terms. Collaboration among companies, government, and other stakeholders is often essential to the success of industry-wide efforts. It can also increase the trust and support of government and citizens. Such discussions can more effectively incorporate local environmental sustainability priorities and challenges. Listening to these challenges can support a company in staying ahead of issues that can impact reputation, production delays, lawsuits, and regulatory actions. In order to make public engagement meaningful and successful, companies must listen to stakeholders, ask for alternative views, and reflect stakeholders positions in strategic objectives and communications. Sufficient resources should be devoted to this effort.
wide variance in how these systems are defined and applied across the natural gas and oil companies and service companies in the industry. There is also variance in the effectiveness in managing environmental risks. The establishment of councils of excellence will go a long way to improve implementation of EMSs throughout the industry. A properly implemented EMS can provide greater efficiencies as consistent practices are developed and implemented by each company, which also helps establish responsibility to properly mitigate and manage risks. Each energyproducing company is accountable for its health and environmental impacts and each producer is obligated to minimize these impacts. In order to ensure environmentally responsible development, all levels of the natural gas and oil industry should be encouraged to use appropriate and comprehensive predevelopment planning, stakeholder engagement, risk assessment, and the innovative applications of technology. These elements must be adapted to the variability of resource plays and regional differences.
Corporate Responsibility
Natural gas and oil companies should continue to improve the development and use of Environmental Management Systems (EMSs) and implementation of environmental sustainability practices. There is a
Councils of Excellence
While most natural gas and oil companies operate at a high environmental performance level, some companies are not as far along. Companies gain
Planning and risk Assessment

Operators and regulators have long recognized that operations in extreme or sensitive environments, such as arctic climates, deepwater offshore settings, and wetlands, require careful planning to ensure operational success, worker safety, and environmental performance. As operations have moved into deeper, more challenging plays in more conventional settings, the need for more careful planning of these operations is necessary. The new paradigm for planning involves not only careful operational and logistic plans, but also requires that those plans be developed specifically to accomplish clear environmental protection goals as well as worker safety and public safety goals. In addition, risks must be identified and assessed. Early planning for prevention of hazardous events preserves the largest numbers of response options; in contrast, during a crisis event, options are reduced as urgency overtakes systematic analysis, planning, and thought. Options become more 172 abundant again only long after the event and as the latter stages of the recovery mode lead to detailed retrospectives and root-cause analysis. Recent events have shown that careful planning across the entire operational life cycle is essential. The tragic events associated with the Macondo well blowout put a spotlight on the need to have plans that will prevent accidents, quickly and accurately identify incidents that do occur, and provide effective response to mitigate the impacts that may occur. In addition, public opposition to coalbed natural gas and shale gas development in several areas has highlighted the need for public involvement and public education to engage stakeholders and to inform the way firms manage environmental and operational risks. Shell oil offshore safety study: http://www. scribd.com/doc/8438367/Bow-Ties-and-OffshoreSafety-Studies.
exposure to and adopt new technologies and operating practices in different ways and at different rates. Although accidents, spills, and other problems have occurred, overall environmental protection has improved. This has occurred as companies have applied more sophisticated technologies to drilling and production practices. Broad systems (i.e., operational, management, technological, and communications) within the industry and government must be managed to work together to achieve consistently high environmental performance. More systematic mechanisms to identify, evaluate, and disseminate information about environmental best practices would promote consistently higher environmental performance. North American natural gas and oil companies should explore opportunities to share best practices for protecting the environment, safety, and public health while developing different types of resource opportunities. An existing example of best practice sharing and recommended practice development is the Petroleum Technology Transfer Council, a national network of state universities, independent producers, service companies, federal agencies, and national labs established in 1994 to provide a forum for the transfer of technology and best practices within the producer community, adapted to the regional level. The latest example is the recently formed Center of Offshore Safety, which will promote the highest level of safety for offshore operations, through an effective program that addresses management practices, communication and teamwork, and which relies on independent, third-party auditing and verification. Natural gas and oil companies should draw upon existing activities, as appropriate, and form regionally focused councils of excellence to function as centralized repositories and systematic mechanisms to collect, catalog, and disseminate non-proprietary standards, practices, procedures, and management systems that would be made available to all appropriate government and private sources. Because development of natural gas and oil resources differs depending on factors such as the geology, water resources, and geography of the region, what constitutes effective practices is regionally defined. As such, there may be a need for multiple councils, each with a regional focus. The councils would be industry led and should be open to companies, regulators, policymakers, nongovernmental organization stakeholders, and the public. These recommendations are supported by findings and
recommendations on sustainable systems and building public confidence in the Key Findings and Policy Recommendations section of this chapter.
Effective Regulation
High-quality regulation is often risk-based, considers flexible approaches where feasible, encourages innovation, is informed by public input, and is based on sound science. A balance between prescriptive and performance-based approaches is sought in developing high-quality regulation, with consideration given to efficiency and effectiveness. Such regulation is based on the best available data, takes into account benefits and costs, evolves as technology changes, and has other attributes necessary for implementing effective regulatory programs and enabling regulatory compliance without unnecessary burdens. Highquality regulation can increase the potential for protecting public health, safety, and the environment, while promoting economic growth, innovation, competitiveness, and job creation. Regulation of oil and gas operations is best accomplished at the state level. A one-size-fits-all approach to regulation is not a viable option to ensure the highest level of safety and environmental protection. State agencies have extensive knowledge of geological conditions, which vary from state to state. State regulators are well suited to consider many variables, such as the regional hydrogeology, topography and seasonal climate variation to ensure wells are constructed properly, environmental footprints are minimized, and operations are conducted safely. State regulators are in close proximity to conduct inspections, oversee local operations, enforce existing regulations, and target new regulations to improve safety and environmental performance. State regulators have management responsibility for other natural resources (e.g., wildlife, fisheries, etc.) and are in the best place to integrate the regulation and management of all natural resources, including oil and gas. Regulators should continue to evolve regulatory requirements to address new information and best practices for operations and safety programs. Each state with natural gas and oil development has laws and regulations governing the conduct of companies and potential impacts. But each state is not equal in maintaining knowledge of the implications of scientific and technological advancements in improving regulations to protect the environment, public
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health, and safety. Similarly, states may vary in the resources dedicated to conduct timely and thorough reviews of permit applications and plans, inspections, and enforcement. Each state should be able to ensure that: (1) actions are carried out efficiently and effectively; (2) regulatory staff have the appropriate technical competencies to provide oversight of industry actions and keep pace with industry practices and technology; (3)standards evolve over time to take into account technological innovation, intensity of development, and scientific advancements; and (4) regulations are enforced. To deal with the limitations of prescriptive regulations, some agencies have developed performancebased requirements allowing for the use of new practices and technologies while meeting environmental protection goals. This approach potentially allows greater flexibility and innovation while ensuring environmental protection, but both operators and regulators have recognized that this is not the best approach in all cases. State and federal agencies must seek a balance between prescriptive and performance-based regulations to encourage innovation and environmental improvements while maintaining worker and public safety.
For these government initiatives to be successful, state and federal regulatory agencies will need a sufficient level of staff to carry out new and in some cases heightened regulatory requirements. To this end, state and federal governments must provide the necessary financial resources to support regulation and enforcement. A fee-based funding mechanism is one approach to provide these in states where there are neither the resources nor adequate industry contributions to support this function, provided that such fees support the institutional mission of efficient and effective regulation and are not used solely to increase taxes for general budgetary support.
Environmental Footprint Analysis

As discussed in the section entitled Sustainable Strategies and Systems for the Continued Prudent Development of North American Natural Gas and Oil, an environmental footprint (EF) analysis can be a valuable tool for considering the environmental benefits, impacts, and risks associated with each energy source in comparison to the other energy sources that are available. In theory, an EF analysis is an objective, science-based assessment of the potential positive and negative impacts of each energy source. In
Issues on the Horizon: decisions for the regulatory Path Forward

State, federal, and in some cases, regional regulations are in place to govern oil and natural gas production for the purpose of achieving environmental protection. The interaction of these many layers of regulation is complex and generally effective. However, regulation among jurisdictions is uneven and in some cases requires strengthening resources available for staffing, continuous training to keep current with changes in the industry, and enforcement. In certain circumstances, there are federal legislative exemptions or special considerations afforded the natural gas and oil industry that some environmental advocates believe result in material deficiencies in environmental protection, particularly in relation to water and air quality. Others, including many in the natural gas and oil industry and in state governments, maintain that the special classifications under federal law are appropriate and supported by scientific or economic findings, and addressed by state laws. These special considerations exist for many industries. There is a range of views on whether particular outstanding regulatory issues are best addressed through state or federal regulatory action. Many state agencies have unique knowledge and expertise relative to the local geological, hydrological, environmental, and land use setting, and are responsible for regulation and development of private and state natural gas and oil resources, as well as for implementing certain federal laws. Federal agencies have similar responsibilities for federal mineral development where the federal government owns or controls such mineral rights or lands. Some entities believe states are generally more nimble than federal agencies in their ability to adapt to changes in technology and new industry practices. Others believe that only through federal regulation can there be assurance of a reasonably consistent level of environmental and public health protection across the country.
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practice, EF analyses tend to remain in early stages of development, with analyses exhibiting widely varying assumptions and different techniques for measuring impacts that often produce apples-to-oranges comparisons across fuels and energy resources. An EF analysis is often conducted in a manner to consider the environmental impacts across the life cycle of an operation or product. When this is done, a life-cycle assessment (LCA) is typically employed to define the beginning, middle, and end phases or steps to be considered in the EF analysis.2 There are technical issues such as incomplete data and the lack of consensus around quantification of impacts and risks. This latter fact complicates the ability of this potentially important analysis to provide policymakers with useful information to evaluate the relative importance of the different impacts. Moreover, the different resource types for the same fuel may have different impacts, such as with shale gas versus conventional gas. The results of an EF analysis are not intended to be a rationale to avoid mitigating the impacts of any fuel. An EF analysis can be an effective tool for evaluating the relative impacts of each energy source by each type of impacted environmental resource. To illustrate why a standard EF methodology is needed, it is useful to examine existing studies on the subject and their similarities and differences. The fundamental assumptions and organization of any EF analysis strongly influence its quantitative results and the validity of comparisons to other studies. Different studies have different boundaries around the analysis i.e., how far back and forward in the life cycle they go. Results will be very different when comparing the footprint of raw fuels vs. end uses, where the latter takes into account efficiencies of end-use technologies and their impacts. There are many other large and small assumptions that go into arriving at the final estimate of footprint. The body of literature on EF represents an evolving set of related estimates rather than a set of independent analyses. Most EF analyses use previous studies as the sources for their data so that estimates from different studies cannot necessarily be seen as
2 Science Applications International Corporation (SAIC), Life Cycle Assessment: Principles and Practice, EPA/600-R-06-060, prepared for the National Risk Management Research laboratory, Office of Research and Development, U.S. Environmental Protection Agency, May 2006, accessed June 29, 2011, http://www.epa.gov/nrmrl/lcaccess/pdfs/600r06060.pdf.
independent nor can their agreement be taken as evidence for the reliability of the results if they are interdependent. Furthermore, due to the large scope of EF analyses, they face a wide assortment of analytical issues that arise from research in other fields such as geology, biology, health sciences, chemistry, engineering, climate studies, and social science. Adding to the difficulty of comparing the results is the fact that different EF studies have different definitions of what represents an environmental impact and may be estimating quantities whose definitions only partially overlap. A comparison of two such studies serves to illustrate a few of these issues. The Bonneville Power Administration Fish & Wildlife Implementation Plan Final Environmental Impact Statement (BPA study) and The Environmental Cost of Energy prepared by the Applied Energy Studies Foundation (AESF) took different approaches to determining the EF for a range of energy sources. While the former focused on health effects and monetized those effects, the latter analyzed a broader range of environmental impacts and did not assign dollar values. The BPA study assessed a variety of energy sources but did not evaluate a full life cycle, neglecting to include transportation and production impacts. The AESF study addressed a wider range of energy sources considered under a full primary lifecycle assessment, including extraction, processing, transportation, and generation. There were also many methodological differences. Figures 2-1 and 2-2 display some of the results from the two studies on water and land resources. The figures show that the results of the two studies vary widely, for the reasons stated above. Such differences argue for the development of a sound, consistent approach to footprint analysis that is vetted through the various stakeholder groups and would result in a comparable set of estimates for the impacts of the various energy sources. The federal government should support the development of a methodology(ies) for conducting an EF analysis. As sound methodologies are established and vetted, regulators and other policymakers should refine their understanding of the environmental footprint of energy sources, including natural gas and oil, as part of providing a high-quality information base for making decisions about energy choices that reflect the different nature and intensity of impacts. As environmental considerations of energy choices become
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Figure 2-1. Water Consumed to Provide Electricity to 1,000 Average U.S. Households Annually
Figure 2-1. Water Consumed to Provide Electricity to 1,000 Average U.S. Households Annually
6 MILLION GALLONS PER 11,000 MEGAWATT HOURS
BONNEVILLE POWER ADMINISTRATION ENVIRONMENTAL COST OF ENERGY
5,145,900
5
4,290,000
4
3,312,400
3
2,095,000
1
0 16,500
NATURAL GAS
COAL
WIND
Figure 2-2. Area Disturbed to Provide Electricity to 1,000 Average U.S. Households Annually
Figure 2-2. Area Disturbed to Provide Electricity to 1,000 Average U.S. Households Annually
BONNEVILLE POWER ADMINISTRATION ENVIRONMENTAL COST OF ENERGY 21.2
ACRES PER 11,000 MEGAWATT HOURS
20
10
1.77
2.59
2.45
0.3
0.63
NATURAL GAS
COAL
WIND
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more relevant in a carbon-constrained economy, developing better, more complete information about impacts from producing, transporting, and consuming different forms of energy will provide a more robust foundation for public policy decisions that affect the future energy mix of North America. Similarly, such information could be incorporated into analyses used in making investment and purchasing decisions by consumers, producers, and state and federal governments.
through production, plugging of the well, and final reclamation. Industry has implemented new technologies and innovative practices to better control water use, reduce air emissions, and ensure groundwater protection. Additional performance improvements have been developed for hydraulic fracturing, materials management, and overall operations and management. Continued development of advanced technologies and operating practices is critical to future recovery of high potential natural gas and oil resources along with improved environmental performance. Research and development conducted by both industry and government, in such areas as siting and planning, drilling, stimulation, and environmental management to minimize water, air, and land impacts, will make it possible to develop future natural gas and oil supplies
Technology
Improvements in environmental performance have occurred in every phase of natural gas and oil development for both offshore and onshore operations, from construction, drilling, completion and stimulation,
Examples of Industry technological and Environmental Advances

Well Control Methods (such as rotary rigs, mud systems, casing and cementing, and blowout preventers): Designed to stop the uncontrolled releases of oil and gas from wells. Drilling Advances (such as directional/horizontal drilling and multi-well drilling pads, and elimination of open pits through closed loop mud systems): Greatly reduces the number of wells drilled and surface area footprint (and attendant environmental impacts), allows for centralization of facilities, and avoids/minimizes risk to sensitive environments. Deepwater Subsea Production Systems (such as subsea completions with tie back to production platforms): Offer an automated and leakresistant system that significantly reduces the environmental footprint and enables recovery of previously uneconomic reservoirs. Subsea Well Containment: Subsea containment systems are available that can operate in up to 10,000 feet of water and contain up to 60,000 barrels of oil per day. Equipment designed to contain 100,000 barrels of fluid per day will be available by the end of 2012. Remote Monitoring Systems and Downhole Instrumentation: Allow for real-time view of downhole conditions i.e., another set of eyes to review ongoing operations and provide feedback on critical operations. Underground Injection Control Program (e.g., construction of enhanced oil recovery and disposal wells): Protects groundwater and allows subsurface disposal instead of surface disposal. Water Treatment and Reuse Technology: Conserves freshwater, reduces transportation impacts, and decreases discharge volumes. Modern Plugging Methods (such as cement formulation and plugging techniques): Greatly reduces environmental risks from abandoned wells. Remote Operated Vehicles: Enables robotic capabilities in ultra-deepwater operations. Long Distance Transport of Natural Gas (including pipeline technology and compression): Greatly reduces the venting of natural gas as a waste. Pipeline Leak-Detection Systems: Enables increased monitoring capability to determine pipeline integrity and provide for rapid response at the earliest signs of a pipeline leak or failure.
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while protecting the environment. The accompanying text box includes examples of industry technology advancements that have led to better environmental protection. While it is important not to jeopardize this private enterprise system of innovation, sometimes the payoff period for such research is too long to attract private support. Therefore, private investment cannot always be counted on to perform this research, and federal government agencies should also perform important roles in supporting the development of new technology. In other cases, the intellectual property developed by research is better held as a public good rather than being held privately. This can occur when the benefits of the research would accrue to the United States as a whole, yet do not meet the criteria of any individual company to justify the investment such as with methane hydrate extraction technologies. Public research and development investment may also be justified when it improves recovery of federally owned natural gas and oil, producing benefits that accrue directly to the government through the collection of royalties.
that much of the data is not easily shared. Different software packages and data standards have been used over the years, which made it difficult for agencies to receive data from companies and also difficult, if not impossible, to share operational and environmental data. Additional efforts are needed in the area of standardization of data and its communication between entities. This standardization is expected to provide benefits to the public in environmental and health protection, and could also provide industry with cost savings. These cost savings will result from making the data easier to communicate with others and report to regulators, as well as from streamlining regulations, reducing duplicative reporting, and providing means to review and learn lessons from past incidents.
Industry Transparency and Public Education

Earning public trust through excellent environmental performance includes maintaining transparency and informing the public about operations and risks. This information and understanding is critical to achieving and maintaining the publics permission to operate in many parts of North America. Industry needs to clearly explain nonproprietary production practices and environmental, safety, and health impacts. The public should have the information necessary to have a clear understanding of the challenges, risks, and benefits associated with natural gas and oil production. Transparent reporting of comparable and reliable information can provide companies the tangible and intangible benefits of stronger relationships with communities, employees, and public interest groups. This is an essential part of earning public trust and critical to establishing appropriate public policies and regulations. In addition to ensuring public access to important data about environmental and operational performance, public education can take many forms, including information libraries, K-12 curricula, media campaigns, speakers bureaus, websites, and studies of risks in areas of special consideration. One recent example of the natural gas and oil industrys efforts at transparency is found in FracFocus, the hydraulic fracturing chemical registry website. A joint project of the Ground Water Protection Council (GWPC) and the Interstate Oil and Gas
Data Management
Modern computer systems have provided a means for more data to be readily available to operators, regulators, and the public. Use and analysis of these data have provided a means to conduct more complex technical and environmental assessments, which may, in turn, increase regulatory requirements. The increased complexities of new technologies require that operators and regulators have access to and can quickly assess larger and more complex data sets so that they can minimize risk and maximize environmental protection. Widespread access to the Internet has also increased the opportunities for more efficient data sharing in the areas of regulatory reporting, data sharing between partners, and increased public access to operational and compliance information maintained by public agencies. A common issue is that both private and public organizations have not created standard data management processes or common programs across their own enterprises. Non-centralized data limits the ability of users to share information and make more effective use of the information gathered. Historically, many agencies and companies developed their data management systems in relative isolation so 178
Framing Questions
The Operations & Environment Task Group was tasked with answering the following framing questions: 1. What is the evolution of environmental improvements in operating practices and technologies used across the range of resource plays and regional differences? 2. What is the environmental footprint of upstream and midstream natural gas and oil operations, including greenhouse gas emissions, compared to other energy sources? Compact Commission (IOGCC), FracFocus provides information about the chemicals used in the hydraulic fracturing of natural gas and oil wells along with educational materials on hydraulic fracturing, groundwater protection, and regulation. Many natural gas and oil companies participate in FracFocus but not all do so. Increasing the participation in FracFocus to all natural gas and oil companies that engage in hydraulic fracturing, and adding into the system all wells currently in drilling and production, would be important steps in raising the level of industry transparency. 3. What is the environmental and regulatory framework for growth and development of North American natural gas and oil resources? 4. What technological and operational advances are on the horizon to improve efficiency and environmental performance in offshore and onshore operations? 5. What sustainable development principles and practices will enhance and demonstrate North American environmental leadership into the future? unique aspects of offshore safety and environmental management that must be considered to ensure that offshore production is both safe and environmentally responsible. The Key Findings and Policy Recommendations section presents a more complete discussion of the Operations & Environment Task Groups findings and recommendations.
rESourcE PlAY VArIAtIonS And ASSocIAtEd EnVIronMEntAl cHAllEngES

The accumulation of natural gas and oil requires three elements: a hydrocarbon source, a reservoir to store the hydrocarbons, and a trapping mechanism to hold them in place. These three elements exist in a wide range of resource plays throughout North America. Consequently, North American producers operate in diverse geographic regions, characterized by differences in topography/geomorphology, rainfall, and ecosystems, as summarized in Table 2-1. Most natural gas and oil wells incorporate a common set of processes3 that result in a common set of operational and environmental challenges. Despite these similarities, a one-size-fits-all approach to exploration and production would be impossible. Operators face unique or more intense challenges in developing resources of certain types or with certain physical, geographic, or physiographic characteristics. Unique
3 Paul Bommer, A Primer of Oilwell Drilling: A Basic Text of Oil and Gas Drilling, 7th ed. Austin: The University of Texas Continuing Education Petroleum Extension Service, October 2008.
Chapter Organization
This chapter presents discussion and analysis leading to the major findings and recommendations presented above. The Resource Play Variations and Associated Environmental Challenges section describes how variations in natural gas and oil resource types lead to associated variations in environmental impacts and challenges. The History of Innovation in Environmental Stewardship section presents information showing how innovation in technology and practices has improved environmental performance throughout the history of the industry. The History of Natural Gas and Oil Environmental Laws section describes this history as it applies to natural gas and oil development. The Sustainable Strategies and Systems for the Continued Prudent Development of North American Natural Gas and Oil section addresses these topics and how they could be applied into the future. The Offshore Environmental Management section includes the
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Table 2-1. Play Variation by Geographic Distribution

Region Onshore Northeast/Midwest USA/ Canada Southwest/ Midcontinent Western mountain region USA Canada West Coast USA/Canada Offshore Coastal/Shallow Deep, Outer Continental Shelf Arctic <1,000 water depth to coastal marsh >1,000 water depth Open water to ice-covered water Severe hurricane potential Severe hurricane potential Severe weather, ice Wetlands, marine estuaries to marine habitat Marine habitat Open water to ice-covered water Hills and valleys, open flood plains Relatively flat plain/ uplifted plateau Upthrusted mountain ranges and foreland basins Mixed terrain of high mountains and flats Rain and snow prevalent Mainly dry with rainy periods Mainly dry with winter snows Rainy on coast, very dry inland Deciduous forests Open rangeland Alpine Rainy forests near Pacific, desert Topography Rainfall Ecosystem
strategies, technologies, and environmental considerations are required when developing and managing each individual resource play. Table 2-2 summarizes some important operational and environmental concerns inherent in each type of play. Significant geographic and physiographic diversity can be found within a single resource play type, again necessitating varying development strategies, as illustrated in Table 2-3 for current shale plays. Multiple play types may even be located in a single physiographic basin, as in the Uinta-Piceance basin in Utah and Colorado.4 Figure 2-3 presents the play types found in the Uinta-Piceance basin, which include, but are not limited to, coalbed natural gas, shale gas, oil sands and tight oil, oil shale (kerogen), and conventional natural gas and oil. Operational and environmental differences are particularly pronounced between onshore and offshore development, and between conventional and unconventional resource development.5 Accordingly, this section addresses the challenges and potential impacts
associated with development of conventional natural gas and oil resources both onshore and offshore, and then those associated with unconventional resources.
Overview of the Life Cycle of Natural Gas and Oil Exploration and Production
The following brief overview of natural gas and oil exploration and production is a general description that applies to all play types, both onshore and offshore, and provides context for this chapter. y Exploration Performed to establish the presence of hydrocarbon-bearing rocks in an area of interest, exploration typically begins with geologic evaluation to identify underground geologic structures and properties characteristic of hydrocarbon accumulations. Various surveys are employed to assess specific traits of rocks such as: magnetic surveys evaluate magnetic field intensity variations; geochemical surveys look for the presence of naturally migrated hydrocarbons near the surface; gravimetric surveys find variations in the gravity field; and seismic surveys, the most common survey type, evaluate the acoustic properties of the rock. Once a potential oil or natural gas accumulation is identified, an exploration well is drilled to confirm the presence of hydrocarbons and further
4 Charles W. Spencer, Uinta-Piceance Basin Province (020) (n.d.), accessed June 27, 2011, http://certmapper.cr.usgs.gov/ data/noga95/prov20/text/prov20.pdf. 5 U.S. Department of Energy, Environmental Benefits of Advanced Oil and Gas Exploration and Production Technology, DOE-FE-0385, October 1999.
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Table 2-2. Resource Plays Operational and Environmental Challenges

Resource Play Onshore Operational and Environmental Challenges
Conventional: Oil Typical direct impacts can include changes in land-use patterns, habitat fragmentation, aesthetic and noise alterations, extraneous light, atmospheric emissions (GHGs, VOCs, NOx, etc.), soil erosion and sedimentation considerations, introduction of noxious vegetation, surface water quality and quantity changes, waste disposal challenges (drilling fluids, cuttings, muds, produced water), and spills and leakages. Typical indirect impacts can be associated with creation of new access routes that lead to unplanned consequences, social changes resulting from employment opportunities, stress on existing infrastructures, increased traffic, secondary ecological issues such as food and nutrient supply changes, breeding area and migratory route pattern changes, increased vulnerability to predators, and hydrology changes from siltation. All of these potential impacts can be compounded because long-term occupation of sites requires access to facilities resulting in long-term loss of habitat and land use, coupled with long-term effects of vegetation clearance, including erosion, and possible changes to surface hydrology. Unconventional: Oil Sands, Heavy Oil Requires special production operations that can be water and energy intensive. Surface disturbances per production unit are generally larger than conventional oil and require more infrastructure, resulting in greater air emissions. Unconventional: Oil Shale Requires special production operations that can be resource intensive. Potentially extensive surface disturbance required. Both in situ and surface retorting are energy intensive and produce large quantities of GHG emissions. Unconventional: Tight Oil, Shale Oil Requires horizontal wells and hydraulic fracturing to produce the resource. Conventional: Gas The same operational and environmental challenges as associated with conventional oil would be experienced with conventional gas development. Unconventional: Tight Gas Requires special completion techniques to produce gas in economic quantities. Hydraulic fracturing is typically required. Heterogeneity of resource requires unique development, which could affect level of environmental impact. Unconventional: Coalbed Natural Gas Withdrawal of large quantities of freshwater to liberate gas production may be required; to reduce the hydrostatic head, dense well patterns may be needed. Disposal and treatment of produced water create challenges and conflicts when associated with arid western conditions where freshwater can be scarce. Unconventional: Shale Gas High Volume Hydraulic Fracturing (HVHF) of horizontal wells is often required to develop this resource. Water sourcing and produced water disposal, treatment, and reuse from HVHF are a challenge. Development in a range of geographic and urban/rural areas creates socioeconomic challenges and increases demand on local infrastructure, traffic, labor force, education, medical, and other services.
Offshore
Offshore Long-term site selection based upon biological and socioeconomic sensitivities and minimum disturbance. Risk of impact to sensitive species and commercially important species, resource conflicts, and access difficulties. Long-term support and supply base requirement and impacts on local port infrastructure. Drill cuttings, drilling mud, produced water, sewage, sanitary and kitchen wastes, spillages, and leakage must be disposed of appropriately. Emissions from power and processing plants affect air quality. Impact of noise and light from facilities. Offshore Arctic Specific Ice-related environment must be addressed; special consideration for Arctic marine species and disturbance of habitat. Atmospheric emissions from vessel engines and platform equipment are heavily scrutinized by the U.S. EPA. Discharges to ocean limited due to environmental concerns. Bilges, sewage, spillages, waste, and garbage need to be disposed on shore.
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Table 2-3. Shale Plays

Formation
New Albany
Basin
Illinois Basin
Depth, ft*
5002,000
Thickness, ft
50100, 20
Location
KY, IL, IN
Comments
Shallow, produces formation water, small gas production since 1858, minor until horizontal drilling became an option. Produces from 60 main fields; possible control natural fractures related to faulting, folds, and draping, high water levels indicate permeability. Well spacing, 80acres; drinking water depth, 400ft. Classic play shallow, produces formation water, actively developed since 1980s, unique based on depth, water, thin pay zone to develop. Two sets of dominant fractures, no key fields developed, limited production outside of area of natural fractures, the fractures require stimulation for production. Well spacing, 40160 acres; drinking water depth, 300 ft. Most expansive shale play in U.S., several attempts at development, but 2003 first economic well with horizontal drilling and hydraulic fracturing, key to success of play. Lower in relative gas content to other plays, but sheer size makes good play. Well spacing, 40160 acres; drinking water depth, 850 ft. Shale oil Exploration play natural fractures and thin sands are key to production, there is shear failure at high drawdowns, fluid treatment selection important, overpressured. Classic play late 1990s start of play, typically secondary completion in wells targeting other intervals, allows economics to not rely solely on Lewis. Well spacing, 80320 acres; drinking water depth, <4,000 ft. Emerging play
Antrim
Michigan Basin
6002,200
20200, 70120
MI
Marcellus
Appalachian Basin
4,0008,500
<900, 50200
NY, PA, OH, WV
Bakken Mancos
Williston Basin San Juan Basin
8,000 10,000# >18,000** 1,0005,000
ND, MT NM, CO
Lewis
San Juan Basin
>5,000
200300
CO, NM, WY
Baxter * #
Vermillion Basin
Up to 2,500
CO, WY, UT
Ground Water Protection Council (GWPC) and ALL Consulting, Modern Shale Gas Development in the United States: A Primer, prepared for the U.S. Department of Energy, Office of Fossil Energy, National Energy Technology Laboratory, April 2009. EnergyIndustryPhotos.com, The New Albany Shale, Maps and Info (n.d.), accessed April 21, 2011, http://www.energyindustryphotos.com/new_albany_shale.htm. GWPC and ALL Consulting, Modern Shale Gas Development in the United States: A Primer. OilShaleGas.com, Woodford Shale Oil & Natural Gas Field Arkoma Basin Oklahoma (n.d.), accessed April 21, 2011, http://oilshalegas.com/woodfordshale.html. GWPC and ALL Consulting, Modern Shale Gas Development in the United States: A Primer. Montana Board of Oil and Gas Conservation, Online Oil and Natural Gas Database, (n.d.), accessed May 2011, http://www.bogc.dnrc.mt.gov/MBOGCdotNET/frmFilterNavigation.aspx.
** IHS, Inc., Energy Information, Software & Solutions (n.d.), accessed June 27, 2011, http://energy.ihs.com/NR/rdonlyres/345C2AAA-AAE3-435F-B1B0-6E8A883A105A/0/curtisnape08.pdf. Halliburton, The Mancos Shale, presentation (n.d.), accessed April 21, 2011, http://www.halliburton.com/public/solutions/contents/Shale/related_docs/Mancos.pdf. John B. Curtis, Fractured Shale-Gas Systems, AAPG Bulletin 86, no. 11, November 2002, pages 19211938.
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Table 2-3. Shale Plays (continued)

Formation
Haynesville
Basin
AKA Bossier
Depth, ft*
10,500 13,500
Thickness, ft
200270, 200300
Location
LA
Comments
AKA Haynesville/Bossier, still being delineated, potential realized in 2007. Well spacing, 40560 acres; drinking water depth, 400ft. Very hydrosensitive formation, drilling involves minimal water use, and production began in 2005. Classic play most prominent shale gas play in the United States, deep Barnett (>18,000) exploration play. Innovation has played a part in increasing recovery to 20%; however, infill drilling has been key to increases in reserves. Initial completions used 100,0001,000,000 pounds of proppant, very costly and did not work, light sand fracturing introduced in 1998 and has been successful. Using horizontal drilling increased production rates by 2-3 times over vertical wellbores. Well spacing, 80160 acres; drinking water depth, 1,200 ft. Emerging play development began in 2003-2004 via vertical wells, horizontal now being explored, early phases of development, higher than average gas content. Well spacing, 640 acres, drinking water depth, 400 ft. Exploration play
Conasauga
AL, GA
Barnett
Fort Worth and Permian Basins
6,5008,500
100600, 50200##
TX
Woodford
6,000 11,000
120220***
OK, TX
Floyd
Black Warrior Basin Arkoma Basin
9,000
801,000
AL, MS
Fayetteville
1,0007,000
20200
AR, OK
Emerging play exploration began in 2000s, key to success horizontal drilling and hydraulic fracturing, early results from vertical wells mediocre. Well spacing, 80160 acres, drinking water depth, 500 ft. Exploration play
Utica
9,000###
200****
NY, OH, Quebec
## ***
GWPC and ALL Consulting, Modern Shale Gas Development in the United States: A Primer. GWPC and ALL Consulting, Modern Shale Gas Development in the United States: A Primer. John B. Curtis, Fractured Shale-Gas Systems, AAPG Bulletin 86, no. 11, November 2002, pages 19211938. OilShaleGas.com, Woodford Shale Oil & Natural Gas Field Arkoma Basin Oklahoma.
GWPC and ALL Consulting, Modern Shale Gas Development in the United States: A Primer. IHS, Inc., Energy Information, Software & Solutions. OilShaleGas.com, Woodford Shale Oil & Natural Gas Field Arkoma Basin Oklahoma. GWPC and ALL Consulting, Modern Shale Gas Development in the United States: A Primer. ### IHS, Inc., Energy Information, Software & Solutions. **** OilShaleGas.com, Woodford Shale Oil & Natural Gas Field Arkoma Basin Oklahoma. Note: Additional Shale Plays Include: Huron (Ohio Shale, OH, WV, KY), Pearsall-Eagle Ford (Maverick Basin, TX), Pierre (Raton Basin, CO), Gammon (Williston Basin, MT), Collingswood (Michigan), Niobrara (CO, WY), Monterey (CA), McClure (West Coast), Horton Bluff & Lorraine (Eastern Canada), Horn River Muskwa (British Columbia) and Montney (Alberta, Northeast British Columbia).
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FigureFigureGeneralized Resource Areas within the Uinta-PiceanceBasin Showing the Distribution of FossilFossilSourceSourceand Reservoirs 2-3. 2-3. Generalized Resource Areas within the Uinta-Piceance Basin Showing the Distribution of Fuel Fuel Rocks Rocks and Reservoirs
WY UT CO
184
SHALE GAS TIGHT OIL TAR SANDS
0 0 12.5 20 25 40 50 Miles 80 Kilometers
UINTA PICEANCE BASIN
CONVENTIONAL GAS AND OIL
COALBED NATURAL GAS
OIL SHALE KEROGEN
Note: The full extent of all resource areas are not visible as they overlap one another.
Source: Modi ed from U.S. Geological Survey (USGS), Petroleum Systems and Geologic Assessment of Oil and Gas in the Uinta-Piceance Province, Utah and Colorado, USGS Digital Data Series DDS-69-B (2002).
evaluate the reservoir rock. Numerous tests are run to characterize the formation, allowing geologists and engineers to determine whether or not the site is likely to produce oil or natural gas in economic quantities. If the site is determined to be of poor quality, the exploration well is plugged and abandoned and no further action is taken. If the well is successful, the operator will run further appraisals of the area to delineate the extent of the reservoir and type and quantity of oil or natural gas. y Siting During site selection, operators identify optimal drilling locations, formulate a land control strategy, and design the infrastructure to rapidly bring wells into production. Available drilling technologies may also be a factor in site selection and planning. Site selection involves geological characterization; habitat evaluations; storm water management; road and feeder pipeline development; construction; and reclamation planning, including topsoil conservation and revegetation. Companies take actions to adhere to federal, state, tribal, and local regulatory and permitting requirements addressing environmental, archaeological, development, and surface use issues. Regulations and enforcement can vary widely among different agencies. These rules require companies to plan for the entire life of the well, unexpected events, safety, environmental protection, and final reclamation once the production cycle is complete. Public outreach efforts may also be initiated during the siting phase. y Planning and Design The site is then prepared and a well pad constructed to support the variety of heavy equipment needed during drilling, completion, and production operations. Alocation that is not part of an existing gas field or large development design may require construction of additional facilities. The current design paradigm includes a flexible drilling site that can accommodate multiple wellheads. Multi-well drilling pad locations have a slightly larger footprint than single-well pad sites, typically ranging from one to five acres or larger. Multi-well pads on a local and regional scale can comparatively reduce environmental impacts, particularly habitat fragmentation and land use coupled impacts such as erosion and sedimentation. Site preparation includes clearing, grubbing, and leveling an area and preparing the surface to support movement of heavy equipment. The site preparation usually includes spreading a uniform layer
of crushed stone over geotextile fabric constructing an access road, establishing erosion and sediment control structures, and installing surface impoundments for retention of drilling fluid and possibly freshwater. The potential environmental impacts of site development include erosion and sedimentation, habitat fragmentation, noise, introduction of invasive vegetation, increased traffic, direct disturbance of sensitive resources, and dust. Most impacts can be mitigated by locating a site in lesssensitive areas and with proper site design. y Drilling Drilling is conducted to reach natural gas and oil reservoirs, creating a pathway for the extraction of hydrocarbons. Optimization of time is essential in this highly coordinated and expensive process, with most rigs running 24 hours a day. The time needed to drill a well is highly variable, ranging from days for shallow coalbed natural gas (CBNG) wells to months for more complicated and deeper exploratory wells in a new field. A well is drilled by a rotating bit that cuts through rock. Fluid specifically designed for each well is circulated through the drill pipe and bit and back up the space between the drill pipe and the wellbore to condition the hole, manage pressure, keep the bit cool, and move the drill cuttings to the surface. This fluid can be compressed air or water, but most often is drilling mud, which is comprised of water, clays, and chemicals. As drilling proceeds, lengths of pipe are added onto the drill string. Surface casing is run into the wellbore to isolate the drilling process from any shallow aquifer zones once a predetermined depth is reached. Depending on the geologic conditions, one or multiple strings of intermediate casing may be run to isolate shallow hydrocarbons and to protect shallower formations from deeper pressures. Drilling continues through the surface and possibly intermediate casing until the total depth of the well is reached. Each string of casing is cemented in place and the integrity evaluated to protect the groundwater and formation. Liquid and solid materials and waste brought to the surface during drilling are disposed of by a variety of permitted processes that are chosen to meet the needs of individual wellconstruction projects. Depending on data needs and regulatory requirements, open-hole well logs or other measurements may be run. At this point, production casing or liner and cement are run in the wellbore or, depending on the completion plan, the
185
portion of the wellbore containing the producing formation may be left open. The integrity of the casing and cement is essential to avoid possible groundwater contamination. Figure 2-4 is a schematic of a completed well showing the casing and tubing strings and cement. After installation, wellbores are evaluated and if everything is intact and effectively working, a collection of valves, gauges, fittings, spools, and chokes (a Christmas tree) is placed on top of the well to control the flow of formation fluids, isolating the well while still allowing access for completion and maintenance. y Completion Once a well has been drilled and tested (logged, cored, and pressure data), the target reservoir rocks porosity and permeability are examined to determine whether the well will be
completed or plugged. If the potential flow of hydrocarbons is low, the well may not justify the cost of completion. In these cases, the well is plugged with cement in several places and abandoned. If test information indicates a well will be commercially productive, it is completed by preparing the bottom of the hole as necessary and running the tubing or other equipment into the wellbore. In most formations, stimulation is necessary to make a connection between the formation and the wellbore to enable the flow of oil or gas. During stimulation, the casing at the depth of the reservoir rock is perforated, if necessary, and the rock is either hydraulically fractured, acidized, enhanced, or otherwise stimulated to increase the permeability. Hydraulic fracturing is the practice of injecting water, chemicals, and sand into a
Figure 2-4. Example of Wellbore Schematic
186
wellbore for the purpose of fracturing the formation to create the permeability necessary for movement of natural gas and oil in the formation to the wellbore. In initial (primary) production, the natural pressure of the reservoir is usually enough to drive liquid and gas hydrocarbons to the surface. However, in some types of reservoirs, this pressure drops over time and additional lift is required. A pump jack or gas lift system may be installed on a well to provide artificial lift. In some cases, reservoir pressure is enhanced with the injection of gas, water, or steam directly into the reservoir to increase hydrocarbon flow into the wellbore. The reservoir injection process may require additional wells. Enhanced oil recovery and secondary recovery are important components in increasing potential production from oil-bearing formations. y Production and Delivery Well products are often a complex mixture of liquid hydrocarbons, gas, water, and solids. Once well products reach the surface, field facilities gather and separate the mixture, removing and disposing of or recycling constituents that are not saleable. The hydrocarbons are then transported by pipeline to end users. Purchasers have contract standards for the natural gas and oil accepted, often called pipeline quality. For example, oil purchasers typically limit the amount of basic sediment and water to less than 1%. Gas purchasers set similar limits on water, water vapor, hydrogen sulfide, carbon dioxide, and British thermal unit (Btu) content. Throughout its producing life, a well is continually monitored and maintained to ensure that its integrity is maintained and its production is optimized. Interim reclamation also takes place throughout the life of an operation. For example, when a portion of the pad can be reclaimed following drilling and completion, reseeding can be initiated to start the process towards complete mitigation. y Reclamation Once a well is no longer economic, after years or decades of production, it is plugged and abandoned, which involves filling the well casing with cement and removing the wellhead, pump jacks, tanks, pipes, and other location facilities and equipment. Federal land and state natural gas and oil agencies specify the time frame and methods for plugging the well, reclaiming the soil, and completing other environmental and safety
protections. Reclamation does not necessarily require full ecological restoration, but focuses on creating short-term stability and restoring the visual and hydrological potential to allow the site to naturally return to its original state or serve a future intended use.
Developing Onshore Conventional Natural Gas and Oil Resources

Conventional oil is accessed by what could be termed standard well extraction methods. Typically, conventional oil wells produce from a pressure-driven system, meaning oil flows from the reservoir to the wellbore and to the surface based on a pressure difference between the reservoir rock and the wellbore. Over time, the well may require assistance in lifting the oil from the reservoir to the surface, via pumps, secondary recovery methods (e.g., waterflood), and/or enhanced oil recovery methods (e.g., thermal, miscible, or chemical means). Primary production from a conventional oil well may only average 10% of the original oil in place; with the use of enhanced oil recovery, recovery may only reach 3060% original oil in place. Conventional natural gas deposits, similar to conventional oil, originate from proximal organic-rich source beds, such as shale. The gases migrate into either structural or stratigraphic traps, which are sealed by low-permeability shale formations, mudstones, or salt. The gas remains trapped in these discrete accumulations of sandstone or carbonate reservoirs, both of which have interconnected pore networks that allow gas flow to the wellbore. Due to their ease of access and high porosity and permeability, conventional gas resources require a low number of wells to economically access the resource, which is often held in small pockets within the stratigraphy. Conventional oil has been produced from a wide geographic area across the country. Characterized as a more mature resource development, conventional oil currently accounts for only 30% of the existing North American reserves. Although some conventional oil wells have gone into abandonment and cleanup, many of the fields are becoming prolific again via unconventional drilling techniques. Figure 2-5 outlines conventional natural gas and oil basins that have been developed in the lower-48 states of the United States.
187
Figure 2-5. Major Conventional Natural Gas and Oil Basins in the Lower-48 States
Figure 2-5. Major Conventional Natural Gas and Oil Basins in the Lower-48 States
188
MONTANA THRUST BELT BULL MTNS WILLISTON POWDER RIVER SHIRLY HANNA LARAMIE MICHIGAN APPALACHIAN SW MONTANA WIND RIVER WYOMING THRUST GREATER BELT GREEN RIVER UINTAPICEANCE DENVER FOREST CITY CHEROKEE ANADARKO ARKOMA MISSISSIPPI BLACK WARRIOR PARADOX BLACK MESA SALTON TROUGH SAN JUAN ILLINOIS BIG HORN NORTH CENTRAL MONTANA PERMIAN BEND ARCH-FORT WORTH GULF COAST COASTAL
WESTERN OREGON WASHINGTON
NORTHERN COASTAL
SACRAMENTO
CENTRAL COASTAL
SAN JOAQUIN
SANTA MARIA
VENTURA
LOS ANGELES
CONVENTIONAL GAS AND OIL BASINS
Environmental challenges for onshore conventional natural gas and oil development include potential impacts to surface water, groundwater, air quality, land, public health, wildlife and habitat, and community character and quality of life that will vary depending on local conditions. y Wildlife Potential impacts to wildlife are attributable primarily to construction of roads and pads through habitat loss and habitat fragmentation. Migratory or reproductive behavior may be disturbed due to noise and vehicle traffic. Improperly managed surface impoundments can result in injury or death for terrestrial wildlife and birds, especially migratory waterfowl. In addition, the movement of equipment and materials creates the risk of introducing invasive species from one area to another. y Surface Water The potential for impacts to surface water primarily results from storm water runoff or spills. During construction, storm water runoff must be managed to prevent erosion of roads and slopes of well pads. Such soil erosion, if allowed to reach streams or lakes, can adversely affect surface water quality and may impact aquatic wildlife. In addition, if pads are not properly constructed, storm water runoff can wash lubricants and other chemicals from machinery or surface stains and transport these chemicals to surrounding soils or streams. Potential impacts from spills can result from produced water, fuels, or other chemicals that may be temporarily stored on site. If such spills are not contained on the well pad, they may reach surface water bodies and affect both water quality and aquatic life. y Groundwater The potential for groundwater impacts exists during drilling and produced water management as well as after plugging and abandonment. During drilling, proper casing and cementing is required to ensure that groundwater aquifers are protected. If produced water is injected into an underground injection control (UIC) well for secondary recovery or disposal, wells must be properly constructed and cemented to ensure that injected fluids do not contaminate underground sources of drinking water. Groundwater impacts also can result from improper disposal of wastes. In addition, wells must be properly plugged to ensure that the plug is not degraded by subsurface chemical and pressure conditions. Improperly plugged wells can allow oil, gas, or saltwater to migrate into groundwater aquifers over time.
y Air Quality The potential for air quality impacts comes primarily from engine emissions, dust, and methane emissions. Engine emissions include construction equipment, transport trucks, personal vehicles, drilling rigs, and compressor engines. Such emissions can contribute both regulated pollutants and greenhouse gases. Dust can be generated by truck and personal vehicle traffic. In addition, methane can be released by flaring or venting and may also escape through leaks in piping or equipment. Each of these challenges can be magnified depending on site-specific geologic, geographic, climatic, or other environmental factors. For example, the potential for erosion is greater in areas with steep slopes or erosive soils. In addition, sensitive or extreme environments, such as wetlands, deserts, and arctic regions, can be susceptible to impacts from relatively small disruptions and may be very slow to recover from adverse impacts. Furthermore, threatened and endangered species are more likely to be encountered in such areas.
Developing Offshore Conventional Natural Gas and Oil Resources

Offshore development is a major source of natural gas and oil to North America. Typically, offshore resources must be well proven and capable of producing greater volumes per well to justify the added cost of their development relative to onshore resources. The reservoirs themselves usually are of a conventional nature. The offshore environment presents extreme variations in physical conditions. From potential hurricane conditions on the East and West Coasts and in the Gulf of Mexico to the rigors of the Arctic North, these conditions demand special considerations when planning for development, timing, and safety. Managing subsea operations and maintaining equipment in this environment also adds to the development and operational complexity. Operating in a water environment eliminates or minimizes many of the challenges associated with soil and habitat disturbance that affect onshore development; yet offshore production poses a number of unique environmental challenges. Seismic noise generated by offshore natural gas and oil exploration activities is recognized as a concern for whale populations and other marine life, including fish.
189
Other considerations germane to offshore operations include special health and safety precautions; physical and other logistical constraints affecting the offshore management of drilling fluids, cuttings, and wastewater; noise and air emissions generated from the drilling equipment and support vessels and aircraft; industrial or solid waste including paint, spent solvents, and packing materials; subsea pipeline integrity; harmful aquatic organisms introduced from vessels traveling from other geographic regions; decommissioning offshore platforms; and ice-related environmental adaptations in arctic environments. Properly trained personnel whose knowledge is continually assessed through regular drills and exercises are the first line of defense in detecting spills or other problems. Quickly detecting and responding to spills is one of the biggest challenges for offshore production, given the remote location of these facilities and the fact that drilling is occurring under water and out of human sight. Detecting spills or other problems also depends on indirect indications provided by instruments, gauges, or sensors. Once a problem is detected, identifying its cause and the most effective response also depends on this equipment, coupled with visual inspection by divers or by remotely operated vehicles. After corrective action, any material or personnel not already on the rig must be transported from shore via helicopter or ship. The high volume of production from offshore wells means that large quantities of hydrocarbons can be released in a relatively short time, affecting aquatic, terrestrial, and avian wildlife. Stationary and bottom-dwelling aquatic organisms can be especially vulnerable. Terrestrial wildlife can be affected when oil is washed ashore, and birds can be affected both by oil that is washed ashore and by oil floating in the sea. Mitigating harmful impacts requires that spill response capabilities are in place and can be rapidly deployed. In arctic environments, periods of prolonged darkness, subzero temperature, and the presence of ice requires that response equipment and strategies are adequately developed to be effective under these challenging conditions.
ventional play types, which are nearly all onshore, offer high resource potential and can pose specific environmental challenges due to the technologies required to produce them. y Classes of unconventional oil include heavy oil, such as bitumen found in oil sands; oil shale or kerogen, which must be heated to transform it into a hydrocarbon; and tight oil, which may be conventional in form, but is produced from low permeability formations using unconventional methods. y Unconventional gas resources, sometimes called continuous gas reservoirs, include shale gas, tight gas, and CBNG. These resources typically lack the matrix permeability that is characteristic of conventional accumulations, connecting the pores of the rock together. Since this lack of permeability greatly reduces the ability for gas to flow, production requires induced fracturing or permeability. Recent advances in stimulation techniques, such as hydraulic fracturing, have improved the economics of these reservoirs, enabling them to become key resource plays in North America.
Oil Sands and Heavy Oil

Oil sands (e.g., extra heavy oil, bituminous sands) are a type of bitumen deposit. The sands are naturally occurring mixtures of sand, clay, water, and an extremely dense and viscous form of petroleum called bitumen. Oil sand reserves have only recently been considered part of the worlds oil reserves, as higher oil prices and new technology enable them to be profitably extracted and upgraded to usable products. Found in many countries throughout the world, oil sands exist in greatest quantities in Canada and Venezuela. Currently, the Western Canada Sedimentary Basin in northern Alberta is the only producer of synthetic crude oil from bitumen deposits. The main deposits are located in three areas in Alberta: Athabasca, Peace River, and Cold Lake. Heavy crude oil feedstock needs pre-processing before it is fit for conventional refineries. This upgrading adds to the production cost and environmental considerations. In addition, the production of oil sands entails substantially greater water consumption than conventional methods. Conventional oil production, on average, uses from 0.1 to 0.3 barrels of water per barrel of oil produced. Unconventional oil supply water use ranges from 0.6 to 4 barrels of water
Developing Unconventional Natural Gas and Oil Resources

Unconventional resources are so termed because they require additional techniques to produce beyond those necessary for conventional resources. Uncon190
per barrel of oil produced.6 In some cases, fresh water is required for unconventional extraction; however non-potable water sources are also used where possible. For example, in steam-assisted gravity drainage (SAGD) operations in the Alberta oil sands, the industry uses saline, or non-drinkable, water from deep underground formations, which has allowed the industry to reduce the amount of net water for operations to 0.6 to 0.9 barrels per barrel of bitumen produced.7 Furthermore, due to extensive recycling of process water by oil sands producers, the average amount of fresh water used per barrel of bitumen produced is lower: 0.39 barrels for SAGD. Also, the amount of fresh water consumed to produce a barrel of bitumen has steadily declined over the last 25 years and is much lower than producing a barrel of bitumen from surface mining operations (2.5 barrels of water). However, because the void left by the extracted bitumen in the underground formations is filled by water, the final ratio of water used to oil produced for in situ operations is closer to 1:1.8 Instead of being produced by wells, oil sands are sometimes harvested by surface mining and separating the bitumen from the inorganic material at centralized surface facilities. Surface mining can create many of the same challenges faced by surface coal mines, including large-scale surface disturbance, changes to surface contours and surface water drainage, and reclamation. Mining also can disrupt surface water flows, remove portions of formations that contain usable groundwater, and potentially affect aquifers that occur below the producing zone. In addition, because the bitumen is separated from the sand by hot water, the process uses large volumes of water and results in large volumes of processed water that is frequently stored in surface ponds while awaiting treatment and disposal. There are concerns that these
6 Energy-Water Nexus Committee, Energy Demands on Water Resources Report to Congress on the Interdependency of Energy and Water, Department of Energy, Sandia National Laboratory, December 2006. 7 Donahue, William, In Situ Oil Sands get ready for massive water demands in northern and central Alberta, Water Matters, Table 1 Annual Water Use in Situ Oil Sands Operations in Alberta, August 2010. 8 Griffiths, M., A. Taylor, and D. Woynillowicz. Troubled Waters, Troubling Trends: Technology and Policy Options to Reduce Water Use in Oil and Oil Sands Development in Alberta, Pembina Institute for Appropriate Development, Table 3-1, 2006.
ponds could result in surface or groundwater contamination and in adverse impacts to wildlife, especially birds, if not properly managed.9 Another production method for oil sands is SAGD, a process that, again, requires substantially more water than conventional production. Combusting fuels to heat water for steam injection can also result in higher air emissions. In addition, mobilizing the bitumen in the subsurface can create concerns about the potential impacts to any aquifers that may occur below the production zone.10
Oil Shale
Oil shale is a fine-grained sedimentary rock containing organic matter that yields substantial amounts of oil and combustible gas upon destructive distillation. Destructive distillation (i.e., retorting) uses heat to decompose the organic matter in the shale, producing hydrocarbon liquids and gases. This need for additional thermochemical decomposition, or pyrolysis, is the main difference between oil sands and oil shale; oil sands already have the product hydrocarbons, whereas oil shale yields kerogen that must be cooked to make the product hydrocarbons. The economic potential of an oil shale resource is largely determined by the price of petroleum and the depth of the deposit; if it is near enough to surface, it can be developed via open pit or conventional mining or by in situ methods. Additional factors include transportation access, workforce availability, and the chemical characteristics of the geology. Upon retorting, the number of gallons per ton of rock that can be generated also largely influences the economic viability of the play. Oil shale resources in North America are highly variable in composition and much of the supply remains to be further evaluated. In Canada, 19 deposits have been discovered, with the greatest potential coming from the Albert Formation in New Brunswick. Additional deposits of interest in Canada include the Devonian Kettle Point Formation and Ordovician Collingwood Shale located in southern Ontario, and the Carboniferous oil shales in the Grinnell
9 National Energy Technology Laboratory (NETL), Unconventional Oil Resources Annual Report Fiscal Year 2004, November 3, 2004. 10 NETL, Unconventional Oil Resources Annual Report Fiscal Year 2004.
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Peninsula in the Canadian Arctic Archipelago. Oil shales in the United States are found throughout the East between formations known as Devonian through Mississippian black shales and in Pennsylvanian aged shales in association with coal. In the West, the Green River Formation is found in the U.S. Rocky Mountain region. Other deposits exist throughout the West and Alaska; however, limited research has been conducted on these areas. The main potentially productive area for oil shale is the Green River Formation near the common borders of Wyoming, Utah, and Colorado, which contains about half of the world reserves. The environmental challenges associated with oil shale development using surface mining, coupled with surface retorting, are similar to those discussed above for oil sands and heavy oil. However, in situ retorting, which is expected to be more widely used in the future, has different environmental challenges. The in situ conversion process developed by Shell involves placing electrical heaters in deep vertical holes drilled through a section of the underground oil shale. The portion of oil shale penetrated is heated over a two- to three-year period, until a temperature of 650700 degrees Fahrenheit is reached, at which point the oil shale releases the liquid hydrocarbon. The released hydrocarbon product is collected in production wells located within the heated zone.11 In situ retorting of deep shale oils requires the development of a dense network of roads, pipelines, well pads, and processing facilities. The surface disturbance associated with this development is envisioned to be greater than the disturbance associated with conventional oil or gas fields, to which in situ processing can be compared. However, the technical feasibility of the concept centers on solving two major environmental issues: controlling groundwater during production and preventing subsurface environmental contamination, including groundwater impacts.12
11 Bureau of Land Management, Oil Shale and Tar Sands Programmatic Environmental Impact Statement, (2008), accessed June 2011, http://ostseis.anl.gov/guide/oilshale/. 12 James T. Bartis, T. LaTourrette, L. Dixon, D. J. Peterson, and G. Cecchine (RAND Corporation), Oil Shale Development in the United States: Prospects and Policy Issues, MG-414-NETL, prepared for the National Energy Technology Laboratory, U.S. Department of Energy, 2005, accessed June 27, 2011, http:// www.rand.org/pubs/monographs/2005/RAND_MG414.pdf.
Both mining and in situ conversion process recovery, coupled with processing activities for oil shale, involve a variety of environmental challenges, such as GHG emissions, disturbance of mined land, and potential impacts to wildlife, air, and water quality. The development of a commercial oil shale industry in the United States would also have social and economic challenges for local and regional communities as activity increases and workers move into the area. Of singular concern would be development in the arid western United States because a large amount of water is required for oil shale processing.
Tight Oil, Shale Oil

Tight oil or shale oil (not to be confused with oil shale) fields typically have some conventional oil resource play characteristics and produce light crude. However, they are unconventional in the sense that porosity and permeability are too low to produce the oil without stimulation. Two examples of successful tight oil fields are the Bakken in North Dakota and Montana, and the Eagle Ford in South Texas. Oil companies discovered these fields decades ago, but only with recent advances in horizontal drilling and hydraulic fracturing technologies have they become economic to drill and produce. Extracting oil from shale uses the same process as extracting gas from shale: injecting large quantities of water, sand, and chemicals deep underground at high pressure to create fractures that allow the oil flow. The potential environmental impacts associated with hydraulic fracturing practices associated with shale are discussed in the following shale gas section.
Shale Gas
Shale gas is produced from low permeability shale formations that are both the reservoir and the source of the gas. As discussed below, tight gas is also sourced from low permeability formations, but unlike shale gas, the methane is not generated by the source rock. Coalbed natural gas is generated by its source rock through either biogenic or thermogenic reactions, whereas shale gas is generated only by thermogenic processes. Subtle trapping mechanisms typically hold the gas in the shale, allowing large areas of shale to be gas saturated. The potential for shale gas production in a reservoir is determined in part by the amount of gas generated by the shale, retention of this gas, presence of
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fractures, and the mechanical properties of the rock. The storage of the gas in the shale can greatly affect the speed and efficiency of production. The percentage of gas recovered by current production methods in shale gas reservoirs is low. Shale gas is one of the most rapidly expanding play types in onshore North America. This rock was formerly seen as only a source of natural gas and a seal for conventional reservoirs, but, with advances in drilling and completion technology, shale gas plays are becoming economically viable. As shown in Figure 2-6, North American shale basins are widespread across the continent. Currently, the most active shale plays include the Barnett, Haynesville/ Bossier, Antrim, Fayetteville, Marcellus, and New Albany in the lower-48 states. Significant variations across these areas present operational challenges that must be addressed through play-specific strategies, with exploration and development approaches suited to the unique characteristics of each reservoir. Shale basins are source rocks and the development of horizontal drilling coupled with hydraulic fracturing has made the development of these resources viable. Advances in horizontal well drilling and hydraulic fracturing have been instrumental in spurring the production of shale gas. Horizontal drilling within the formation allows more exposure of the formation to the wellbore than a vertical well. This enables production with fewer wells overall, which lessens associated environmental impacts. Use of multi-well drilling pads further reduces the environmental footprint and economic costs. The use of horizontal wells for shale gas production can reduce the wildlife and other surface use related challenges associated with conventional oil and gas production. Because multiple wells are frequently drilled from a single pad, and because each well is so productive, the amount of infrastructure and associated disturbance per well and per unit of energy produced can be reduced by as much as 90%. Whether shale gas wells are drilled vertically only or with horizontal lengths in the formation, most are hydraulically fractured to stimulate production.13 (For more information on hydraulic fracturing, see the Hydraulic Fracturing section later in this chapter.) Given the variability seen in the shale formations, no
13 Ground Water Protection Council and ALL Consulting, Modern Shale Gas Development in the United States: A Primer, prepared for the U.S. Department of Energy, Office of Fossil Energy, National Energy Technology Laboratory, April 2009.
single technique for injection has worked universally. Numerous techniques have been applied in the Appalachian Basin alone, including carbon dioxide, basic fluid and chemical mix, foam nitrogen and carbon dioxide, and just water. Horizontal wells require large volumes of fluids to fracture, introducing a number of environmental challenges. Use of freshwater has raised questions about the potential impacts of surface water and groundwater withdrawals on other users and on aquatic life. Produced water from shale gas wells has posed additional challenges because some production areas lack UIC wells with sufficient capacity to receive the volume of water generated. Where produced water has been treated and discharged into surface water bodies, questions have been raised about the potential impacts to the receiving stream. Chemicals needed for fracturing fluids also pose challenges regarding safe transportation and storage to prevent impacts to drinking water that might result from spills. The potential for residual chemicals in the produced water exacerbates the challenges associated with its management. Concerns about the chemicals used in hydraulic fracturing have led to repeated calls for public disclosure of this information. While some states have added rules requiring chemical disclosure for hydraulic fracturing, the requirements to date are not widespread and are not consistent. In addition, in order for such disclosures to be useful, the information must be readily available. To address the concern about chemical use and to make the information easily accessible over the Internet, industry has teamed with the Ground Water Protection Council and the Interstate Oil and Gas Compact Commission to create a voluntary disclosure and information website called FracFocus. The rapid expansion of shale gas development has brought natural gas activity to regions that have not recently experienced widespread development. The introduction of these activities has brought changes in land use to both urban and rural areas. Along with the development have come changes in traffic, noise, and the landscape. In addition to provoking concerns about health and safety, these changes in local areas have drawn attention to shale gas development and the environmental challenges associated with it. While not unique to shale gas production, there have been some widely publicized instances of water wells being contaminated by methane. This
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Figure 2-6. North American Shale Gas Basins
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COLORADO GROUP CODY GAMMON MOWRY ANTRIM NIOBRARA NEW ALBANY UTICA DEVONIAN OHIO MARCELLUS HILLIARD BAXTER MANCOS COLLINGWOOD BAKKEN HORTON BLUFF MANCOS HERMOSA LEWIS PIERRE WOODFORD BARNETT WOODFORD BEND BARNETT EAGLE FORD HAYNESVILLE WOODFORD/ CANEY FLOYD NEAL EXCELLO MULKY FAYETTEVILLE CHATTANOOGA CONASAUGA
HORN RIVER
MONTNEY
SHALE GAS BASINS
contamination has not been associated with fractures created by hydraulic fracturing, but can occur during drilling when shallow geologic zones that contain some natural gas are encountered. Drilling through these zones can cause the gas to migrate to drinking water aquifers and into domestic wells. Industry continues to develop and apply drilling and cementing strategies to further minimize the occurrence of gas migration. As with conventional gas production, emissions of criteria pollutants, hazardous air pollutants, and GHG emissions from combustion, leaks, or other fugitive emissions are associated with various points in the shale gas development life cycle. In particular, concerns about methane emissions from shale gas wells and chemical emissions from produced water have been raised as concerns for climate change and human health.
Coalbed Natural Gas

Natural gas is created naturally in coal formations through one of two distinct pathways: a bacterial (or biogenic) pathway, with anaerobic bacteria reducing carbon dioxide to form methane at low temperatures, or a thermogenic pathway, where the natural heat and pressure within the earth convert organic matter from coal into gas. Under the biogenic process, very shallow accumulations can occur, with maximum depths of 4,000 feet, and the gas is composed mostly of methane with some carbon dioxide and nitrogen. Thermogenic CBNG is formed deeper in the earth, thousands of feet below the surface, and contains methane and heavier hydrocarbons. It may also contain hydrogen sulfide. Thermogenic gas can migrate into shallower coalbeds, adding to the self-sourced gas stored there. The shallow coalbeds where CBNG occurs are completely permeated by water, the pressure of which holds the gas in the reservoir, adsorbed onto the grain surfaces of the coal or as a free phase in the water. In order to produce the gas, the water must be removed, reducing the pressure and allowing the gas to move within the coal matrix to the wellbore. Production of water dominates shallow CBNG wells until the pressure in the coal is reduced below saturation, allowing gas to readily move. At this point, gas production begins and water declines, a process that typically takes several months. Understanding this driver for production has been essential in the successful development of CBNG plays. The need for safe and efficient wastewater disposal is a significant environmental challenge for producing CBNG. Although the most prolific CBNG basins are located in the western United States (see Figure 2-8), the Appalachian Basin, Illinois Basin, and some areas of Alaska and Canada also have notable accumulations. CBNG production generally is accomplished by tightly spaced vertical wells. Several completion technologies have been evaluated including open hole cavity completion, open hole completion, and (most common) cased hole single- or multi-seam completion. Cased hole single- or multi-seam completions may involve a form of hydraulic fracturing. Unlike hydraulic fracturing in tight gas reservoirs, no proppants are used in CBNG production. Instead, water is injected into the coal, a process that may result in fracturing of the coal, but predominantly acts to flush out the coal grains, flossing existing fissures to allow the gas to flow to the wellbore.
Tight Gas
While tight gas is produced from conventional reservoir rock types such as sandstone and (less often) carbonates, it is considered an unconventional resource because the very low porosity of the reservoirs necessitates special completions techniques to stimulate production. Reservoirs commonly lack a water contact, and can range from a single reservoir that is laterally extensive (tens of thousands of acres) to stacked reservoirs thousands of feet thick. Stimulation techniques often involve hydraulic fracturing. Tight-gas drilling programs are under way in the Appalachian Basin, Rocky Mountain basins into Canada, and eastern and southern Texas. Figure 2-7 presents the tight gas basins in the lower-48 states. Different drilling and completion techniques must be used in different areas to respond to the heterogeneity of tight gas accumulations in both geology and surface environmental setting. The appropriate wellbore design allows optimum contact with the producing formation, while avoiding infill drilling and minimizing footprint. Environmental challenges for tight gas are similar to those associated with shale gas with regards to hydraulic fracturing. Other more common challenges associated with surface disturbances and waste disposal are similar to conventional natural gas and oil practices.
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Figure 2-7. Tight Gas Basins in the Lower-48 States
Figure 2-7. Tight Gas Basins in the Lower-48 States
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COLUMBIA CRAZY MOUNTAINS BIGHORN WIND RIVER POWDER RIVER HANNA DENVER MICHIGAN MIDCONTINENT RIFT GREATER GREEN RIVER UINTA PICEANCE SAN JUAN SALTON TROUGH ESPANOLA ALBUQUERQUE PERMIAN FORT WORTH MAVERICK GULF COAST RATON ANADARKO SOUTH PARK SAN LUIS APPALACHIAN ARKOMA BLACK WARRIOR EAST TEXAS & NORTH LOUISIANA
WILLIAMETTE PUGET SOUND TROUGH
SNAKE RIVER PLAIN
MODOC
GREAT BASIN
SACRAMENTO SAN JOAQUIN
TIGHT GAS BASINS
Source: Energy Information Administration, last updated April 2009.
Figure 2-8. Major Coalbed Natural Gas (CBNG) Basins in the Lower-48 States
Figure 2-8. Major Coalbed Natural Gas (CBNG) Basins in the Lower-48 States
NORTH CENTRAL MONTANA TERTIARY LAKE BEDS BIGHORN POWDER RIVER WIND RIVER DENVER PICEANCE RATON ARKOMA CHEROKEE FOREST CITY ILLINOIS MICHIGAN GREATER GREEN RIVER UINTA WILLISTON
SOUTHWESTERN UTAH
APPALACHIAN
BLACK MESA SAN JUAN
BLACK WARRIOR GULF COAST
SOUTHWESTERN MAVERICK
CBNG BASINS
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CBNG produced water varies in the amount of salts and metals in some cases, depending on the geology and hydrology of the coal formation and surrounding rocks. Both the quality and quantity of the produced water have a large inuence on the way in which the water is managed. For example, the large amounts of water produced from the relatively shallow coalbeds in the Powder River basin of Montana and Wyoming contain fairly low levels of salt that is easily treated to meet state standards prior to being reused or released. If this water is released into local rivers and streams for disposal, the concerns focus on the assimilative capacity of the receiving body so that downstream irrigation is not adversely affected. The produced water is sought after by ranchers and farmers for beneficial uses such as livestock watering and irrigation, but again, the quality has to meet appropriate standards. Some produced water meets quality standards for beneficial reuse or release without having to be treated. The opposite is true of the deep coal formation of Colorado, New Mexico, and Utah where very saline water is produced but only in small quantities as compared to the Powder River basin coals. However, generally in these locations, suitable geologic formations for underground injection are readily available and, therefore, much of the produced water is injected into deep formations for permanent disposal. As this example illustrates, many factors influence the treatment or disposal options chosen by operators. Some of the factors include quality and quantity of produced water, availability of suitable geology for injection, exiting infrastructure, cost of treatment and transport, the waters age in the coalbed and possible connections to other groundwater sources, and state regulatory requirements.14
allowed production of new and more challenging resources while at the same time improving environmental protection. y Moving forward, we can expect to see technology and operational advancements that will allow production of even more challenging resources while continuing to improve environmental performance. The modern history of natural gas and oil began in 1858 when Colonel Drake applied saltwater boring techniques to drill for rock oil in Titusville, Pennsylvania. He unknowingly ushered in a new era that would see the escalation of capitalism and modern business, the linking of national strategies and global politics, and the emergence of a society dominated by hydrocarbons and the conveniences that define 21st-century man. The history of natural gas and oil development encompasses geographical advances across North America and the world; an enhanced knowledge of geology and ecology; breakthroughs in chemical, mechanical, and environmental engineering; and countless conveniences that utilized the energy density of hydrocarbons to deliver energy and products to enhance the quality of life for Americans. Today, the history of natural gas and oil across the United States has come full circle, from the initial development of oil in western Pennsylvania in the 1860s to the current boom in Marcellus Shale natural gas drilling initiated in 2006. Drilling has returned to its birthplace, Pennsylvania, with new challenges (albeit natural gas instead of oil) for a new century. Resource extraction in North America has been transformed over the last century to reflect the social values of providing cleaner energy with fewer environmental impacts. As the natural gas and oil industry has matured, measures for protecting threatened or endangered species and other environmental resources have grown more sophisticated and effective. Regulatory agencies at the federal, state, and local level have endeavored to be vigilant in overseeing natural gas and oil operations for compliance of rules, regulations, and statutes. Public concerns and involvement have become increasingly important in driving the evolution of environmental regulations, as well as the technologies and operational practices employed by industry to protect the environment or community beyond regulatory requirements.
HIStorY oF InnoVAtIon In EnVIronMEntAl StEwArdSHIP

Key Points: y Advances in technology and operating practices, in all phases of the development life cycle and in all production settings, have
14 National Academy of Sciences, Management and Effects of Coal Bed Methane Produced Water in the Western United States, 2010, accessed June 2011, http://www.scribd.com/ doc/44556385/Coalbed-Methane-Produced-Water-Report-inBrief.
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New technologies coupled with management systems and conscientious employees are responsible for reducing the environmental footprint of natural gas and oil development activities over time. Flexibility within environmental regulations has allowed technology to be adapted to different settings and circumstances encountered during development. In some cases, new production technologies have required changes to the strategies employed to protect the environment; in other cases, the efficiencies associated with advanced technologies have resulted in improved environmental performance. In still other cases, new environmental regulations have resulted in innovative practices and technologies that have been employed to ensure compliance. Together, voluntary actions and regulatory oversight have led to a more harmonious concert between the natural gas and oil industry and the environment. Todays industry views environmental stewardship as a strategy to assuring access to future reservoirs. Continued innovation in exploration and production technologies can further minimize the risks in developing North American natural gas and oil resources, particularly those in highly sensitive areas and frontier resources plays. This section discusses the evolution of technologies and practices for onshore and offshore exploration and production, followed by a discussion of future expectations in environmental stewardship. Advances have taken place in all phases of the development, as well as across environmental media, giving rise to the prospect of future natural gas exploration and production trends that are progressively smarter and more effective in environmental protection. y Air Quality Improvements have been realized through advances in pipeline technologies, which have reduced the venting of natural gas as a waste; use of natural gas-fired or electric engines during production to reduce site emissions; measures to reduce emissions and dust from truck traffic; and industry efforts to reduce methane emissions through the Natural Gas STAR Program. y Water Quality Innovations in protecting water resources include improvements in well construction, well control, and plugging practices; development of produced water injection wells for enhanced oil recovery; and advances in water use management practices, including reuse of produced water in hydraulic fracture operations.
y Land Management and Wildlife Protection Seismic and drilling technologies, including horizontal drilling, have significantly reduced the amount of land surface disturbance in onshore development, lessening impacts such as erosion and habitat fragmentation. y Materials Management Ongoing improvements in managing drilling fluids and cuttings, as well as produced water during production, have reduced environmental impacts of operations. Closed loop drilling systems reduce the volume of waste and eliminate a potential source of contamination. y Offshore Environmental Management Extended-reach and horizontal drilling, unmanned satellite production systems, and floating production systems have been instrumental in reducing the amount and surface extent of the infrastructures needed to produce subsea hydrocarbon resources. Other environmental improvements have included mitigation measures to reduce the potential impacts of seismic surveys on marine life, and the adoption of environmental management systems as a means of systematically and continuously improving environmental performance. y Data Management Digital data acquisition and telecommunications technologies have facilitated prudent development of natural gas and oil for example, through measurement-while-drilling systems. Internet technologies have increased the opportunities for more efficient data sharing in the areas of regulatory reporting, data sharing between partners, and public access to operational and compliance information maintained by public agencies. Figure 2-9 depicts the advancement of the U.S. natural gas and oil industry in six roughly quartercentury time blocks. Drilling activity is shown from 1844 to 2010, indicating the percentage of wells that were oil or natural gas (with the remainder assumed to be freshwater or saltwater). Also shown are natural gas and oil discoveries and technological achievements, environmental laws and regulations, and historical highlights.
Onshore Development of Natural Gas and Oil

Just like the gold rushes of the 1800s, early oil exploration and production conjures images of wooden derrick forests with operators working in close proximity
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Continuous Innovation of Technology and Environmental Stewardship inFigureNaturalEvolution of Technology in the Natural Gas and Oil Industry: the 2-9. The Gas and Oil Industry
D R I L L I N G A C T I V I T Y I N T H E U N I T E D S TAT E S
January 17, 1844 to December 31, 1899 January 1, 1900 to December 31, 1924
Continuous Innovation of Technology and Environmental Stewardship in the Natural Gas and Oil Industry
January 1, 1925 to December 31, 1949
150 wells per 64,000 acres (100 square miles)
5011,000 wells per 64,000 acres (100 square miles)
>1,000 wells per 64,000 acres (100 square miles)
ENVIRONMENTAL L AWS & REGUL ATIONS 1863 PA enacts first anti-pollution law preventing running of tar and distillery refuse into creeks 1879 NY mandates plugging of abandoned oil and natural gas wells to prevent freshwater contamination 1883 OH enacts law regulating methods of casing and plugging oil and natural gas wells 1890 PA enacts first law requiring non-producing wells to be plugged 1899 TX enacts law on groundwater protection, well abandonment, and conservation of natural gas OIL & GAS TECHNOLOGY 1821 First well dug specifically intended to obtain natural gas in Fredonia, NY, by William Hart 1839 Marcellus Shale identified and named by NY state geologist James Halls 1854 First oil company, Pennsylvania Rock Oil Company, formed by James M. Townsend 1858 First shale gas well fracture using gun powder in Fredonia, NY, by Preston Barmore (first petroleum engineer) 1859 First successful oil well, Drake Well, drilled in Titusville, PA (about 70 ft.) 1870 First and largest multinational corporation, Standard Oil Company, founded by John D. Rockefeller and Henry Flagler
ENVIRONMENTAL L AWS & REGUL ATIONS 1915 CA enacts well drilling, production, and abandonment law 1917 OK expands oil and natural gas regulatory mandate to groundwater protection and well plugging and abandonment 1918 Migratory Bird Treaty Act 1924 Oil Pollution Control Act OIL & GAS TECHNOLOGY 1891 First lengthy natural gas pipeline constructed from wells in central IN to Chicago, IL (120 mi.) 1897 First offshore well drilled south of Santa Barbara, CA (455 ft. below seabed) 1901 Oil explorer Captain Anthony Lucas drills Spindletop Gusher in Beaumont, TX 1905 Oil strike in Glen Pool, OK, heralded as largest discovery of its time 1909 H. Hughes Sr. and Walter Sharp introduce Two-Cone Drill Bit, enabling deep boring 1911 Standard Oil Company dissolved by Sherman Antitrust Act 1917 American Association of Petroleum Geologists founded 1921 First horizontal oil well drilled in Texon, TX 1921 First experimental use of seismic imaging at Vines Branch, OK
ENVIRONMENTAL L AWS & REGUL ATIONS 1935 Interstate Oil & Gas Compact Commission (IOGCC) established (OK, TX, CO, IL, NM, and KS) 1941 Multiple states enact moratoria on aspects of oil and gas conservation and environmental regulation to support war effort 1946 KS Board of Health authorized to regulate oil field brine disposal 1946 Bureau of Land Management created by President Harry Truman 1948 Federal Water Pollution Control Act (FWPCA) OIL & GAS TECHNOLOGY 1922 Wildcatter James S. Abercrombie and machinist Harry S. Cameron develop successful ram-type blowout preventer 1927 First patent on caustic flooding for improved oil recovery 1929 Barite introduced to drilling fluids 1929 First controlled directional drilling in Huntington Beach, CA, by H. John Eastman 1930 East Texas Oilfield discovered by Dad Joiner 1933 Hughes Tool Company develops Tricone Drill Bit 1934 First relief well to control a blowout used in Conroe, TX, by H. John Eastman 1938 Cooper-Bessmer Integral-Angle Gas Engine Compressor installed in natural gas pipeline
1840 First recorded use of natural gas for manufacturing, Centerville, PA
1908 Ford Model-T 18611865 Civil War 18581890 Internal combustion engine 1897 Thomas Edison invented incandescent lamp 1903 Wright Brothers first flight 1905 First gas station 1911 U.S. military converts to oil as fuel source 19141919 WWI 1929 Start of Great Depression
19391945 WWII 1945 Worlds first nuclear explosion at Trinity test site, Alamogordo, NM
1958 First commercial nuclear power plant, Shippingport, PA 1958 First integrated circuit silicon chip 1960 OPEC formed
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Figure 2-9. The Evolution of Technology in the Natural Gas and Oil Industry (Continued)
January 1, 1950 to December 31, 1974 January 1, 1975 to December 31, 1999 January 1, 2000 to January 6, 2011
ENVIRONMENTAL L AWS & REGUL ATIONS 1953 Outer Continental Shelf Lands Act 1968 Cuyahoga River engulfed in flames in northeastern OH 1969 Santa Barbara oil spill leads to environmental legislation and is the impetus for the environmental law movement in the U.S. 1970 National Environmental Policy Act, Occupational Safety and Health Act, Clean Air Act, and the U.S. EPA established 1972 Noise Control Act 1973 Endangered Species Act 1974 Safe Drinking Water Act OIL & GAS TECHNOLOGY 1947 Hydraulic fracturing first used in the U.S. as experiment to stimulate an oil well, Grant County, KS (Stanolind Oil) 19472011 Kerr-McGee drills first offshore well out of sight of land, Vermilion Parish, LA, with continuous firsts in offshore technology afterward 1967 First 3D seismic survey (Exxon) in Friendswood field, Houston, TX 1968 First well drilled in >1,000 ft of water by Humble Oil in Santa Barbara channel 1968 Oil discovered on Alaskas North Slope 1972 Landset satellite used for remote sensing 1972 First use of carbon dioxide-enhanced oil recovery, Scurry County, TX
ENVIRONMENTAL L AWS & REGUL ATIONS 1976 Resource Conservation and Recovery Act and Federal Land Policy and Management Act 1977 Surface Mining Control and Reclamation Act, Toxic Substances Control Act, and FWPCA renamed Clean Water Act 1977 FERC established 1980 Comprehensive Environmental Response, Compensation and Liability Act 1986 Title III Superfund Amendments and Reauthorization Act 1987 Pipeline Safety Act 1989 Hazard Communication Standard 1989 Exxon Valdez runs aground in Prince William Sound, AK 1989 GWPC and IOGCC initiate reviews of state oil and natural gas regulatory programs 1990 Oil Pollution Act OIL & GAS TECHNOLOGY 1977 Trans-Alaska Oil Pipeline System completed after three years of work 1977 U.S. DOE established 1978 First fixed offshore platform >1,000 ft. deep, Shell Cognac 1982 First steerable drilling system
ENVIRONMENTAL L AWS & REGUL ATIONS 1999 State Review of Oil and Natural Gas Environmental Regulations (STRONGER) established 2001 U.S. House passes legislation opening a portion of the Arctic National Wildlife Refuge to oil and gas drilling; Senate rejects proposal 2005 Energy Policy Act clarifies hydraulic fracturing with regards to SDWA 2005 DOI opens thousands of acres on the Alaska North Slope for drilling 2008 Ten-year moratoria on U.S. offshore oil and natural gas leasing end 2010 WY enacts new oil and gas regulations requiring full chemical disclosure for hydraulic fracturing fluid additives 2010 Deepwater Horizon oil rig explodes in the Gulf of Mexico, causing largest offshore oil spill in U.S. history 2010 San Bruno, CA, natural gas pipeline explosion OIL & GAS TECHNOLOGY 1995 Mitchell Energy refines hydraulic fracturing coupled with horizontal wells in the Barnett Shale, TX, to recover natural gas 1997 Baker Hughes Corporation introduces rotary closed loop drilling system 1999 Largest oil discovery in Gulf of Mexico, BP Thunder Horse field (6,000 ft.,1 billion BOE) 2006 New seismic recording technique measures hydraulic fracture propagation in unconventional reservoirs
1960 First large-scale geothermal electric plant, The Geysers, CA 1969 First man walks on the moon (Neil Armstrong)
1970 Founding of Earth Day 1973 First personal computer
1978 Natural Gas Policy Act enables competitive wellhead pricing, which spurs production 1978 NASA dedicates first solar photovoltaic system, AZ 1980 Iraq-Iran War
1980s Large-scale wind farm technology used for the first time in CA 1986 Crude oil price collapses 1990 World Wide Web
19901991 Persian Gulf War 1991 Drawdown of Strategic Petroleum Reserve 1997 Kyoto Agreement to limit greenhouse gases 2003 U.S.-Iraq War
2009 Oil price tops $140/ bbl; Dow Jones Industrial Average plunges 360 points 2010 World oil demand reaches 87 million bbls/day
1973 Arab Oil Embargo
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with little or no regard for the environmental impacts of their actions. The petroleum industry has matured over the last century, evolving into a highly technical industry that develops and employs innovative solutions in all aspects of exploration, drilling, completion, production, and site restoration.
that drilling on ridge tops would result in dry holes. Exploration in other regions revealed the error in this assumption. In actuality, oil floats on top of water and, outside the Appalachians, often exists on ridge tops. The paradigm continues to shift as today natural gas and oil can be extracted from impermeable rock. Once the relationships between oil location and anticline geology were understood, exploration quickly expanded beyond Pennsylvania and the exploration industry was born. Prior to 1920, exploration activities were noninvasive and typically conducted on foot or on horseback, producing no noticeable impacts to the environment. Exploration usually involved field mapping and gravity surveys, neither of which left an obvious impression. The development of more sophisticated seismic methods for subsurface imaging changed all that. Seismic imaging required the drilling of holes for dynamite and the laying of miles of cable across the countryside, and large trucks and other support vehicles were often used to carry equipment and machines. In the 1930s and 1940s, it was commonplace to see systematic patterns of drill holes across the landscape, reaching down through soil layers to bedrock for the placement of charges, coupled with heavy truck tracks traversing the fields. With the availability of computers in the late 1960s, processing of large seismic data sets became manageable, and common depth point seismic operations became the standard operating procedure. More recently, three-dimensional (3D) seismic tools for subsurface imaging have provided economically viable methods of discovering and producing natural gas and oil from ever more challenging and remote locations. Today, geologists and geophysicists use an array of advanced techniques to find commercial accumulations of natural gas and oil. High-speed computing, remote sensing and imaging, geologic interpretation, and visualization technology are coupled with global positioning systems, the latest geographical information systems, and 3D seismic and four-dimensional (4D) imaging capabilities to pinpoint promising new reservoirs. In place of dynamite, seismic technology now employs less intrusive methods designed to mitigate surface and near-surface impacts, such as designed-for-purpose air explosives, contained surface explosions, and vibrators. These technological advances, combined with state regulations for registering seismic surveys, have eliminated or reduced
Exploration
Hundreds of years ago, before any wells were drilled, natural gas was found to be naturally percolating up through the soil and through creeks, where mischievous children would light it for entertainment. The original production system for oil involved damming up an oil seep, and then floating the oil down a river to be picked up by a weir. During the 19th century and into the early years of the 20th century, prospecting was pretty much a hitor-miss proposition. A geologist looked for exposed beds of asphalt, oil springs, naturally occurring methane in streams, or traces of hydrocarbons in water wells to help identify potential sources of oil. Methods ranged from divining rods to creekology (drilling inside the curve of a creek), but none was a sure thing and most wildcatters thought close was the best geologic method (meaning being close enough to the last well to smell it).15 Analyzing streams and domestic water wells for the presence of naturally occurring methane proved to be one of the more successful prospecting methods. A map of domestic well locations with corresponding concentrations of hydrocarbons would be drawn and potential drilling locations plotted based on isotropic concentrations, zeroing in on the sweet spot.16 The presence of naturally occurring methane in domestic water wells prompted several states, including New York, Pennsylvania, Colorado, and Wyoming, to pass laws regarding the placement of wells in relationship to construction of a house. Slowly, oilmen, geologists, and drillers began to notice seismology and subsurface structure. Due to anomalies of Appalachian regional geology and topography, oil there was located in valleys, leading many people to surmise that oil flowed downward and
15 O. Scott Perry, Oil Exploration, The Handbook of Texas Online, Texas State Historical Association, accessed April 11, 2011, http://www.tshaonline.org/handbook/online/articles/doo15. 16 Craig Miner, Discovery! Cycles of Change in the Kansas Oil & Gas Industry 1860-1987, Wichita, KS: KIOGA, 1987.
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many of the onshore environmental impacts associated with seismic exploration (e.g., unplugged shot holes and vehicle tracks).17 Modern sensing technology has significantly reduced dry holes in both exploration and production operations, conserving valuable natural resources and minimizing drilling activities and associated impacts. Thanks to this technology, success rates for discovery of economical quantities of natural gas and oil are up more than 50% over the last 30 years.18 In the most recent decade alone, the drilling success rate improved from 75% successful wells in 1999 to 90% success as of 2009.19
machinist Harry S. Cameron are credited with developing the first successful ram-type blowout preventer (BOP) in 1922. Mud system advances occurred in the late 1920s with the addition of barite and bentonite into drilling fluids to add weight to the fluid, which prevented formation fluids from entering into the wellbore, kept the drill bit cool and clean, and transported the cuttings to the surface. Use of rotary drilling and mud systems has helped to stop blowouts and resulting spills and fires. Another important advance in well control technology has been casing and cementing for wellbores, which forms a seal between potable water aquifers and the borehole, keeping freshwater from being mixed with other fluids. When introduced in 1984, steerable drilling was very expensive; but cost improvements enabled its use by 1990 to establish horizontal wellbores in large resource plays, accessing many more feet of formation than a conventional vertical well. Using horizontal drilling, bores of more than a half-mile have been drilled successfully. Horizontal drilling can access the same resources with fewer wells spaced further apart, reducing the environmental impacts including waste disposal, material use, and energy consumption. Operational footprints are further reduced since the drill rigs no longer stay at the site but are moved to the next project. Today, horizontal drilling permits access to previously inaccessible reservoirs, production from unconventional source rock, and the ability to produce resources in deeper offshore waters. The benefits of this technology include reduction of the number of wells required to produce a resource; development of multi-well pads that confer a variety of environmental advantages; the ability to avoid sensitive surface environments; and use of centralized facilities to service multiple wells. Prudent resource development has been greatly facilitated by data management systems. Todays measurement-while-drilling and logging-whiledrilling technologies, for example, allow real-time analysis of rock properties and more effective steering of the drill into reservoirs. Basic rig instrumentation has been an integral part of drilling operations since the early 20th century. With the introduction of the Geolograph in 1937, time-based analog charts soon became the de facto record of events and a basic tool for trend analysis and identification of anomalies. A gradual shift to digital information capture began in the mid-1970s, as computerized mud-logging units were deployed to drill sites.
Drilling
Drilling was rudimentary in the 19th century, employing wooden derricks that raised and lowered cable tool drills repeatedly, taking advantage of gravity to grind up the bottom of the hole. To clean cuttings from the borehole, workers would bail out the waste and pour it on the ground next to the rig. As drilling technology matured, engine-powered rotary drilling rigs combined drilling and setting of the string, enabling deeper wells (more than 30,000 feet today) and the discovery of more resources. The first rotary drilling rig was developed in France in the 1860s, but it was not until 1901 when Captain Antony Lucas used one to drill a gusher (Spindletop) near Beaumont, Texas, that they were adapted for natural gas and oil development. Drillers for the first time could steer the bit to maintain a straight hole and perform real-time examination of rock samples for densities, allowing them to maintain pressure on the drilling process to control fluid entering and exiting the borehole. Early circulating systems in rotary drilling were focused on controlling subsurface pressures and cleaning the cuttings from the wellbore. At first, there was no mechanism to control the flow of oil or gas once the drill bit penetrated the target formation. Wildcatter James S. Abercrombie and
17 Diane Freeman, No Seismic Footprints Left Behind, AAPG Explorer, October 1999, accessed April 11, 2011, http://www. aapg.org/explorer/1999/10oct/conoco3d.cfm.
18 Lee C. Gerhard and William F. Larson, The Environmental Evolution of the Petroleum Industry, Interstate Oil and Gas Compact Commission, April 2001. 19 M. C. Godec, Environmental Performance of the Exploration and Production Industry: Past, Present, and Future, SPE Paper 120918, 2009.
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Digital data acquisition offered greater flexibility in how data were stored, displayed, and utilized, while advances in telecommunications technology enabled transmission of the data to other locations, aggregating data from various sources, coordinating data analyses, and engaging remotely located personnel. As drilling technology continues to advance, rigs are becoming smaller. Coiled tubing rigs allow drilling of shallow to intermediate-depth wells without a derrick, using a motorized drill bit and flexible coiled tubing applied from a revolving drum and fed by mud pumps. With a smaller hole (slim hole), drilling waste is reduced along with environmental impacts. Drilling fluids and cuttings are the largest potential waste stream during drilling. Fluids consist primarily of water with entrained solids. Barite, a heavy mineral, is commonly introduced to add density to the drilling fluid; bentonite, a swelling clay, is used to add viscosity and provide a slick wall cake on the wellbore. Both of these key additives have low environmental impacts. Improvements in waste management include milling of cuttings for reinjection in former or abandoned wellbores, where supported by the geology, eliminating mud pits and reducing the potential environmental impact of leaks and handling. Current technologies such as closed-loop drilling systems allow for cuttings to be separated and disposed via landfill while the muds are reused in subsequent drilling operations. The approach can reduce cost for operators, reduces the volume of waste, and promotes zero discharge of wastes. Operators have instituted a variety of practices to address regional and site-specific air quality concerns associated with drilling. In some cases, operators have employed natural gas-fired engines or electric engines for compressors or drilling rigs in order to reduce site emissions. Intensive planning and the use of remote monitoring and reporting equipment have reduced truck traffic during both drilling and production phases, limiting engine emissions and fugitive dust. These practices have the added benefit of mitigating community impacts by reducing road damage and traffic congestion. In scenic areas, measures are taken during development to minimize surface disturbances and habitat fragmentation, although some visual impacts remain until all the reclamation activities are completed. Typical methods include stockpiling topsoil and replanting vegetation to reclaim roads. Some roads are reclaimed 204
when production ceases while others remain in place for recreational or other beneficial activities; in Alaska, ice roads and ice pads may be used to facilitate development without leaving a permanent impact.20 Advanced drilling technologies have reduced the amount of surface disturbance required to develop natural gas and resources by as much as 90% in some cases. Less surface disturbance reduces the potential for erosion and reduces vegetation loss including deforestation. In addition, the need for fewer well pads and roads minimizes habitat fragmentation for wildlife, and also results in fewer vehicle miles traveled with the attendant lower air emissions. Evidence of the reduced environmental impact resulting from new drilling technology is widespread. On Alaskas North Slope, for example, the surface footprint of drill pads has been reduced from 60 acres to 6 acres. Tens of wells are drilled from these small pad footprints, resulting in the elimination of other pad sites and associated infrastructure; and the Department of Energy (DOE) reports that the volumes of waste generated from 100 barrels of oil equivalent of reserve additions has shrunk from 7.5 to 3.4 barrels.21 Another example is found in Ecuador, where ARCO developed a 200-million-barrel field from one 5-acre rainforest site using directional drilling. The facility was normally unmanned as an impactreduction measure and there was no road to the site. The pipeline was carefully placed between the trees under the rainforest canopy, making it near invisible from the air. Electricity was used on the production site to reduce engine noise and eliminate exhaust emissions; the power was supplied along the same path as the pipeline, further consolidating any disturbances. This approach was implemented with no increase in cost over conventional methods.22
Hydraulic fracturing is an integral part of natural gas and oil development across the United States. Its objectives are to increase the rate at which a well is
20 U.S. Department of Energy, Environmental Benefits of Advanced Oil and Gas Exploration and Production Technology, DOE-FE-0385, October 1999, accessed April 15, 2011, http://fossil.energy.gov/ programs/oilgas/publications/environ_benefits/env_benefits. pdf. 21 U.S. Department of Energy, Environmental Benefits of Advanced Oil and Gas Exploration and Production Technology. 22 K. Lathrop, C. Slack, and R. Draper, The Villano Project: Preserving the Effort with Words and Pictures, Atlantic Richfield Corporation, 1999.
able to produce natural gas or oil and to increase the economically recoverable reserves for a well. Production increases from this technology, especially when it is combined with horizontal drilling, dramatically reduce the environmental footprint of development while economically commercializing historically undevelopable resources. Fracturing in its various forms is over 150 years old.23 The first shale gas fracturing job was performed in 1858 in Fredonia, New York, prior to Colonel Drake drilling his first oil well.24 Black powder was used in multiple stages and the resultant flow rate changes were recorded after each stage. The first experimental hydraulic fracturing treatment for oil production was performed in Grant County, Kansas, in 1947 by Stanolind Oil. A limestone formation approximately 2,400 feet below ground level was fractured using 1,000 gallons of naphthenic-acid and palm-oil thickened gasoline, followed by a gel breaker. Following the experiment, an industry paper was written by J. B. Clark of Stanolind Oil introducing the technology. In 1949, a patent was issued granting Halliburton Oil Well Cementing Company the exclusive right to pump the new Hydrafrac process. The first commercial application of hydraulic fracturing was performed in March 1949, at a well 12 miles east of Duncan, Oklahoma. The same day, a second well was hydraulically fractured near Holliday, Texas. In the first year, 332 wells were hydraulically fractured with the new technology, yielding an average production increase of 75%. Since then, more than 2 million hydraulic fracture stimulations have been completed in the United States.25 Over time, hydraulic fracturing has evolved in response to challenges posed by different resource types and diverse locations, environmental challenges, costs and economics, and regulatory consider23 John A. Harper, The Marcellus Shale An Old New Gas Reservoir in Pennsylvania, Pennsylvania Geology, 38, no. 1, Spring 2008: pages 213, accessed June 29, 2011, http://www.dcnr. state.pa.us/topogeo/pub/pageolmag/pdfs/v38n1.pdf. 24 Eileen and Gary Lash, SUNY Fredonia Shale Research Institute, Kicking Down the Well, The Early History of Natural Gas ( 2010), accessed June 29, 2011, http://www.fredonia.edu/ shaleinstitute/history.asp. 25 Carl T. Montgomery and Michael B. Smith, Hydraulic Fracturing History of an Enduring Technology, JPT: The Journal of Petroleum Technology 62, no. 12, December 2010: pages 2632, accessed June 29, 2011, http://www.spe.org/jpt/print/ archives/2010/12/10Hydraulic.pdf.
ations. Today, the technology is used on up to 95% of new wells and is continuously refined and modified to optimize fracture networking and maximize resource production. The future influence of hydraulic fracturing technology on the industry and energy market could be staggering, as new sources of unconventional hydrocarbon resources are discovered and exploited. Modern hydraulic fracturing technology involves sophisticated, engineering processes designed to create distinct fracture networks in specific rock strata. Figure 2-10 shows a cross-section diagram of a horizontal well with multiple completion stages where pathways have been created and filled with proppant. Advanced fracturing processes are continually refined to account for in situ reservoir characteristics and optimize natural gas and oil production, using tools such as modeling, micro-seismic fracture mapping, and tilt-meter analysis to define the success and orientation of the fractures created. While
Figure 2-10. Horizontal Well Completion Stages
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hydraulic fracturing typically is used during the initial completion of the well, it also can occur after the initial completion of a well, when it is believed that stimulation of the well could provide additional economic benefit.
The makeup of fracturing fluids is varied to meet specific reservoir and operational conditions, precluding one-size-fits-all formulas. Water and sand are the most common constituents of most fracturing fluids. More recently, advances in water use
Hydraulic fracturing is the treatment applied to reservoir rock to improve the flow of trapped oil or natural gas from its initial location to the wellbore. This process involves creating fractures in the formation and placing sand or proppant in those fractures to hold them open. Fracturing is accomplished by injecting water and fluids designed for the specific site under high pressure in a process that is engineered, controlled, and monitored. drilling goes through shallower areas, with the drilling equipment and production pipe sealed off using casing and cementing techniques. y The technology and its application are continuously evolving. For example, testing and development are underway of safer fracturing fluid additives. y The Interstate Oil and Gas Compact Commission (IOGCC), comprised of 30 member states in the United States, reported in 2009 that there have been no cases where hydraulic fracturing has been verified to have contaminated water. y A new voluntary chemical registry (FracFocus) for disclosing fracture fluid additives was launched in the spring of 2011 by the Ground Water Protection Council and the IOGCC. Texas operators are required by law to use FracFocus. y The Environmental Protection Agency concluded in 2004 that the injection of hydraulic fracturing fluids into coalbed methane wells poses little or no threat to underground sources of drinking water. The U.S. Environmental Protection Agency is currently studying hydraulic fracturing in unconventional formations to better understand the full life-cycle relationship between hydraulic fracturing and drinking water and groundwater resources. y The Secretary of Energys Advisory Board is also studying ways to improve the safety and environmental performance relating to shale gas development, including hydraulic fracturing.
Interstate Oil and Gas Compact Commission, Testimony Submitted to the House Committee on Natural Resources, Subcommittee on Energy and Mineral Resources, June 18, 2009, Attachment B. U.S. Environmental Protection Agency, Office of Water, Office of Ground Water and Drinking Water, Evaluation of Impacts to Underground Sources of Drinking Water by Hydraulic Fracturing of Coalbed Methane Reservoirs (4606M) EPA 816-R-04-003, June 2004.
Fracturing Facts
y Hydraulic fracturing was first used in 1947 in an oil well in Grant County, Kansas, and by 2002, the practice had already been used approximately a million times in the United States.* y Up to 95% of wells drilled today are hydraulically fractured, accounting for more than 43% of total U.S. oil production and 67% of natural gas production. y The first known instance where hydraulic fracturing was raised as a technology of concern was when it was used in shallow coalbed methane formations that contained freshwater (Black Warrior Basin, Alabama, 1997). y In areas with deep unconventional formations (such as the Marcellus areas of Appalachia), the shale gas under development is separated from freshwater aquifers by thousands of feet and multiple confining layers. To reach these deep formations where the fracturing of rock occurs,
* Interstate Oil and Gas Compact Commission, Testimony Submitted to the House Committee on Natural Resources, Subcommittee on Energy and Mineral Resources, June 18, 2009, Attachment B. IHS Global Insights, Measuring the Economic and Energy Impacts of Proposals to Regulate Hydraulic Fracturing, 2009; and Energy Information Administration, Natural Gas and Crude Oil Production, December 2010 and July 2011.
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management practices have resulted in reduced demands on freshwater sources. The volumes of freshwater used for hydraulic fracturing of shale gas wells have led to concerns about the potential impacts to local and regional water supplies as well as potential impacts to aquatic wildlife. Going beyond regulatory requirements designed to ensure that water withdrawals do not adversely affect the environment, many operators are pursuing reuse of produced water in subsequent fracture operations. This reuse of produced water reduces demands on freshwater, and impacts associated with trucking of water, such as traffic congestion, road damage, dust, and engine emissions. In addition, reuse reduces the amount of water to be disposed.
into salt beds. Many states have regulations in place to inspect and conduct mechanical integrity tests of disposal systems, to prevent the escape of saltwater. Another environmental issue in producing and transporting oil is prevention and remediation of spills. Although oil is naturally biodegradable, spilled oil stains the soil; and with large spills, animals and birds could be adversely affected. In the early days of oil production, spills occurred regularly as product was flowed into tanks or barrels, especially when the volume of the container was miscalculated. Gushers were common as well, spilling oil onto the ground where it found its way to ponds or other drainage systems. Today, the product is rigorously defended. Mechanical integrity inspections detect any small leaks in the piping at the producing wellhead to prevent potential minor spills. Additionally, with the diking of tank batteries, crude oil releases are contained and remediated. Contaminated soils are removed and deposited in an approved landfill or cleaned using bioremediation technologies such as oil-metabolizing microbes. Several studies have found that turning the soil and using additives such as fertilizers can speed biodegradation without the use of microbes. Soil amendments can be added to salt-impacted soil to increase permeability and lessen clay hydration; additionally, a cap of new soil can be used. In the early days of oil production, coproduced natural gas (termed casinghead gas) was either flared or vented into the air. Venting has been outlawed over the past 50 years in most states and most cases. In some situations, reinjection of casinghead gas into the reservoir allows the operator to increase production by maintaining field pressures. This method was used on Alaskas North Slope; the U.S. Department of Energy (1999) reported that, as a result, the reserves at Prudhoe Bay were 30% higher than originally thought.26 A byproduct of natural gas and oil production is hydrogen sulfide (H2S), a flammable gas that can be toxic above certain exposures. Hydrogen sulfide presents a danger to workers who might have to be in an enclosed space, such as those inspecting inside tanks. In large-scale production fields where oil is produced with H2S, constant odors are an issue.
26 U.S. Department of Energy, Office of Fossil Energy, Environmental Benefits of Advanced Oil and Gas Exploration and Production Technology, DOE-FE-0385, October 1999, accessed June 29, 2011, http://fossil.energy.gov/programs/oilgas/ publications/environ_benefits/env_benefits.pdf.
Production
Oil and saltwater are almost always produced together. Produced saltwater which can be up to 10 times the salinity of seawater at 400,000 parts per million represents the largest potential waste stream during oil production. Improper disposal of saltwater can affect freshwater and can harm vegetation, in turn increasing erosion. In the 19th century, there was little interest in properly disposing of saltwater since population densities were low and potable water supplies plentiful. Typically, saltwater was simply poured out on the ground. By the early 20th century, it became commonplace to store produced water in ponds. A thin film of oil on the waters surface reduced the rate of evaporation, increasing the chance for infiltration and damage to underlying aquifers. Some states instituted regulated disposal, requiring lined ponds or impoundments. Today, injecting produced water into approved disposal zones (injection wells) has become the preferred alternative for disposal, greatly reducing surface and groundwater contamination. Injection of produced water to improve production began as early as 1910 in Pennsylvania. The Safe Drinking Water Act, passed in 1974, established the UIC program, which sets well casing and cementing standards to ensure protection of underground sources of drinking water. If disposal systems cross salt beds, it is necessary to protect well casings against corrosion by inserting tubing in the casing. Historically, when disposal wells were reaching the end of their useful life or sold, operators would pull the corroded tubing and then inject saltwater. This caused rapid casing corrosion and leaks
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Production sites are constantly monitored to protect both workers and nearby communities from hydrogen sulfide. Hydrogen sulfide in natural gas can be processed to produce sulfur as a marketable byproduct. Visibility of natural gas and oil facilities is considered by some to be intrusive, and to have negative impacts on recreation and aesthetics. Many times the visible impact can be mitigated through camouflage paints or barriers. In the Barnett Shale in the DallasFort Worth area, for example, companies have landscaped, built decorative walls, and painted to blend facilities to the surroundings. Today, most production operation activities involve continual monitoring, maintenance, and assessment of the well and well site to ensure integrity, safety, and security. Maintenance and assessment are accomplished using wireline units or workover rigs, both of which are much smaller than the drilling rig used to bore the well. Monitoring activities include Bradenhead27 pressure monitoring; air emissions monitoring; storm water, spill prevention, and wildlife controls maintenance; interim reclamation assessment; and water management.
practices. Because methane is a potent greenhouse gas, these emission reductions help protect the environment while at the same time conserving a clean energy source. Today, pipelines are essential for the transport of produced hydrocarbons within North America. Maintaining a safe and environmentally sound pipeline network that meets growing energy demands represents a major challenge for the pipeline industry. Pipeline location is crucial to minimize the potential risk to the public and the environment. Pipeline route planning is coordinated with public officials and supported by best engineering practices. Once operational, integrity of the pipeline network incorporates best management practices, including sound integrity management practices and ongoing damage prevention programs involving public officials, emergency officials, and the affected public.
Reclamation
Once production drops below an economically feasible level, an oil or gas field is plugged and abandoned to remediate the site for recreation, wildlife management, industrial, or agricultural uses. In the 1800s and early 1900s, plugging was not done at all or consisted of simply throwing a tree down the wellbore. These early practices resulted in oil and brine contamination of groundwater. In the 1890s, Pennsylvania passed the first plugging requirements, which were aimed at protecting the oil resource from flooding by freshwater. Modern plugging techniques ensure groundwater and surface water protection. Operators remove any recyclable materials during plugging and move in a workover rig that sets cement plugs to separate any production zone from water zones. A steel plate may be welded over the hole below farm-plow depth. Additional activities associated with reclaiming a wellsite include restoring the soil and the contour of the landscape. Over time, nature reclaims producing sites even without human intervention, as evidenced by the former Drake discovery well. Despite extensive industrial activities in the mid and late 19th century, the site now shows no trace of development. Offshore reclamation is similar to onshore except that plugging is done with the platform in place and freshwater protection is not an issue. Offshore platforms have been used to support recreational
Pipelines
As new uses for natural gas were developed, pipelines were needed to transport it to major population centers. Over time, improvements have been made in the construction material and welding techniques used in pipelines. In addition, compressor stations have been added to enable transportation of natural gas over longer distances from remote fields. Developments of pipelines and compressors have reduced the widespread venting of natural gas as a waste, substantially reducing the amount of greenhouse gases being released. As an example of practices that go beyond regulatory requirements, industry has teamed with the EPA to reduce methane emissions through the Natural Gas STAR Program. The program is a voluntary partnership that encourages the dissemination and use of cost-effective practices and technologies that reduce emissions of methane, including pipeline-related
27 The monitoring of the pressure between the well casing and the drill pipe using a device (Bradenhead) that is situated at the top of the well casing, where it allows a drill pipe to be extended into the well while the wellhead is sealed and the annulus is pressurized.
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fisheries and abandoned platforms have been sunk to provide artificial reefs for aquatic habitats. Other disposal methods for the platform include towing it to the shore and dismantling it.
Offshore Development of Natural Gas and Oil

Drilling offshore began near the turn of the 20th century when shallow-water fixed platforms were used to access offshore reservoirs. Offshore production accelerated after 1947, when the first offshore well was drilled at a location completely out of sight of land. Since then, offshore production, particularly in the U.S. Gulf of Mexico, has contributed significantly to total U.S. energy production. Today, about 35% of crude oil production in the United States comes from offshore developments. Because costs of offshore development typically are considerably higher than for land-based development, economic justification hinges on the potential for larger volumes of hydrocarbon reserves. The need for detailed research and exploration on the potential play prior to drilling has driven advances in technologies used offshore; some of these technologies have also been adapted for onshore exploration and production. Three technologies are instrumental in reducing the amount and surface extent of infrastructures necessary for offshore production. First, extended-reach and horizontal drilling allows for greater hydrocarbon production with fewer facilities and a smaller environmental footprint. Second, unmanned satellite production systems, which contain wellhead and manifold systems with no or minimal processing facilities, are being used to develop smaller fields or sections of larger fields. Production from these systems flows to a central facility for processing. Satellite facilities can either be installed on small platform structures or on the seafloor. Third, floating production systems typically are used in deepwater and in conjunction with subsea production or satellite systems. Since fixed structures are not utilized, these systems have the added advantage of being easily removed at the end of the field development. Advances in such areas as seismic, drilling and completion, and well control technologies have overcome many barriers to prudent development of offshore resources. The development of offshore natural gas and oil technologies is complicated by overlapping
statutes and regulatory agencies. Environmental rigors of subsea operations include maintaining pipeline integrity and addressing offshore safety and environmental management as a broad safety sustainability planning challenge. Because of the complexities faced in subsea operations, the use of EMSs has been particularly beneficial in offshore development.
Seismic Technology
Geophysical technologies have been a critical tool in hydrocarbon exploration since the early part of the 20th century. Prior to the mid-1980s, the majority of seismic data collected in offshore settings were two-dimensional (2D), meaning they defined a plane where the seismic-derived structure (depth of the plane) pertained to a single surface traverse (edge of the plane). Since that time, techniques to assemble 3D seismic data were developed by integrating multiple 2D planes (as multiple surface traverses) into projection of a 3D volume. Currently, 3D seismic has become the standard tool for exploration and development, especially in the Gulf of Mexico. In an exploration context, seismic data are used to identify regions or geologic trends that have higher potential for commercial resources, with the ultimate goal being to reduce the amount of wildcat drilling necessary to successfully locate economic reserves. Once a prospect has been identified, seismic is a critical tool to identify potential drilling hazards. During the production phase, time-lapsed 3D seismic acquired over months or years (commonly called 4D seismic in recognition of the time dimension) can be a critical tool for understanding the effectiveness of the development strategy and allow for adjustments to maximize production from existing wellbores, potentially eliminating the need for additional drilling. 4D seismic can also help increase overall resource recovery. Seismic noise generated by offshore natural gas and oil exploration activities is recognized as a concern for whale populations and other marine life, including fish. Scientific understanding of these potential impacts has expanded significantly in the last two decades, but important gaps in knowledge still exist. Potential impacts include behavioral changes, masking, auditory injury, physical injury, and other indirect effects, and for fisheries, reduction in catch rates of some commercial species. Seven nations the United States, Australia, Brazil, Canada, Ireland, New Zealand, and the United Kingdom have national guidelines requiring mitigation measures
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during marine seismic surveys. In the United States and in most of the other countries that have guidelines, the two most commonly used mitigation measures involve visually observing a monitoring zone around the array and temporarily suspending seismic activities when a protected species is detected within the zone; and gradually increasing the emitted sound level from the seismic array (called soft-start or rampup) before a survey begins or resumes after a period of silence. The intent of a soft-start procedure is to warn marine animals of pending seismic operations and to allow sufficient time for those animals to leave the immediate vicinity. The questioning of the efficacy of the soft-start method by some has prompted a four-year Australian study to gain better understanding as to whether animals do move out of the immediate vicinity of the seismic source as it slowly ramps up. Seasonal and geographical restrictions have been implemented in some jurisdictions, including Australia, Brazil, Canada, the United Kingdom, and the United States. In the United States and other jurisdictions, research is underway to develop additional mitigation and monitoring tools and to investigate the effectiveness of current mitigation measures. Additional technological refinement can be developed to supplement current seismic acquisition and mitigation methods, leading to a more environmentally sustainable approach to geophysical data acquisition. Additional considerations for design changes include reducing unwanted noise from air gun seismic sources and refining limited alternatives to air guns (e.g., marine vibroseis devices).
y Polycrystalline Diamond Compact bits and bicentered bits y Top drives y Expandable casings y Low-viscosity non-aqueous drilling fluids (clayfree, flat-rheology, and micronized barite systems) y Improved software modeling (wellbore stability, hydraulics, torque and drag, etc.) y Improved hole-cleaning practices y Sharing of nonproprietary operational best practices. Industry anticipates that additional improvement to drilling technologies and performance will further reduce environmental impacts, providing for more environmentally responsible development of offshore resources. Significant differences also exist in well completion methods for offshore development. The advent of the first horizontal Christmas tree in 1993 allowed operators access to the wellbore for workovers and interventions without having to disturb the tree and associated flowlines, service lines, or control umbilicals.28 Developments of subsea and other equipment for higher pressures and temperatures continued as operators progressed to drill deeper wells with more stressful physical conditions. The next major advance in subsea trees came in 2007 with the introduction of an all-electric tree.29
Drilling and Completion Technology

One of the remarkable accomplishments of the petroleum industry has been the development of technology for drilling wells offshore. While the rotary drilling process used for offshore drilling is similar to that for land-based drilling, modified drilling rigs and methods are required to suit the more complex subsea environment. For example, offshore operations often require closed-loop drilling so that there is limited discharge of drilling wastes. Important drilling developments related to offshore resources have included: y Embedded operation-while-drilling functions (measurement, logging pressure management, reaming, casing installation) y Improved mud motors 210
Well Control Technology

Blowout preventers have been used for nearly a century in control of oil well drilling on land. The onshore BOP equipment technology has been adapted and used in offshore wells since the 1960s. A key difference in surface and subsea BOPs is in the remote control technology required for subsea BOP operation. Because BOPs are meant to be fail-safe devices, efforts are made to minimize their complexity to ensure ram BOP reliability and longevity. As a result,
28 H. B. Skeels, B. C. Hopkins, and C. E. Cunningham, The Horizontal Subsea Tree: A Unique Configuration Evolution, OTC 7244, prepared for the Offshore Technology Conference, May 36, 1993. 29 L. Bouquier, J. P. Signoret, and R. Lopez, First Application of the All-Electric Subsea Production System: Implementation of a New Technology, OTC 18819, prepared for the Offshore Technology Conference, April30May3, 2007.
despite the ever-increasing demands placed on them, state-of-the-art ram BOPs are conceptually the same as the first effective models and resemble those units in many ways. Recently, underwater remotely operated vehicles (ROVs) have been employed to assist in well control. These unoccupied, highly maneuverable vehicles are operated by a person on board a vessel. They are linked to the ship by a tether (umbilical cable), a group of cables that carry electrical power, video, and data signals between the operator and the vehicle. High power applications often will use hydraulics in addition to electrical cabling. Most ROVs are equipped with at least a video camera and lights. Additional equipment may include sonar, magnetometers, a still camera, a manipulator or cutting arm, water samplers, and instruments that measure water clarity, light penetration, and temperature.
The 2011 Presidential Oil Spill Commission recognized that significant scientific knowledge exists for Arctic regions and supported the proposition that Arctic natural gas and oil developments should be qualified on individual merit. Specifically, it was stated that: The existing gaps in data also support an approach that distinguishes in leasing decisions between those areas where information exists and those where it does not, as well as where response capability may be less and the related environmental risks may therefore be greater. The need for additional research should not be used as a de facto moratorium on activity in the Arctic, but instead should be carried out with specific time frames in mind in order to inform the decision-making process.31 The case can be made that the scientific data currently available are more than adequate and complete to identify, assess, and minimize the potential impacts of limited offshore natural gas and oil operations of the types previously proposed for the Beaufort Sea and the Chukchi Sea. The Ocean Research and Resources Advisory Panel, a collaborative group consisting of government agencies, academia, nongovernmental organizations, and the private sector, found that knowledge of the Arctic Ocean has further increased in recent years through additional efforts of the Department of Defense (Navy), the National Research Council, the CIA-funded MEDEA project (Measurements of Earth Data for Environmental Analysis an informationsharing program to declassify certain information gathered for military intelligence purposes to be used for science), and other U.S. government activities that have not been widely publicized.32 Although there are ample opportunities to add valuable knowledge through selected studies, the currently available physical and biological science studies from the many scientific research programs have been incorporated into numerous impact assessments
31 National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling, Deep Water: The Gulf Oil disaster and the Future of Offshore Drilling, report to the President, January 2011, 303, accessed June 27, 2011, http://www.oilspillcommission.gov/sites/default/files/documents/DEEPWATER_ ReporttothePresident_FINAL.pdf. 32 Ocean Research and Resources Advisory Panel (ORRAP), Key Findings and Recommendations Related to Arctic Research and Resource Management, ORRAP of the National Oceanographic Partnership Program, December 16, 2010.
Arctic Baseline Science

The compilation by Westlien documented scientific knowledge of the Arctic Ocean surrounding Alaska that has accrued through studies dating from 1900 through 2010.30 Over the last 100 years, scientists, using ever-advancing technology, have refined our knowledge of the Arctic resulting in a detailed understanding of the physical environment, biological resources, various ecosystem processes, as well as its human inhabitants. The Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE) Environmental Studies Program Information System contains 700 technical summaries of BOEMRE-sponsored environmental research projects as well as over 2,000 entries for research reports, studies, workshops, and seminars for Alaska. In addition to BOEMRE-supported studies, other federal agencies and organizations conducting science programs with implications for the Arctic marine ecosystem include the Bureau of Land Management, Department of Defense, EPA, NASA, National Oceanic and Atmospheric Administration (NOAA), National Park Service, and Marine Mammal Commission. These government programs are further enhanced by industry-supported science, as well as international programs like the Russian-American Long-Term Census of the Arctic.
30 Shell Exploration & Production Company, Science of the U.S. Arctic Outer Continental Shelf, vol. 1, November 2010, accessed June 29, 2011, http://www-static.shell.com/static/usa/downloads/2010/alaska/215723_booklet_spreads_rs.pdf.
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conducted to assess the potential negative impact and positive benefit of natural gas and oil exploration activities in the U.S. Arctic.
Future Expectations
Technology advancements over the past century have enabled production of natural gas and oil from non-traditional resources, decreasing costs of recovery while effectively shrinking the footprint of operations, protecting the environment, and safeguarding workers health. In the coming decade, even smaller physical operational footprints are envisioned through the deployment of such technologies as microbore drilling, advanced imaging of reservoirs in a nonintrusive surface view, and borehole imaging. Tools and rigs are expected to become lighter, decreasing surface impacts and operating profiles. Advances in computer processing will be harnessed in high-power diagnostics and risk-based data interpretation, leading to fewer wells and reducing the chance of dry holes. Equipping drilling tools with implanted sensors will enhance the accuracy of searches for hydrocarbons, leading to a higher rate of recovery in reservoirs and, in turn, reducing cutting wastes and increasing recovery or reuse of produced water. Muds will become more advanced and environmentally friendly. Planning will take the forefront to ensure mitigation and anticipation of activities that could impact the environment and operations. Visual, noise, and emissions impacts will be reduced through technological advances of monitoring and reduced energy consumption of equipment. These improvements will all contribute to a more efficient operation.
land use setting, and are responsible for regulation and development of private and state natural gas and oil resources, as well as for implementing certain federal laws and regulations. y Effective regulation balances prescriptive requirements with performance-based requirements that encourage innovation and accommodate changing technologies and practices. The evolution of water and environmental resource protection regulations governing natural gas and oil exploration, production, and well abandonment has followed a unique pattern. Most producing industries, including those related to oil refining and other downstream operations, developed controls for preventing pollution to air, water, and land resources primarily in response to federal pollution control acts passed by Congress between 1972 and 1990. In contrast, the upstream (production) sector of the petroleum industry began to initiate water protection measures in response to individual state statutes and regulations enacted in the early part of the 20th century. Most of these early regulations on well construction and plugging were not designed to protect ground or surface water from the impacts of natural gas and oil production. Rather, the regulations were meant to prevent waters from adjacent nonproductive formations and upper aquifers from flooding the oil-producing reservoir during drilling and production. The influx of alien waters could be of such a volume that drillers lost the hole before penetrating the target oil horizon. Thus, casing and cementing activities were incipient oil conservation measures to prevent loss of a saleable product. This kind of thinking was evident in the technical books of the period. For example, in 1919, geologist Dorsey Hager wrote a book called Practical Oil Geology. In Chapter 9, entitled Water Enemy of the Petroleum Industry, Mr. Hager states: The danger of water in oil fields must not be underestimated. Water flooding is a danger often present where care is not taken in advance to protect the wells. In these early years, the principal focus was on protection of the petroleum resource from the effects of water incursion and not on protection of water resources themselves. Most oil producers of the early period (prior to 1935) believed that royalty payments to the landowner for the privilege of extracting oil or natural gas
HIStorY oF nAturAl gAS And oIl EnVIronMEntAl lAwS

Key Points: y There is a comprehensive set of state and federal regulations in place that govern all aspects of oil and natural gas production and environmental protection. y Many state agencies have been involved in regulating oil and gas development for longer than the federal government and have unique knowledge and expertise relative to the local geological, hydrological, environmental, and
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from beneath their land adequately compensated the landowner for any surface and water resource damages caused to the property. These damages included accidental spillage of oil or saltwater, leakage of produced water from storage and disposal pits, and loss of agricultural land taken out of production by the occupancy of property. Pollution to groundwater from activities at individual tank battery locations sometimes rendered freshwater aquifers unusable for a long period of time; yet even landowners who had experienced considerable damage to their farms first viewed surface pollution as a necessary evil and an inherent part of the oil or natural gas production process.
and landowners felt that some framework of government controls over the production of oil was necessary. The United States was then, and still is, the only oil-producing country in the world where minerals rights can be privately owned and the owner of the natural gas and oil rights can make a lease agreement with a company to extract hydrocarbons in return for a royalty payment based on a percentage of each barrel produced and sold.
Initiation of Natural Gas and Oil Conservation

In 1935, after several aborted attempts to come up with an acceptable concept for government intervention into the supply-demand roller coaster, six states Oklahoma, Texas, Colorado, Illinois, New Mexico, and Kansas formed the Interstate Oil Compact Commission (IOCC). In 1991, the organization changed its name to the Interstate Oil and Gas Compact Commission. The purpose of the IOCC was to promote conservation of oil resources through an orderly development of oil reservoirs. Companies would predict a market demand for their product and the state agency would then set an annual or semiannual extraction allowable for each producing field (or producing horizon) based on the market prediction. Governor Marland of Oklahoma supported a concept addressing economic waste and believed that government should prorate production to obtain a fair price for crude oil. This concept was eventually changed to embrace the term physical waste and the six states ratified the Compact agreement. One of the early efforts of the Compact was the development of a set of model regulations that the states could use as a pattern to establish their own regulatory framework. Even though the model established a format for natural gas and oil conservation, the protection of groundwater from pollution was carried as a secondary consideration in most regulations, particularly as the regulations applied to well construction and plugging. In the early 1960s, the IOCC also developed a model for natural gas regulation similar to that created for oil in 1935. From 1941 through the end of World War II, several state legislatures enacted moratoriums on the enforcement of environmental regulations and conservation practices controlling supply and demand due to the increased need for oil for the war effort.
Prior to 1935
Through the early 1930s, regulation of the exploration and production industry was irregular rather than systematic. New York required the plugging of abandoned wells as early as 1879. Ohio reported enacting the first law for regulating methods used to case and plug natural gas and oil wells to prevent water from penetrating and contaminating the oil-bearing rock in 1883. In 1890, Pennsylvania passed the first law requiring non-producing wells to be plugged in order to protect the integrity of the producing formation. Texas legislature passed a law relating to protection of groundwater, well abandonment, and conservation of natural gas in 1899. In 1915, the Oil and Natural Gas Division of the Oklahoma Corporation Commission was given exclusive jurisdiction over all wells drilled for the exploration and production of natural gas and oil, and in 1917, the Commission was given authority over related groundwater protection and mandated to develop procedures for plugging and abandonment. The Texas Railroad Commission was given similar authorities in 1917 and 1919, respectively. California enacted a plugging program in 1915 and added a groundwater protection component in 1929. Other states set up natural gas and oil regulatory commissions, often without specific authority to promulgate regulations and where enforcement authority was only available under the general statutes and civil or county control. Around 1931, a barrel of oil, which cost about 80 cents to produce, sold for as low as 15 cents. This differential between supply and demand improved somewhat in ensuing years through the early 1930s. However, the potential for serious gluts of unmarketable oil remained and several governors over the objections of oil producers, some state legislators,
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In late 1941, the beneficial effect of conservation in the late 1930s had been proven and the United States had a surplus capacity of about 1 million barrels of oil, approximately 80% of which was produced from Compact states. By 1945, the IOCC had grown in membership to 17 states and was a sustaining force in providing models for natural gas- and oil-producing states to follow in promulgating regulations.
U.S. Oil Production Dominance

From 1946 to 1960, most oil- and natural gasproducing states established a regulatory agency to enforce oil and natural gas conservation practices. Still, the environmental protection aspects of the oil regulatory picture developed sporadically. State statutes regarding pollution abatement and control of oil field practices and waste emanated from individual events rather than from an overall welfare of the nation impetus. Kansas, for example, gave its board of health (not the Corporation Commission) authority in 1946 to issue orders against oil field brine disposal pits that were causing saltwater pollution; but it was not until January 1958 that the board could issue permits for acceptable pit usage and deny permits for those deemed to cause potential pollution. Texas adopted no-pit rules in the late 1960s and several other states placed stricter limits on how long produced fluids could be retained in pits. The concern over pit usage stemmed from a realization that these so-called produced water evaporation pits were little more than unsealed seepage pits and, as a result, domestic water wells were being contaminated with saltwater.
Environmental Movement
The 1970s brought the nations environmental consciousness to the forefront. The passage of the Federal Water Pollution Control Act (FWPCA) in 1972 sent the message that discharges of pollutants to the nations waterways, estuaries, and drainages, even intermittent ones, were no longer acceptable and discharges of specific inorganic pollutants were to be regulated either by state or federal permit. Congress authorized formation of the U.S. EPA to implement the FWPCA and successive environmental and water resource protection acts. Section 311 of the FWPCA and its successor, the Clean Water Act (CWA) of 1977, elevated the consequence of accidental spillage of oil from a producing lease to a finable offense when the oil entered a 214
flowing stream. The non-reporting of an oil spill was also a finable offense. Another part of the CWA required containment dikes around tank batteries and oil storage facilities to prevent releases of oil to navigable streams, which by definition included almost every intermittent upper reach of a stream if it connected to a potential flowing watercourse. This program, called the Spill Prevention, Control, and Countermeasures program, was administered under the direct implementation authority of the EPA. Prior to the FWPCA, most state natural gas and oil regulatory agencies required operators to contain, report, and clean up serious oil spills on water. However, few operators were fined unless they refused to obey a state agency directive. The CWA marked the first time that the natural gas- and oil-producing industry was subject to direct dealings with a federal agency on environmental protection issues. In 1974, Congress passed the Safe Drinking Water Act (SDWA), which authorized the EPA to promulgate regulations for wells used to inject fluids into subsurface formations. This section of the SDWA was called the Underground Injection Control Program, and included wells used for either disposal of excess produced water or for injection of produced water to increase recovery of oil. Between 1982 and 1990, 20 oil-producing states applied for and received primary enforcement authority (primacy) from the EPA to administer the program under Section 1425 of the SDWA. (Additional states received primacy under Section 1422 of the SDWA.) Delegating authority to the states allowed those with longstanding natural gas and oil regulatory programs to demonstrate that their programs were as effective in protecting groundwater as those promulgated and administered by the EPA. The major initial impact of the UIC program was that operators had to verify the mechanical integrity of each of their injection wells once every five years. Prior to the UIC program, most regulatory agencies only required operators to test an injection well if it was known or suspected to be leaking. In the 1970s, domestic oil production began to decline. Some landowners, who were actively engaged in agriculture, came to view the oil production on their acreage as a nuisance, rather than a benefit. Landowners and tenants increased demands that state natural gas and oil regulators direct operators to plug idle and non-productive wells. In response, many states set up temporarily abandoned or idle well programs that required operators to monitor the mechanical integrity of these wells and certify annually that idle wells had a future purpose.
In the 1980s, particularly after the 1986 depression in the industry, several states (Kansas, Texas, California, and others) received legislative authorization to establish dedicated funding to contract the plugging of abandoned or orphan wells. These well plugging funds resulted in the permanent closure of thousands of wells that might have posed a threat to the environment. Congress passed the Resource Conservation and Recovery Act (RCRA) in 1976, which gave the EPA authority to regulate the disposition and disposal of hazardous substances. Fluids produced during the exploration and production of natural gas and oil were originally excluded from RCRA and set aside for further study. In 1988, the EPA administrator issued a regulatory determination that wastes produced in connection with natural gas and oil exploration and production operations would remain under state regulation and would be exempt from the RCRA Subtitle C regulatory regime. In response to this decision, IOGCC committees developed environmental program guidelines for states to strengthen their natural gas and oil waste management programs (excluding those under the UIC program). Beginning in 1991, the IOGCC asked state committees to systematically review state natural gas and oil environmental regulatory programs against the guidelines. These review committees were comprised of state natural gas and oil regulators, state environmental regulators, major and local natural gas and oil producers and members of environmental advocacy organizations. This work is carried forward today by the State Review of Oil and Natural Gas Environmental Regulations (STRONGER).
tion to reflect the latest technological, environmental, and public policy needs of the state. There has also been increased scrutiny of operators who fail to maintain compliance standards. During this period, several states, including Kansas, Oklahoma, Indiana, and Louisiana, set up formal penalty schedules and operator suspension procedures to address habitual or flagrant noncompliance. Penalties that had applied only to Class II (natural gas and oil related) injection wells were now adopted for a whole range of environmental programs. Operators have also been subject to increased well and performance bonding and financial assurance requirements. Since 1990, intensified environmental awareness has resulted in the implementation of several new environmental programs. Some of these programs are listed below. y The discovery of CBNG in Montana, Wyoming, the Four Corners area, and the Black Warrior Basin of Alabama, brought the search for gas into some areas previously unexplored for hydrocarbons. In Colorado and California, which had always regulated natural gas and oil at the state level under home rule statutes, citizens now exerted pressure to regulate them through county or city ordinance. In 2008, Colorado revised its regulations to allow for expanded public participation in the permitting and environmental assessment of oil field sites. This participation included review by other state water protection agencies. y In the mid-1990s, citizens became concerned over the amount of naturally occurring radioactive material produced at some natural gas and oil lease locations. Sufficient radium and other radioactive isotopes in some produced water caused a coating of precipitate to develop in tubular goods and at pump connections. Operators were concerned when loads of salvage pipe were rejected by prospective buyers and were returned to them for disposal. As a result, some states, such as Louisiana and Texas, developed regulations governing the disposition of this pipe and other naturally occurring radioactive material and wastes. y The Community Right-To-Know portion of Superfund (Section 312 of SARA Title III) of 1988 required oil operators to submit Material Safety Data Sheets reporting how much hydrocarbon was stored onsite at a lease facility. The state level administration of this program is usually administered by the principal state environmental agency rather than
Environmental Regulation Refinement

The last two decades have provided new environmental regulatory challenges to natural gas and oil producers. Many states formed separate departments to administer overall environmental regulations in response to a programmatic shift in emphasis towards protection of water and land resources and to the special technical knowledge needed to implement programs. Such changes provided better coordination of environmental permitting and field inspection activities and improved documentation of accountable actions to state legislatures, the public, and the petroleum industry. Several states revised existing regulations concerning pits, tanks, and well construc-
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the natural gas and oil regulatory agency. This law also has a provision under Section 304 whereby the operator has to make changes in the facility design if a large release of hydrocarbons occurs. y The Oil Pollution Act of 1990 has had a huge impact on offshore natural gas and oil production operations, shipping, pipeline, and terminals primarily throughout the U.S. coastal areas of Louisiana, Texas, Mississippi, and Alabama. The Oil Pollution Act began as a reaction to the Exxon Valdez incident in Alaska in 1988 and required the use of doublehulled vessels to transport oil.
evidence of this early social consensus: historic oil fields are interspersed with urban and suburban development in Baldwin Hills, a number of the beach communities, and even Beverly Hills. In the postwar decades, several changes have influenced the regulatory processes governing natural gas and oil development and in some cases, the achievability of such development on a field-wide scale in economic and practical terms. Among these changes are: y The emergence of grassroots networks able to influence local community opinion y The shift of some regulatory agencies from a historic pro-development mission to a position of adjudicating the interests of opposing parties y The emergence of a strong interest by the public to manage, restrict, or prevent projects they see as affecting them y The erosion of a social consensus that development of energy resources is at all times in the public interest. Controversy in the 1950s and early 1960s over development of the portion of Californias Wilmington Oil Field that extends under much of the City of Long Beach and out into Long Beach Harbor augured this change in social consensus. Development of the original section of the Wilmington Field north and west of Long Beach underneath the communities of Wilmington and Carson caused extensive surface subsidence and a proliferation of surface production equipment and pipelines. When the state of California, which owned the mineral rights to the Wilmington Field under tidelands in Long Beach Harbor, first proposed development of the resource, the city of Long Beach vigorously opposed the states proposal with the strong support of city residents. The outcome of years of litigation and administrative delay resulted in a historic decision in which the state committed to develop the Long Beach portion of the field using water injection to control subsidence and to increase oil recovery. That this dispute occurred in the middle of a dynamic and growing metropolitan area ensured substantial media coverage, and led many in the public to recognize that an energized citizenry could influence not only local government, but oil field development promoted by state government. The seminal event that shifted public perception about natural gas and oil drilling was the Santa Barbara oil spill in 1969. A drilling accident at an offshore
Transformation of Public Confidence

Environmental protection technologies, practices, and regulations have evolved along with natural gas and oil production technologies. The direction of change has been movement from conservation for the economic protection of natural gas and oil resource operators to a multidimensional approach involving citizens rights, government regulation, and the rights of developers. As operators, citizens, and governments became more aware of the ways in which production could affect the environment, they developed a new perspective on environmental stewardship. In the early years of this process, which originated in energy-producing states decades before the environmental movement of the 1960s, the primary emphasis was on conservation and efficient production of the resource with a focus on economics. The term conservation, in fact, initially served as a legal term of art to describe measures to avoid physical and economic waste of natural gas and oil resources. State regulations were developed to address well spacing, pooling, and unitization in producing natural gas and oil fields, among other issues, recognizing a public interest in orderly development of natural gas and oil resources, and in balancing the interests of those holding rights to those resources. The governing assumption was that those interests were primarily economic in nature. During this period, conflicts over surface uses and occasional controversies over surface or groundwater pollution incidents were most often resolved by the legal system under principles of tort law or nuisance and in the case of surface use conflicts, occasionally through local zoning ordinances. Natural gas and oil drilling and production operations were broadly seen as legitimate industrial activities. The postwar development of metropolitan Los Angeles provides 216
oil rig sent almost 3 million gallons of oil into the Santa Barbara channel. As volunteers rushed to the beach and harbor to assist with cleanup, the days events spurred a new environmental movement beginning that evening in Santa Barbara and soon extending throughout the United States. Public clamor over the spill led Congress to pass, and President Richard Nixon to sign, the National Environmental Policy Act (NEPA). Similar public pressure led to the passage of the California Environmental Quality Act (CEQA). The spill was used again and again as a justification for passage of other environmental statutes or the adoption of new regulations intended to address pollution and environmental risk. The spill and its aftermath were among the factors leading to passage of the Coastal Zone Management Act (CZMA). The state of California imposed a moratorium on further exploration drilling in state tidelands that was not lifted until 1981, and which was reimposed several years later. Many major environmental groups focused their position statements on opposition to offshore natural gas and oil drilling and production. Over time, many in the general public developed a distrust of the competence and credibility of the natural gas and oil industry that has never fully abated. In the early 1980s, the California State Lands Commission cautiously lifted the moratorium on drilling from new locations in state tidelands (drilling from existing offshore structures had been allowed with state permit approvals). At the same time, the Reagan administration, through then-Interior Secretary James Watt, proposed an ambitious plan of new federal natural gas and oil lease sales in the Pacific Outer Continental Shelf (OCS). Natural gas and oil companies proposing to drill or to develop federal OCS leases promptly found themselves challenged by energized and resourceful community groups, not just in Santa Barbara County, but up and down the California coast from San Diego to Humboldt County. These groups proved adept at using early generation telecommunications and computer networks and a web of personal relationships to exchange strategies and lessons learned on grassroots organization, local referendum campaigns, and other methods to mobilize community opposition to offshore natural gas and oil projects. They recruited activists to attend public hearings to speak out against oil projects, particularly those of the California Coastal Commission, the State Lands Commission, and the Board of Supervisors of Santa Bar-
bara County. As a result, administrative hearings that two decades before might have taken place in relative obscurity were forums for creative acts of street theatre, notably at Minerals Management Service scoping hearings for OCS lease sales proposed off the coast of Northern California in the mid-1980s. In time, grassroots opponents of new projects in the California Pacific offshore found funding to sustain their efforts. The natural gas and oil industry adapted slowly to this transition in the regulatory environment in California. Nor was the industry nimble in forming coalitions and mustering its supporters at public hearings. While the industry debated the percentage of the public represented by opponents of offshore natural gas and oil development, it could not deny their energy. Declining oil prices in the mid-1980s, the complexity of a post-NEPA, post-CEQA regulatory environment, and the efforts of opposition groups in Californias coastal counties combined to discourage many of the major companies from further pursuit of new projects in the California offshore. Most have since sold or decommissioned their assets there. The lessons of California for the environmental movement have been discussed frequently and at length. Their effects elsewhere on regulatory processes governing the development and production of natural gas and oil have been significant. California became the proving ground for use of administrative processes to express public opposition to (or at least skepticism of) natural gas and oil projects, and for the use of administrative requirements to subject project proposals to rigorous third-party scrutiny. Whereas agencies in the early decades of regulating natural gas and oil development were often in the position of encouraging development (and in many cases were statutorily charged to do so), beginning with California and the West Coast states, some agencies took on the role of arbiter between the interests of those advocating and those opposing natural gas and oil projects. Also, the experience of California spread through the broader public to nurture an expectation that administrative processes existed not merely to resolve the interests of owners of mineral rights, but to recognize and address the interests of those who were potentially affected by natural gas and oil development. This transition in purpose and expectation for administrative processes has not been linear, and it has varied in pace and in outcome from state to state. But to some extent, underscored by media coverage of
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controversies over energy projects of many types and in many locations, this transition is occurring everywhere in North America. Historically, development of a natural gas or oil field was grounded in property transactions and in the administrative adjudication of the rights of participants in those transactions. Companies acquired natural gas and oil leases through negotiation with mineral rights owners, then voluntarily farmed out or pooled their leasehold acreage to assemble sufficient working interest and capital to drill. Subsequently, companies would negotiate, or work within the framework of state regulatory processes to form units to optimize the development and production of the resource discovered through drilling. Over time, as state (and later, federal) laws were enacted to ensure safe and environmentally responsible operations, companies would also obtain necessary permits and approvals. In the early years of enforcement of these laws, issuance of such permits and approvals most often occurred on strictly technical grounds. A company would submit an application demonstrating its ability to comply with the law in question, and upon review by agency staff, sometimes accompanied by a largely technical hearing, the permit or approval would be issued. Sometimes companies would need to obtain site construction permits, zoning variances, or similar approvals from local governments, but these were likewise based on technical and factual showings.
minerals. It is also the case in natural gas plays such as the Barnett Shale near Fort Worth, Texas, where severance may exist, or where mineral interest ownership may be so fragmented into small lots that owners of mineral rights may not see an economic benefit that outweighs the inconvenience of having a large drilling operation nearby. Similar controversy has more recently emerged where a critical mass of local citizens becomes a stakeholder in the maintenance of intangible but nonetheless strongly held values such as landscape or lifestyle. Many Santa Barbara residents in the offshore oil debates of the 1980s feared that their community and region could take on an unwanted industrial character if offshore oil projects proliferated. They fought to preserve vistas free of offshore platforms (though some 20 platforms could be found in Santa Barbara Channel at the time). Opponents of natural gas exploration in the Intermountain West have fought to preserve the undeveloped character of Colorados Roan Plateau, Wyomings Red Desert, and New Mexicos Galisteo Basin. Currently, in New York State, controversy surrounds proposed natural gas development in the Catskill portion of the Marcellus Shale, which supplies drinking water to New York City. Many local residents, as well as customers of the New York City Water Supply System and the citys government, oppose plans to develop this resource. Controversy and opposition to energy development projects can also find fertile ground in situations where the scale of development or perceptions and fears about future development exceed the capability of existing regulatory processes to resolve the issues in dispute. The state of New York is again a good example. Many members of the public opposed to any development of the Marcellus Shale natural gas resource in the state have petitioned the New York Department of Environmental Conservation not to approve a new regulatory scheme for drilling and production of the shale gas, even though the department is statutorily directed to issue such regulations. This has resulted in protracted delays in the issuance of revised New York Department of Environmental Conservation regulations and in a suspension of new project activity in the New York Marcellus region. The transaction-based framework for natural gas and oil development, guided by a regulatory process supporting conservation and efficient production of the resource, has evolved into a new framework
Affected Populace Opinion

The contemporary approach to development of a natural gas or oil field adds to this transaction-based history an evolving emphasis on the rights and interests of those who are potentially affected by the transactions. The potential for controversy is greatest where large numbers of people consider themselves affected by natural gas and oil development, but have no direct economic interest in the development. This was, and to a certain extent remains, the case along the California coast, where many residents felt they were at the mercy of decisions made between the federal government and oil companies. This potential also exists where an ownership of the surface rights has been separated from ownership of the mineral rights, known as split estate. Examples include both fee land states like Texas and public lands in the Intermountain West, where the U.S. government issued patents and deeds to the surface while retaining the 218
that is open to the influence of parties who may not be directly involved in the underlying transactions. These parties express interests that often fall outside the scope of agencies with traditional authority over natural gas and oil drilling and production operations, and may even fall outside the authority of other state or federal agencies with an environmental mission. In the breadth of ongoing public debate over subjects pertaining to energy and the environment, a consensus that existed in support of developing energy resources, and that recognized their economic and general social value, no longer exists. With this change, long-prevalent assumptions about what rights a party holds to the development of minerals acquired through ownership, lease, or contractual arrangement are being questioned. This leaves to mineral rights owners, their lessees, and operating companies, along with administrative agencies and governments at every level, the challenge of addressing public perceptions and responding to public concerns in order to foster a decisionmaking environment in which resource development can proceed. The need to secure the legal right to drill through the appropriate sequence of property transactions has not changed. The need to secure the appropriate permits and regulatory approvals to be able to drill in compliance with applicable laws and regulations has not changed. What has changed is the need to identify and engage with those who are potentially affected, broadly defined, by a proposed project. Not only must they be identified, but also the prudent operator must make best efforts to understand and to provide means to address their convictions, questions, and concerns within the budget and scope of his project. It has long been understood that natural gas and oil projects take place within boundaries of economic feasibility and rate of return, and in the context of legal title and geologic, logistical, and site surface characteristics. Over the past few decades, the enactment of new laws and regulations have also clarified that such projects must be considered in the context of their environment; that is, project plans must address their effects on air quality, on surface environment and the uses to which that environment may be put, on soils, on surface water and groundwater, on habitat and wildlife, and in some areas, on impacts to traffic and other infrastructure, and on community character and quality of life. Figure 2-11 illustrates the extensive process required for permitting a shale gas well in Pennsylvania, which addresses this variety of environmental impacts.
Now the task of effective project planning has expanded to include measures to address concerns of people who live in the community or region in which the project is proposed to take place. Project success or failure, timely completion, or uneconomic delay, increasingly depends on the degree to which issues of public concern are recognized and addressed in the project plan. Likewise, the pace of development of our natural gas endowment will be influenced by the ability to accomplish this project by project, field by field, and region by region. The specific approaches will vary greatly across the universe of projects. But as has been the case with many other attributes of successful natural gas and oil development projects, resolution will depend upon informed observation, thoughtful consideration of past experience, and adaptability to circumstance.
Hydraulic fracturing stimulates production in oil or gas wells and provides the industry a means to increase recovery of the hydrocarbon resource and lessen the environmental footprint from the development of natural gas and oil resources. Individuals and organizations concerned about the environmental and social consequences of hydraulic fracturing cite air emissions, surface- and groundwater withdrawals, produced water management, surface disturbances, invasive vegetation, habitat fragmentation, seismic vibrations, amplified noise, visual alterations, and community changes as potential problems. These environmental concerns have influenced legislative and regulatory policies as they relate to hydraulic fracturing. However, as hydraulic fracturing technology has progressed, operators and regulators have identified and developed extensive mitigation measures to reduce the probability of impacts. The Safe Drinking Water Act was enacted in 1974, 25 years after the commercial onset of hydraulic fracturing operations. Hydraulic fracturing was not considered for federal regulation under the SDWA during drafting. However, opponents to the technology and existing regulatory framework have emerged over the last decade to bring hydraulic fracturing into the forefront of the current environmental regulatory debate. Table 2-4 outlines the drivers of hydraulic fracturing since the passage of the SDWA.
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Figure 2-11. The Natural Gas and Oil Industry is Well Regulated: Figure 2-11. The Project Development Requirements in Pennsylvania Natural Gas and Oil Industry
1. LEASE LAND
Multiple Use Stipulations Non-Surface Use Stips Federal ESA Review DCNR Species of Concern
LEASE CONDITIONS
2. SEISMIC ACQUISITION
DCNR - Seismic Survey Agreement U.S. Fish & Wildlife DCNR PA Game PA Fish & Boat PNDI Mapping PA Game Comm. Right-of-Way & Spec. Use DEP Explosive Permits PA DOT State Road Permits PA County Local Road Use Permits
High Occupancy Road Permits Local Zoning Issues Seasonal Game Restrictions Stream, Road & Pad Bu ers Holiday Work Restrictions Disturbance Limits Road Use Bonds
START
Submit Bid to SLO
Collect Seismic Data Evaluate Data
5. DRILLING AND COMPLETION

Local Water Well Survey & Tests DEP Coal/Non-Coal Determination Surface Owner Sign-o DEP File Drilling Plan Compliant with PA Const. & Op. Stds. DEP Pre-Spud Noti cation Local Sewage Permits SRBC Registration DEP/SRBC Water Mgmt Plan
6. WELL START UP
DEP PERMIT TO DRILL
Frac Focus Report SRBC Post Drill Report DEP Solid Waste Mgmt Permit DEP Gas Flaring Permit DEP Post Drill Reports
SPUD, DRILL & FRAC WELL TEMPORARY FLOW BACK
Cuttings & Waste Mgmt. (Tested & Sent to DEP Licensed Land ll) Adhere to Previous Permit Conditions Obey All Lease Stips Obey Local Ordinance Requests Inspections & Oversight PA Fish & Boat PA Game DCNR DEP SRBC Local Operator
LEGEND: BMP Best Management Practice COE U.S. Army Corps of Engineers DCNR PA Dept. of Conservation & Natural Resources DEP PA Dept. of Environmental Protection EA Environmental Assessment
Well Test & Clean Up All Water Recycled Solids Disposed o site at Approved, Permitted Facility
EPA Environmental Protection Agency ESA Federal Endangered Species Act FAA Federal Aviation Administration NOI Notice of Intent PA DOT PA Dept. of Transportation
PNDI PA Natural Diversity Inventory SLO State Lands O ce SPCC Spill Prevention, Control & Countermeasure Plan SRBC Susquehanna River Basin Commission U.S. F&W U.S. Fish & Wildlife Service
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is Well Regulated: Project Development Requirements in Pennsylvania Project Development Requirements in Pennsylvania (continued)
Figure 2-11. The Natural Gas and Oil Industry is Well Regulated:
3. SITE SELECTION
FEMA/Local-Flood Plain Determination U.S. FAA Air Clearance Consult PA Biological Review Pre-const. EA Forestry Approval of Location PA DEP Road Const. Plan DCNR Location and Approval DEP COE - Wetlands & Stream Crossings PA Game Commission Species of Concern PA Fish & Boat Species of Concern U.S. F&W Federal ESA Issues; Seasonal Stips Penn-State Historical Preservation Cultural Resources Storm water Pre-Const. Notice (BMP)
4. LOCAL CONSTRUCTION
NOI to DEP (w/ Local Notice & Comment) Managing Agencies Seasonal Activity Restrictions PA DOT Road Const. Permits PA County Local Road Const. Permits SRBC Water Access Permits Local Municipal Zoning & Land Development Permits
DEP Pre-Const. Meeting Activity Notice Various Agencies Build Location & Access Roads DEP Inspection Compliance Monitoring (Life of Well)
AND PRODUCTION
INFRASTRUCTURE & HOOK UP
7. RESTORATION AND RELEASE
Repeat Steps 3 & 4 DECOMMISSIONING DEP Air Permits EPA SPCC Requirements DEP Plugging Permit Landowner/Lease - Adhere to Restoration Requirements
END
TERMINATION OF PRODUCTION
Construct Gathering Lines Construct Permanent Facilities Connect to Sales Line
Maintenance Activities Repeat Steps 3 & 4 Inspections (Life of Well) DEP EPA SRBC COE U.S. F&W Operator Monitor Well Integrity (Reg. Req.) DCNR
Release of Land & Location Operator Shut-In Production Plug Well Decommission & Remove Equipment Abandon Gathering Lines (See Steps 3 & 4)
Source: Adapted from Governors Marcellus Shale Advisory, Commission Report by Jim Cawley, Lt. Governor, Commonwealth of Pennsylvania, July 22, 2011. Full Report Found at http://www.pa.gov. Also see Pennsylvania Public Records for Grugan development: Gathering Line - Permit #ESX10-035-0002, GP0518291004, GP0818291001; COP Tract 289 Pad E Permit #ESX10-081-0076, API #37-081-20446 (Well #E-1029H); COP Tract 285 Pad C - Permit #GP0718291001, ESX10-035-0007. Additional reporting and oversight required for exceptions to permitted activity not shown.
PRODUCE WELL
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As hydraulic fracturing is applied to unconventional resources, it has become the focus of many regulatory modifications at the federal, regional, state, and local levels. Although hydraulic fractur-
ing is currently regulated at all of these levels (most prominently the state), many groups and individuals have called for additional federal regulation under the UIC program.
Table 2-4. History of Hydraulic Fracturing Regulation

Year 1940s to Present Action Adoption of state natural gas and oil regulatory programs Entity All natural gas- and oil-producing states, including OK, TX, LA, CO, WY, PA, etc. U.S. Environmental Protection Agency (U.S. EPA) U.S. EPA Comments States have adopted their own comprehensive laws and regulations to protect drinking water supplies, including the regulation of hydraulic fracturing. These states programs have been refined over the years, as necessary, to address industry changes. Act drafted to protect health by regulating nations public drinking water supply. Alabama regulation of hydraulic fracturing in coalbed natural gas stimulations under the Underground Injection Control (UIC) program. Major service companies agree to refrain from using diesel fuel in hydraulic fracturing fluids in stimulations involving underground sources of drinking water (USDWs) associated with CBM wells. Study evaluated potential threat to USDWs from injection of hydraulic fracturing fluids into CBM wells. Concluded that injection of hydraulic fracturing fluids into CBM wells poses minimal threat to USDWs. Clarified that hydraulic fracturing (exception for diesel fuel) was not underground injection as defined in the SDWA. Act would require chemical disclosure of hydraulic fracture fluid additives. Full chemical disclosure of fracturing fluids regulations put into place. Multiple state regulatory bodies and legislators studying or enacting regulations on disclosure of hydraulic fracturing fluids. EPA announces commencement of a new study investigating the possible relationships between hydraulic fracturing and drinking water. The frac panel was established to provide recommendations to the SEAB on how to improve the safety and environmental performance of natural gas hydraulic fracturing from shale formations. EPA initiates process to develop guidance for diesel use in UIC operations.
1974
Safe Drinking Water Act (SDWA) Legal Environmental Assistance Foundation, Inc. (LEAF) vs. U.S. EPA Memorandum of Understanding (MOU) between U.S. EPA and service companies Evaluation of Impacts to USDWs by Hydraulic Fracturing of Coalbed Methane (CBM) Reservoirs Final Report Energy Policy Act
1996
2003
U.S. EPA
2004
U.S. EPA
2005
U.S. House
2009 2010 2010
Frac Act Introduced Wyoming natural gas and oil Regulations State Regulations
U.S. Congress State of Wyoming Various
2010
Hydraulic Fracturing Study Establishment of Secretary of Energy Advisory Board (SEAB) Natural Gas Subcommittee EPA Regulation Review
U.S. EPA
2011
U.S. DOE
2011
U.S. EPA
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SuStAInAblE StrAtEgIES And SYStEMS For tHE contInuEd PrudEnt dEVEloPMEnt oF nortH AMErIcAn nAturAl gAS And oIl
Key Points: y Environmental sustainability can be accomplished by individual companies adopting business strategies that meet the needs of the company and stakeholders, while enhancing human and natural resources for the future. y To support informed energy decisions, an objective assessment of the environmental footprint (benefits, adverse impacts, and risks) of each potential energy source is essential. y Stakeholder engagement can provide valuable insights that lead to better decisions and strategies. y Public-private partnerships have proven to be a successful tool to collaborate with stakeholders and to drive environmental sustainability goals within a sector. y An environmental management system is a tool that can be used to drive environmental sustainability in a systematic manner. y Information sharing, transparency, and continued environmental stewardship are prerequisites to gaining public confidence. Prudent development of secure and reliable domestic sources of energy includes protecting the environment and public health, and is essential to maintain our quality of life and economic strength in North America. Along with renewable energy sources, domestically produced oil and natural gas are positioned to provide electricity and fuel for many decades to come. The future role of natural gas and oil within the North American energy portfolio hinges on the ability of companies to demonstrate their ability to sustainably produce such energy resources. For any industry, achieving the goal of environmental sustainability is an aspirational goal. The idea of sustainably producing natural gas and oil resources is not yet well defined (see Definitions of Sustainable Development at the end of this
chapter). Sustainable development is defined by the Brundtland Commission as meeting the needs of the present without compromising the ability of future generations to meet their own needs. Conceptually, sustainable development within the natural gas and oil industry may be driven by a vision for global leadership by the North American industry in setting the standard for technological and environmental performance. It may be reflected in: regional, state, and provincial strategies; pace of development; management of community impacts; investment of revenues in sustainable businesses, infrastructure, assets for the future; and public-private partnerships for sustainable development. Sustainable development goals, which are aspirational in nature, include: y Continually decreasing the surface footprint, working towards zero air emissions during production, achieving a positive water balance, and moving towards materials management not waste generation y Measurable benefits to and reduction of impacts on communities and ecosystems where production occurs y Ensuring development occurs at a rate where a high level of environmental compliance is consistently achieved y Economic success of sustainable energy companies. Ultimately, environmental sustainability can be accomplished by individual companies adopting business strategies and activities that meet the needs of the company and stakeholders while protecting and enhancing human and natural resources for the future. A number of natural gas and oil companies already have incorporated environmental sustainability goals into their business. A sound framework for sustainable natural gas and oil resource recovery would include a regulatory program that drives ongoing environmental improvement, allows operational flexibility to drive innovation in technologies and practices, and requires measurement of key environmental and social impacts. Other essential elements include: y Realistic sustainability comparisons of energy sources (social, environmental, and economic metrics) using life-cycle assessments (LCAs) and footprint analyses y Use of industry-developed environmental management systems to systematically drive environmental sustainability
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y Public-private partnerships (of industry, nongovernmental organizations, and government) that engage stakeholders in defining and supporting sustainable outcomes y An effective data management system that provides data standardization to regulatory agencies with appropriate and standard information (via uploads from operators), and allows operators and regulators to maintain the system via a single data portal for effective data extraction and sharing of solutions and lessons learned. Each of these four elements is discussed below.
y Markets accounting for the above factors will affect valuations and responses. To ensure environmentally responsible development of North American energy resources, it is important that energy policy decisions rest on science-based, consistent, comparative information on the environmental impacts of each, otherwise known as the environmental footprint (EF). The EF can be defined as the breadth of incremental impacts necessary to adequately compare the footprint of source types.33 It is the sum of positive and negative environmental impacts of developing, processing, transporting, and using an energy resource, considering all aspects of extracting, developing, processing, and transporting an energy source. Therefore, the EF can be assessed following principles developed for life-cycle assessments. Use of an LCA approach will result in the evaluation of all stages of development and use of an energy source, with the understanding that stages are sequential and interdependent. By analyzing each natural medium (air, water, and land) in connection with each resource input (energy, water, or other resource), LCA facilitates the appraisal of cumulative environmental impacts accruing during all stages in development and transport of an energy source (e.g., raw material extraction, material transportation, material processing, ultimate material use).34 Capturing impacts not contemplated in more established examinations is one benefit of adopting an LCA. A challenge is combining the LCA for each medium and resource into a single EF analysis for each unique area. Decisions are needed on how to balance and compare various impacts for example, determining whether water use is valued at a higher level than air emissions. At this time, there is a need for a standard method for creating an overall EF for energy sources across all media and all resource use. To be of greatest value, the EF would present impacts in a common set of metrics, under a series of main categories, such as resource consumption, land utilization, discharges (air and water), risk assessment,
33 Science Applications International Corporation (SAIC), Life Cycle Assessment: Principles and Practice, EPA/600-R-06-060, prepared for the National Risk Management Research Laboratory, Office of Research and Development, U.S. Environmental Protection Agency, May 2006, accessed June 29, 2011, http:// www.epa.gov/nrmrl/lcaccess/pdfs/600r06060.pdf. 34 SAIC, Life Cycle Assessment: Principles and Practice.
Life-Cycle Assessments and Footprint Analyses

Numerous decisions by a host of players will determine the energy economy of North America in future decades. Questions of investments, research and development expenditures, policy priorities, and legislation and regulatory requirements all influence these decisions. While most energy decisions ultimately are economically driven, environmental implications are increasingly important. Virtually any form of energy development and generation can result in both adverse and beneficial effects to air, water, land, community, and quality of life. These impacts can be realized on the environment at the global, national, regional, state, and local levels. Environmental matters can affect energy projects and companies in many ways and may delay or even halt projects, including: y Operational economics may be affected, for example, when compliance requirements and negative environmental externalities not included in the original plan increase project costs. y Operational changes may be required, such as increasing efficiencies, implementing recycling, encouraging conservation, implementing efforts to reduce GHG emissions, and designing criteria for more sustainable generation, extraction, and transportation methods. y Project feasibility and access to resources may be limited by permit moratoria, land use restrictions, and timing restrictions on development activities. y Changes to the social license and perception of the domestic energy industry may affect public trust. 224
toxic potency, and energy expenditure. Decision makers will then have information to weigh against social factors such as job creation, job retention, national security, energy independence, wealth exportation, resource depletion, and other considerations to select the energy resource appropriate for the specific circumstance in accord with national, regional, and local priorities. An objective understanding of impacts can enhance the decision-making process. For instance, policymakers may wish to evaluate the requirement that by a specified date, 20% of the nations electrical needs must be provided by wind power. An LCA can be used to compare the EF of the necessary amount of wind power to the EF of other energy sources. The increase in the desired power type could then be evaluated to predict the likely environmental consequence of the contemplated development compared to that of an alternative energy source. Additional benefits of an EF analysis include involving stakeholders in planning and implementing transparency into the process. A collective, transparent approach increases all stakeholders understanding of the issues and encourages objectivity in both public and private decision-making. A recent National Research Council study, entitled Hidden Cost of Energy: Unpriced Consequences of Energy Production and Use, specifically reports findings about health and environmental externalities from various energy types and calls for a life-cycle analysis of full fuel cycles.35 Additionally, an independent research study issued by the Applied Energy Studies Foundation, titled The Environmental Cost of Energy, identified the need for further in-depth analysis of environmental implications associated with the development of various renewable and nonrenewable energy sources.36 An LCA for energy37 can include, but is not limited to, an examination of the following subjects: y Extraction of the raw resource, including: Drilling natural gas or oil wells and transportation to a processing facility or the end user
35 National Research Council of the National Academies, Hidden Costs of Energy: Unpriced Consequences of Energy Production and Use, The National Academies Press, 2010, accessed June 29, 2011, http://www.nap.edu/catalog.php?record_id=12794. 36 Applied Energy Studies Foundation (AESF), The Environmental Cost of Energy, September 2010, accessed June 29, 2011, http:// energydecisions.org/Downloads/ECOE-Report-AESF.pdf. 37 SAIC, Life Cycle Assessment: Principles and Practice.
Mining of coal or uranium and transportation to a processing facility Constructing a solar or wind farm and transmission to the end user Farming of biofuels feedstocks (e.g., algae, corn, soy, switch grass, wood) and transportation to the end user. y Processing, manufacturing, and conversion, including: Ethanol from corn Biodiesel from soy Uranium ore into fuel rods Oil or natural gas into commercial fuels. y Energy end use, reuse, and maintenance, including use of: Coal to generate electricity and transmission of electric-power to the end user Natural gas to generate electricity and transmission of electric-power to the end user Nuclear fuel to generate electricity and transmission of electric-power to the end user Biodiesel or compressed natural gas to power vehicles Petroleum-derived gasoline or diesel to power vehicles Electricity to power vehicles. y Management of emissions, effluent, and waste, including: Produced water and hydraulic-fracture-produced water from oil or gas drilling and production Spent nuclear fuel wastes Spent semiconductor solar panels Spent lubricating and cooling oils from wind turbines Mine tails and spoils. In developing an LCA, the baseline year and level of comprehensiveness to adequately define a life cycle must be determined. The baseline year can be established based upon the validity of the historical data. The appropriate level of detail could include the primary life-cycle parameters including the energy necessary to drill the well or mine the coal. A primary
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life-cycle parameter is the sequence of activities [that] directly contributes to making, using, or disposing of the product or material.38 The primary assessment includes an evaluation of the environmental impacts from extraction to final end use, including processing, transportation, distribution, and waste streams generated along the way. Secondary life-cycle parameters include activities such as the manufacture of the blades for a wind turbine, the manufacture of the drilling rig for a natural gas well, or the manufacture of semi-conductor panels for a solar farm.39 Performing a secondary life-cycle assessment can be extremely complex. Deciding which factors to include or exclude may be subjective and difficult to apply consistently across energy sources. An LCA using primary life-cycle parameters is the most realistic approach for obtaining a comparable assessment level. Figure 2-12 presents process-based primary LCA of energy resources, including inputs (raw materials, energy, and water) and outputs (air emissions, water discharges, surface impacts, biological changes, and noise and visual impacts). Each energy source must be evaluated to the same level of detail. The policymaker must define and justify the limits of the analysis and ensure an appropriate peer review. A comprehensive, objective EF analysis will ensure that public policy decisions are based on sound and comparable information. Determining the appropriate methodology and establishing a system to collect the necessary information would provide sound analytic results on environmental impacts for policy decisions. This process would involve interested stakeholders in public forums and enable discussion of a variety of viewpoints and issues. The following sections suggest an approach for conducting such a process and provide an EF analysis example, including the issues and gaps involved.
mental considerations apply to all energy LCAs: scalability, metrics, regulatory compliance, and unique considerations. The methodology must include: y A scalability filter to avoid making comparisons that are inappropriate y A primary life-cycle approach to defining the limits of factors to be included and those that are excluded y Consistent and compatible metrics to facilitate comparative analyses, including risk so that both probable and consequential impacts are assessed y Recognition that not all criteria for comparison are quantitative and that qualitative or semiquantitative data must be analyzed in some cases y An assumption that energy development is performed in substantial compliance with applicable environmental regulations y An accounting for unique situational or location factors y The temporal nature of the impacts.
Figure 2-12. Life-Cycle Assessment
Figure 2-12. Life-Cycle Assessment
EMISSIONS AND EFFLUENTS
EXTRACTION OF RAW ENERGY SOURCE
PROCESSING AND CONVERSION TO ELECTRICITY OR FUEL
ENERGY END USE
Fundamentals of Energy Life-Cycle Assessments

A standard methodology is key to comparing the EF of energy types. While each energy type involves unique characteristics specific to location, four funda38 SAIC, Life Cycle Assessment: Principles and Practice. 39 SAIC, Life Cycle Assessment: Principles and Practice.
WASTES AND OTHER BURDENS Source: National Research Council of the National Academies, Hidden Costs of Energy: Unpriced Consequences of Energy Production and Use, The National Academies Press, 2010, accessed June 29, 2011, www.nap.edu/catalog.php? record id=12794.
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Those factors must be equitably analyzed within and among energy development scenarios to objectively describe and compare the various energy resources. An EF analysis can become complex due to the myriad of factors, variations, and methodology issues. The analysis needs defined boundaries and documented assumptions. A comprehensive EF analysis has not been conducted for energy resources at this time. Some of the needed data exist in various sources, but it is not comprehensive or in the required form.
tricity or transportation fuels), comparisons should be made by determining the EF associated with delivering that form of energy based on its end use. These calculations could also account for the relative quality of fuels. Different grades of coal will have different Btu contents. Measurements based on heat or electrical power produced account for the thermal or thermal-equivalent energy content of each energy source. Some impact types cannot easily be quantified and some assessments may be constrained to semiquantitative or even qualitative terms. That constraint may be especially true for impacts related to quality of life. Not all environmental impacts are similar nor can all environmental impacts readily be placed into quantifiable terms. However, where quantitative assessments are possible, they should be associated with a standard metric, or measure, in order to make valid comparisons.
Scalability
Meaningful comparison of energy sources must include scalability. Scalability means an energy source can contribute to the current North American electrical or fuel needs (i.e., grid, industrial combustion, routine daily heating, and transportation). Energy sources that are not yet scalable and exist only in an experimental capacity (e.g., hydrogen cell technology) or are limited to local application (e.g., rooftop solar power) cannot realistically be compared to other scalable sources. It is most appropriate to compare one scalable source to another scalable source.
Environmental Regulatory Compliance

Industries differ in compliance requirements, levels of compliance attained, and environmental impacts resulting from noncompliance. For purposes of the EF analysis, an assumption of compliance is essential since it would be difficult to assign a level of noncompliance and then evaluate the environmental impact of those noncompliant activities across industries. If that reality is to be reflected in the EF analysis, a consistent methodology for including risk must be identified and accepted. Federal and state laws, regulations, mandatory controls, and mitigation measures govern most practices. These requirements regulate the degree or intensity of the environmental impacts of these practices. For example: y Natural gas and oil extraction and coal and uranium mining operations are subject to federal, state, and local regulations that are intended to limit the environmental impacts from those activities. y The Clean Air Act regulates emissions from electrical power generating facilities and industrial manufacturing plants. y The Clean Water Act and Safe Drinking Water Act address impacts to surface and groundwater. y Emissions from automobiles and other motor vehicles are regulated at the federal and state levels.
Metrics
A consistent, objective, and quantitative set of measurements or units (i.e., metrics) is important to ensure an effective comparison of dissimilar energy sources. Most of the energy sources included here are capable of generating electricity, with the exception of corn-ethanol and biodiesel. Therefore, the unit of 1,000 megawatt-hours (MWh), which is commonly referenced in the electric-power industry, is a useful comparative metric. The impact (e.g., surface disturbance, air emissions) associated with generating 1,000 MWh from various energy sources can be compared using a metric such as acres disturbed per 1,000 MWh generated, or tons of CO2 emitted per 1,000 MWh generated. For heating fuels, environmental impacts assessed on a basis of 1 million British thermal units (MMBtu) also would be appropriate. For transportation, assessment units for environmental impacts per mile driven (for example, pounds of CO2 emitted per 100 miles driven) would be appropriate. The use of these assessment units allows for scaling and facilitates the comparison of evolving technologies to existing technologies. Because some renewable sources produce energy in specific forms (e.g., elec-
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These regulations are assumed in the footprint analysis to be effective in achieving the goals of protecting human health and the environment. However, it would be beneficial to include a risk factor in the EF analysis to account for the differences in noncompliance-caused impacts to assess the effect of anthropogenic actions.
Unique and Additional Considerations

Not all energy sources are appropriate in all locations. The sun does not shine with the same reliability in all parts of the world. Likewise, the distribution of consistent, forceful wind is not uniform. Soil type and weather conditions affect areas where biomass plants can be grown under natural conditions. Oil, gas, and coal deposits are only found in certain geographical locations. These natural variations mean that energy sources may have greater, lesser, or simply different environmental impacts depending upon where that resource is or can be located. Such factors must be considered when comparing different energy sources to each other or in comparing one energy source in different locations. For example, the environmental impacts and challenges of oil drilling in the offshore Arctic are different from those of oil drilling in the offshore Gulf of Mexico. Different land types or locations will have different sensitivities to impacts; for instance, some desert, tundra, and wetland landscapes may be more sensitive to impact and so may require a longer period of time to recover. Impacts to freshwater and clear air can also be magnified in high population density areas where the number of receptors is maximized. For instance, changes to air quality may push pollutant levels over critical non-attainment thresholds in areas with high population densities where other anthropogenic impacts already exist. However, it is also the case that small changes in air quality may be very noticeable in pristine areas such as Class I airsheds. The temporal nature of impacts should also be considered. Environmental impacts can vary over time and be short-term, long-term, temporary, or permanent. Temporary visual impacts associated with drilling for natural gas and oil differ from the permanent visual impacts associated with wind farms. The time dimension of changes to the chemistry of the atmosphere from combustion of fossil fuels is also a consideration. Impacts on the global environment that are essentially permanent in the scale of human 228
existence are driving a host of energy policy decisions at the state and federal levels that will have a growing influence on energy choices. Other impacts are reversible or can be remediated. A photovoltaic solar array constructed in an open landscape can easily be reclaimed when the solar arrays productive life has ended while the impacts of mountaintop mining are often not reclaimable due to preexisting conditions. The environmental impacts of biofuels and biomass include land use for farming. This requires a continual land disturbance causing loss of soil, surface runoff, sedimentation buildup, and continual chemical use in fertilizers and pesticides. Wind and gas development creates an initial disturbance to the land that may be more permanent (i.e., roads and site construction), but may be partially reclaimed, have a more minor ongoing impact (i.e., traffic), and have limited recurring replacement requirements (i.e., wind turbines). The nature of the resource being developed and the technology that will be used to develop it must be taken into account when doing an EF analysis. Shallow conventional natural gas and oil development involves different drilling and production techniques than the development of unconventional petroleum reservoirs (e.g., CBNG, shale gas, shale oil). Resource extraction methods are different and waste byproducts can also differ in both quantity and quality. Some natural resources can be accessed from remote locations. Oil or gas wells can be drilled directionally to reach reservoirs located under sensitive environments (e.g., wetlands, tundra, lakes, or deserts) or under sensitive locations (e.g., historic landmarks or parklands). Similarly, underground mining can take place beneath areas where direct surface mining may not be acceptable (e.g., under towns and cities). It is evident that unique and sometimes intangible variables must be included in a comprehensive analysis of energy-source alternatives. It is also apparent that in some cases, those variables can be defined by quantitative metrics, whereas in other cases, qualitative comparison may be the only means possible. A measurement of environmental consequences should be assessed at a common end point and from a common form, such as assessing the environmental consequences for sources used to generate electricity to the point where the electricity is ready to be placed on the grid. Understanding of the boundary issues to be included in an analysis is critical to the development
of an assessment producing comparable results. This becomes particularly evident when assessing highly dissimilar sources of energy (e.g., concentrated versus dispersed generation and use, direct generation and use versus energy that requires intermediate processing to use). Hence, the varied nature of the resources used to generate energy creates a need to develop common methodologies for assessment. The level of data detail and quality of the data that can be obtained for analysis may be a limiting factor. Data may be varied or nonexistent, depending on the energy source or environmental media being analyzed. Activities associated with the development of non-renewable resources have been studied and assessed in various documents developed by federal agencies such as the Bureau of Land Management and the U.S. Forest Service. Such assessments do not appear to be available for other resources or for all of the impacts of interest. Data exist regarding environmental impacts for specific locations in which resource development is occurring. The data are maintained by a variety of regulatory authorities and for various purposes, but those data cannot always be applied or extrapolated to other locations. For instance, assessments of environment impacts for development of natural gas and oil resources in the Rocky Mountain Front region of the United States would not necessarily be applicable to the Gulf Coast region. Data sources also can become outdated due to changing technologies, resources, and regulations. Each of those data-related factors will influence the level of detail possible for a data-driven assessment.
automobile technologies, and the impacts associated with those end uses. There is also a methodological decision to make on how far back in the life cycle to go, such as whether to include the impacts of producing construction and equipment materials. There are many other large and small assumptions that go into arriving at the final result. Every EF analysis is performed within such a structure of methodology, assumptions, and data. Estimating the EF requires findings from many other types of studies, including air quality modeling, ground and surface water analyses, production reports, efficiency analyses, studies of environmental emissions and discharges, fuel transport, and risk assessment, to name a few. Due to the large scope of these requirements, EF analyses face a wide assortment of analytical issues that arise from research in other fields such as geology, biology, health sciences, chemistry, engineering, climate studies, and social science. Almost all studies are careful to specify the uncertainty involved in their estimates. Some present a range of results. Some arrive at point estimates then discuss or attempt to quantify the uncertainty around those estimates. Those ranges or uncertainties can be large and this can also make inter-study comparison difficult to interpret. Since most EF analyses use previous studies as the source for their data and assumptions, the body of literature on environmental footprint represents an evolving set of related estimates rather than a set of independent analyses. The assumptions, estimates, and methods of one study are often used in subsequent studies, sometimes in modified form. The relationship between studies, therefore, should be taken into account in comparing them. Estimates from different studies cannot necessarily be seen as independent and their agreement cannot be taken as evidence for the reliability of the results if they are interdependent. Adding to the difficulty of comparing the results of several studies is the fact that EF studies are not always assessing the same thing. Each study has its definition of what represents an environmental impact and its assumptions about how those impacts should be estimated. As a result, studies that are being compared may actually be estimating quantities whose definitions only partially overlap. A comparison of two such studies serves to illustrate a few of these issues. The Bonneville Power Administration Fish & Wildlife Implementation Plan Final
Example of EF Calculations
To illustrate why a standard environmental footprint methodology is needed, as recommended here, it is useful to examine existing studies on the subject and their similarities and differences. Some of those studies are referenced here and in the associated topic papers. The fundamental assumptions and organization of any EF analysis deeply influence its quantitative results and the validity of comparisons to other studies. One basic set of assumptions involves the boundaries of the analysis, including which phases of energy development and use are included. For example, a comparison of the footprint of raw fuels will not take into account the relative efficiency of end-use technologies, such as electric power generation or
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Environmental Impact Statement (BPA study) and The Environmental Cost of Energy, prepared by the Applied Energy Studies Foundation (AESF), took different approaches to determining the EF for a range of energy sources. While the former focused on health effects and monetized those effects, the latter analyzed a broader range of environmental impacts and did not assign dollar values. The BPA study assessed a variety of energy sources but did not evaluate a full life cycle, neglecting to include transportation and production impacts. The AESF study addressed a wider range of energy sources considered under a full primary life-cycle assessment, including extraction, processing, transportation, and generation. There were also many methodological differences. Figures 2-1 and 2-2, found earlier in this chapter, display some of the results from the two studies on water and land resources. The figures show that the results of the two studies vary widely, for the reasons stated above. Such differences argue for the development of a sound, consistent approach to footprint analysis that is vetted through the various stakeholder groups and would result in a comparable set of estimates for the impacts of the various energy sources. In developing the EF examples above, numerous data deficiencies became apparent. First, much of the information and data needed for an EF analysis may exist, but not in the form required, or in forms that are not easily accessible. Second, most attempts at EF analysis did not include risk-assessment scores as indicators of the likelihood of future environmental catastrophes involving individual energy sources. Last, none of the examples of EF analysis included criteria for peer review of the outcomes. Although EF results are informative and instructive, they are limited to quantitative data and environmental impacts. Challenges remain for including qualitative data and community impacts. The Key Findings and Policy Recommendations section of this chapter contains recommendations for developing EF LCA inputs for making sound, science-based decisions that affect the future energy mix of North America.
system can be defined as the framework of policy and procedures used to ensure that an organization can fulfill all tasks required to achieve its objectives.40 In the environmental and sustainability context, a management system is a tool that provides a systematic approach for managing those components of an operation, function, or business that are both critical to achieve a desired level of environmental performance and to enhance regulatory compliance.41 Companies in many sectors have adopted EMSs over the last 20 years as a means of systematically and continuously improving environmental performance. An EMS is typically premised on a plan-do-check-act approach and involves the development of a systematic approach to manage operational activities in ways that meet environmental performance goals and support regulatory compliance. Companies with an effective EMS profess a host of benefits, including improved environmental performance, better environmental compliance, reduced cost of compliance, improved operating performance, increased accountability, and improved profitability. For example, a leading energy company that implemented a safety and environmental management system showed reductions of 34% in safety and environmental paperwork and cut 20% in annual training costs in its first three years of operation.42 An effectively implemented EMS can reduce spills, releases, and other environmental incidents by focusing on prevention and risk mitigation rather than reaction. This improved performance benefits public health and environment, provides social benefits, and presents a more positive company image. Financial rating agencies may factor the use of an EMS into assessing a companys environmental and safety performance for financial performance and stability. Reducing incidents can improve profitability and reduce overall costs. A sound overall goal for operational and environmental management is to invest enough into prevention and appraisal to significantly drive down failure costs, which can include spill response, remediation, repair or
40 International Organization for Standardization, ISO 14001:2004, Environmental Management Systems Requirements with Guidance for Use, 2004. 41 John H. Statzer and Michael J. Baldwin, Environmental Management Systems, Key Issues on Design, Value & Implementation, February 2011. 42 Statzer and Baldwin, Environmental Management Systems.
Environmental Management Systems

Perhaps one of the most important developments in the environmental performance of natural gas and oil operations has been the adoption of Environmental Management Systems (EMSs). A management 230
replacement of equipment, litigation, and medical costs for injured employees. Prevention includes encouraging employees to decrease overall impacts, including assessing in-process activities and integrating environment into operational standard operating procedures. A properly implemented EMS can enhance efficiencies through developing and using consistent practices across the company,43 and support institutionalization of knowledge, benefitting the company over the long term. Systematic approaches in developing processes can improve corporate-wide understanding of environmental goals and objectives. An EMS can streamline alignment of cultures, procedures, and corporate standards during mergers and acquisitions, reducing associated risks and costs. An EMS will vary significantly between companies. But the standards for consideration of implementation follow some notable examples:44 y United States: Standards for compliance assurance programs in the U.S. Department of Justice Prosecutorial and U.S. Sentencing Commission Guidelines; OHSAS 18001 Occupational Health and Safety Management System; Environmental Protection Agency National Enforcement Investigations Center 12 key elements of an Environmental Management System. ANSI:Z10-OHSMS U.S. Bureau of Ocean Energy Management, Regulation and Enforcement 30 CFR Part 250 Safety & Environmental Management Systems y European Union: Community Ecomanagement and Audit Scheme Great Britain: BS (British Standard) 7750 Specification for Environmental Management Systems y International: ISO 14001:2004 Environmental Management System Standard y Industry associations also recognize this trend with their own standards: American Petroleum Institute Model EHS Management System and Recommended Practice 75 American Chemistry Council Responsible Care (RC 14001 or RCMS) E&P Forum, Guidelines for the Development and Application of HSE Management Systems.
43 Statzer and Baldwin, Environmental Management Systems. 44 Statzer and Baldwin, Environmental Management Systems.
One of the most widely recognized management system standards is ISO 14001:2004, Environmental Management Systems (ISO 14001). ISO 14001 is designed for use by organizations to minimize harmful effects on the environment caused by its activities and to achieve continual improvement of its environmental performance. This standard contains 17 elements as shown in Table 2-5. The ISO 14001 standard provides a framework for companies to consider when developing an EMS. Many natural gas and oil companies have developed unique EMSs. Important factors influencing the success of an organization45 in implementing an EMS are executive management attention and commitment; allocation of appropriate time and resources; multi-functional
45 Statzer and Baldwin, Environmental Management Systems.
Table 2-5. ISO14001 Elements*

y Environmental Policy y Environmental Aspects y Legal & Other Requirements y Objectives & Targets y Environmental Management Programs y Structure & Responsibility y Training, Awareness & Competence y Communication y Environmental Management System Documentation y Document Control y Operational Control y Emergency Preparedness & Response y Monitoring & Measurement y Non-Conformance, Corrective & Preventative Action y Records y Environmental Management System Audit y Management Review
* See, for example, International Organization for Standardization (ISO), ISO 14000 Environmental Management, 2011, accessed April 15, 2011, http://www.iso.org/iso/ iso_catalogue/management_and_leadership_standards/ environmental_management.htm.
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internal involvement; organizational willingness to change; establishing goals and monitoring progress; employee communication; and simplicity. It is critical that upper management is a visible and active champion of the EMS and all levels of the organization are committed to and involved in implementation. Necessary culture changes can include integrating environmental considerations and operational controls into daily work tasks; repeatedly communicating with employees and contractors on planning, prevention, and continuous improvement; and incorporating environmental objectives, initiatives, and activities into employee performance evaluations and compensation. Mandating the use of an EMS has been shown to be ineffective in motivating environmental performance. But government agencies can incentivize and recognize companies that are implementing effective, performance-based EMSs. For example, agencies can provide regulatory flexibility based on a companys performance, and can work with an industry sector to develop incentives and programs based on member companies environmental performance and use of EMSs.
Frameworks for the development of public-private partnerships can be described generally by asking the four key questions of why, where, who, and what.47 Depending on the issue and scope of the engagement, the answers to those questions will vary greatly. Some of the more recognizable public-private partnerships through which the petroleum industry has engaged in recent years are summarized as follows: y EPA Natural Gas STAR program48 voluntary, costeffective methane reductions by the gas production and transportation sectors y STRONGER49 a collaborative process by which review teams composed of stakeholders from the natural gas and oil industry, state environmental regulatory programs, and members of the environmental and public interest communities review state natural gas and oil waste management programs against a set of Guidelines developed and agreed to by all the participating parties Federal agencies, including EPA,50 have a long history of partnering with industry sectors on specific goals or challenges. The natural gas and oil industry is well positioned to engage in a discussion with agencies and stakeholders to develop a partnership that drives environmental best practices, enables the industry to actively engage with stakeholders on key issues, and enhances effective environmental performance reporting. For example, EPA created the program Design for the Environment51 to incentivize the chemical industry to put green chemistry to work for people and the planet. Members can use a label on products. For
47 International Petroleum Industry Environmental Conservation Association, Building NGO Capacity for Pipeline Monitoring and Audit in Azerbaijan, Partnerships in the Oil and Natural Gas Industry, 2006. 48 U.S. Environmental Protection Agency, Natural Gas STAR Program, updated April 13, 2011, accessed April 15, 2011, http://www.epa.gov/gasstar/. 49 State Review of Oil & Natural Gas Environmental Regulations (STRONGER), Inc., Homepage (n.d.), accessed April 15, 2011, http://www.strongerinc.org/. 50 U.S. Environmental Protection Agency, Partnerships and Programs, updated February 2, 2011, accessed April 15, 2011, http://www.epa.gov/oppt/pubs/opptprg.htm. 51 U.S. Environmental Protection Agency, Design for the Environment: An EPA Partnership Program, updated January 5, 2010, accessed April 15, 2011, http://www.epa.gov/opptintr/ dfe/pubs/about/index.htm.
Public-Private Partnerships46
A key aspect of environmental sustainability for any corporation is to adopt business strategies and activities that meet the needs of the company and internal and external stakeholders while protecting and enhancing human and natural resources for the future. One method of engaging key stakeholders is through the use of what are known as public-private partnerships. These arrangements typically focus on relatively narrow issues identified as company development plans and activities that are being scrutinized either during or before operations commence. As the name suggests, regulatory agencies, community leaders, and nongovernmental organizations (NGOs) are typically engaged to ensure all relevant views are captured. Public-private partnerships provide a less confrontational method to share concerns and have them resolved when compared to enforcement and litigation. Often, public-private partnerships yield results beyond what were initially anticipated by the parties.
46 This does not refer to a public-private partnership where government services are being funded by a partnership between industry and government. This refers to a partnership between government and industry.
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natural gas and oil operators, the greatest value may be achieved during regulatory and permitting processes. Such a partnership can result in a label or recognition that companies can use in permitting and other regulatory settings that are recognized by agencies. Public-private partnerships are just an example of a tool available to drive the industry towards greater environmental sustainability to benefit communities and the environment. An industry-driven program closely aligned with the regulatory agencies and allowing stakeholder engagement is a possible strategy to be considered and implemented.
increase regulatory requirements. This has a Catch 22 effect in that the increased complexities of new technologies developed require that operators and regulators have access to and quickly assess larger and more complex data sets so they can advance new technologies that require more complex data. Widespread access to the Internet has also increased the opportunities for more efficient data sharing in the areas of regulatory reporting, data sharing between partners, and an increased demand for public access to operational and compliance information maintained by public agencies. An issue commonly seen when evaluating data management is that organizations have not created standard data management processes or common programs across their own enterprises. Noncentralized data limits the ability of users to share information and make more effective use of the information gathered. It is common that data management was done at a local level with each office defining their process and technology. The end result has been many fragmented technologies and data sources that dont work to provide a cohesive picture of the resource being tracked. Today organizations have recognized the importance of data sharing and are optimizing their data management across the entire organization, either by introducing common technologies and processes or linking the current systems. In the future, data management conduits and standards should be developed for exchange of information between the industry stakeholders. Care should especially be given to providing a means to report to regulatory agencies so that common data and information are easily transferred from the lease operators to the various regulatory organizations and among the regulators. Providing a means to accomplish this goal could streamline reporting and potentially reduce duplicative efforts of dual reporting. Because historically many agencies and companies developed their data management systems in relative isolation, much of the data are not easily shared. Different software packages and data standards have been used over the years, which made it difficult for agencies to receive data from companies and also difficult, if not impossible, to share operational and environmental data. In some cases, revising these systems would require massive capital outlays, not to mention operational disruptions, in order to change systems for which there has already been a substantial
Data Management Systems

Data management, as described by DOE in 2004, is as relevant today as it was then. What constitutes data, how data are collected, who owns the data, how data are organized and stored, how data sets may be reused, and what ultimately happens to data are significant issues that are surfacing and demanding attention. New challenges have arisen because of exponential growth of data and the capability to collect, organize, store, and reuse it for future scientific endeavors. Sharing of data in multidisciplinary and international collaborations has blurred traditional lines of scientific communication. New issues have arisen as technology enables new kinds of analyses and as numeric data and text data are integrated. End users of scientific data are demanding better access to more collections and expecting better quality. Information organization and retrieval issues, once considered essential for published research findings, now also apply to data.52 Modern computer systems have provided a means for more data to be readily available to operators, regulators, and the public for analysis. Use and analysis of these data has provided a means for the development of new technologies. These new technologies are in turn more complex and generate more detailed information to be managed, and provide data to perform more complex environmental assessments, which may
52 U.S. Department of Energy, Office of Scientific and Technical Information, The State of Data Management in the DOE Research and Development Complex, Report of the Meeting DOE Data Centers: Preparing for the Future, held July 1415, 2004, Oak Ridge, Tennessee, November 5, 2004, accessed April 15, 2011, http://www.osti.gov/publications/2007/ datameetingreport.pdf.
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investment. Efforts have been underway in light of providing better means of sharing information moving into the future, and many software development platforms have recognized the need for this option, which is providing hope for the advancement of data collection. The fragmented approach to data management is influenced by the current requirements in the United States from multiple regulatory agencies, as well as by a rich variation in resource plays and individual operator priorities. As illustrated in Table 2-6, data collected by the industry and regulatory community as a whole are used in a diverse manner. There are also many standards being implemented across the industry to manage the information. These diverse requirements of reporting and data collection can limit the effective and efficient management of resources, and until a unified approach to collecting and presenting the data from the diverse streams is realized, the true benefits of the data may not be seen. The benefits are expected to provide a better means for the prudent development of resources and take advantage of past knowledge inherent in the collected data. Other countries have started developing or have developed data portals to assist in this collection and dissemination of information, making for more efficient and environmentally sound decision making.53,54,55 One highly visible example representing the importance of robust data management in assisting the protection of human health and the environment was seen in the explosion of PG&Es natural gas pipeline in San Bruno, California (a suburb of San Francisco), on September 9,2010. Preliminary investigations from this tragedy, which resulted in the deaths of eight people and the destruction of 38 homes, identified the adequacy and accuracy of records as one of several
53 C. Makrides (Canada Nova Scotia Offshore Petroleum Board), Review of the Canada Nova Scotia Offshore Petroleum Boards Digital Data Management Centre, OTC 19089 (2007), presented at the Offshore Technology Conference, Houston, Texas, April 31May 3, 2007, accessed April 15, 2011, http://e-book.lib.sjtu.edu.cn/otc-2007/pdfs/otc19089.pdf. 54 UK Department of Energy & Climate Change, UK Oil Portal (n.d.), accessed April 15, 2011, https://www.og.decc.gov.uk/ portal.htm. 55 UK Department of Energy & Climate Change, The Aims of the UK Oil Portal (n.d.), accessed April 21, 2011, https://www. og.decc.gov.uk/portal_files/aims.htm.
possible factors contributing to the pipeline failure.56,57,58 A safe, reliable, expanded natural gas pipeline delivery system is critical to meet growing gas demand. The U.S. natural gas infrastructures, while robust and reliable, are facing operational challenges. Future efforts are needed to accomplish the goals of prudent development of the U.S. natural gas and oil natural resources relative to data management. These efforts include the standardization of data, and its communication between entities is seen as the most advantageous benefit to the future. This standardization is expected to provide benefits to the public in environmental and health, and could also provide industry with cost-saving benefits. These cost-saving benefits are seen to come from making the data easier to communicate with others, report to regulators, streamline regulations, reduce duplicative reporting, and provide means to review past incidents so mistakes may not be repeated or find more successful ways to develop a resource. Several efforts are underway to overcome some of the identified limitations of data management. For example, the U.S. Department of Energy, through the Ground Water Protection Council, has created the Risk Based Data Management System that allows natural gas and oil state regulatory agencies to more easily collect, manage, and analyze data. In addition, the Ground Water Protection Council and the IOGCC, through funds from DOE, have recently released the FracFocus.org website that provides for the voluntary collection, sharing, and disclosure of hydraulic fracturing chemical data that were previously either unavailable or difficult for regulators and the public to access. This website is the first step in an effort to provide public disclosure of hydraulic fracturing reported data and the first step in an even broader
56 California Public Utilities Commission, Report of the Independent Review Panel: San Bruno Explosion, rev. ed., June 24, 2011, accessed June 30, 2011, http://www.cpuc.ca.gov/NR/ rdonlyres/85E17CDA-7CE2-4D2D-93BA-B95D25CF98B2/0/ cpucfinalreportrevised62411.pdf. 57 Cynthia L. Quarterman (U.S. Department of Transportation, Pipeline and Hazardous Materials Safety Administration), letter to Deborah A.P. Hersman, Chair of National Transportation Safety Board, January 5, 2011, accessed June 30, 2011, http://phmsa.dot.gov/staticfiles/PHMSA/ DownloadableFiles/To%20NTSB%201%205%202011.pdf. 58 National Transportation Safety Board (NTSB), Natural Gas Pipeline Explosion and Fire Investigation (n.d.), accessed June 30, 2011, http://www.ntsb.gov/investigations/2010/ sanbruno_ca.html.
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effort to create a public Digital Oil Field that would allow both operators and agencies to realize significant efficiencies and improve environmental performance and compliance. The development of a data portal from the currently available public data sources could be a huge first step to help in the realization of a new digital oil field era that could benefit development of resources in the United States as a whole. A new cohesive digital oil field is where the benefits of data management in the pursuit of prudent development will be most realized. Future efforts from expansion of the data portal to migrate from a data gathering and dissemination tool, of publicly available data streams, would be its evolution into a data collection tool that could collate information from the operators and push it back to the necessary regulatory agencies. This effort in todays regulatory climate may appear to be a daunting task, but the benefits to regulatory review and streamlining of permitting and reporting could be seen as a major step in efficiency and prudent development of resources. In addition, it would provide a consistent interface to managing the environmental and compliance data necessary for the protection of health and human life.
y Offshore Regulation: Offshore development in federal waters is regulated by a variety of agencies including the BOEMRE (within the Department of the Interior), U.S. Coast Guard, Department of Transportation, Environmental Protection Agency, National Oceanic and Atmospheric Administration, National Marine Fisheries Service, Federal Energy Regulatory Commission, U.S. Fish and Wildlife Service, and U.S. Army Corps of Engineers. Additionally, coastal development includes state regulatory agencies. Conflicting statutory mandates make it difficult to achieve a balanced and predictable federal offshore policy. y Scientific understanding of environmental conditions in sensitive environments in deep Gulf waters, along the regions coastal habitats, and in areas proposed for more drilling, such as the Arctic, must be enhanced in order to meet the expectations of stakeholders. y Seismic noise is recognized as a concern for whale populations and other marine life, including fish. y Decommissioning offshore platforms includes beneficial options such as Rigs to Reefs that have been underutilized. Any technological endeavor involves risk and there are risks associated with developing offshore natural gas and oil resources. While the benefits of development include the assured supply of energy, it is important to ensure the energy recovery process is conducted in a manner that is safe and environmentally responsible. As discussed in the previous section, an effectively implemented EMS can reduce spills, releases, and other environmental incidents by focusing management and employee attention on prevention and risk mitigation rather than reaction. Furthermore, each of the many complex activities needed to develop offshore energy resources must identify and incorporate appropriate safetysustainability elements into plans and procedures. To address safety concerns, the offshore natural gas and oil industry manages and reduces potential risk through the integration of key planning requirements for hazards management, which are categorized into four principal elements: y Prevention (P) Preemptive measures to reduce the likelihood of a hazardous event
oFFSHorE SAFEtY And EnVIronMEntAl MAnAgEMEnt

Key Points: y Offshore Leases: The Gulf of Mexico provides 97% of federal Outer Continental Shelf (OCS) production and has nearly 7,000 active leases, 64% of which are in deep water. The Pacific OCS has 49 active leases off the coast of Southern California, 43 of which are producing. There have been no Pacific OCS lease sales since 1984. Alaska has 675 active leases and production from a single, joint state-federal field. The Atlantic does not have any active leases or production. y Offshore Production: Gulf of Mexico provides 31% of U.S. oil and 11% U.S. gas, with the majority of Gulf of Mexico production from deep water (25% oil and 5% gas).
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Table 2-6. Summary of Data Management Efforts

Sector Standards: Entity Energistics* Type of Data Standards for Data Publicly Available Yes Issues NGO-developed standards not enforceable for adoption, Wellsite Information Transfer Standard Markup Language (WITSML), Production Markup Language (PRODML), and Reservoir Characterization Markup Language (RESQML). Many state natural gas and oil regulatory agencies, through a collaborative effort, have developed de facto standards to natural gas and oil regulatory data. Standards for the development of Environmental Management Systems. Other NGOs have assisted in the development of standards used by various industry sectors. These have ranged from efforts to generate industry-wide standards by the American Petroleum Institute through the Petroleum Industry Data Exchange (PIDX) and Professional Petroleum Data Management Association (PPDM) to pipeline specific standards by Pipeline Open Data Standard (PODS).# Multiple federal agencies requiring submission of regulatory and operational data on natural gas and oil activities. Standards between agencies may not have been adopted on same data elements, limiting ability to exchange. Many individual state agencies require the submission of data. These data may be stored in paper files not readily accessible to the public or industry as a whole. Individually housed industry data management operations that are specific to the needs of the operator. May not be based on standards-based development, making it difficult to communicate and collaborate with other operators and regulating communities. Data are maintained as private intellectual property.
State Oil & Gas Regulatory
Regulatory Requirements/ Operations
Yes
EMS ISO 14001 Nongovernmental organizations (NGOs)
Environmental Standard Various Standards for Data
Yes Yes
Regulatory:
Federal Agencies
Yes FOIA (Freedom of Information Act) Request and Websites Provide Yes Many State Websites Provide
State Agencies (Oil & Gas, Environmental Protection, Department of Transportation, etc.) Industry: Operators
Regulatory Requirements/ Operations/ Business
No
Service Companies
Operations
No
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Table 2-6. Summary of Data Management Efforts (continued)

Sector Other Data: Entity Data Vendors Type of Data Various Publicly Available Yes Purchased Issues Data vendors have existed for many decades in the upstream market. These vendors collect and collate data available and provide tools to the industry for the retrieval and presentation of the data. Many times, they are a more efficient means to get analyzable data. Many NGOs are involved in support of distribution of data to the industry or by providing access to specific information. Examples include Air Emissions by Western Regional Air Partnership (WRAP)** or the disclosure of hydraulic fracturing chemical by the Groundwater Preservation Council and the Interstate Oil and Gas Compact Commission (GWPC/IOGCC).
NGOs
Various
Yes Membership, Public Domain
* #
Energistics, Homepage ( 2011), accessed March 21, 2011, http://www.energistics.org/home. Ground Water Protection Council, Risk Based Data Management System (1992present), accessed April 15, 2011, http://rbdmsonline.org/GWPC/. International Organization for Standardization (ISO), ISO 14000 Essentials 2011, accessed March 21, 2011, http://www.iso.org/iso/iso_14000_essentials. PIDX International, website 2011, accessed June 27, 2011, http://www.pidx.org/. Professional Petroleum Data Management (PPDM) Association, website (n.d.), accessed June27, 2011, http://www.ppdm.org/. Pipeline Open Data Standard (PODS) Association, website 2011, accessed June27, 2011, http://www.pods.org/.
** Western Regional Air Partnership, Oil/Gas Emissions Workgroup: Phase III Inventory 2009, accessed June27, 2011, http://www.wrapair.org/forums/ogwg/PhaseIII_Inventory.html. Ground Water Protection Council (GWPC) and Interstate Oil and Gas Compact Commission (IOGCC), FracFocus Chemical Disclosure Registry website 2011, accessed June27, 2011, http://fracfocus.org/.
y Detection (D) Early identification of a hazardous event y Mitigation (M) Effective measures to arrest and control a hazardous event y Recovery (R) Restoring normalcy after a hazardous event. As shown graphically in Figure 2-13, a menu of options that changes with time takes the shape of a bowtie. Early planning for prevention of hazardous events preserves the largest numbers of response options; in contrast, during a crisis event, options are reduced as urgency overtakes systematic analysis, planning, and thought. Options become more abun-
dant again only long after the event and as the latter stages of the recovery mode lead to detailed retrospectives and root-cause analysis. Thus, early and comprehensive planning (or the P-D-M-R approach) is important to sustaining safety during offshore operations. P-D-M-R safety-sustainability elements receive different relative proportions of emphasis within different offshore activities, depending on which hazards are being managed. While all offshore operational activities must include planning for the Prevention (P) of hazards, not all combinations of activities and issues would necessarily require Recovery (R).
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Figure 2-13. The Safety and Sustainability Model Featuring the P-D-M-R Elements
Figure 2-13. The Safety and Sustainability Model Featuring the P-D-M-R Elements
DETECTION NUMBER OF OPTIONS
PREVENTION
EVENT
MITIGATION
RECOVERY
MANAGEMENT OF HAZARDS
TIME
Notes: Safety Responsible management of risks and hazards for human health. Sustainability Responsible management of risks and hazards for natural environmental quality, including water, air, animals, and plants. Source: Modi ed based on O shore Technology Report 2001/063 - Marine Risk Assessment, prepared for Health and Safety Executives by Det Norske Veritas, 2002, of London Technical Consultancy. ISBN 0 71762231 2.
Table 2-7. P-D-M-R Safety-Sustainability Elements and Risk Management

Safety-Sustainability in Offshore Development: Planning Emphasis P = Prevention, D = Detection, M = Mitigation, R = Recovery Human Health &Safety (Immediate) P, M Disturbance of Marine Mammals & Fish P, D, M, R Oil & Gas Spills into Marine Environment P, D, M, R Other Pollutant Releases into Air or Water P, D, M, R
Offshore Operational Topic Area Environmental Footprints and Regulatory Reviews Environmental Management of Seismic and Other Geophysical Exploration Work Subsea Drilling, Well Operations, and Completions Well-Control Management and Response Offshore Production Facilities and Pipelines, Including Arctic Platform Designs Offshore Transportation Data Management
P, D, M
P, D, M
P, D, M, R
P, D, M, R
P, D, M, R P, D, M, R
P, M P, M
P, D, M, R P, D, M, R
P, D, M, R P, D, M, R
P, D, M, R P, D, M, R P, D
P, M P, M P, D, M
P, D, M, R P, D, M, R P, D, M
P, D, M, R P, D, M, R P, D, M
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Table 2-7 summarizes one view of how the safetysustainability elements are incorporated into risk management and indicates combinations of P-D-M-R emphasis for different intersections of seven topical areas and four hazard categories. For example, core topic 7 (Data Management) enables the dissemination of essential information used in oil-spill planning, recovery and restoration operations, but data management alone cannot implement hazard Recovery measures. Fieldwork required for Recovery from an oil-spill hazard remains the purview of core topic 4 (Well Control Management and Response). Therefore, Table 2-8 indicates an R for Well Control Manage-
ment and Response under the Oil & Gas Spills into Marine Environment, but not so for Data Management.
Center for Offshore Safety

To realize the intended benefits of P-D-M-R mapping into development plans, a credible infrastructure is needed to ensure that effective planning tools are available and that operators accept and demonstrate accountability. The Presidential Oil Spill Commission (2011) endorsed the role of a new Ocean Energy Safety Institute within the U.S. Department of the
Table 2-8. U.S. Government Agencies Involved in Offshore Natural Gas and Oil Regulations
Offshore Natural Gas and Oil Project Phase Regulatory Authority Federal Statute Predevelopment Phase (Exploration) Development Phase (Design, Construct) Production Phase (Operations) Divestiture Phase (Decommissioning)
Bureau of Ocean Energy, Management, Regulation and Enforcement U.S. Coast Guard U.S. Department of Transportation U.S. Environmental Protection Agency National Oceanic and Atmospheric Administration National Marine Fisheries Service Federal Energy Regulatory Commission U.S. Fish and Wildlife Service U.S. Army Corps of Engineers
OCSLA, NEPA, NFEA, CAA, NHPA OPA, PWSA HMTA CWA, CAA, RCRA CZMA MMPA, ESA, MFC NGPA ESA CWA, RHA
Note: CAA = Clean Air Act; CWA = Clean Water Act; CZMA = Coastal Zone Management Act; ESA=Endangered Species Act; HMTA = Hazardous Materials Transportation Act; MFC = Marine Fisheries Commission; MMPA = Marine Mammal Protection Act; NEPA = National Environmental Policy Act; NFEA = National Fishing Enhancement Act; NGPA = Natural Gas Policy Act of 1978; NHPA = National Historic Preservation Act; OCSLA = Outer Continental Shelf Lands Act; OPA=OilPollution Act; PWSA = Ports and Waterways Safety Act; RCRA = Resource Conservation and Recovery Act; RHA = Rivers and Harbors Act.
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Interior (DOI), but separately called upon industry to embrace the potential for an industry safety institute to supplement government oversight of industry operations.59 Based on an industry-led study, which included review of five other safety programs including the Institute for Nuclear Power Operations and the Occupational Safety and Health Administration Voluntary Protection Program, the Center for Offshore Safety was formed. The Center for Offshore Safety is administered by the separately funded standards and certification arm of the American Petroleum Institute and is open to companies exploring and producing natural gas and oil offshore.
On September 8, 2010, the Safety Oversight Board issued a report providing recommendations for improving the Bureau of Ocean Energy Managements operational and management policies, notably: y Enhance personnel training and recruitment to address the lack of technical expertise. y Increased fines and civil penalties to deter risky industry practices. y Address real and perceived conflicts between resource management, safety, and environmental oversight and enforcement, and revenue collection responsibilities. y Take steps to improve inter-agency coordination with federal agencies related to oil spill response and the mitigation of environmental effects of offshore energy development.
Outer Continental Shelf Safety Oversight Board

The OCS Safety Oversight Board was established by Secretary Salazar (Order No. 3298) on April 30, 2010. The purpose of the board was to provide recommendations regarding interim measures that could enhance OCS safety and improve the BOEMREs overall management, regulation and oversight of OCS operations.60
59 National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling, Deep Water: The Gulf Oil Disaster and the Future of Offshore Drilling, report to the President, January 2011, page 272, accessed June 27, 2011, http://www.oilspillcommission.gov/sites/default/files/documents/DEEPWATER_ ReporttothePresident_FINAL.pdf. 60 National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling, Deep Water: The Gulf Oil Disaster and the Future of Offshore Drilling, page 4.
Regulatory Framework on the Outer Continental Shelf

The 1953 Outer Continental Shelf Lands Act (OCSLA), as amended, governs the development of offshore mineral resources, including natural gas and oil. The OCS consists of submerged lands lying between the seaward extent of state jurisdiction and the seaward extent of federal jurisdiction. OCSLA provides the authority to the U.S. Coast Guard (USCG) and BOEMRE to exercise control over the exploration, exploitation, or development of OCS mineral resources.
regulatory Framework on the outer continental Shelf

Regarding references to BOEMRE, on October 1, 2011, the Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE), formerly the Minerals Management Service (MMS), was replaced by the Bureau of Ocean Energy Management (BOEM) and the Bureau of Safety and Environmental Enforcement (BSEE) as part of a major reorganization. BOEM is responsible for managing environmentally and economically responsible development of the nations offshore resources. Its functions will include offshore leasing, resource evaluation, review and administration of oil and gas exploration and development plans, renewable energy development, National Environmental Pol240 icy Act (NEPA) analysis and environmental studies. BSEE is responsible for safety and environmental oversight of offshore oil and gas operations, including permitting and inspections, of offshore oil and gas operations. Its functions include the development and enforcement of safety and environmental regulations, permitting offshore exploration, development and production, inspections, offshore regulatory programs, oil spill response and newly formed training and environmental compliance programs. Due to this NPC reports completion and approval on September 15, 2011, the following discussion references the regulatory framework prior to the October 1 reorganization.
The complex regulatory processes that affect offshore developments involve at least nine federal statutes, as well as nine different federal agencies. After the Macondo blowout and oil spill in April 2010, the Minerals Management Service was replaced by BOEMRE in June 2010, which in turn is subdivided into the Bureau of Ocean Energy Management and the Bureau of Safety and Environmental Enforcement, effective October 1, 2011. Along with the U.S. Coast Guard, BOEMRE is a key agency in regulating all OCS development phases. Other federal agencies involved with offshore development include: the U.S. Department of Transportation, U.S. Environmental Protection Agency, National Oceanic and Atmospheric Administration, National Marine Fisheries Service, Federal Energy Regulatory Commission, U.S. Fish and Wildlife Service, and the U.S. Army Corps of Engineers. Table 2-8 provides a summary of federal agencies (and their associated statutes) that are involved with administering offshore regulations, and which phase of offshore development they are principally involved with. BOEMRE regulations are contained in 30 CFR, Chapter II, with operations regulations at Part 250.61 Specific reviews of possible environmental impacts from routine events and accidents are required for plans for exploration, development, and production. Separate from these requirements, there is also specific permitting of proposed discharges, cooling water intake entrainment (for new facilities), and implementation of various best management practices plans required under the EPAs National Pollutant Discharge Elimination System permits. All waste transport and onshore disposal/reuse is regulated under RCRA and DOT regulations, as well as specific state regulations. USCG regulations are contained in 33 CFR, Subchapter N.62 USCG regulations contain provisions for occupational safety and health and citizenship of workers on the OCS, firefighting and lifesaving equipment on OCS facilities, and operational requirements. USCG regulations also contain many references to other requirements in 46 CFR, which is related to
61 Code of Federal Regulations. Title 30, Mineral Resources. Chapter II, Minerals Management Service, Department of the Interior. Part 250, Oil and Natural Gas and Sulphur Operations in the Outer Continental Shelf. 62 Code of Federal Regulations. Title 33, Navigation and Navigable Waters. Chapter I, Coast Guard, Department of Homeland Security.
shipping, as well as the navigational rules and pollution prevention pertaining to oil, hazardous materials, and human waste. For state and local government involvement, the Coastal Zone Management Act requires federal agencies to provide them the opportunity to review leasing and permit proposals. If a state disagrees with a proposed project, there is a process for resolving inconsistencies with the states coastal management plan or an appeal can be filed. The OCSLA requires the Secretary of the Interior to accept the recommendations of state and local governments on leasing proposals unless it is determined that they do not balance federal and state interests. The OCS support facilities that are located onshore are regulated by numerous state and local statutory regimes. One problem faced by the BOEMRE is the conflicting goals of OCSLA and other federal statutes. Table 2-9 provides current examples of these conflicting issues. At a minimum, clarifications are needed for certain overlapping authorities and responsibilities among the BOEMRE, U.S. Coast Guard, National Oceanic and Atmospheric Administration, and Department of Transportation.
Lease Sale Planning Process

BOEMRE has a five-year evaluation process that takes place during the OCS planning process, lease sale, and exploratory and development project phases. A component of the process also includes the performance of an environmental impact statement, which is conducted pursuant to the National Environmental Policy Act (NEPA), and is designed to identify risk-producing factors at a level appropriate for the different stages of development. As the process moves from a regional perspective to a very specific location for a project, stipulations to minimize and mitigate potential for harmful impacts to the environment as well as avoid conflicts between different user groups are implemented. Before the project phase is implemented, a number of different mechanisms are used to ensure extensive oversight and intensive environmental review. Some of these mechanisms are highlighted below: y Statutory Requirements Energy and mineral activities on the OCS are governed by numerous statutory obligations and operations may not proceed unless the process requirements satisfy applicable laws.
241
Table 2-9. Examples of Conflicting Goals between the Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE) and Other Agencies
Examples of Conflicting Goals Memorandum of Understanding between Minerals Management Service/ BOEMRE and U.S.Coast Guard (January 15, 1999) Notice to Lessees (NTL) No.2009-N11 (December4,2009) Memorandum of Understanding between Department of the Interior and Department of Transportation (August 17, 1998) U.S. Coast Guard and BOEMRE Purpose or Issue Identifies the division of responsibilities and communication process for these two agencies. Annex 1 of the Memorandum of Understanding includes a responsibility matrix for systems and subsystems related to Mobile Offshore Drilling Units. This NTL clarifies air quality jurisdiction on the OCS in the Gulf of Mexico. However, timing of EPA approvals of air emissions is a prolonged process in Alaska. The timing should better coincide with the BOEMRE permit and plan approval process. Implements the regulation of OCS pipelines. BOEMRE regulations apply to all OCS oil or gas pipelines located upstream of the points at which operating responsibility for the pipelines transfers from a producing operator to a transporting operator. Certain security procedures limit the BOEMREs ability to conduct unannounced inspections. BOEMRE Regulatory Authorities
30 CFR Part 250
30 CFR Part 250.302, 303, and 304
30 CFR Part 250
30 CFR Part 250
y Consultation Requirements Proposals for potential uses of the OCS must be published for public review and comment pursuant to specified statutory and regulatory provisions. y NEPA Compliance Each successive step in the process is subject to NEPA analyses, for five-year program proposals, lease sale proposals, Marine Mammal Protection Act authorizations, seismic exploration proposals, exploration proposals, and development and production proposals. y State and Local Government Roles The CZMA requires federal agencies to provide state and local governments the opportunity to review leasing and permit proposals. If states disagree, an elaborate mechanism for ensuring consistency with state coastal zone plans is provided. y OCSLA Programmatic Process Pursuant to Section 18 of the OCSLA, no area of the OCS may be offered for leasing unless the Secretary of the Interior complies with the requisite scientific, analytical, and deliberative process requirements. y OCSLA Lease Sale Process Once a 5-Year OCS Leasing Program is approved in accordance with Section 18 (above), specific lease sale proposals are subject to the process provisions of Section 19 of the OCSLA. 242
y OCSLA Exploration Process Once a lease is obtained, site-specific exploration proposals (seismic and exploratory drilling) must be subjected to further analysis. y OCSLA Development and Production Process If oil or natural gas is discovered in commercial quantities during the exploration process, site-specific development and production plans must be subjected to further analysis, NEPA compliance, state and local government CZMA review, Marine Mammal Protection Act authorization, Clean Air Act compliance, CWA discharge permitting, and public consultation and review prior to plan approval. To provide checks and balances in its regulatory program, the DOI and other agencies have the opportunity to review and comment on proposed rules and the 5-Year OCS Leasing Program. There are existing Memoranda of Understanding and Memoranda of Agreements with other agencies (e.g., U.S. Coast Guard, U.S. Fish and Wildlife Service, Department of Energy, and Department of Transportation), with states, and with other countries to accomplish this. The DOI is also held accountable to the White House, and Congress via multiple avenues such as: (a) the 5-Year OCS Leasing Programs planning documents and press releases on specific lease sales; (b) forms
that are submitted to the House, Senate, and the Government Accountability Office alerting them of imminent final rules; (c) information collection packages (new and updates) that are submitted to the Office of Management and Budget for approval and that provide cost and hour burdens of new and existing rules; (d) an annual publication notice in the Federal Register listing civil penalties; and (e) annual appropriation reports to Congress on the agencys performance over the past year and its future goals.
how BOEMRE must use regionally developed coastal and marine spatial plans to inform the statutory development process under OCSLA.
Consideration of Studies on the Deepwater Horizon Incident

This reports recommendations were developed through independent research and analysis. Nonetheless, they bear some similarities with, and are complementary to, recommendations from external studies focused on the Deepwater Horizon incident and the associated Macondo well blowout. The following external studies and investigations were considered, although some were not yet complete when the review was conducted and only preliminary public information may have been available. y The National Commission on the BP Deepwater Horizon Oil Spill and Offshore Safety y The Bureau of Ocean Energy Management, Regulation and Enforcement and U.S. Coast Guard Joint Investigation y The National Academy of Engineering Macondo study y The Chemical Safety Board study y The Outer Continental Shelf Safety Oversight Board y BPs and Transoceans Company Investigations y Industry Study Group Investigations, and Congressional Investigations by: (1) the House Oversight and Government Reform Committee; (2) the House Natural Resources Committee; and (3) the House Energy and Commerce Committee. Many of the external study findings generally align with findings and recommendations reported in this study that are aimed at prudent offshore natural gas and oil development. Specifically, the key aims for sustainable future offshore operations must include better coordination among regulatory agencies and industry attention to honing best practices both in equipment and operational risk management.
Coastal Marine Spatial Planning

On July 19, 2010, President Obama signed an Executive Order that led to the creation of a National Policy for the Stewardship of the Ocean, our Coasts, and the Great Lakes. The policy will be guided by the National Ocean Council, which met for the first time in November 2010. The National Ocean Council has begun developing draft strategic action plans and held a public comment period from June 2 to July 2, 2011. These plans will address the nine priority objectives that relate to the most pressing challenges facing the ocean, coasts, and Great Lakes. One of the priority objectives is for Coastal and Marine Spatial Planning (CMSP). CMSP is an integrated ecosystem-based management strategy with the goal of maintaining the marine ecosystem in a healthy, productive and resilient condition. The intent of CMSP is to identify areas most suitable for various types or classes of activities to reduce conflicts among uses, reduce environmental impacts, facilitate compatible uses, and preserve critical ecosystem services to meet economic, environmental, security, and social objectives. In addition, the National Ocean Policy states that one of the guiding principles of CMSP is for multiple existing uses (e.g., commercial fishing, recreational fishing and boating, subsistence uses, marine transportation, sand and gravel mining, and natural gas and oil operations) and emerging uses (e.g., offshore renewable energy and aquaculture) to be managed in a manner that enhances compatibility among uses and with sustained ecosystem functions and services, provides for public access, and increases certainty and predictability for economic investments. It is still unclear whether CMSP will result in the creation of and strict adherence to planning or systematic zoning areas in the ocean environment that might preclude natural gas and oil development, or
Offshore Operations and Environmental Management Findings

y Seismic methods will continue to be the primary geophysical tool used to discover, evaluate, and enable responsible production of offshore oil and gas resources.
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y Seismic noise is recognized as a concern for whale populations and other marine life, including fish. y Pipelines have proven to be the safest, most reliable, economical, and environmentally favorable way to transport oil and gas from well to shore. The aging of the pipeline infrastructure is a concern. y Decommissioning offshore platforms includes beneficial options, such as Rigs to Reefs, that have been underutilized. y Scientific understanding of environmental conditions in sensitive environments in deep Gulf waters and coastal habitats in areas proposed for more drilling, such as the Arctic, must be enhanced in order to meet the expectations of stakeholders. y Oil-spill response must include multiple methods/ tools such as: (1) oil sensing and tracking; (2) dispersants; (3) in situ burning; (4) mechanical recovery; and (5) shoreline protection and cleanup. All of these methods/tools must be properly developed, available, and preapproved to effectively respond to a large event. y The multiplicity of U.S. government regulatory agencies involved in setting data reporting requirements has led to inefficiencies. y Conflicting statutory mandates make it difficult to achieve a balanced and predictable federal offshore policy. y Federal regulatory agencies lack technical expertise to oversee complex technical systems and operations. y DOI/BOEMRE has implemented a NEPA policy that limits the use of categorical exclusions. This leads to preparation of more time-consuming environmental assessments, which has further slowed the commencement of drilling in the Gulf of Mexico.
of sustainability is often used to refer to a companys objective to achieve goals related to social, environmental, and economic needs. There is not one correct approach to encouraging or implementing environmental sustainability within the industry. It can be accomplished by individual companies adopting business strategies and activities that meet the needs of the company and stakeholders while protecting sustainability and enhancing human and natural resources for the future. A number of natural gas and oil companies already have environmental sustainability goals incorporated into their business. An environmental management system strategy is an industry-developed tool that can be used to drive environmental sustainability in a systematic manner. In addition, collaboration among companies, government, and other stakeholders is often essential to the success of industry-wide efforts. Due to the complexity of environmental sustainability issues, no one group (government, stakeholders, or business) can master the concept of environmental sustainability alone. A properly implemented EMS can provide greater efficiencies as consistent practices are developed and used across the implementing company. Stakeholder engagement can provide valuable insights that lead to better decisions and strategies. It can also increase the trust and support of government and citizens. Such discussions can more effectively incorporate local environmental sustainability priorities and concerns. Environmental sustainability is often seen as first a local matter, then regional, and finally national and international. Stakeholder discussions at a local level can easily be incorporated into public-private partnerships and overall environmental sustainability goals and objectives. These can, in turn, be addressed on a regional basis, whether by state or on a multistate basis that may include all jurisdictions involved in a geologic basin or resource play. Listening to these concerns can support a company in staying ahead of issues that can impact reputation, production delays, lawsuits, and regulatory actions. Public-private partnerships have proven to be a successful tool to collaborate with stakeholders and to drive environmental sustainability goals within a sector. These partnerships put the regulator in a different role. Instead of implementers of programs as dictated by legislators, they are managers working for outcomes that result in public benefit by navigating
KEY FIndIngS And PolIcY rEcoMMEndAtIonS Key Findings

Sustainable Strategies and Systems
Sustainable development was defined by the Brundtland Commission as meeting the needs of the present without compromising the ability of future generations to meet their own needs. The concept 244
the various strategic choices. Public-private partnerships, if properly designed and implemented, are an effective tool to drive environmental sustainability objectives consistently throughout an industry. It can also enhance the ability to engage stakeholders and incorporate input. Below are two examples of publicprivate partnerships through which the natural gas and oil industry has engaged in recent years, but none are focused on overall industry stewardship: y EPAs Natural Gas STAR program voluntary, cost-effective methane reductions by the gas production and transportation sectors. y State Review of Oil and Natural Gas Environmental Regulations (STRONGER) a collaborative process of the natural gas and oil industry, state environmental regulatory programs, and members of the environmental/public interest communities to review state natural gas and oil waste management programs against a set of guidelines.
agencies and programs that govern natural gas and oil operations and require compliance with environmental laws and regulations. Additional assurance is provided by industry organizations and public-private partnerships that develop industry standards, recommended practices, and guidelines, such as those cited above, and industry associations, professional societies and organizations of states such as the Interstate Oil and Gas Compact Commission and the Ground Water Protection Council. However, there may be a need for additional efforts to coordinate systems, activities, and programs within industry and between industry and government, to collect and disseminate state-of-the art practices, technologies, and management systems on a regional or resource play specific basis. Such a set of repositories would give industry and regulators easy access to the latest information on environmentally protective practices, applicability, and effectiveness in different areas and settings, and costs and benefits. It would also provide the public with transparency for those practices and with confidence that the principles of excellent environmental performance are being followed by those companies that use these practices and systems. The repositories should be open to companies, regulators, policymakers, NGO stakeholders, and the public. One recent example of the natural gas and oil industrys efforts to build public confidence is found in FracFocus, the hydraulic fracturing chemical registry website. A joint project of the Ground Water Protection Council and the IOGCC, FracFocus provides information about the chemicals used in the hydraulic fracturing of oil and gas wells along with educational materials on hydraulic fracturing, groundwater protection, and regulation. Many natural gas and oil companies participate in FracFocus, but not all companies do so. Increasing the participation in FracFocus to all natural gas and oil companies that engage in hydraulic fracturing and adding into the system all wells currently in drilling or production would be an important step in building public confidence.
Finding:
Industrys and governments commitment to an enhanced partnership focused on promoting and using systems-based strategies to drive environmental sustainability goals and outcomes can minimize the environmental impact of recovering North Americas natural gas and oil resource.
Recommendations:
y Industry and government should work with stakeholders to implement public-private partnerships focused on achieving environmental sustainability goals, sharing best practices, and measuring outcomes. y Government should recognize continuous improvement within the regulatory and permitting processes in a manner to promote innovation within the industry.
Building Public Confidence

One element of building public confidence and demonstrating the necessary environmental performance is assuring the public that industry adheres to a set of operational performance standards or principles that minimize risk and are protective of the environment. Much of this assurance is provided by the regulatory
Finding:
Broad systems (i.e., operational, management, technological, and communications) within the industry and government must work together to achieve efficient, sustainable, and prudent development. 245
Recommendations:
y The leaders of companies set the expectations for organizations and focus attention on the critical nature of environmental safeguards and practices. Therefore, commitment must be maintained to excellent environmental performance and continuous environmental improvement at both the leadership level of companies and throughout the organization. y Industry and government should work together to establish centralized and playspecific repositories that collect, catalog, and disseminate standards, practices, procedures, management systems, etc., from all appropriate private and government sources. y This will not take the place of standards-setting bodies, but rather serve as a central repository where industry, the public, and government may review and have free access to the most current standards and practices and a description of their applicable uses. y Every natural gas and oil company that uses hydraulic fracturing should participate in FracFocus and comply with applicable statemandated registries. The Department of the Interior should require every natural gas and oil company that uses hydraulic fracturing on federal lands to participate in FracFocus.
Finding:
Prudent development of North American natural gas and oil resources requires enhanced predevelopment planning.
Recommendation:
y All levels of the oil and gas industry should be encouraged to use appropriate and comprehensive predevelopment planning, stakeholder engagement, risk assessment, and the innovative applications of technology, which must be adapted to the variability of resource plays and regional differences.
Regulatory Framework
There is a comprehensive set of state and federal regulations in place that govern all aspects of natural gas and oil production and environmental protection. The U.S. EPA administers most of the federal environmental laws, although development on federally owned land is regulated primarily by the Bureau of Land Management (part of the Department of the Interior) and the U.S. Forest Service (part of the Department of Agriculture) while offshore development in federal waters is regulated by a variety of agencies, including the BOEMRE (within the DOI), U.S. Coast Guard, Department of Transportation, Environmental Protection Agency, National Oceanic and Atmospheric Administration, National Marine Fisheries Service, Federal Energy Regulatory Commission, U.S. Fish and Wildlife Service, and the U.S. Army Corps of Engineers. In addition, each state in which natural gas and oil is produced has one or more regulatory agencies that permit wells including the design, location, spacing, operation, and abandonment as well as environmental activities and discharges, including water management and disposal, waste management and disposal, air emissions, underground injection, wildlife impacts, surface disturbance, and worker health and safety. Many of the federal laws are implemented by the states under agreements and plans approved by the appropriate federal agencies. To deal with the limitations of prescriptive regulations, some agencies have developed performancebased requirements that allow the use of new practices and new technologies so long as environmental protection goals are met. This approach allows greater
Planning and Risk Assessment

Operators and regulators have long recognized that operations in extreme or sensitive environments, such as arctic climates, deepwater offshore settings, and wetlands, require careful planning to ensure operational success, worker safety, and environmental performance. As operations have moved into deeper, more challenging plays in more conventional settings, the need for more careful planning of these operations has been highlighted as well. The new paradigm for planning involves not only careful operational and logistic plans, but also requires that those plans be developed specifically to accomplish clear environmental protection goals as well as worker safety and public safety goals. In addition, risks must be identified and assessed. 246
flexibility and innovation while ensuring environmental protection, but both operators and regulators have recognized that this is not the best approach in all cases. Operators, regulators, and the public are in a near-constant dialogue to ensure that regulations are in place to effectively balance the need for natural gas and oil production, and the need for flexibility and innovation, with the need for regulatory certainty and environmental protection.
Finding:
A balanced and optimized regulatory process is critical to prudent development of resources.
Recommendations:
y Regulators at the federal and state level should have sufficient funding to ensure adequate personnel, training, technical expertise, and effective enforcement to properly regulate natural gas and oil companies. y State and federal agencies should seek a balance between prescriptive and performancebased regulations to encourage innovation and environmental improvements while maintaining worker and public safety. y Federal agencies should undertake efforts to better coordinate and streamline permitting activities on federal lands and in the OCS.
In practice, however, environmental footprint analyses tend to remain in early stages of development, with analyses exhibiting different techniques for measuring impacts and widely varying assumptions that often end up producing apples-to-oranges comparisons across fuels and energy resources. There are technical issues such as incomplete data and the lack of consensus around quantification of impacts and risks. This latter fact complicates the ability of this potentially important technique to provide policymakers with useful information to evaluate the relative importance of the different impacts. Moreover, the different resource types for the same fuel may have different impacts, such as with shale gas versus conventional gas. Environmental footprint results, however, are not intended to be a rationale for not mitigating the impacts of any fuel. Policymakers should refine their understanding of the life cycle and environmental footprint of energy sources, including natural gas and oil, as part of providing a high-quality information base for making decisions about energy choices that reflect the different nature and intensity of impacts. Information from environmental footprint analyses could be incorporated into analyses used in making investment and purchasing decisions by consumers, producers, and state and federal governments. With a high energy density and relatively low air emissions, the overall footprint of natural gas and oil appears to be smaller than most other energy sources and compares favorably with all sources in available analyses. In particular, shale gas, with higher than average production per well, has an even smaller environmental footprint on an energy unit basis according to some studies. Coupled with other factors such as domestic abundance, reliably consistent production, and its versatility as a fuel for many uses, the environmental footprint of natural gas, especially shale gas, makes it an attractive energy source that can fuel the U.S. economy both now and in the future.
Environmental Footprint
The U.S. economy depends on a reliable, affordable, and abundant supply of energy. A key element of a reliable energy supply is one that can be developed prudently i.e., one that is sustainable environmentally, economically, and socially. As the United States considers its energy sources for the future, assessing the environmental impacts of the various energy sources will be a significant factor in the choices that are made. One useful approach for this is an environmental footprint analysis that, to the extent possible, quantifies the potential environmental impacts of each source on a per unit of energy basis. The footprint analysis does not attempt to provide a single score to indicate that one source is better than another. Instead, it provides an objective, science-based assessment of the potential positive and negative impacts of each source so that trade-offs can be evaluated and the relative importance of different impacts can be weighed.
Finding:
When compared with other energy sources, natural gas (and shale gas in particular) has a comparable or better overall environmental footprint across the full life cycle than most other energy sources. 247
Recommendations:
y The federal government should support the development of methodologies for assessing environmental footprint effects such as impacts on water and land. y As sound methodologies are established and vetted, regulators and others policymakers should use environmental footprint analysis to inform regulatory decisions and in implementing other policies where energy resource choices involve economic and environmental trade-offs.
research and technology development is conducted by private companies and it is important to not jeopardize this private enterprise system of innovation. However, sometimes the payoff period for such research is too long to attract private support. Therefore, private investment cannot be counted on to perform this work. In other cases, the intellectual property developed by research is better held as a public good rather than being held privately. This can occur when the benefits of the research would accrue to the United States as a whole, yet do not meet the criteria of any individual company to justify the investment.
Finding:
Technology Innovation
The history of natural gas and oil development has been one of continuous technology advances, improved systems management, and improved regulatory processes that have allowed production of new and more challenging resource plays, while at the same time improving environmental performance. These advances have led to production of resources that until recently were not considered to be technically recoverable and have resulted in levels of environmental performance that could not have been envisioned just a few years ago. Improvements in environmental performance have occurred in every phase of natural gas and oil development for both offshore and onshore operations, from construction, drilling, completion through production, plugging of the well, and final reclamation. New technologies and innovative practices have been implemented to better control water use, reduce air emissions, and ensure groundwater protection. Additional performance improvements have been developed for hydraulic fracturing, materials management, and overall operation and management. As we move forward, we can expect to see even more technology advancements that will allow production of ever more challenging resources while continuing to improve environmental performance. Such advances must continue to be accompanied by regulations that provide effective environmental protection based on sound science while allowing innovative changes that can lower costs and improve protection. Continued support for research and technology development is a necessary condition to enable development of our natural gas and oil resources. Much 248
Advances in technology, continuous operational and environmental performance improvements, and the appropriate assessment and mitigation of risks are essential to ensure continued prudent development of North American natural gas and oil resources.
Recommendations:
y Even as natural gas and oil companies continue to fund their own proprietary technology and other research, federal government agencies should also perform important roles in supporting the development of new technology. While different federal agencies may be appropriate homes for a range of research and technology development efforts, the Department of Energy should lead in identifying, in some cases funding, and in other cases supporting publicprivate partnerships for research and development on energy and certain environmental issues of national interest. Examples where federal involvement is needed include: The environmental impact of oil spills and cleanup, including residual effects of chemical dispersants, and science-based risk assessments Science and pre-commercial technology relating to methane hydrates Technology and methods for understanding, quantifying, and mitigating the environmental impacts and other risks of natural gas and oil development to continue to improve the environmental performance of exploration and development activities.
y State and federal agencies should continue working to develop regulations that ensure environmental protection and encourage technology advancement and innovative environmental practices.
stewardship is a prerequisite to gaining public confidence. The importance of this undertaking merits highlighting through a separate finding.
Finding:
Public knowledge and confidence needs to be built through open information sharing and transparency about operations, impacts, risks, and availability of mitigation strategies.
Public Education
The importance of informing the public, maintaining transparency concerning operations and risks, and gaining public confidence through excellent environmental performance is a recurring theme. This information and understanding is critical to achieving the publics permission to operate in many parts of North America. Public education can take many forms, including information libraries, K-12 curricula, media campaigns, speakers bureaus, web sites, and studies of risks in areas of special concern, such as hydraulic fracturing. Continuously improving environmental
Recommendations:
y The oil and gas industry must maintain and publicize continuous effective environmental performance and transparency. y The industry and state and federal agencies must disseminate science-based information on practices and risks to inform the public and build public confidence.
definitions of Sustainable development

Sustainable development was defined by the Brundtland Commission as meeting the needs of the present without compromising the ability of future generations to meet their own needs.63 The concept of sustainability is often used to refer to a companys objective to achieve goals related to social, environmental, and economic needs. Sustainable development for industry can be referred to as the triple bottom line,64 a three-legged stool,65 or corporate social responsibility.66 The triple bottom line was introduced
63 United Nations General Assembly, Report of the World Commission on Environment and Development: Our Common Future, transmitted to the General Assembly as an Annex to document A/42/427 Development and International Co-Operation: Environment (1987), accessed April15,2011, http://www.un-documents.net/wced-ocf.htm. 64 Timothy F. Slaper and Tanya J. Hall, The Triple Bottom Line: What Is It and How Does It Work? Indiana Business Review 86, no. 1 (Spring 2011), accessed June 29, 2011, http://www. ibrc.indiana.edu/ibr/2011/spring/article2.html. 65 United Nations General Assembly, Report of the World Commission on Environment and Development. 66 Cynthia A. Williams and Ruth V. Aguilera, Corporate Social Responsibility in a Comparative Perspective, University of Illinois at Urbana-Champaign (2007), accessed June 29, 2011, http://www.business.illinois.edu/aguilera/pdf/Williams%20 Aguilera%20OUPfinal%20dec%202006.pdf.
by John Elkington in 1997 in order to demonstrate that to reach sustainability, economic, environmental and social performance must be achieved.67 The Global Reporting Initiative (GRI),68 a widely recognized sustainability measurement organization, introduced draft Sustainability Reporting Guidelines for organizations in 1999.69 GRI is currently developing a tool specifically designed to measure the different environmental aspects of the natural gas and oil industry.70 This effort can be further defined once the GRI tool is released. Sustainability within business is not a clearly defined concept for industry.71 Most companies have
67 William R. Blackburn, The Sustainability Handbook: the Complete Management Guide to Achieving Social, Economic and Environmental Responsibility, Environmental Law Institute, 2007, page 4. 68 Global Reporting Initiative, Homepage (n.d.), accessed April 15, 2011, http://www.globalreporting.org/Home. 69 Global Reporting Initiative, Homepage (n.d.), accessed April 15, 2011, http://www.globalreporting.org/Home. 70 Global Reporting Initiative, Oil and natural gas (n.d.), accessed April 15, 2011, http://www.globalreporting.org/ ReportingFramework/SectorSupplements/OilAndGas/. 71 Blackburn, The Sustainability Handbook, page 9.
249
Examples of Economic, Environmental, and Social Topics*

Examples of Economic Topics y y y y y y Brand strength Capital expenditures Cash flow Community donations Credit rating Debt and interest y y y y y y Dividends Liabilities Local purchasing Market share Profits R&D investments y y y y y y Retained earnings Return on investment Sales Taxes Tax subsidies Wages
Examples of Environmental Topics and Impacts (Benefit or Impact) y y y y y y y y y y Air pollution Biodiversity (wildlife or habitat) Chemical spills Compliance Cultural resources Energy use (conservation or consumption) Greenhouse gases Invasive species (increase or decrease) Land disturbance (soil erosion, construction) Natural resource use (consumption or conservation) y y y y y y y y y Noise and odors Product energy use Renewable energy Soil contamination Spills (prevention or occurrence) Waste disposal (hazardous, solid, liquid) Water quality (surface water or groundwater) Water use (consumption or conservation) Wetlands
Examples of Social Topics y y y y y y y y y y y y y y

*
Surface owner concerns or benefits Visual changes Community concerns, including environmental justice Changes in reputation Indoor air pollution Access to healthcare Charitable donations Labor issues Community education and outreach Corporate governance Employee benefits Disaster relief Emergency preparedness Employee assistance programs
y y y y y y y y y y y y y y
Employee diversity Employee wellness programs Employment Ethics Human rights Impacts on local cultures and communities Industrial hygiene Legal compliance Occupational health Product safety Securities regulation Support for community services Workplace safety Transparent public reporting
William R. Blackburn, The Sustainability Handbook: the Complete Management Guide to Achieving Social, Economic, and Environmental Responsibility, Environmental Law Institute, 2007, pages 2527.
activities that further the cause of environmental sustainability. Financial success and long-term employment can be part of a sustainability equation. Strong corporate governance and business ethics are other common sustainability successes for companies. Sustainability does not mean that a company can achieve no negative impacts to society and the environment. It is a process that supports companies moving towards a more sustainable outcome. Companies can be perceived by society as being environmentally and socially conscious, or not based on perceived or actual past occurrences. Jeffrey Immelt, 250
Chief Executive Officer of General Electric, was noted for stating: The worlds changed. Businesses today arent admired. Size is not respected. Theres a bigger gulf today between the haves and have-nots than ever before. Its up to us to use our platform to be a good citizen. Because not only is it a nice thing to do, its a business imperative.72
72 Marc Gunther, Money and Morals at GE, Fortune (November 15, 2004), accessed April 15, 2011, http:// money.cnn.com/magazines/fortune/fortune_archive/2004/ 11/15/8191077/index.htm.
Organizations can engage with stakeholders to improve goals, metrics, monitoring systems, and reports. To achieve superior performance, a business will continually challenge itself. James Collins, former Stanford University business professor, indicated that a common characteristic of great companies is that they understand and confront the brutal facts.73 Companies and industries often have dialogues within their organizations, which can lead to discussions based on hope rather than reality. Great companies have the courage to listen to stakeholders and ask for alternative views.74 Such companies will reflect stakeholders views in strategic objectives and communications. Listening to these concerns can support a company to get ahead of issues that can impact reputation, production delays, lawsuits, and regulatory actions.75 Stakeholder engagement can provide valuable insights that lead to better decisions and strategies. It can also increase the trust and support of government and citizens. For example, Art Gibson of Home Depot stated: A company cant realize the full potential of environmental sustainability unless the organization and its stakeholders are aligned on the important aspects of that concept in a way that brings mutual benefit. A good way to achieve that alignment is through an engagement process. And from our experience, a proactive, well-planned process is much easier than a reactive one.76 In the sectors involved in land development, public comment and hearings are often required for permitting and other government approvals. There are also a number of laws requiring disclosures to agencies or shareholders. Such discussions can also more effectively incorporate local environmental sustainability priorities and concerns. Environmental sustainability is often seen as first a local matter, then regional, and finally, national and international. Stakeholder discussions at a local level can easily be incorporated into publicprivate partnerships and overall environmental sustainability goals and objectives.
73 Blackburn, The Sustainability Handbook, page 373. 74 Blackburn, The Sustainability Handbook, page 373. 75 Blackburn, The Sustainability Handbook, page 373. 76 Blackburn, The Sustainability Handbook, page 375.
Stakeholder engagement and partnerships have not always proven successful. There are a few commonly stated reasons for such engagements to be less than successful, including: y Individuals in the organization are concerned about the outcome of the engagement y Poor understanding of engagement techniques y Failure to effectively scope purpose of discussions and partnership y Lack of evaluation of outcomes y Lack of resources.77 Any partnerships or engagements could focus on an open dialogue with clear goals and purpose. These lessons can be taken into consideration for developing public-private partnerships. Public-private partnerships have proven to be a successful tool to drive environmental sustainability goals within a sector. These partnerships put the regulator in a different role. Instead of implementing programs as dictated by legislators, they are managers striving for outcomes that result in public benefit by navigating the various strategic choices. This can enhance accountability of public managers and provide a greater source of regulatory and voluntary tools. As the National Academy of Public Administrations 1995 report on the U.S. EPA states: At present, EPA is hobbled by overly prescriptive statutes that pull the agency in too many directions and permit managers too little discretion to make wise decisions. Congress should stop micromanaging EPA.78 The report continues to press for a coherent integrated governing statute and indicates that EPA should promulgate a mission statement of its own.79 Public-private partnerships, if properly designed and implemented, are an effective tool to drive environmental sustainability objectives consistently throughout an industry. It can also enhance the ability to engage stakeholders and incorporate input.
77 Blackburn, The Sustainability Handbook, page 377. 78 National Academy of Public Administration, Setting Priorities, Getting Results: A New Direction for the Environmental Protection Agency, Report to Congress (Washington, D.C., 1995), page 1. 79 National Academy of Public Administration, Setting Priorities, Getting Results, page 1.
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Chapter Three
Natural Gas Demand

Abstract
The application of technology developed in North America has dramatically changed the outlook for North American natural gas supply from one that is supply constrained and expected to rely on significant liquefied natural gas (LNG) imports, to one that has created an opportunity for natural gas to play a larger role in the transition to a lower carbon fuel mix. To assess the range of potential North American natural gas demand, a study of studies methodology was used. Trends and drivers of demand by sector, including energy efficiency, technological change, and policy and regulatory impacts, were examined. As a consequence of this analysis, several policy recommendations were made on increasing energy efficiency, promoting efficient and reliable markets, increasing effectiveness of energy policies, and conducting carbon capture and sequestration research and development. A benefit of a study of studies approach is that it widens the range of assumptions used and, consequently, the range of natural gas demand outlooks. The range of natural gas demand outlooks for North America in 2030 was 67 to 104 billion cubic feet per day (Bcf/d) compared to a 2010 level of 74 Bcf/d. Most of the range in demand comes from the power sector where assumptions vary widely on electricity demand growth, the impact of non-greenhouse gas (GHG) Environmental
* See Chapter Four, Carbon and Other Emissions in the End-Use Sector, for a description of the non-GHG EPA rules and definition of a price on carbon.
Protection Agency (EPA) rules on coal-fired generation, and implementation of a price for carbon, if any.* The assessments of natural gas supply and demand for this report were prepared separately. An integrated supply-demand study was not developed. In lieu of an integrated study, a very high estimate of total potential natural gas demand was prepared that, in addition to residential, commercial, industrial, power, and natural gas transmission demand, also includes potential direct and indirect natural gas demand for vehicles, exports to Mexico, and LNG exports. This high total potential natural gas demand, which should not be considered a projection, was used to stress test the gas supply assessment. The stress test involved comparing a range of potential natural gas supply to a range of potential natural gas demand to assess the adequacy of natural gas supply to meet natural gas demand. The comparison shows that the 2035 high potential natural gas demand of 133 Bcf/d could be supplied. Based on a 2011 Massachusetts Institute of Technology (MIT) study, The Future of Natural Gas, this high natural gas demand potential could be supplied at a current estimated wellhead production cost range in 2007 dollars of $4.00 to $8.00 per million British thermal units (MMBtu),as shown in Figure ES-3 in the Executive Summary, based on current expectations of cost performance and assuming adequate access
The potential for direct and indirect natural gas demand for vehicles was prepared independently of the NPC Future Transportation Fuels study, because it will not be completed until after this report is published.
Chapter 3 NatUraL GaS DeMaND
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to resources for development (Figure ES-10). Of course, natural gas prices for end users will reflect many other factors, including costs to gather, process, and deliver natural gas to end users; returns on investments for production, distribution, and storage; mandated regulatory fees and taxes; and other market factors. The outline of the Demand chapter is as follows: y Summary Back to the Future: Two Decades of Natural Gas Studies Range of U.S. and Canadian Natural Gas Demand Projections Potential U.S. and Canadian Total Natural Gas Requirements Compared to Natural Gas Supply y U.S. Power Generation Natural Gas Demand
y U.S. Residential and Commercial Natural Gas, Distillate, and Electricity Demand y U.S. Industrial Natural Gas and Electricity Demand y U.S. Transmission Natural Gas Demand y Full Fuel Cycle Analysis y Canadian Natural Gas and Electricity Demand y A View on 2050 Natural Gas Demand y Potential Vehicle Natural Gas and Electricity Demand y LNG Exports y Exports to Mexico y U.S. Liquids Demand y Policy Recommendations y Description of Projection Cases.
MIT Energy Initiative, The Future of Natural Gas: An Interdisciplinary MIT Study, 2011.
Summary
Secretary of Energy Steven Chu in his study request of September 16, 2009, made three statements that are particularly relevant for this study: y All energy uses and supply sources must be reexamined in order to enable the transition towards a lower carbon, more sustainable energy mix. y Accordingly, I request the National Petroleum Council to reassess the North American resources production supply chain and infrastructure potential, and the contribution that natural gas can make in a transition to a lower carbon fuel mix. y Of particular interest is the Councils advice on policy options that would allow prudent development of North American natural gas and oil resources consistent with government objectives of environmental protection, economic growth and national security. In answering its framing questions, discussed in the text box at the end of this Summary, the Demand Task Group (DTG) focused its analysis on the role of 254
natural gas in a carbon-constrained world to two key metrics: y The role of energy efficiency in reducing demand for natural gas and electricity, thereby reducing all emissions including CO2. y Opportunities for natural gas to displace more carbon-intensive fuels, primarily coal in the power sector and oil in the transportation sector, either directly by natural gas vehicles (NGVs) or indirectly by plug-in electric vehicles (PEVs), and distillate used for heating in the residential and commercial sectors.1 To answer the framing questions, the DTG used a study of studies approach by examining a wide range of demand studies and data from public sources, making no attempt to produce a new, consensus outlook. Additionally, the DTG examined aggregated proprietary data collected via a confidential survey of private organizations, primarily oil and gas companies
1 PEVs include battery-only vehicles like the Nissan Leaf or plug-in hybrids with an onboard generator that uses gasoline or diesel like the Chevrolet Volt and a new version of the Toyota Prius. It does not include non-plug-in hybrids like previous versions of the Toyota Prius.
prUDeNt DeVeLOpMeNt: realizing the potential of North americas abundant Natural Gas and Oil resources
and specialized consulting groups. The proprietary data were collected by a third party and aggregated to disguise individual responses. Proprietary studies were aggregated by type of forecaster: consultants; international oil companies; independent oil and gas companies; and oil and gas companies (an aggregation of international and independent oil and gas companies). For proprietary studies that provided more than one outlook, the data were also aggregated by maximum, median, and minimum outlooks. The primary benefits of a study of studies are twofold. First, work can be completed more quickly by using off-the-shelf studies instead of creating a new one. Second, a broader range of outlooks and analyses can be incorporated, bringing a wider array of assumptions and results into consideration. However, the value of any particular study needs to be put in perspective. Demand studies are based on numerous assumptions on future policies, investment decisions, costs, and economic relationships. Econometric relationships used by most forecasting models have built into them numerous assumptions, including past relationships that are a prologue for future relationships. Demand studies come in several forms: y Business as usual projections (or reference cases) such as the Energy Information Administrations (EIAs) Annual Energy Outlook (AEO) Reference Cases that focus on the factors that shape the U.S. energy system over the long term under the assumption that current laws and regulations remain unchanged throughout the projection y Single point forecasts that incorporate assumptions on various future inputs y Scenarios that are designed to test alternate future story lines such as a carbon cap and trade program or different rates of technological progress y Sensitivity analyses that test the impact of changing a key assumption such as the determinants of the price of natural gas or the endowment of shale gas resources y Goal-seeking studies to find alternative pathways to achieve a particular goal, such as a 50% reduction in CO2 emissions by 2035 y Advocacy studies such as those prepared by associations that discuss the merits of a particular industrys situation or the impact from a proposed policy change.
A study of studies seeks balance by reviewing studies from differing points of view. A review of many studies not only can help to uncover any limitations applicable to a particular study, but can also identify the relative importance of key assumptions. The DTG looked at both natural gas and electricity demand because the latter is a major driver of gas demand for power generation. In addition, three white papers were prepared covering exports to Mexico, LNG exports, and U.S. liquids demand.2 Users of projections need to be particularly wary of the circularity inherent in some demand projections: assumptions equal conclusions; conclusions equal KY Recycle Graphic - Demand Pg. 3-6 assumptions. The DTG endeavored to keep that in mind in reviewing studies.
ASSUMPTIONS
CONCLUSIONS
The assessments of natural gas supply and demand for this report were prepared separately. An integrated supply-demand study was not developed. In lieu of an integrated study, a high estimate of total potential natural gas demand that also includes potential direct and indirect natural gas demand for vehicles, exports to Mexico, and LNG exports was prepared and used to stress test the natural gas supply finding.
Back to the Future: Two Decades of Natural Gas Studies

In 1992, 1993, and 2003, the National Petroleum Council (NPC) conducted three major studies of natural gas supply and demand.3 The purpose of these
2 White Paper #3-6, Natural Gas Exports to Mexico, was prepared by the Resource & Supply Task Group, with input from the Demand Task Group. 3 For a description of cases, see Description of Projection Cases at the end of this Demand chapter.
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previous NPC studies was to identify measures to promote efficient natural gas markets and to propose a menu of policy choices focused upon advancing the environment, energy security, and economic wellbeing. An evaluation of these NPC studies provides some lessons learned and the big things that these studies have missed.4,5 Key observations on the outcomes from prior NPC studies of the natural gas market include: y Past projections of the range of demand for natural gas were generally accurate enough to be useful for testing policies and indicating necessary increments of supply required (see Figure 3-1). Though increasing reliance on unconventional natural gas was featured in each NPC study, the focus was on coalbed methane and tight sands formations, while the potential role of shale gas was limited. y While the models employed to prepare the studies worked reasonably well, assumptions about the price of oil and gas, gross domestic product (GDP) growth rates, and trends in energy intensity (or
4 See Demand Task Group White Paper #3-5, What Are the Big Things That Past Studies Missed?, which examines the 1992, 1999, and 2003 NPC studies addressing natural gas supply and demand and the 2007 Hard Truths study that examined world energy demand. 5 For a retrospective review of past EIA Annual Energy Outlooks, see: http://www.eia.gov/iaf/analysispaper/ retrospective/retrospective_review.html.
energy efficiency) were not borne out by actual trends in later years. There are often future surprises that change the landscape from what a study assumed. Examples of this include the swift rise of China within global industrial and energy markets, which has had a strong effect on the energy landscape. y The inherent uncertainty of a single reference case was recognized from the start and led to preparing multiple scenarios in the 1992 and subsequentNPC natural gas studies. This resulted in a range of demand bounded by a maximum and a minimum case useful for stress testing the industrys ability to meet demand and identifying policy recommendations commensurate with the challenges facing the industry. y For the 2007 NPC study, a survey of existing projections, or a study of studies, was used to broaden coverage and bring a wider array of assumptions and results into consideration.
Range of U.S. and Canadian Natural Gas Demand Projections

The analysis of public and proprietary studies found a wide range of future natural gas demand for the United States and a narrower range for Canada. Delivered natural gas excludes exports to Mexico as well as LNG exports.
Projection Cases
The last section of this Demand chapter, Description of Projection Cases, contains a brief description of the outlook cases used in this chapter, particularly for figure legends. Generally, AEO2010 and AEO2011 refer to projections developed by the Energy Information Administration (EIA) as part of their 2010 and 2011 Annual Energy Outlooks. EIA WM and EIA KL refer to EIA projections developed as part of the EIAs analysis of the Waxman-Markey (American Clean Energy and Security Act of 2009) and Kerry-Lieberman (American Power Act of 2010) cap and trade bills. The analyses of the Waxman-Markey and KerryLieberman bills were based on the AEO2009 and AEO2010 Reference Cases, respectively. RFF Cases were from Resources for the Future studies and 256 the MIT cases were from Massachusetts Institute of Technology studies. Proprietary cases are the result of the aggregation of proprietary projections. The public accounting firm Argy, Wiltse & Robinson, P.C. (Argy) received and aggregated the projections to protect respondents confidentiality. Numerous firms, including oil and gas companies and energy consulting firms, were requested to fill in demand data templates and return them to Argy. Much of the analytical work done by the DTG was completed before the issuance of the EIA AEO2011 Reference Case and sensitivities. Consequently, much of the analysis and charts use data from the AEO2010 cases. However, data from the AEO2011 Reference Case have been added to most charts.
Figure 31. Retrospective on U.S. Natural Gas Demand: 20 Years of National Petroleum Council (NPC) Studies Figure 3-1. retrospective on U.S. Natural Gas Demand: 20 Years of National petroleum Council (NpC) Studies
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Range of U.S. Natural Gas Demand Projections

For 2010, U.S. delivered natural gas demand is estimated at 65.2 Bcf/d (23.8 trillion cubic feet per year [Tcf/yr]) (see Figure 3-2). For 2030 projections of U.S. delivered natural gas demand ranges from 59.6 Bcf/d (21.8 Tcf/yr) to 89.9 Bcf/d (32.8 Tcf/yr). For the United States, most of the variation in projected natural gas demand comes from the power sector, which ranges from 19.2 Bcf/d (7.0 Tcf/yr) to 35.3 Bcf/d (12.9 Tcf/yr). The variation in power generation natural gas demand mostly flows from variation in policy assumptions that will affect the fuel and technology mix of future generation capacity or will affect dispatch economics (i.e., whether natural gas-fired generation will be scheduled ahead of coalfired generation). U.S. vehicle natural gas demand ranges from the inconsequential in most projections to almost 2 Bcf/d in 2030 for the Proprietary Maximum Outlook.6 Electric vehicle demand in publicly available outlooks was minimal. Data on electric
6 The Proprietary Maximum, Median, and Minimum Cases represent the maximum, median, and minimum cases for all of the proprietary cases aggregated by an independent third party.
vehicle demand for proprietary cases was not provided. The potential for direct and indirect natural gas demand from the vehicle sector is discussed later in the Potential Vehicle Natural Gas and Electricity Demand section.
Drivers of Natural Gas Demand Under Existing Policies

Under the AEO Reference Cases, the primary driver of natural gas demand (including the indirect effect from electricity demand growth) is the growth rate of the economy as shown in the difference between the AEO2010 High Macro and Low Macro Cases (or high and low economic growth cases) compared to the AEO2010 Reference Case (see Figure 3-3). Energy efficiency improvement has a significant moderating influence on residential and commercial demand for natural gas and electricity, as shown in the difference between the AEO2010 High Tech and Low Tech Cases (or high and low efficiency gain cases). The application of technology has unlocked shale gas and changed the conversation about the role of natural gas in a carbon-constrained world. The
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Figure 3-2. U.S. Natural Gas Demand ALSO U.S. Natural ES-7 Figure 3-2. used as Figure Gas Demand 100
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difference between the AEO2010 Reference Case and the AEO2010 High Shale Case, and the difference between the AEO2010 Reference Case and the AEO2011 Reference Case (which includes a larger gas resource base among other changes) helps to demonstrate that the successful development of low cost shale gas should result in higher natural gas demand (see Figure 3-3). In the AEO2011 Reference Case, natural gass share of total energy for the period 2010 through 2035 increases to 24.3%, up 1.9% from the AEO2010 Reference Case. Partly as a result, cumulative CO2 emissions for the period 2010 through 2035 from energy are 1,271 million MtCO2e (metric tons of carbon dioxide equivalent) (or 1%) lower under the AEO2011 Reference Case than under the AEO2010 Reference Case.7
7 The EIAs AEO2010 included a Reference Case and many sensitivities, including a high shale case and a no shale case. The EIAs AEO2011 early Reference Case was available in December 2010 for use in this study, but the final Reference Case and sensitivities from the AEO2011 were not available until most of the analytical work was completed.
Range of Canadian Natural Gas Demand Projections

For 2010, projections of Canadian delivered natural gas demand are estimated at 9.1 Bcf/d (3.3 Tcf/yr). For 2030, Canadian delivered natural gas demand ranges from 7.4 Bcf/d (2.7 Tcf/yr) to 13.7 Bcf/d (5.0 Tcf/yr). For Canada, most of the variation comes from the industrial sector and is primarily related to oil sands (see Figure 3-4). Development of the Canadian oil sands could require from 2.6 to 5.2 Bcf/d of natural gas by 2035 compared to 2010 consumption of 1.6 Bcf/d.8 With Canadian coal generation capacity being only 11% of total generation, versus 31% for the United States, the ability of natural gas to displace coal in Canada is much more limited and, therefore, so is the range of power generation natural gas demand outlooks.
8 Canadian oil sands requirements for natural gas were obtained from the Resource & Supply Task Group.
Figure 3-4. Canadian Natural Gas Demand
Figure 3-4. Canadian Natural Gas Demand

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Potential U.S. and Canadian Total Natural Gas Requirements Compared to Natural Gas Supply
The range of potential total natural gas requirement for the United States and Canada for 2035 is 72 Bcf/d (26 Tcf/yr) to 133 Bcf/d (49 Tcf/yr) (see Figure 3-5). The high potential total natural gas requirement is the sum of: y 111 Bcf/d Highest outlook for U.S. and Canadian total delivered natural gas demand excluding vehicles. U.S. and Canadian demand for 2035 are based on an extrapolation of 2020 to 2030 Proprietary Maximum and Minimum cases. y 13 Bcf/d Very high potential for increased use of natural gas to displace oil in the transportation sector. The NPC Future Transportation Fuels (FTF) study is examining the potential market penetration of NGVs and PEVs that could create some natural gas demand for NGVs, and indirectly for power generation to meet electricity demand from PEVs, as well as fuel cell electric vehicles, using hydrogen reformed from natural gas. Since the FTF study will
be completed after this one, this study examined high-potential-demand cases for NGVs and PEVs from published sources. For purposes of stress testing natural gas supply, potential U.S. and Canadian natural gas demand for vehicles is the sum of: NGV natural gas demand of 4.5 Bcf/d by 2035, assuming sales penetration rates for heavy-duty vehicles (HDVs) of 40% by 2035 PEV natural gas demand of 7.6 Bcf/d by 2035, assuming 100% of the electricity is supplied by natural gas generation and assuming sales penetration rates for light-duty vehicles (LDVs) of 40% and 57% by 2030 and 2050, respectively. y 4 Bcf/d Exports to Mexico based on AEO2011 Reference Case. y 5 Bcf/d LNG exports at the initial liquefaction capacity of the first three projects that filed for permits. The high potential total natural gas requirements for 2035 is not a projection, but a very high estimate of potential natural gas requirements used to stress test the natural gas resource base ability to meet all
Figure 3-5. Range of Potential North American Natural Gas Requirements
Figure 3-5. North american Natural Gas production Could Meet high Demand
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potential sources of natural gas demand. It appears that the 2035 high potential natural gas demand of 133 Bcf/d can be supplied. Based on the 2011 MIT Study, The Future of Natural Gas, this high natural gas demand potential could be supplied at a current estimated wellhead production cost range in 2007 dollars of $4.00 to $8.00 per MMBtu,as shown in Figure ES-3 in the Executive Summary, based on current expectations of cost performance and assuming adequate access to resources for development (Figure ES-10).9 This wellhead development cost should not be read as an expected market price, since many factors determine the price to the consumer in competitive markets. Most of the increase in North American natural gas requirements comes from displacement of coal in the power sector and oil in the transportation sector, which are likely to require significant policy support to be achieved.
9 MIT Energy Initiative, The Future of Natural Gas: An Interdisciplinary MIT Study, 2011.
The CO2 emissions intensity of the U.S. economy would decline as natural gas is substituted for coal in the power sector or for oil in the vehicle sector. In addition, growth in NGVs or PEVs could improve U.S. energy security by reducing reliance on oil imports (other than from Canada).
u.S. POWEr GENEraTION NaTuraL GaS DEmaND

Natural gas power generation has significant advantages over other power generation technologies including low upfront capital costs, short construction lead times, low heat rates (high efficiency), reasonable energy production costs, a well-established track record of performance and operational flexibility, and a significantly lower environmental emissions profile compared to other intermediate and base load fossil resources.10 In addition, natural gas combined cycle
10 Heat rate is the quantity of Btu necessary to generate 1 kilowatt hour.
Demand Task Group Framing Questions

To address the Secretarys request, the Demand Task Group proposed to answer the following framing questions as part of the NPC Integrated Study Plan April 29, 2010: y What are the big things that past projections have missed? y What is the range of publicly available natural gas demand projections and what accounts for the differences between projections? y How could technology and energy efficiency affect future natural gas demand? y What are the key drivers of demand for natural gas and electricity by sector (residential, commercial, industrial, and transmission [fuel to gather, process, and deliver natural gas])? Which demand drivers are the most important? What is the future range for each demand driver? How could abundant natural gas resources affect future natural gas demand? How could a carbon-constrained world affect major demand drivers? What regulatory policy action may significantly affect natural gas demand? Vehicle demand would be based upon and coordinated with the NPC Future Transportation Fuels Study. y How might various generation capacity portfolios and carbon programs impact power generation natural gas demand? The focus of this study was on natural gas and oil. Therefore, it was decided at the beginning to limit the analysis of the power sector to those issues that would have the greatest impact on power generation natural gas demand. Not included in the analysis were power generation issues that have an indirect impact on natural gas demand such as smart grids, peak day capacity requirements, time-of-day pricing, electric transmission and distribution losses, and need for transmission capacity. The impact of proposed EPA regulations and carbon programs was limited to a review of their potential impact on natural gas demand. Not considered within the scope was an analysis of the merits, benefits, and costs or effectiveness of such proposed regulations or programs. 261
(NGCC) plants have the flexibility to operate efficiently over a wide range of utilization rates, allowing them to transition over time into different sections of the dispatch curve. They can, for instance, move from a high to intermediate capacity factor resource to more of a peaking role if technological or market changes to dispatch profiles for the industry suggest such a move is prudent.
Drivers of Power Generation Natural Gas Demand

Natural gas demand from the power sector is driven primarily by three factors: y Total electricity demand net of electrical efficiency gains y The fuel and technology mix of future generation capacity y Delivered cost of fuel to generators plus any costs for carbon and other emissions, and, most importantly, the spread between delivered cost of natural gas and coal.
Natural Gas Demand Summary

For 2010, U.S. power generation natural gas demand is estimated at 20.5 Bcf/d, accounting for 33% of U.S. total natural gas demand.11 Power generation natural gas demand for 2030 is expected to range from 11.3 to 35.3 Bcf/d (see Figure 3-6).12 Generally for this chapter, ranges of demand projections for 2030 will be used rather than 2035, as the aggregated proprietary cases usually ended in 2030 and often had a wider range than other projections.
11 Includes only natural gas consumed by power generators. Does not include related natural gas transmission fuel needed to deliver the natural gas to the power generator. 12 This excludes natural gas used by end users for on-site generation.
Power Generation Natural Gas Demand Projections

The outlook for power generation natural gas demand can be generally characterized as depending on the following (see Figure 3-7): y Net growth in electricity demand. Increase in electricity demand from growth in
Figure 3-6. U.S. power Natural Gas Demand Figure 3-6. U.S. Power Natural Gas Demand 40
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population and gross domestic product (GDP) and rate of the adoption of new electrical devices Decrease in electricity demand from improvement in energy efficiency of electrical devices and buildings y Low natural gas prices that enable gas-fired generation to displace some coal-fired generation. y Implementation of proposed non-GHG EPA rules that will likely lead to retirement of some coal generation.13 y Construction of more gas-fired generation, as currently it has the lowest levelized cost of electricity (LCOE) before taking into account mandates for renewable generation, production tax credits for wind, loan guarantees for nuclear, or emissions costs. LCOE represents the present value of the total cost of building and operating a generating plant over its financial life, converted to equal annual payments and amortized over expected annual generation for an assumed utilization rate.
13 Subsequent to the completion of the analytical work behind this report, one of the proposed rules was implemented.
y If the United States chooses to establish a price for carbon, then some natural gas generation could dispatch ahead of some coal generation.14 y To achieve a deep reduction (over 80%) in CO2 emissions from the power sector, carbon capture and sequestration (CCS) for gas- and coal-fired generation may be needed depending on the time frame for achieving a deep reduction in CO2 emissions. Under a deep CO2 reduction program, coal and natural gas generation would be expected to decline from peak levels; however, CCS would reduce the decline. Figure 3-7 is illustrative. The size of the steps and time at which they occur will vary. Even whether the steps are up or down is dependent on many variables.
14 See http://www.ipcc.ch/pdf/assessment-report/ar4/wg3/ar4wg3-annex1.pdf. Generally, the term price on carbon refers to the recognition of the negative externalities of GHG emissions and the associated economic value of reducing or avoiding one metric ton of GHG in carbon dioxide equivalent (1 MtCO2e). In this report, there is no differentiation between an explicit carbon price (e.g., under a cap and trade or carbon tax policy) and an implied carbon cost (e.g., specific regulatory limitations on the amounts of emissions).
Figure Illustrative Steps to Future Power Generation Natural Gas Demand Figure 3-7. 3-7. Illustrative Steps to Futurepower Generation Natural Gas Demand
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Growth in Electricity Demand

In the residential, commercial, and industrial sectors, total electricity demand is driven by the rate of GDP growth, demographics (population growth and migration), improvement in electricity efficiency, the penetration rate for new electrical devices, and the relative level of electricity prices. All of the studies reviewed had electricity demand continuing to grow, driving a likely increase in power generation natural gas demand (see Figure 3-8). Implementation of a price on carbon is more likely to reduce total electricity demand than to increase it. Two factors will likely drive end-user electricity prices higher, thus increasing incentives to improve electricity energy efficiency. The first factor is the addition of new generation capacity or transmission and distribution capacity built either to meet an increase in electricity demand or to replace retired generation capacity.15 Since new generation capacity generally costs more than the depreciated cost of existing
15 The EPAs proposed non-GHG regulations may result in retirement of some generation.
generation capacity, adding new generation capacity will likely increase the overall retail cost of electricity. The second factor is a price on carbon that, depending on the specific terms and conditions of a carbon program, is likely to increase generation costs and, consequently, electricity prices.
Low Natural Gas Prices Enabling Displacement of Some Coal Generation

Generally, power generation in wholesale markets is dispatched or scheduled based on variable costs. Dispatch or variable costs are the sum of cost of fuel (which is a function of the delivered cost of fuel and a units heat rate); variable operation and maintenance expenses; and emissions allowance costs, if any.16 Until the last couple of years, natural gas-fired generation had higher variable costs than coal-fired generation meaning that more emission-intensive coal plants were dispatched before the less emissionintensive gas plants. With the low natural gas prices seen since early 2009, the variable dispatch cost of some coal-fired generation has exceeded that of NGCC
16 Heat rate is the quantity of Btu required to generate 1 kWh.
Figure 3-8. U.S. total electricity Demand

5,500
Figure 3-8. U.S. Total Electricity Demand
5,000
BILLION KILOWATT HOURS
AEO2010 HIGH MACRO AEO2010 LOW TECH AEO2010 HIGH SHALE AEO2010 REFERENCE CASE AEO2011 REFERENCE CASE
AEO2010 NO SHALE EIA KL BASIC EIA WM BASIC AEO2010 HIGH TECH AEO2010 LOW MACRO
EIA KL NOINTL LTDALT EIA WM NOINTL LTDALT AGGOGMAX AGGOGMEDIAN AGGOGMIN
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2005
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generation. This displacement of coal has increased natural gas demand from the power sector by about 2.7 Bcf/d since then.17 Unless natural gas prices remain low or coal prices increase, the displacement of coal by natural gas in generation may not last for very long. Based on 2007 data, the Congressional Research Service has estimated, on an unconstrained basis, that there is the potential to increase NGCC natural gas demand by 12.7 Bcf/d through the displacement of existing coal-fired generation while reducing CO2 emission by 382 million MtCO2e per year.18 More displacement of coal generation by gas generation is unlikely to be realized unless natural gas prices decrease below recent levels or unless delivered coal prices increase above recent levels. If policymakers desire to make greater use of natural gas to displace coal, then there are a couple of mechanisms to accomplish such a goal. One way is to narrow the spread between natural gas and coal prices by instituting a price on carbon. Another way that does not use a direct price mechanism to displace more coal generation would be to dispatch based on emissions, not variable costs. These latter two options fall in the category of regulatory or policy drivers.
y Mercury (Hg) and other hazardous air pollutants and acid gases y Coal combustion products (ash) y Cooling water intake. There is significant uncertainty about the ultimate impact that the proposed EPA regulations will have on natural gas demand because of the lack of clarity on what the final rules will be for multiple regulations, on what the final implementation deadlines will be, on what waivers might be granted by the EPA on implementation deadlines, and what the investment decisions of generators and their regulators, if applicable, will be. Many factors such as age and efficiency of generating units, extent of capital cost depreciation, installed emissions controls, relative prices of natural gas and coal, whether the generator operates in a merchant market, and other things may affect plant owners decisions about whether to retire units. Some studies indicate that the units most likely to be retired are older, smaller, and less-efficient units lacking modern pollution controls. Some of these would likely be retired anyway in coming years. However, the Brattle Groups December 8, 2010, report on the Potential Coal Plant Retirements Under Emerging Environmental Regulations indicates that some relatively new coal-fired merchant generation may be retired because the merchant generator cannot recover incremental capital costs from adding emissions controls, either through an increase in capacity payments, or in the case of energy-only markets, through wholesale electric prices. These factors contribute to the EPA regulations uncertain impacts on natural gas demand going forward.
Implementation of Proposed Non-GHG EPA Rules

Implementation of various proposed non-GHG EPA regulations affecting power generation will likely lead to an increase in natural gas demand and in gasfired generation capacity. A review of several studies suggests this could lead to an increase in power generation natural gas demand of up to 12.9 Bcf/d (4.7 Tcf/yr), with an average of 6.0 Bcf/d (2.2 Tcf/yr) (see Figure 3-9).19 Proposed non-GHG EPA regulations include those for20: y Sulfur dioxide (SO2) and nitrogen oxide (NOx)
17 See Bentek Energy, Market Alert, Power Burn Head Fake Catches Market Off Guard, August 3, 2010, page 22. 18 Congressional Research Service, Displacing Coal with Generation from Existing Natural Gas-Fired Power Plants, January 10, 2010. 19 The Carbon and Other Emissions Subgroup analyzed several studies of the impact of EPA rules; the sample included research from private consultants, investment banks, trade associations, and the North American Electric Reliability Corporation. The average impact was a closure of 58 GW of coal capacity. 20 See Chapter Four, Carbon and Other Emissions in the EndUse Sectors, for a description of the non-GHG EPA Rules.
Levelized Cost of Electricity Favors Gas-Fired Generation

Currently, on an LCOE basis, new NGCC capacity has a lower cost than all but conventional hydro, as shown in Figure 3-10. This LCOE analysis excludes the impact of grants, production tax credits, and loan guarantees, as well as costs of emissions and other environmental impacts. Some load serving entities also consider consumer energy efficiency gains or demand response and interruptible services as viable alternatives to building new generation capacity.21
21 For instance, the PJM and ISO-New England grid operators allow energy efficiency and demand response providers to bid into capacity their capacity markets. Such providers are compensated for reduced demand in a manner comparable to that provided to suppliers of electricity.
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Figure 3-9. Impact of Proposed Non-Greenhouse Gas EPA Rules WAS Figure 8; ALSO Fig. CS-13
Figure 3-9. Impact of proposed Non-GhG epa rules

MAXIMUM AVERAGE MINIMUM 700 700
101
496
4.7
58
326
295 254 2.2
12
70
68
50
0.4
COAL RETIREMENT (GIGAWATTS)
COAL RETIREMENT (TERAWATT HOURS)
INCREASED GAS GENERATION (TERAWATT HOURS)
CO2 REDUCTIONS (MILLION METRIC TONS CO2 EQUIVALENT)
INCREMENTAL GAS DEMAND (TRILLION CUBIC FEET)
Notes: EPA = Environmental Protection Agency. Only to scale within each statistic of interest.
These two sources are often cheaper than new generation capacity. For instance, in a 2009 review of 14 state energy efficiency programs, the American Council for an Energy-Efficient Economy found costs of $16 to $33, averaging $25, per megawatt hour (MWh) saved, which is lower than all the supply options in Figure 3-10.22 Furthermore, efficiency gains have zero dispatch cost. The data on LCOE, however, cover only the costs for new generation capacity. Figure 3-10 provides a single point estimate based on data from the AEO2011 Reference Case. Capital cost uncertainties are significant for some generation technologies, especially those where the production volume is low or where there has been a significant time lapse since some capacity was built. In contrast, the capital costs for new NGCCs and wind are relatively certain, as a very large number of these units have been built over the last few years.
22 Katherine Friedrich, Maggie Eldridge, Dan York, Patti Witte, and Marty Kushler (2009) Saving Energy Cost-Effectively: A National Review of the Cost of Energy Saved Through UtilitySector Energy Efficiency Programs, American Council for an Energy-Efficient Economy, Report Number U092.
Capital costs can vary significantly between studies. Often the variation in capital costs is a function of when the cost estimate was prepared. Capital costs for most energy projects increased significantly through 2008, and then modestly retreated. Studies prepared in 2009 or earlier were generally based on costs before the 2008 run-up. LCOEs can also vary significantly between studies because of variations in assumed energy prices used to estimate fuel cost per MWh, whereas the heat rate part of the fuel cost equation generally is not a cause of major variation (see Table 3-1).23 Although LCOE for natural gas technologies is very competitive as they have relatively low capital costs, natural gas technologies usually have the highest dispatch cost as variable costs, primarily fuel costs, are higher than other technologies (see Figure 3-11). The dilemma is: if you build it, it may not run at a high capacity utilization rate.
23 Fuel cost per MWh is the product of delivered cost of fuel per MMBtu and the heat rate (Btu required to generate a kWh).
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Figure 3-10. Levelized Cost of Electricity CONVENTIONAL HYDRO ADVANCED NGCC BIOMASS BFB ADVANCED PULVERIZED COAL ADVANCED NGCC WITH CCS GEOTHERMAL BINARY IGCC WIND ONSHORE ADVANCED NUCLEAR IGCC WITH CCS
Figure 3-10. Levelized Cost of electricity

NATURAL GAS COAL NON-FOSSIL
Figure 3-11. Dispatch Cost of electricity

CONVENTIONAL HYDRO ADVANCED NGCC BIOMASS BFB ADVANCED PULVERIZED COAL ADVANCED NGCC WITH CCS GEOTHERMAL BINARY IGCC WIND ONSHORE ADVANCED NUCLEAR IGCC WITH CCS
Figure 3-11. Dispatch Cost of Electricity
ADVANCED PULVERIZED COAL WITH CCS ADVANCED COMBUSTION TURBINE BIOMASS COMBINED CYCLE MSW LANDFILL FUEL CELLS CONCENTRATING SOLAR POWER PHOTOVOLTAIC WIND OFFSHORE 0 50 100 150 200 250 300 DOLLARS PER MEGAWATT HOUR 350
ADVANCED PULVERIZED COAL WITH CCS ADVANCED COMBUSTION TURBINE BIOMASS COMBINED CYCLE MSW LANDFILL FUEL CELLS CONCENTRATING SOLAR POWER PHOTOVOLTAIC WIND OFFSHORE 0
NATURAL GAS COAL NON-FOSSIL
Notes: Based on AEO2011 Reference Case data. Gas price, $5.11 per MMBtu (2009$) for 2020. Coal price, $2.16 per MMBtu (2009$) for 2020. No emissions costs for sulfur dioxide, nitrogen oxide, or carbon dioxide. Capacity factors: Base load, 80%; Intermittent renewables, 30%; natural gas combustion turbine, 10%. NGCC = natural gas combined cycle; BFB = bubbling uidized bed; CCS = carbon capture and sequestration; IGCC = integrated gasi cation combined cycle; MSW = municipal solid waste.
20 40 60 80 DOLLARS PER MEGAWATT HOUR
100
Notes: Based on AEO2011 Reference Case data. Gas price, $5.11 per MMBtu (2009$) for 2020. Coal price, $2.16 per MMBtu (2009$) for 2020. No emissions costs for sulfur dioxide, nitrogen oxide, or carbon dioxide. Capacity factors: Base load, 80%; intermittent renewables, 30%; natural gas combustion turbine, 10%. NGCC = natural gas combined cycle; BFB = bubbling uidized bed; CCS = carbon capture and sequestration; IGCC = integrated gasi cation combined cycle; MSW = municipal solid waste.
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Table 3-1. Comparative CapeX and heat rates for Select Coal and Natural Gas power technologies
Technology aeO2010 Supercritical pulverized Coal (pC) aeO2011 r. W. Beck advanced pC rice University Scrubbed Coal New Department of energy (DOe) Source (2005$) rice University Scrubbed Coal New Industry Sources (2005$) National energy technology Laboratory (NetL) pC Subcritical total Overnight Cost (2007$) NetL pC Supercritical total Overnight Cost (2007$) aeO2011 r. W. Beck advanced pC with Carbon Capture and Sequestration (CCS) rice University Scrubbed Coal New with CCS DOe Source (2005$) rice University Scrubbed Coal New with CCS Industry Sources (2005$) NetL pC Subcritical with CCS total Overnight Cost (2007$) NetL pC Supercritical with CCS total Overnight Cost (2007$) aeO2010 Integrated Gasification Combined Cycle (IGCC) aeO2011 r. W. Beck IGCC rice University IGCC DOe Source (2005$) rice University IGCC Industry Sources (2005$) NetL IGCC General electric energy (Gee) r+Q total Overnight Cost (2007$) NetL IGCC Conocophillips (Cop) e-Gas FSQ total Overnight Cost (2007$) NetL IGCC Shell total Overnight Cost (2007$) aeO2010 IGCC with CCS aeO2011 r. W. Beck IGCC with CCS rice University IGCC with CCS DOe Source (2005$) rice University IGCC with CCS Industry Sources (2005$) NetL IGCC with CCS Gee r+Q total Overnight Cost (2007$) NetL IGCC with CCS Cop e-Gas FSQ total Overnight Cost (2007$) NetL IGCC with CCS Shell total Overnight Cost (2007$) aeO2010 advanced Natural Gas Combined Cycle (NGCC) aeO2011 r. W. Beck advanced NGCC rice University advanced NGCC DOe Source (2005$) rice University advanced NGCC Industry Sources (2005$) NetL advanced F Class NGCC total Overnight Cost (2007$) aeO2010 advanced NGCC with CCS aeO2011 r. W. Beck advanced NGCC with CCS rice University advanced NGCC with CCS DOe Source (2005$) rice University advanced NGCC with CCS Industry Sources (2005$) NetL advanced F Class NGCC with CCS total Overnight Cost (2007$) CAPEX ($/kW) $2,223 $3,167 $1,939 $3,080 $1,996 $2,024 $5,099 $2,993 $4,846 $3,610 $3,570 $2,569 $3,565 $2,241 $3,714 $2,447 $2,351 $2,716 $2,776 $5,348 $3,294 $5,480 $3,334 $3,465 $3,904 $968 $1,003 $893 $996 $718 $1,932 $2,060 $1,781 $1,850 $1,497 7,968 6,798 8,613 7,525 8,613 10,458 10,998 10,924 6,752 6,430 6,752 8,765 8,585 8,099 10,781 10,700 10,781 13,046 12,002 8,765 8,700 8,765 12,000 11,061 9,277 Heat Rate (Btu/kWh) 9,200 8,800 9,200
Sources: energy Information administration, annual energy Outlook 2010 (aeO2010) reference Case and annual energy Outlook 2011 (aeO2011) reference Case. r. W. Beck, Inc. task 692, Subtask 2.6 review of power plant Cost and performance assumptions for NeMS. rice University (James a Baker III Institute for public policy), Energy Market Consequences of Emerging Renewable and Carbon Dioxide Abatement Policies in the United States, august13,2010. National energy technology Laboratory (NetL), Cost and Performance Baseline for Fossil Energy Plants Volume 1: Bituminous coal and Natural Gas to Electricity Revision 2, November2010.
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Figure 3-12. U.S. Generation Capacity Additions through 2030 or 2035
Projections of Generation Capacity and Generation by Technology and Fuel

The fuel and technology mix of power generation capacity additions through 2035 for EIA Cases and 2030 for the Resources for the Future (RFF) Cases vary significantly, reflecting the impact that policy can have on capacity additions (see Figure 3-12).24 Given the differences between studies in power generation capacity additions, it is not surprising that there are significant variations in generation by fuel and technology that lead to a wide variation in projections for power generation natural gas demand (see Figure 3-13).25 Given the damage to the Fukushima Daiichi nuclear facility in Japan from the March 2011 Richter 9.0 earthquake and tsunami, it should be noted that none of the studies reviewed had a decrease in U.S. nuclear generation capacity from todays levels. Although it is too early to assess what the impact might be on the future of U.S. nuclear generation, any reduction in future forecasts of nuclear generation capacity would likely be offset to some extent by more gas-fired generation capacity.
Figure 3-12. U.S. Generation Capacity additions through 2030 or 2035

NGCC WITH CCS NEW COAL WITH CCS
AEO2010 REFERENCE CASE
COAL CCS RETROFIT NATURAL GAS CT NGCC WITHOUT CCS
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Impact of a Price on Carbon on Natural Gas Demand

If the United States chooses to establish a price for carbon, more natural gas generation could likely dispatch ahead of some coal generation, increasing power generation natural gas demand.26,27 Since coal is more carbon intensive than natural gas, a price on carbon could affect dispatch economics by increasing the generation cost of coal by more than the generation cost of natural gas. A price on carbon most likely would increase power generation gas demand, but could decrease total natural gas demand depending on specific terms and conditions of a carbon program, natural gas supply, CO2 price, inter-fuel competition, and economy-wide price/demand feedback effects
24 These were the cases for which power generation capacity additions through at least 2030 were available. 25 These were the cases for which generation by fuel was available through 2030 or 2035. 26 For a discussion of price on carbon, see Chapter Four. 27 Generally, natural gas and coal are the fuels on the margin for power generation. Nuclear, hydro, and renewables generally dispatch before coal and gas. See Figure 3-11.
EIA KL HIGH SHALE
EIA KL HIGH COST
EIA KL NOINTL LTDALT
RFF LOW CARBON POLICY BASELINE
RFF LOW CARBON POLICY WITH ABUNDANT SHALE
RFF LOW CARBON POLICY WITH ABUNDANT SHALE AND LIMITS ON NUCLEAR AND RENEWABLE 0 50 100 150 200 250 300 350 GIGAWATTS 400 450
Notes: For a description of cases, see Description of Projection Cases at the end of this chapter. RFF cases are for 2030. NGCC = natural gas combined cycle; CCS = carbon capture and sequestration; CT = combustion turbines.
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Figure 3-13. U.S. Generation by Fuel 2030 or 2035
Figure 3-13. U.S. Generation by Fuel for 2030 or 2035

HYDRO NUCLEAR RENEWABLES COAL WITHOUT CCS GAS WITHOUT CCS OIL WITHOUT CCS COAL WITH CCS GAS WITH CCS
(see Figure 3-14). For the studies reviewed that had a price on carbon, the typical feedback effects for natural gas relative to a reference or business-asusual case are: y Natural gas demand will tend to increase relative to other fossil fuels in the electric sector, particularly with respect to coal, due to natural gass favorable environmental and efficiency attributes. y Higher power generation natural gas demand could lead to higher end-user natural gas prices that through the price elasticity effect could lead to a reduction in residential, commercial, and industrial natural gas demand. Most, but not all, studies expect total natural gas demand to increase. y Higher generation costs for coal and natural gas could increase wholesale and retail electricity prices that, depending on the price for carbon, may lead to a reduction in electricity demand through the price elasticity effect. y Lower electricity demand could lower natural gas and coal demand as natural gas and coal generation are usually on the margin for dispatch and that in turn leads to slightly lower natural gas and coal prices, but not enough to offset the impact from putting a price on carbon. y An improvement in the LCOE for natural gas-fired generation versus coal-fired generation that could increase natural gass share of total future generation capacity that could in turn lead to higher natural gas demand from the power sector. y An increase in demand for greater energy efficiency in both generation and end use that could result in lower natural gas demand. Depending on specific terms and conditions of a carbon program, one of the likely feedback effects of putting a price on carbon will be an increase in natural gas and electricity prices for end users (see Figure 3-15). All other things being equal, higher natural gas and electricity prices for North American industrial end users will likely reduce their competitiveness unless international competitors are also subject to commensurate energy cost increases, assuming all other factors are held constant. These impacts need to be fully considered in any cost benefit analysis of a proposed carbon program.
2008 AEO2010 REFERENCE CASE AEO2010 HIGH SHALE AEO2010 NO SHALE EIA KL BASIC EIA KL HIGH GAS EIA KL HIGH COST EIA KL NOINTL LTDALT MIT NO CLIMATE POLICY MIT WITH CLIMATE POLICY MIT REGULATORY EMISSIONS REDUCTIONS RFF BASELINE RFF ABUNDANT SHALE RFF LOW CARBON POLICY BASELINE RFF LOW CARBON POLICY WITH ABUNDANT SHALE RFF LOW CARBON POLICY WITH ABUNDANT SHALE WITH LIMITS ON NUCLEAR AND RENEWABLE 0 1 2 3 4 TERAWATT HOURS 5 6
Notes: For a description of cases, see Description of Projection Cases at the end of this chapter. RFF cases are for 2030. CCS = carbon capture and sequestration.
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Figure 3-14. total U.S. Natural Gas Demand and CO2 price for 2030
Figure 3-14. Total U.S. Natural Gas Demand and CO2 Price for 2030
2008 DOLLARS PER METRIC TON OF CO2 EQUIVALENT
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AEO2010 REFERENCE CASE FOR 2030 24 25 TRILLION CUBIC FEET 26 27 28 29
Carbon Capture and Sequestration

Those studies that looked at a deep reduction in CO2 (over 80%) assumed that CCS would be available for coal and gas-fired generation (see Figures 3-12 and 3-13). NGCC with CCS may have a lower LCOE per MWh than coal with CCS (see Figure 3-10). A recent Department of Energy (DOE) Office of Fossil Energy analysis shows that first generation CCS technology for natural gas has a lower first-year cost of electricity than first generation CCS technology for coal at natural gas prices up to $8 (2010$) per MMBtu.28 This analysis used a low delivered coal price of $1.64 per MMBtu whereas the estimated delivered price of coal for 2010 is $2.30 per MMBtu. The analysis also shows that second generation CCS technology for coal has a first-year cost of electricity that is over $25 per MWh lower than first generation CCS technology for coal.
28 Sources: National Energy Technology Laboratory (NETL) Today Cost and Performance Baseline for Fossil Energy Plants (NETL/2010) and NETL 2nd Generation based on multiple NETL technology pathway study reports.
A cost for second generation gas with CCS is not yet available. NGCC with CCS should have significantly lower emissions of NOx, SO2, Hg, and ash as well as significantly lower CO2 emissions, transportation, and sequestration requirements (see Figure 3-16). The lower CO2 emissions are a function of the differences in carbon content of the fuels and heat rates, both of which favor natural gas. The total heat rate for CCS is greater than for non-CCS, as CCS has large parasitic electric requirements. The heat rate for advanced pulverized coal with CCS is 12,000 British thermal units per kilowatt hour (Btu/kWh) compared to 8,800 Btu/ kWh without CCS. The heat rate for NGCC with CCS is 7,525 Btu/kWh compared to 6,430 Btu/kWh without CCS (see Figure 3-16).29 Given that natural gas CCS has significant emissions advantages over coal CCS, CCS research and development efforts should include both natural gas and coal. At present, federal research
29 Based on AEO2011 Reference Case data and 2010 technology documentation report by R. W. Beck, Inc., and SAIC, prepared for the EIA, Task 692, Subtask 2.6 Review of Power Plant Cost and Performance Assumptions for NEMS.
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Figure 3-15. Impact of Carbon on end-User Natural Gas and electricity Prices Figure 3-15. Impact of Carbon Cases Cases on End-User Natural Gas and Electricityprices 60
RESIDENTIAL NATURAL GAS COMMERCIAL NATURAL GAS INDUSTRIAL NATURAL GAS RESIDENTIAL ELECTRICITY COMMERCIAL ELECTRICITY INDUSTRIAL ELECTRICITY
2008 DOLLARS PER MILLION BTU
40
20
2010
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EIA WM NOINTL LTDALT 2030
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Figure 3-16. Natural Gas and Coal CO2 emissions with and without CCS
2,000
Figure 3-16. Natural Gas and Coal CO2 Emissions with and without CCS
POUNDS PER MEGAWATT HOUR
CO2 EMISSIONS CO2 STORAGE 1,000
ADVANCED PULVERIZED COAL
IGCC
ADVANCED NGCC
ADVANCED PULVERIZED COAL WITH CCS
IGCC WITH CCS
ADVANCED NGCC WITH CCS
Notes: CCS = carbon capture and sequestration; IGCC = integrated gasi cation combined cycle; NGCC = natural gas combined cycle. Source: Energy Information Administrations AEO2011 Reference Case.
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and development and pilot project dollars for carbon capture are focused mostly on coal, although much of the research is also applicable to natural gas.30 Additional investment in demonstration projects for first generation carbon capture technologies is not likely to yield a substantial reduction in costs. The Global CCS Institute does not find scope for significant cost reductions because the component technologies are all commercially mature.31 The cost reductions from building first generation technology demonstration plants could average between 9.7% and 17.6% depending on the technology. These cost reductions represent decreased risk in the existing technologies and do not consider other improvements such as implementing new technologies for capture or economies of scale savings in transportation and storage. The reason for these small cost decreases is that the majority of the capital costs are well known for proven technologies. Furthermore, the DOE Office of Fossil Energy analysis mentioned above also shows that second generation CCS technology for coal has a first-year cost of electricity that is over $25 per MWh lower than first generation CCS technology for coal.
Both natural gas transmission pipelines and electric transmission grids operate under different complex systems of rules and regulations that have evolved over decades, largely independent of each other. The prospects that natural gas will become an even larger supply source for power generation and the increasing need for natural gas generation to backstop intermittent renewable generation will further complicate these respective operating and regulatory systems. The market rules and service arrangements that govern these two markets, however, differ from one another so that inefficiencies occur. For instance, in many power markets, generators must request natural gas transportation capacity a day before electric grid operators determine which generation plants will be needed to meet the market demand in a near-term upcoming period. As a result, power generators must schedule pipeline capacity before being scheduled for generation commitment or attempt to find pipeline capacity and gas supplies after other potential gas transportation users have already scheduled capacity. This mismatch in the timing of processes results in an inefficient market and use of resources. Further, while the gas day is uniform across their industry, and pipeline shippers can transport gas across time zones and across different pipelines seamlessly, the electric industry does not have a uniform electric day. An example of the increasing interdependence of natural gas and electric power is what happened in February 2011 in the Southwest when more than 50 electricity generation units stopped working overnight because of severe weather, reducing capacity by 7,000 megawatts and leading to rolling power outages. Other power plants found their fuel supplies curtailed by local distribution companies under natural gas priority rules that were last updated in the early 1970s. Some of the controlled electric outages also idled natural gas pipeline compressor stations, reducing pipeline pressure and hampering the ability of natural gas generation plants to get the fuel they needed. This incident highlights the need to resolve certain issues that sit at the intersection of gas and electric deliverability, and wholesale electric market reliability. The natural gas industrys reliance on electricity is also increasing. Increased use by pipelines of electric compression to meet air quality requirements in some areas has increased the need for reliable electric service to be able to provide reliable natural gas service. Another example is the dependence
Harmonization of U.S. Natural Gas and Power Markets

In the past decade, the U.S. natural gas and power industries have become more interdependent. From 2000 to 2010, the use of natural gas for generation increased from 16 to 24% of total electric sector generation. For the same period, natural gas demand for power generation grew from 14 to 20 Bcf/d, increasing power generation share of total natural gas demand from 22 to 31%. Renewable generation, excluding conventional hydro, has increased from 2% of total generation in 2000 to 4% in 2010. With an expectation of strong future growth in intermittent renewable generation driven by state-mandated Renewable Portfolio Standards and federal subsidies for wind, it has also become increasingly clear that natural gas infrastructure and supply will be impacted in multiple ways.32
30 National Energy Technology Laboratory, NGCC with CCS: Applicability of NETLs Coal RD&D Program, January 27, 2011. 31 Global CCS Institute, Strategic Analysis of the Global Status of Carbon and Storage, Report 2: Economic Assessment of Carbon Capture and Storage Technologies, 2009, page 80. 32 See http://www.eia.gov/energy_in_brief/renewable_portfolio_ standards.cfm and http://www.eia.gov/analysis/requests/ subsidy/.
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of many gas processing plants on electric service as demonstrated by gas processing plants being offline in February 2011 in the Southwest and in the aftermath of hurricanes Katrina and Rita in 2005, and Ike and Gustav in 2008. If natural gas cannot be processed, pipelines may not accept gas for delivery if acceptance would adversely affect their operations. Clearly, the natural gas and power industries are becoming increasingly interdependent. And that interdependency is expected to continue to increase in the future. As natural gas and power industries have become more interdependent, various issues have surfaced including: y How merchant generators can recover costs associated with firm pipeline capacity and firm gas supply.33 Merchant generators, even those operating in markets with capacity payments, are very reluctant to acquire firm transportation and natural gas supply, because they cannot recover the fixed costs associated with firm supply. Yet many of these merchant generators sell firm electricity and their generation capacity is considered firm for reserve margin purposes. y The operating day and time lines for scheduling natural gas and electricity are different and inconsistent with each other. y The electric day for scheduling across regions is not standardized. y A lack of harmonization between natural gas and power markets on how to deal with intraday variations in demand. Intraday changes in electricity demand requires generation that can quickly respond to unexpected changes in requirements that are not necessarily compatible with either the terms and conditions of natural gas service, the natural gas intraday nomination processes, or capacity priority rights. y Very few generators subscribe to either pipeline no notice or other services that can be tailored to generators needs. y Potential transmission constraints to the use of existing NGCC plants to displace coal-fired
33 Firm pipeline capacity means that a shipper has a contract with a pipeline for firm transportations service under the pipelines approved tariff. Firm transportation is generally not subject to interruption except in the event of a force majeure or a maintenance outage. Under a firm transportation contract the pipeline is only obligated to deliver natural gas that it has received.
generation or to replace coal-fired generation that might be retired because of proposed non-GHG EPA regulations. y The natural gas network is becoming increasingly reliant on electric service to provide reliable gas service and the electric network is becoming increasingly reliant on gas service to provide reliable electric service.
Firm Pipeline Transportation Capacity

Interstate gas pipelines are designed based on the firm contractual commitments made by shippers that support the project. Interstate gas pipelines do not have reserve capacity, which electric utilities have. For over a decade now, the Federal Energy Regulatory Commission (FERC) has generally required pipeline shippers who need new capacity and will benefit from that capacity, to pay for that capacity. Producers wanting to connect new supply have to contract for any new pipeline capacity needed. Buyers wanting new delivery capacity have to contract for any new pipeline capacity needed. Further, the FERC has held pipelines at risk for any unsubscribed capacity.34 Generally, the costs of new capacity are not allocated to existing customers. There are no operational impediments to natural gas pipelines serving electric generators, provided that the generator has contracted for the appropriate pipeline transportation service. Most peaking generators contract only for interruptible transportation service or rely on the capacity release market to transport gas on the pipeline.35 If during peak demand periods, pipeline firm transportation customers use their full contractual entitlements and the pipelines capacity is fully subscribed, then interruptible transportation will not be available. For example, a January 2004 cold snap in New England highlighted that most merchant generators do not have firm pipeline transportation and firm gas supply. With record peak electricity demand during the cold snap, pipelines firm transportation shippers used their full contractual entitlements and the pipelines
34 Under the FERCs at-risk policy, costs allocated to unsubscribed or unsold capacity are borne by the pipelines stockholders, not its customers. This prevents a pipeline from shifting costs to other customers if they are unable to sell the capacity. 35 Capacity release occurs when a firm shipper who is not utilizing its firm capacity releases its firm entitlements to another shipper for a specified period subject to any specified recall rights.
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did not have excess capacity available to schedule for interruptible transportation customers. While the pipelines met their firm contractual obligations, and all firm transportation customers received transportation service, customers relying on interruptible transportation did not. As a consequence, 6,000 megawatts of natural gas-fired generation was unavailable to run because the operators chose to rely on interruptible transportation, which is only available after the pipeline has met all of its firm contractual requirements.36 The loss of this generation jeopardized the reliability of the ISO-New England electric grid. The January 2004 cold snap in New England also demonstrates how local spot gas prices can increase as merchant generators and other non-firm shippers bid against each other to acquire a shrinking supply of pipeline capacity. The result is not only higher local natural gas prices, but higher local wholesale power market prices. Electric grid service reliability also can be threatened, which again happened in New England in 2004. As power-generation gas demand increases, the possibility of constraints could spread to other markets during other times of heavy demand. To ensure reliability of power service during the winter in regions with substantial heating loads, generators need to be able to access gas supplies quickly in order to respond to system dispatch orders by (1) holding both firm pipeline capacity and firm gas supply, purchasing appropriate services from interstate pipelines, or (2) having dual fuel capability i.e., the ability to burn a fuel other than natural gas such as distillate. Unless wholesale power markets allow generators to recover the cost of firm pipeline capacity or of dual fuel capability, generators will not enter into long-term pipeline contracts that are a prerequisite for pipelines to provide firm service nor will they build dual fuel capability. An alternative approach would be for grid operators, such as the regional transmission operators (RTOs) and independent system operators (ISOs), to hold some quantity of firm pipeline transportation capacity on behalf of the market to ensure that electric reliability could be preserved during coincident peak periods. As noted above, most generators, particularly those selling into unbundled wholesale electric markets, choose less-expensive interruptible transporta36 ISO-New England Final Report on Electricity Supply Conditions in New England During the January 14-16, 2004 Cold Snap, October 12, 2004.
tion pipeline capacity or short-term capacity release because under wholesale power market rules, there generally is no assurance that they can recover the fixed costs associated with either firm transportation or firm gas supply. For merchant markets with capacity payments, such payments seldom fully compensate for the fixed cost of generation capacity, let alone cover the fixed costs of having firm pipeline transportation contracts.
Operating Day and Time Lines for Scheduling

For over a decade now, U.S. and Canadian natural gas interstate pipelines have operated under a common set of standards developed by the North American Energy Standards Board (NAESB) under the auspices of the FERC. These standards were developed to improve market transparency and efficiency by facilitating computer-to-computer communication for, among other things, scheduling flows of natural gas. All pipelines use a gas day that begins at 9 a.m. central time. In addition, a common set of pipeline location codes were implemented. Scheduling processes have been standardized. On the other hand, the electric industry does not have a set of North America-wide or even interconnection-wide standards for when the electric day starts. Moreover, the times for scheduling electricity vary by specific RTO and these are not consistent with standardized natural gas scheduling processes. Thus, the process for scheduling electricity is neither consistent with the standardized natural gas scheduling process nor consistent with other RTOs (see Figures 3-17 and 3-18). As a consequence of these inconsistent time lines, the owner of a gas-fired generator must either buy gas without knowing if its power will be scheduled, or submit a power bid before knowing if the gas can be purchased and scheduled. The cost of covering the risk created by the inconsistency in time lines must be reflected in generators power offers. During periods when or regions where power and natural gas pipeline capacity are not constrained and demand is not volatile, this is a manageable risk. However, when pipeline capacity is constrained, the risk is high as gas-fired generators may be exposed to substantial balancing penalties from pipelines and local distribution companies (LDCs). Intraday time lines are also inconsistent, such as between the natural gas and electric scheduling processes. The intraday gas market is generally much
275
Figure 3-17. electric Day versus Gas Day Figure 3-17. Electric Day versus Gas Day
ELECTRIC DAY PACIFIC MIDNIGHT TO MIDNIGHT PST MOUNTAIN MIDNIGHT TO MIDNIGHT MST CENTRAL MIDNIGHT TO MIDNIGHT CCT EASTERN MIDNIGHT TO MIDNIGHT EST
12 AM
3 AM
6 AM
9 AM
12 PM
3 PM
6 PM
9 PM
12 AM
3 AM
NORTH AMERICAN GAS DAY 9 AM TO 9 AM CCT GAS DAY

Note: Central Clock Time (CCT) means Central Standard Time (CST), except when Daylight Saving Time is in e ect, when it means one hour in advance of CST.
less liquid than the electric market, adding to the risk associated with real-time offers. All of this is complicated by the operation of electric generating units (especially gas-fired units), which can be brought online with relatively short notice and/or can change generation output levels very frequently to adjust for changes in power requirement on the grid. These changes can be related to other generating units unexpectedly going offline, changes in load, and/ or changes to intermittent renewable generation output. These frequent and sometimes dramatic changes in gas-fired generation requirements can put stress on the pipeline system. Although pipelines have various mechanisms for dealing with these changes, including the use of storage, compression and/or line pack, their tariffs typically call for gas to be used at an even 24-hour or ratable flow, if pipeline operations could be adversely affected.37
37 Line pack is the volume of gas in a pipeline. Line pack will vary as the pressure within the pipeline varies between minimum and maximum operating pressures. Hourly variations in demand are generally met by variations in line pack. On a daily basis, however, variations in line pack need to be either restored or depleted by either withdrawing or injecting from natural gas storage.
Better-coordinated natural gas and power time lines could help reduce power generator risks. However, given that gas processes are based on national standards, but power processes vary by region, it will take significant efforts to develop uniform, consistent gas and power time lines for North America. In 2006, NAESB filed a report on Gas and Electric Interdependency with the FERC that included a proposed standard energy day. NAESB undertook a process to review potential modifications to the gas nomination schedule as a way to improve gas-electric consideration. In 2008, NAESB reported to the FERC that while several proposals were advanced, none achieved a sufficient consensus. However, recent events in the Southwest have led the NAESB to file with the FERC to reactivate discussions.
Firm Pipeline Service

Regulated utility generators that do have the ability to recover costs associated with firm transportation
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Figure 3-18. electric Schedule versus Gas Nomination Schedule for Day-ahead Market
Figure 3-18. Electric Schedule versus Gas Nomination Schedule for Day Ahead Markets
SCHEDULING FOR ORGANIZED MARKETS RTOs AND ISOs
NYISO 2 3 4 5
CAISO
MISO
ISO-NE
PJM
ELECTRIC DAY MIDNIGHT TO MIDNIGHT Central Clock Time (CCT) 12 PM 6 PM 12 AM 6 AM 12 PM 6 PM GAS DAY 9 AM TO 9 AM 12 AM
12 AM
6 AM
6 7 8 9
TIMELY NOMINATION EVENING NOMINATION INTRADAY 1 NOMINATION INTRADAY 2 NOMINATION
SCHEDULING FOR ALL NORTH AMERICAN NATURAL GAS PIPELINES

CLOSE FOR BIDS OR NOMINATONS TO POSTING OF SCHEDULED FLOW FLOW 6 7 8 9 11:30 am - 4:30 pm - 9 am to 9 am 6 pm - 10 pm - 9 am to 9 am 10 am - 2 pm - 5 pm to 9 am 5 pm - 9 pm - 9 pm to 9 am
Scheduling - Posting - Flow 1 4 am - 10 am - 12 am to 12 am 2 12 pm - 3 pm - 12 am to 12 am 3 10 am - 2 pm - 12 am to 12 am 4 11 am - 3 pm - 12 am to 12 am 5 11 am - 3 pm - 12 am to 12 am
Notes: Central Clock Time (CCT) means Central Standard Time (CST) except when Daylight Saving Time is in e ect, when it means one hour in advance of CST. All times are converted to CCT. NYISO = New York Independent System Operator; CAISO = California Independent System Operator; MISO = Midwest Independent System Operator; ISO-NE = Independent System Operator New England.
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have found that standard firm transportation may not fully meet their needs for two reasons: y The use of alternate receipt or delivery points by other firm shippers can restrict the ability of an electric generator holding firm transportation from being able to schedule its firm capacity in any of the three intraday scheduling cycles. This can happen when another firm shipper schedules gas from an alternate receipt point and/or to an alternate delivery point in the timely nomination cycle, which results in gas flows that exceed the capacity of certain points on the interstate pipeline system. When these flows exceed the capacity at a point or points on the interstate pipeline system, it creates a constraint. This constraint then restricts the ability of a shipper having firm transportation that is scheduled to flow through the constraint to make any changes (increases or decreases) to its scheduled quantities in any subsequent scheduling cycle for that particular gas day. This is often referred to as the No Bump Rule. Therefore, a shipper having firm transportation that serves an electric generating facility that is scheduled to flow through a constraint has to manage with the amount of gas that it schedules in the timely cycle and cannot make any changes without losing its firm rights. To the extent that the shipper did not schedule its full primary capacity to a point, the remaining capacity is rendered unavailable for that gas day. y As stated earlier, standard firm transportation generally limits hourly flows to 1/24th of the maximum daily quantity e.g., pro rata or ratable flow; however, both natural gas and electricity demand do vary considerably over the course of a day. Typically, natural gas demand, especially in the winter, peaks in the early morning and bottoms out just before sunset. Typically, electric demand, especially in the summer, peaks in late afternoon or early evening and bottoms out just before sunrise. For both markets, the prorata take requirement does not meet basic market requirements. However, pipelines are required to allow non-ratable hourly takes so long as operations are not adversely affected. Most of the time, non-ratable takes can be accommodated, but there is a risk that they may not always be accommodated.38 As a result, many pipelines offer
38 Non-ratable take is met by varying the quantity of line pack at a particular point. However, variations in line pack are limited by the size of the pipe and allowable variation in pressure at a particular point, as well as operating requirements to meet firm contractual obligations.
two other firm transportation services to address the issue of hourly takes: enhanced firm transportation and no-notice service. The typical enhanced firm transportation allows shippers to take up to 1/16th of the maximum daily quantity in an hour. The typical no-notice service further allows shippers to take service without a nomination and to take up to 1/16th of the maximum daily quantity in an hour, addressing not only the ratable take issue but also the no bump issue. However, enhanced firm transportation and no-notice service are more expensive than standard firm transportation as they require more line pack and/or storage to provide the services.39 In fact, some interstate gas pipelines have begun to develop services designed to meet the needs of gasfired electric generators to access gas supplies quickly in response to electric system dispatch orders. A practicable obstacle to providing more flexible firm service, such as hourly firm service, that is not subject to the no bump rule, is that the staff that schedules natural gas for many gas suppliers and buyers are not available on a 24/7/365 basis.
Firming Up Intermittent Renewables

As intermittent renewable generation capacity increases, the power sector is increasingly focused on natural gas-fired generation with its flexible operating characteristics to accommodate day-to-day variations in renewable generation and to firm up intraday variations between scheduled renewable generation (based on a wind forecast) and actual renewable generation or firming requirement. At the heart of all of these issues is how costs should be allocated, whether for maintaining enough pipeline capacity to serve an increase in power generation load, or for compensating generators for backing up intermittent renewable generation. This issue of who pays for the infrastructure to support renewable energy has been raised in the context of new electric transmission lines for transporting expanded renewables generation. On November 18, 2010, the FERC issued a Notice of Proposed Rulemaking RM10-11-000 that would amend its requirements for electric transmission planning and cost allocation. In this Notice of Proposed Rulemaking, the FERC seeks to address
39 Some pipelines offer no-notice service only to former sales customers.
278
perceived deficiencies in its transmission planning process and cost allocation requirements that may inhibit the development of new transmission facilities. The central debate is whether electric consumers should be burdened with the costs of new electric facilities from which they receive little or no meaningful benefit given a standard that the cost of transmission projects be allocated in a fashion reasonably proportionate to measurable economic and reliability benefits. Recent decisions in Southwest Power Pool, 131 FERC 61,252 and in Midwest Independent Transmission System Operator, 133 FERC 61,221, involve cost allocation methodologies that, at their heart, spread the costs of certain, significant high voltage transmission facilities over the regional transmission operators respective footprint. On March 16, 2011, the Interstate Natural Gas Association of America Foundation released a new study, Firming Renewable Electric Power Generators: Opportunities and Challenges for Natural Gas Pipelines. The study examined the amount of firm transportation capacity that would have to be built to support the forecasted growth in renewable energy and the regulatory policy issues that would have to be addressed to ensure the cost of this new capacity was recovered. The highlights of the study include: y In the next 15 years, 105 gigawatts (GW) of renewable power generation is forecast to be constructed, of which 88 GW could be new intermittent wind generation. y The natural gas-fired generation, most likely a combustion turbine, needed over the next 15 years to firm up wind generation could be approximately 33 GW, generating some 45,500 gigawatt hours (GWh) of electricity. y Almost 5 Bcf/d of incremental delivery capability could be required over the next 15 years to provide the new gas-fired firming generation with firm natural gas supply. But at an expected load factor of only 15%, natural gas demand might increase by only 0.75Bcf/d over the next 15 years. y The total capital cost of the natural gas infrastructure to support firming requirements could range from about $2 billion to $15 billion. Utilization of the new gas pipeline infrastructure is expected to be quite low, around 15% or less. The implied unit cost of firm transportation capacity ($/MMBtu) at a 15% utilization rate would be over six times greater than the cost at a full rate of utilization.
The study goes on to conclude that to ensure adequate backup generation for electric system reliability and that other pipeline customers are not adversely affected by backup generation, regulators should consider adopting policies that: y Identify generation units that are providing firming service y Provide a mechanism for cost recovery for generators, including the recovery of firm pipeline transportation and storage costs y Support tariffs that ensure the recovery of costs of pipeline services that meet the needs of firming generation.
Curtailment Rules
Curtailment of interstate pipeline capacity is generally done on a pro rata basis based on shippers firm entitlements. In contrast, state or LDC level curtailment rules may curtail industrial customers before human needs customers such as homes, hospitals, and schools. Unfortunately, in some cases power generators are lumped in with industrial load. Curtailment of power generators could adversely affect human needs customers, as most such customers need electricity to operate their natural gas equipment. Also, curtailment of power generators could adversely affect the delivery of natural gas if processing plants, pipelines, or distributors use electric compression. This is an area that state regulators and LDC ought to examine to ensure reliability of service.
Transparency
Unexpected changes in demand or supply are drivers of price volatility. One way to reduce volatility is to minimize surprises by increasing transparency of supplier operations.40 The FERC has done this by requiring interstate pipelines to post on the web extensive data on their operations. Increasing the transparency of power and transmission operations could also add predictability and reduce surprises.
Transmission Issues
Much has been written about transmission bottlenecks related to wind generation. As previously
40 A well insulated home with efficient HVAC has a smaller range of demand for heating and cooling energy (whether electric or direct gas) than inefficient house. Improving thermal integrity of buildings can reduce demand volatility thereby reducing price volatility.
279
discussed, since early 2009, lower natural gas prices have resulted in over 2.7 Bcf/d of incremental natural gas demand from displacement of coal-fired generation.41 However, little has been published on possible transmission bottlenecks related to increased use of existing NGCC plants to further displace or replace coal-fired generation. A Congressional Research Service (CRS) study estimated the potential for coal-to-gas displacement at 12.7 Bcf/d.42 However, that estimate assumed that there are no electric transmission barriers to inhibit use of existing NGCCs. The CRS study estimated the displacement potential for NGCC plants within 25 miles of a coal plant at a more limited 3.5 Bcf/d. This study, as well as others reviewed, including the ones analyzing the impact of proposed non-GHG EPA regulations on coal plants, did not address potential transmission bottlenecks to maximizing coal displacement.
U.S. Residential Energy

For 2010, U.S. residential energy demand, excluding vehicles, is estimated at 22,132trillion Btu (see Figure 3-19).44 Residential energy demand includes not only fuel consumed on site, but indirect energy consumption consisting of: y Natural gas transmission fuel consumed in lease (gathering), processing, and delivering natural gas to the end user, about 8.5%.45 Figure 3-19 includes only the residential sectors share. y Energy used to generate electricity (i.e., to convert Btu to kWh) and transmission and distribution (T&D) losses incurred in delivering the electricity to the end user. See text box, Generation and T&D Energy Losses, for more detail. Figure 3-19 includes only the residential sectors share. As discussed under Full Fuel Cycle Analysis later in this chapter, information on direct and indirect energy requirements and emissions would assist policymakers and end users in making informed choices about total energy consumption, efficiency, and emissions. Energy efficiency improvements have weakened the link between economic and population growth and energy demand. There remains significant technological potential for efficiency improvements for both natural gas and electricity to reduce long-term demand and emissions.46 Much of this potential is available from better implementation of currently available technologies and techniques (including operations and maintenance practices), while improved technology is needed to obtain further improvements. Beyond the great energy efficiency potential from implementing existing technologies and practices, significant efficiency improvements can arise from new technologies that would emerge from investment in research and development. Also, such impediments as information gaps and uncertainty, split incentives (e.g., landlord-tenant problem), and related financial issues would need to be addressed to achieve the potential.
44 Renewable energy includes wood, and petroleum includes liquefied petroleum gases such as propane. 45 It does not include any methane leakages from production to end user, as those data are not available from the EIA. 46 American Council for an Energy-Efficient Economy. The Technical, Economic, and Achievable Potential for Energy Efficiency in the U.S.: A Meta-Analysis of Recent Studies, 2004. Also, DOE/EIA National Energy Modeling System (NEMS) technology assessments.
u.S. rESIDENTIaL aND COmmErCIaL NaTuraL GaS, DISTILLaTE, aND ELECTrICITy DEmaND
Since 1970, residential and commercial total energy demand, excluding energy used for vehicles, has been driven by growth in electricity sales and associated generation related energy losses from converting Btu to kWh and delivering the electricity to the end user. Growth in electricity demand has been driven by increasing electricity use per customer as we continue to develop new electric devices that have more than offset improvements in electrical efficiency for existing devices.43 In contrast to electricity, natural gas used directly in the residential and commercial sector has remained level since 1970, as efficiency improvements have contributed to lower gas use per customer, thereby offsetting growth in demand attributable to a 71% increase in the total number of natural gas customers.
41 Bentek Energy, Market Alert, Power Burn Head Fake Catches Market Off Guard, August 3, 2010. 42 Congressional Research Service, Displacing Coal with Generation from Existing Natural Gas Fired Power Plants, January 19, 2010, page 10 estimate of 4,775,104,647 MMBtu of natural gas. 43 The U.S. DOE/EIA March 2011 Residential Energy Consumption Survey shows an increase in residential electricity use for appliances and electronics from 1.77 to 3.25 quadrillion Btu over the past three decades despite federal mandatory efficiency standards.
280
Figure 3-19. U.S. residential energy Consumption by Fuel
Figure 3-19. U.S. Residential Energy Consumption by Fuel
20,000
TRILLION BTU
ELECTRIC TRANSMISSION AND DISTRIBUTION ENERGY LOSS GENERATION LOSS ELECTRICITY SALES NATURAL GAS TRANSMISSION FUELS NATURAL GAS RENEWABLE ENERGY PETROLEUM COAL
10,000
0 1950 1960 1970 1980 1990 YEAR 2000 2010 2020 2030 2035
Note: Renewable energy includes wood, and petroleum includes lique ed gases such as propane. Source: Energy Information Administration.
U.S. Residential Natural Gas Demand

U.S. residential natural gas demand for 2010 is estimated at 13.0 Bcf/d, accounting for about 21% of U.S. total natural gas demand (see Figure 3-20).47 For 2030, residential natural gas demand is expected to range from 10.7 to 14.7 Bcf/d driven by household growth (which is a function of population growth) and continued decline in gas demand per household (which is a function of energy efficiency improvements) (see Figures 3-21 and 3-22). Only about 61% of households have residential natural gas service. Major drivers of residential natural gas demand from highest increase to greatest decrease are: y Increases Low technology (less efficiency gains and greatest increase in demand)
47 Includes only natural gas consumed by residential end users. Does not include related natural gas transmission fuel needed to deliver the natural gas to the residential end user.
High macroeconomic growth High gas resources (smallest increase in demand). y Decreases Low gas resources (smallest decrease in demand) Low macroeconomic growth High technology (more efficiency gains and greatest decrease in demand). Studies with a price on carbon usually had lower residential natural gas demand than those that did not.
U.S. Residential Distillate Demand

U.S. Northeast residential distillate demand of 1.4 Bcf/d equivalent accounts for 80% of U.S. residential distillate demand (see Figure 3-23). This distillate demand represents an area where conversion from an oil furnace to a natural gas furnace could help increase energy efficiency, reduce greenhouse gas emissions, and reduce oil imports. A new natural
281
Generation and T&D Energy Losses

Generation and T&D Energy Losses shown in Figures 3-19, 3-27, and 3-35 consist of the energy used to generate electricity (i.e., to convert Btu to kWh) and transmission and distribution losses incurred in delivering the electricity to the end user. For 2010, it took on average 10,192 Btu of coal, natural gas, oil, and uranium to generate 1 kWh, which is equal to 3,412 Btu. The thermal loss on conversion of 6,780Btu per kWh is likely to decline as new more efficient fossil fuel generation or renewable generation is built. In addition to the thermal losses from conversion, there are also losses incurred in the transmission and distribution of electricity. Based on EIA data, on average, about 6.5% of the kWh generated is lost transmitting and distributing electricity.
gas furnace will likely require fewer Btu than an existing distillate furnace due to higher efficiency of new furnaces.48 However, there are many obstacles to conversion. High appliance first cost, low population density rates, and regulatory impediments to recover costs from extending natural gas service to certain areas
48 The average oil furnace is 48% efficient, but a new natural gas furnace is currently 85% efficient. A pending DOE rule would increase this to 90% efficient.
present challenges. When service costs are prohibitive, a customers contribution in aid of construction to extend service lines can further increase the customers first-cost burden. Consumers often make purchase decisions based on first cost, whereas the economic and carbon-related benefits accrue over the lifetime of the gas-using equipment. Prudent policy could provide better alignment of long-term economic and environmental benefits of natural gas with the short-term costs of the equipment and service extension.
Figure 3-20. U.S. Residential Natural Gas Demand Figure 3-20. U.S. residential Natural Gas Demand
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Figure 3-21. U.S. Residental Natural Gas Demand Drivers
Figure 3-21. U.S. residential Natural Gas Demand Drivers
2.0 INDEX OF 1 FOR 1970
HOUSEHOLDS POPULATION RESIDENTIAL NATURAL GAS DEMAND RESIDENTIAL NATURAL GAS DEMAND PER HOUSEHOLD
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Figure 3-22. U.S. residential Natural Gas Demand per household

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Figure 3-22. U.S. Residential Natural Gas Demand per Household
THOUSAND CUBIC FEET PER HOUSEHOLD
60
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20 1970
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Figure 3-23. U.S. residential Distillate Demand
Figure 3-23. U.S. Residential Distillate Demand
BILLION CUBIC FEET PER DAY EQUIVALENT
OTHER U.S. VERMONT RHODE ISLAND
NEW HAMPSHIRE MAINE NEW JERSEY
CONNECTICUT PENNSYLVANIA MASSACHUSETTS
NEW YORK
0 1989
1994
1999 YEAR
2004
2009
Source: Energy Information Administration.
U.S. Commercial Electricity Demand

U.S. residential electricity demand for 2010 is estimated at 1,388 billion kWh, accounting for about 38% of U.S. total electricity demand (see Figure 3-24).49 For 2035, residential electricity demand is expected to range from 1,446 to 1,844 billion kWh, driven by customer growth (which is a function of population growth) and the introduction of new residential electrical devices, and offset in part by continued energy efficiency improvements for existing electrical devices (see Figures 3-25 and 3-26).50 Almost all households
49 Includes only electricity consumed by residential end users. Does not include related generation and T&D losses to deliver the electricity to the residential end user. 50 The U.S. DOE/EIA March 2011 Residential Energy Consumption Survey shows an increase in residential electricity use for appliances and electronics from 1.77 to 3.25 quadrillion Btu over the past three decades despite federal mandatory efficiency standards for some electrical appliances. Many electrical devices such as TVs and computers are not subject to federal efficiency standards. Some electrical equipment categories, such as general lighting, are subject to standards that are just having their first set of standards promulgated or implemented. Some standards have not been updated in years.
have residential electric service. Historically, electricity demand from new electrical devices has grown faster than energy efficiency improvements for existing electrical devices. Unlike natural gas demand, the range for electricity demand is narrower and generally upward. Major drivers of residential electricity demand from highest increase to greatest decrease are: y Increases High macroeconomic growth (greatest increase in demand) Low technology (less efficiency gains) High gas resources (smallest increase in demand). y Decreases Low gas resources (smallest decrease in demand) Low macroeconomic growth High technology (more efficiency gains and greatest decrease demand). Studies with a price for carbon usually have lower residential electricity demand than those that did not.
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Figure 3-24. U.S. Residential Electricity Demand
Figure 3-24. U.S. residential electricity Demand

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Figure 3-25. U.S. Residential Electricity Demand Drivers 4.0

RESIDENTIAL ELECTRICITY DEMAND HOUSEHOLDS POPULATION RESIDENTIAL ELECTRICITY DEMAND PER HOUSEHOLD
Figure 3-25. U.S. residential electricity Demand Drivers
3.0 INDEX OF 1 FOR 1970
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Figure U.S. residential electricity Demand per household Figure 3-26.3-26. U.S. Residential ElectricityDemand per Household 14,000
KILOWATT HOURS PER HOUSEHOLD
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U.S. Commercial Energy

For 2010, U.S. commercial energy demand, excluding vehicles, is estimated at 19,068trillion Btu (see Figure 3-27).51 Commercial energy demand includes not only fuel consumed on site, but indirect energy consumption consisting of: y Natural gas transmission fuel consumed in lease (gathering), processing, and delivering natural gas to the end user, about 8.5%.52 Figure 3-27 includes only the commercial sectors share. y Energy used to generate electricity (i.e., to convert Btu to kWh) and transmission and distribution losses incurred in delivering the electricity to the end user. See text box, Generation and T&D Energy Losses, earlier in this chapter for more detail. Figure 3-27 includes only the commercial sectors share.
51 Renewable energy includes wood, and petroleum includes liquefied petroleum gases such as propane. 52 It does not include any methane leakages from production to end user, as those data are not available from the EIA.
As discussed under Full Fuel Cycle Analysis later in this chapter, information on direct and indirect energy requirements and emissions would assist policymakers and end-use customers in making informed choices about total energy consumption, efficiency, and emissions. Energy efficiency improvements have weakened the link between economic and population growth and energy demand. There remains significant technological potential for efficiency improvements for both natural gas and electricity to reduce long-term demand and emissions.53 Much of this potential is available from better implementation of currently available technologies and techniques (including operations and maintenance practices), while improved technology is needed to obtain further improvements. Beyond the great energy efficiency potential from implementing existing technologies
53 American Council for an Energy-Efficient Economy. The Technical, Economic, and Achievable Potential for Energy Efficiency in the U.S.: A Meta-Analysis of Recent Studies, 2004. Also, DOE/EIA National Energy Modeling System (NEMS) technology assessments.
286
Figure 3-27. U.S. Commercial Energy Consumption by Fuel
Figure 3-27. U.S. Commercial energy Consumption by Fuel

ELECTRIC TRANSMISSION AND DISTRIBUTION ENERGY LOSS GENERATION LOSS ELECTRIC RETAIL SALES NATURAL GAS TRANSMISSION FUEL NATURAL GAS RENEWABLE ENERGY PETROLEUM COAL
20,000
TRILLION BTU
10,000
0 1950 1955 1965 1975 1985 1995 YEAR 2005 2015 2025 2035
Note: Renewable energy includes wood, and petroleum includes lique ed gases such as propane. Source: Energy Information Administration.
and practices, significant efficiency improvements can arise from new technologies that would emerge from investment in research and development. Since the early 1970s, growth in commercial energy demand has come from growth in the demand for electricity and the generation and T&D losses incurred in providing that electricity. More than half of the energy consumed in the United States is consumed in buildings when the energy used to generate electricity and the fuels used or lost during transmission are included.54
For 2030, commercial natural gas demand is expected to range from 7.3 to 11.5 Bcf/d, driven by economic and customer growth (which is a function of population growth) and continued decline in gas demand per customer (which is a function of energy efficiency improvements) (see Figures 3-29 and 3-30). Major drivers of commercial natural gas demand from highest increase to greatest decrease are: y Increases High macroeconomic growth (greatest increase) High gas resources Low technology (less efficiency gains and smallest increase). y Decreases Low macroeconomic growth (smallest decrease) Low gas resources High technology (more efficiency gains and greatest decrease). Studies with a price for carbon usually had lower commercial natural gas demand than those that did not.
U.S. Commercial Natural Gas Demand

U.S. commercial natural gas demand for 2010 is estimated at 8.5 Bcf/d, accounting for about 14% of U.S. total natural gas demand (see Figure 3-28).55
54 Overview of Commercial Buildings, 2003, http://www.eia.doe. gov/emeu/cbecs/cbecs2003/overview2.html. 55 Includes only natural gas consumed by commercial end users as reported by the EIA. Does not include related natural gas transmission fuel needed to deliver the natural gas to the commercial end user.
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Figure 3-28. U.S. Commercial Natural Gas Demand
Figure 3-28. U.S. Commercial Natural Gas Demand
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Figure 3-29. U.S. Commercial Natural Gas Demand Drivers
Figure 3-29. U.S. Commercial Natural Gas Demand Drivers
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Figure 3-30. U.S. Commercial Natural Gas Demand per Person
Figure 3-30. U.S. Commercial Natural Gas Demand per person
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U.S. Commercial Distillate Demand

U.S. Northeast commercial distillate demand of 0.5 Bcf/d equivalent accounts for 47% of U.S. commercial distillate demand (see Figure 3-31). Commercial distillate demand is less concentrated in the Northeast than residential distillate demand, as a substantial portion of commercial distillate demand is for backup generation or commercial combined heat and power (CHP) for large buildings. This distillate demand represents an area where conversion from an oil furnace to a natural gas furnace can help increase energy efficiency, reduce greenhouse gas emissions, and reduce oil imports. A new natural gas furnace will likely require fewer Btu than an existing distillate furnace due to higher efficiency of new furnaces. However, there are many obstacles to conversion. High appliance first cost, low population density rates, and regulatory impediments to recover costs from extending natural gas service to certain areas present challenges. When service costs are prohibitive, a customers contribution in aid of construction to extend service lines can further increase the customers first-cost burden. Consumers often make purchase
decisions based on first-cost, whereas the economic and carbon-related benefits accrue over the lifetime of the gas-using equipment. Prudent policy could provide better alignment of long-term economic and environmental benefits of natural gas with the shortterm costs of the equipment and service extension. An example of a required expansion to allow natural gas to replace fuel oil is the city of New Yorks program that requires the conversion of 0.4 Bcf/day (average day, or 0.8 Bcf/day peak day) equivalent of fuel oil demand to low emission fuels such as natural gas. This will require a substantial expansion of pipeline capacity into Manhattan. The conversion program follows from an analysis of the health advantages of reducing use of heavy fuel oils in the commercial sector by the Environmental Defense Fund. Texas Eastern Gas Transmission has proposed a 0.8 Bcf/day expansion to facilitate bringing gas supply from Pennsylvania to Manhattan.
U.S. Commercial Electricity Demand

U.S. commercial electricity demand for 2010 is estimated at 1,355 billion kWh, accounting for about
289
Figure 3-31. U.S. Commercial Distillate Demand Figure 3-31. U.S. Commercial Distillate Demand 1.6 BILLION CUBIC FEET PER DAY EQUIVALENT
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38% of U.S. total electricity demand.56 For 2035, commercial electricity demand is expected to range from 1,586 to 2,062 billion kWh, driven by economic and customer growth (which is a function of population growth) and the introduction of new commercial electricity devices, and offset in part by continued energy efficiency improvements for existing electrical devices (see Figures 3-32, 3-33, and 3-34).57 Historically, new uses of electricity have grown faster than energy efficiency improvements for existing devices.58
56 Includes only electricity consumed by commercial end users. Does not include related generation and T&D losses to deliver the electricity to the commercial end user. 57 Savings taken or based on calculations by the American Council for an Energy-Efficient Economy. See especially John A. Skip Laitner, et al., The American Power Act and Enhanced Energy Efficiency Provisions: Impacts on the U.S. Economy, ACEEE Report E103, June 2010. 58 For the first four Commercial Buildings Energy Consumption Surveys [19791989], electricity intensity remained in a narrow range from 42 to 45 thousand Btu per square foot. In 1992, the electricity estimate dropped to 39,000 and then began a steady increase to 51,000 in 2003 as demand for more services that use electricity increased (http://www.eia.gov/ emeu/cbecs/cbecs2003/overview2.html).
Major drivers of commercial electricity demand from highest increase to greatest decrease are: y Increases Low technology (less efficiency gains and greatest increase) High macroeconomic growth High gas resources (smallest increase). y Decreases Low gas resources (smallest decrease) Low macroeconomic growth High technology (more efficiency gains and greatest decrease). Studies with a price for carbon usually had lower commercial electricity demand than those that did not.
u.S. INDuSTrIaL NaTuraL GaS aND ELECTrICITy DEmaND

For 2010, U.S. industrial energy by fuel is fairly balanced between natural gas, electricity,
290
Figure 3-32. U.S. Commercial Electricity Demand
Figure 3-32. U.S. Commercial electricity Demand
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Figure 3-33. U.S. Commercial Electricity Demand Drivers
Figure 3-33. U.S. Commercial electricity Demand Drivers

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Figure 3-34. U.S. Commercial Electricty Demand per Person
Figure 3-34. U.S. Commercial electricty Demand per person
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and petroleum (see Figure 3-35). About 54% of industrial energy is used for heat, light, and power, including purchased electricity and its associated generation and T&D losses (see Figure 3-36). Fuel uses account for another 32% of industrial energy, and feedstock accounts for 14%. The 14% feedstock component breaks down into petroleum, 6%; natural gas, 2%; and liquefied petroleum gases (LPGs), 6%. Industrial energy used does not include fuel for vehicles. As with the residential and commercial sectors, there are opportunities to improve energy efficiency using existing technologies and practices as well as for new processes and technologies. Superficially, generation and transmission and distribution losses for the industrial sector appear significantly lower than for the residential and commercial sectors. This is because the industrial sector generates a substantial portion of its electricity requirements on-site, meaning the thermal losses from converting Btu to kWh is part of the energy consumed for heat, light, and power. Furthermore, on-site generation does not have transmission and distribution losses. 292
Industrial Natural Gas Demand

U.S. industrial natural gas demand for 2010 is estimated at 17.9 Bcf/d, accounting for about 29% of U.S. total natural gas consumption.59 For 2030, industrial natural gas demand is expected to range from 13.4 to 22.2 Bcf/d, driven by economic growth and offset by continued improvement in energy efficiency (see Figures 3-37 and 3-38). Major drivers of industrial natural gas demand from highest increase to greatest decrease are: y Increases High macroeconomic growth (greatest increase in demand) High gas resources High technology (higher growth in industrial activity that requires more energy and sometimes a shift to higher value and more energy-intensive products as well as higher efficiency gains)
59 Includes only natural gas consumed by industrial end users. Does not include related natural gas transmission fuel needed to deliver the natural gas to the industrial end user.
Figure 3-35. U.S. Industrial energy Demand

ELECTRIC TRANSMISSION AND DISTRIBUTION ENERGY LOSS PURCHASED ELECTRICITY NATURAL GAS OTHER NATURAL GAS FEEDSTOCK LIQUEFIED PETROLEUM GASES HEAT AND POWER BIOFUELS HEAT AND COPRODUCTS PETROLEUM FEEDSTOCK GENERATION LOSS NATURAL GAS TRANSMISSION NATURAL GAS HEAT AND POWER LIQUEFIED PETROLEUM GASES FEEDSTOCKS RENEWABLES PETROLEUM OTHER COAL
Figure 3-35. U.S. Industrial Energy Demand
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Figure 3-36. U.S. Industrial Energy by Use 2010 Estimate
Figure 3-36. U.S. Industrial energy by Use 2010 estimate
Low technology (smallest increase in demand) (slower growth in industrial activity that requires less energy as well as less efficiency gains). y Decreases Low gas resources (smallest decrease in demand)
32% 54%
Low macroeconomic growth (greatest decrease in demand). Typically, the studies reviewed that had a price for carbon had lower industrial natural gas demand than those that did not. When the industrial sector uses natural gas as a feedstock or in the direct production of products, the value is leveraged over and over, resulting in a strong value-added proposition for the economy. U.S. firms rely on natural gas and oil-derived chemicals as building blocks for the production of electronics (including computers and cell phones), plastics, medicines (and medical equipment), cleaning products, fertilizers, building materials, adhesives, and clothing. Consequently, a strong industrial sector is critical to a healthy economy. In a global business
6% 6% 2%
FUEL HEAT, LIGHT, AND POWER PETROLEUM FEEDSTOCK
NATURAL GAS FEEDSTOCK LIQUEFIED PETROLEUM GASES FEEDSTOCK
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Figure 3-37. U.S. Industrial Natural Gas Demand

25
Figure 3-37. U.S. Industrial Natural Gas Demand
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Figure 3-38. U.S. Industrial Natural Gas Demand per Dollar of Gross Domestic product ($GDp)
Figure 3-38. U.S. Industrial Natural Gas Demand per GDP
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environment where companies have the ability to move capital around the world, a dependable, competitive supply of natural gas is critical to creating investment and jobs. Therefore, attention must be paid to ensure energy is used efficiently and there is adequate energy supply at reasonable cost to meet the growth demands of the industrial sector. Recycling of energy-intensive products such as paper, steel, aluminum, glass, solvents, asphalt, concrete, and plastic is a very powerful tool for reducing energy consumption, greenhouse gas emissions, pollution, and wastes. Much energy is embodied in the material or expended in making the material, through the energy needed to extract, process, and distribute them. This includes water, which requires significant energy for collection, treatment, and distribution. Further, some organic materials (such as manures from animal agriculture) can sometimes substitute for energy-intense (and often natural gasbased) synthetic fertilizers or energy can be recovered through direct combustion or digestion to biogas. In 2009, the estimated avoided greenhouse gas emissions from recycling totaled over 142.2 million
MtCO2e.60 Despite these significant gains from recycling, there are still significant quantities of these products that are not recycled each year. Generally, when natural gas prices are low and decreasing, U.S. industrial natural gas demand is high and increasing. Conversely, when natural gas prices are high and increasing, U.S. industrial natural gas demand is low and decreasing (see Figure 3-39). The availability of abundant natural gas resources at a low cost led to a higher oil to natural gas price ratio, even before the recent unrest in the Middle East. This has led to an improvement in the international competitiveness of industries that use natural gas and natural gas liquids (NGLs) as a feedstock relative to foreign competitors that use oilbased naphtha as a feedstock or natural gas priced as a function of oil prices. To accommodate increasing levels of ethane production related to the growth in natural gas production, increased investment by the chemical industry will be required. The American Chemistry Council recently estimated that a 25%
60 U.S. EPA, Source Environmental Benefits Calculator, 2009 Data.
Figure 3-39. U.S. Natural Gas Industrial Demand versus Wellhead price
12
8 2005 DOLLARS PER THOUSAND CUBIC FEET
Figure 3-39. U.S. Natural Gas Industrial Demand versus Wellhead Price
MARKET PENETRATION
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increase in ethane supply could result in $16 billion in capital investment by the chemical industry. This would generate 17,000 new jobs in the U.S. chemical industry and 395,000 additional jobs outside the chemical industry and increase U.S. economic output by $132 billion.61 Outside of the chemical industry, other energyintensive manufacturers are also increasing production or expanding. Recently, several ammonia manufacturers have announced plans to restart idled units in the United States. PCS Nitrogen, Inc. will restart its ammonia plant in Geismar, Louisiana, and Pandora Methanol has begun the process of restarting its ammonia plant in Beaumont, Texas. Additionally, Nucor Corporation announced the construction of a $750 million iron making facility in Louisiana that will use direct reduction technology.62
Industrial Electricity Demand

The U.S. industrial sectors purchased electricity demand for 2010 is estimated at 868 billion kWh, accounting for about 24% of U.S. total electricity demand (see Figure 3-40).63 For 2035, industrial electricity demand is expected to range from 842 to 1,190 billion kWh, driven by economic growth and offset by continued energy efficiency improvements for existing applications and new industrial uses for electricity (see Figure 3-41). Historically, new uses for electricity have grown faster than energy efficiency improvements for existing uses. Major drivers of industrial electricity demand from highest increase to greatest decrease are: y Increases High macroeconomic growth (greatest increase in demand)
61 American Chemistry Council, Shale Gas and New Petrochemicals Investment: Benefits for the Economy, Jobs, and US Manufacturing, March 2011. 62 See Nucor press release: http://www.nucor.com/investor/ news/releases/?rid=1471666.
63 Includes only electricity consumed by industrial end users. Does not include related generation and T&D losses to deliver the electricity to the industrial end user.
Figure 3-40. U.S. Industrial electricity Demand

1.2
Figure 3-40. U.S. Industrial Electricity Demand
BILLION MEGAWATT HOURS
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Figure 3-41. U.S. Industrial electricity Demand per Dollar of Gross Domestic product ($GDp)
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Figure 3-41. U.S. Industrial Electricity Demand per GDP
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High gas resources High technology (higher growth in industrial activity that requires more energy and sometimes a shift to higher value and more energyintensive products as well as higher efficiency gains) (smallest increase in demand). y Decreases Low gas resources (smallest decrease in demand) Low technology (slower growth in industrial activity that requires less energy) Low macroeconomic growth (greatest decrease in demand). Unlike the residential and commercial sectors, the High Technology Case results in an increase in electricity demand, not a decrease. A higher pace of technology change spurs an increase in economic activity and a shift towards higher value, more energy-intensive products.64 However, greater technological change can also increase the efficiency and
64 DOE/EIA AEO2010, High Technology Case compared to the Reference Case and Low Technology Case.
productivity of production to reduce the energy required per added dollar of value. Studies with a price on carbon usually had lower industrial electricity demand than those that did not. Energy-intensive industries in Europe have expressed concerns that expansion of the European Union Emissions Trading System should be done as part of a global framework; otherwise, their international competitiveness could be adversely affected.65 The industrial sector spends about five times as much on electricity as it does directly on natural gas, making electricity pricing very important to industry.66 Wholesale electric prices are very dependent on natural gas prices, making industrial activity highly sensitive to the natural gas market when both direct and indirect effects are considered. High, volatile natural gas prices from 1999 through 2008 played a
65 European Alliance of Energy Intensive Industries press release, May 6, 2010. 66 Calculated from EIA data on Industrial energy consumption and prices for natural gas and electricity for 2010, Short-Term Energy Outlook, March 2011.
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significant role in the relatively flat growth in industrial electricity during the 19992008 period as investment by industry in the United States dropped. Industry has generally proven itself to be an efficient consumer of natural gas, responding to high prices by investing in new technology and shutting down assets that no longer compete. However, there are still many opportunities to improve energy efficiency. Some of the more promising technologies include CHP, low temperature heat recovery, use of oxygen to supplement or replace combustion air, biomass integrated gasifier combined cycle, and municipal solid waste used to fuel generation or CHP. Further investment in these and other technologies is needed for industry to thrive well into the future. The industrial sector has and is expected to continue to improve its efficiency in using electricity across all outlooks.
ing), processing plant, pipeline, and distribution facilities that reliably and efficiently delivers significant quantities of natural gas from the wellhead to end users throughout the entire continent. This elaborate system is the culmination of decades of investment by countless participants and combines legacy components with state-of-the-art improvements (Figure 3-42). Expansion of natural gas lease, plant, pipeline, and distribution infrastructure generally depends upon growth in the natural gas market or development of new sources of supply. Still, even in a flat-to-declining market, additional infrastructure assets will likely be required to accommodate natural shifts in the locations of supply and demand. Most of the natural gas infrastructure capacity added in the last 30 years has been to deliver new supply to existing load or to load that has shifted regionally. It is important to note that each lease, plant, pipeline, and distribution supply and delivery system is unique. Consequently, a one-size-fits-all approach to seeking efficiency improvements will not work. This is because each systems age, geographic location,
u.S. TraNSmISSION NaTuraL GaS DEmaND

The North American Natural Gas Transmission System consists of an intricate network of lease (gather-
Figure 3-42. Natural Gas Transmission System
Figure 3-42. Natural Gas transmission System

IMPORTS TRUCKED PIPELINE COMPANY STORAGE LNG STORAGE LOCAL DISTRIBUTION COMPANY MARKET CENTERS/HUBS & INTERCONNECTS COMMERCIAL END USER CATEGORIES RESIDENTIAL
PRODUCERS GATHERING
INDUSTRIAL ELECTRIC POWER GENERATORS
GAS PLANT
PIPELINE COMPANY
LARGER DIAMETER PIPELINE SMALLER DIAMETER PIPELINE Note: LNG = lique ed natural gas. Source: Energy Information Administration, O ce of Oil and Gas.
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original design, modifications, and shifting supply and transmission patterns are all distinct. Therefore, an improvement may be cost effective in one case, but not be feasible or economical in another case. Due to this reality, the greatest opportunity for maximizing either economics or efficiency is in the initial design and construction phase of a major facility. For example, new gas processing plants tend to be much more efficient than older legacy gas processing facilities. Though covered in the Other Transmission Issues portion of this study, legislative mandated safety enhancements will impact costs, particularly in high consequence populated areas.
Figures 3-43 and 3-44). As discussed below, these percentages have varied little over time and are not expected to do so in the future. CO2 emissions from this segment of the industry are tied to throughput. It is reasonable to assume that natural gas consumption for transmission (lease and plant fuel, and pipeline and distribution fuel) for the United States will stay within the historical range of about 7.1% to 9.5% of throughput for the foreseeable future and to range between 4.1 and 6.1 Bcf/d through 2035.
U.S. Transmission Natural Gas Demand

Today, lease and plant fuel consumption for the United States is about 3.5 Bcf/d, or 6%, of dry gas production, while pipeline and distribution fuel consumption is about 1.7 Bcf/d, or 3%, of natural gas demand. Total natural gas transmission fuel (lease and plant, pipeline and distribution) is about 5.2 Bcf/d, or 8.5%, of throughput (total natural gas demand) (see
Other Transmission Issues

The natural gas industrys reliance on electricity is increasing. The use by pipelines of electric compression to meet air quality requirements in some areas make the need for reliable electric service an important component of reliable natural gas service. Another example is the dependence of many gas processing plants on electric service, as demonstrated by gas processing plants being offline in February of 2011 in the Southwest and in the aftermath of
Figure 3-43. U.S. Total Natural Gas Transmission Percentage of Throughput
Figure 3-43. U.S. total Natural Gas transmission percentage of throughput

10
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Figure 3-44. U.S. Total Natural Gas transmission Fuel Figure 3-44. U.S. total NaturalGas Transmission Fuel 8
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hurricanes Katrina and Rita in 2005, and Ike and Gustav in 2008. If natural gas cannot be processed, pipelines may not be able to accept gas for delivery if acceptance would adversely affect their operations. Some parts of the transmission network are fairly old, especially distribution systems, and need to be adequately monitored and inspected to ensure reliability and to avoid incidents like the explosion at San Bruno.67 To the extent additional costs incurred to ensure integrity of the transmission network are passed along to end users, the resultant higher delivered natural gas prices could, through the price elasticity effect, slightly reduce natural gas demand.
fuels such as coal, oil, and natural gas; energy losses in thermal combustion in power-generation plants; and energy losses in transmission and distribution to homes, commercial buildings, and other end users.68, 69 An FFC analysis could be used in making and implementing certain energy-related policies at different levels of government (and by legislative and executive branch entities) to provide policymakers and end-use consumers with more complete and robust information on energy consumption and emissions including CO2 emissions. Figure 3-45 is an illustrative example of the application of an FFC analysis to gas and electric water heaters. For the natural gas value chain, the FFC analysis includes natural gas (methane) vented during production as well as transmission fuel used in gathering,
68 National Research Council, Review of Site (Point-of-use) and Full-Fuel-Cycle Measurement Approaches to DOE/EERE Building Appliance Energy-Efficiency Standards, May 2009. 69 DOE is also proposing to include vented gas. (Docket No [EERE-2010-BT-NO-0028A] Statement of Policy for Adopting Full-Fuel-Cycle Analyses into Energy Conservation Standards Program).
FuLL FuEL CyCLE aNaLySIS

A full fuel cycle (FFC) analysis measures energy consumption including in addition to site energy use the energy consumed or vented (added to National Academy of Sciences definition) in the extraction, processing, and transport of primary
67 See Chapter Two, Operations and Environment, for more details on the San Bruno incident.
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Figure 3-45. Illustrative Full Fuel Cycle for Water Heaters
Figure 3-45. Illustrative Full Fuel Cycle for Water heaters
TOTAL REQUIRED INPUT MILLION BTU
NATURAL GAS TRANSMISSION FUEL GENERATION FUEL ELECTRIC T&D LOSSES WATER HEATER EFFICIENCY LOSS PER ACEEE* MMBTU OUTPUT
CO2 EMISSIONS FOR REQUIRED INPUT
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NATURAL GAS WATER HEATER
ELECTRIC WATER ELECTRIC WATER HEATER COAL HEATER NATURAL GAS COMBINED CYCLE
ELECTRIC WATER HEATER 2010 AVERAGE U.S. GENERATION
*Water e ciency loss includes Btu and CO2 content of fuel plus upstream methane emissions. ACEEE = American Council for an Energy E cient Economy.
ELECTRIC WATER HEATER 2010 AVERAGE U.S. GENERATION ADJUSTED TO 20% RENEWABLES
processing, pipeline, and distribution.70 The electric value chain includes methane vented during mining, losses on converting Btu to kWh, and electric transmission and distribution losses. There are four variants on the electric water heater based on the mix of generation used: y Electricity generated by an NGCC plant y Electricity generated by a coal plant y Electricity generation based on average U.S. 2010 generation mix y Electricity generation based on U.S. 2010 generation adjusted to increase renewables from 9.5% of total generation to 20.0%. If it takes 10 years to achieve such an increase, then this case reflects a FFC analysis for the midpoint of a 20-year asset. The FFC analysis shows that a natural gas water heater uses less total energy and emits less CO2 than an electric water heater based on the four generation cases used.
70 Production data on natural gas- and coal-related methane emissions provided by the Emissions & Carbon Subgroup.
More than half of energy consumed in the United States is consumed in buildings when one includes the energy used to generate electricity and the fuel used or lost during transmission (delivery and distribution) i.e., an FFC analysis. Historically, energy consumption was reported by site. For the purposes of analyzing energy choices, the FFC methodology more comprehensively assesses energy consumption, energy efficiency, and emissions. The fuel mix used to generate electricity varies by region and will change over time (seasonally, daily, and even hourly) (see Figure 3-46). Over longer periods, the generation mix shifts as new plants are built and old ones retired. This complicates development of a national FFC analysis for electrical applications.71 So comparing the FFC of an appliance with a 20-year life purchased in 2010 is subject to some uncertainty, as changes in the future mix of fuels and technologies used in generation will change.
71 The DOE generally is limited by statute to developing only a national standard.
301
TOTAL CO2 EQUIVALENT EMISSIONS POUNDS
Figure 3-46. U.S. Generation by Fuel, by North american electric reliability Corporation (NerC) Subregion
RENEWABLES PUMPED STORAGE/OTHER NUCLEAR NATURAL GAS PETROLEUM COAL
302
NORTHEAST LONG ISLAND UPSTATE NEW YORK SOUTHWEST CALIFORNIA ROCKIES 0 20 40 PERCENT 60 80 100
TEXAS REGIONAL ENTITY
FLORIDA RELIABILITY COORDINATING COUNCIL
MIDWEST RELIABILITY COUNCIL/EAST
MIDWEST RELIABILITY COUNCIL/WEST
NEW YORK CITY WESTCHESTER
RELIABILITY FIRST CORPORATION/EAST
RELIABILITY FIRST CORPORATION/MICHIGAN
RELIABILITY FIRST CORPORATION/WEST
SERC RELIABILITY CORPORATION/DELTA
SERC RELIABILITY CORPORATION/GATEWAY
SERC RELIABILITY CORPORATION/SOUTHEASTERN
SERC RELIABILITY CORPORATION/CENTRAL
VIRGINIA CAROLINA
SOUTHWEST POWER POOL/NORTH
SOUTHWEST POWER POOL/SOUTH
Figure 3-46. U. S. Generation by Fuel, by North American Electric Reliability Corporation (NERC) Subregion
NORTHWEST POWER POOL AREA
CaNaDIaN NaTuraL GaS aND ELECTrICITy DEmaND

For 2010, Canadian natural gas and electricity were expected to provide 16% and 10%, respectively, of Canadian total end-use demand.72
pipeline and distribution fuel is included in the commercial segment whereas in the United States, it is included in pipeline and distribution fuel component of transmission. Canadian commercial electricity demand is expected to grow as energy efficiency gains are more than offset by increasing commercial floor space, new electrical devices, and growth in air conditioning (see Figure 3-51). A general trend in the Canadian economy towards an expanding service sector share relative to the manufacturing sector is also driving this growth.
Canadian Natural Gas Demand

Canadian natural gas demand is expected to grow from about 9.1 Bcf/d in 2010 to between 9.8 and 15.2 Bcf/d in 2030. Most of this demand growth is expected to come from consumption related to oil sands development, not power generation, as Canada has a large hydropower base, but limited coal generation capacity. This limits the opportunity for natural gas to displace coal-fired generation (see Figure 3-47).
Canadian Industrial Natural Gas and Electricity Demand

Natural gas accounts for about 40% of the industrial sector fuel, and electricity accounts for about 15%. Industrial energy demand accounts for almost half of Canadas total energy use. Industrial use also includes feedstock energy used by the chemical industry and off-road transportation. The majority of energy use in the industrial sector comes from six energy-intensive industries that are highly dependent on export markets. Therefore, the general state of the world economy is a major influence on Canadian energy consumption. The NEB is forecasting slower growth between 2008 and 2020 than seen historically. The principal reasons for this are increasing global competition in commodity markets and a higher Canadian dollar. Given the above, the NEB believes that industrial energy demand will increase at an average rate of 0.8% annually between now and 2020. The natural gas share is expected to remain near 40% of the energy mix. No major fuel switching trend is seen in the next 10 years (see Figure 3-52). The proprietary aggregated oil and gas company outlooks for Canadian industrial demand show a wide range compared to NEB outlooks (see Figure 3-53). The difference may be caused by where one classifies natural gas demand that is related to oil sands development. The NEB outlooks for industrial electricity demand are relatively flat, reflecting a slowing in the GDP growth rate and increasing value of the Canadian dollar (see Figure 3-54). The recent recession caused a notable dip in industrial electricity demand.
Canadian Residential Natural Gas and Electricity Demand

As in the United States, residential natural gas and electricity demand increases are a function of population growth (somewhat higher in Canada) and the introduction of new residential electrical devices, offset in part by energy efficiency improvements. Canadian residential natural gas demand is expected to be relatively flat (see Figure 3-48). Canadian residential electricity demand is expected to grow as electrical energy efficiency gains are more than offset by the introduction of new electric devices (see Figure 3-49).
Canadian Commercial Natural Gas and Electricity Demand

As in the United States, commercial natural gas and electricity demand increases are a function of population and economic growth (somewhat higher in Canada), energy efficiency gains, and the introduction of new electrical devices. Canadian commercial natural gas demand is expected to be relatively flat (see Figure 3-50). The difference between the National Energy Board of Canada (NEB) outlooks and the proprietary outlooks is most likely due to how demand is classified in Canada. In Canada,
72 National Energy Board (Canada) 2009 Reference Case Scenario: Canadian Energy Demand and Supply to 2020.
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Figure 3-47. Canadian Total Natural Gas Demand
Figure 3-47. Canadian total Natural Gas Demand

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NEB BASE NEB HIGH PRICE AGGOGMAX AGGOGMEDIAN NEB LOW PRICE AGGOGMIN
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Figure 3-48. Canadian Figure 3-48. Canadian Residential Natural Gas Demand residential Natural Gas Demand 2.5
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Figure 3-49. Canadian residential electricity Demand

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Figure 3-49. Canadian Residential Electricity Demand
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Figure 3-50. Canadian Commercial Natural Gas Demand
Figure 3-50. Canadian Commercial Natural Gas Demand
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Figure 3-51. Canadian Commercial Electricity Demand
Figure 3-51. Canadian Commercial electricity Demand

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Figure 3-52. Canadian Industrial energy Demand Figure 3-52. Canadian IndustrialEnergy Demand 6
OTHER BIOFUELS AND EMERGING ENERGY COAL, COKE, & COKE OVEN GAS
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Note: LPG = lique ed petroleum gas. Source: National Energy Board of Canada 2009 Reference Case.
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Figure 3-53. Canadian Industrial Natural Gas Demand
Figure 3-53. Canadian Industrial Natural Gas Demand

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Figure 3-54. Canadian Industrial Electricity Demand
Figure 3-54. Canadian Industrial electricity Demand

250 BILLION KILOWATT HOURS
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Table 3-2. Natural Gas Demand for Oil Sands

2010 Oil Sands Forecast (Million Barrels per Day) high Middle Low 1.5 1.5 1.5 3.3 2.7 2.1 5.1 3.9 2.7 6.0 4.5 3.0 8.0 5.0 2020 2030 2035 2050
Natural Gas Demand for Oil Sands (Billion Cubic Feet per Day) high Middle Low 1.6 1.6 1.6 2.9 2.4 1.8 4.5 3.5 2.4 5.2 4.0 2.6 6.9 4.4
Natural gas demand related to producing oil sands is expected to be the single biggest source of growth in Canadian natural gas demand. The Unconventional Oil Subgroup of the Resource and Supply Task Group estimates that oil sands natural gas demand could grow from 1.6 Bcf/d in 2010 to a range of 2.6 to 5.2 Bcf/d in 2035 (see Table 3-2).
Canadian Power Generation Demand

Canadian total electricity demand is expected to grow primarily as a result of increases in electricity demand for the commercial and residential sectors (see Figure 3-55).
Figure 3-55. Canadian Total Electricity Demand
Figure 3-55. Canadian total electricity Demand

600
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480 2000 2005 2010 YEAR 2015 2020
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The Canadian mix of generation by fuel and technology is significantly different than the U.S. mix. Canadian capacity and generation is dominated by hydro and nuclear (see Figures 3-56 and 3-57). For 2010, hydro and nuclear are expected to account for 61% and 14%, respectively, of total generation with coal and natural gas trailing at 11% and 9%, respectively. With limited opportunity to displace coal, natural gas demand for power generation is expected to grow only modestly in Canada and will occur primarily in the province of Ontario, which is retiring all of its coal-fired generation to meet CO2 reduction goals (see Figure 3-58).
a VIEW ON 2050 NaTuraL GaS DEmaND

Looking towards 2050, it appears that the key drivers of natural gas demand will continue to be policy decisions that will affect the role of natural gas in the power and transportation sectors. The outlook for residential and commercial sector natural gas demand will likely remain flat unless there is a
major technological change in how heating, cooling, and lighting are provided. For example, widespread adoption of natural gas fuel cells or micro CHP units could affect both natural gas and central station electricity demand. Reducing central station electricity demand would likely reduce power generation natural gas demand. The industrial sector will continue to face competitive pressures to reduce energy costs through investments in energy efficiency. In addition, global development of shale gas and a delinking of natural gas from oil prices elsewhere in the world could reduce the competitive advantage that U.S. and Canadian chemical and other energy-intensive industries currently enjoy. Growth in other manufacturing will likely be constrained by the desire to invest in new facilities closer to where the demand for manufactured products is growing, rather than trying to serve those markets from North America. However, there are some signs of restoration of production that moved overseas in the last decade. The outlook for power generation gas demand will continue to be affected by whether the United States implements a price on carbon and the terms and conditions of any such program. A push to achieve a deep reduction in
Figure 3-56. Canadian Generation Capacity NEB 2009 Base Case
Figure 3-56. Canadian Generation Capacity NeB 2009 Base Case

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Notes: NEB = National Energy Board of Canada; ST = steam turbine; CT = combustion turbine; NGCC = natural gas combined cycle; CCS = carbon capture and sequestion.
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Figure 3-57. Canadian Generation NeB 2009 Base Case Figure 3-57. Canadian GenerationNEB 2009 Base Case
BIOMASS OTHER SOLAR GEOTHERMAL WIND GAS/OIL ST GAS CT NGCC COAL CCS COAL NUCLEAR HYDRO
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Notes: NEB = National Energy Board of Canada; ST = steam turbine; CT = combustion turbine; NGCC = natural gas combined cycle; CCS = carbon capture and sequestion.
Figure 3-58. Canadian power Generation Natural Gas Demand

3.0 NEB BASE NEB HIGH PRICE AGGOGMAX 2.0 AGGOGMEDIAN NEB LOW PRICE AGGOGMIN
Figure 3-58. Canadian Power Generation Natural Gas Demand
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CO2 emissions from the power sector will likely mean that at some point, natural gas power generation demand for capacity without CCS would decline. As natural gas generation with CCS is added, natural gas power generation demand should stabilize, but likely at below peak levels.
equivalent). This case results in natural gas providing 40% of the fuel for HDVs by 2035. For 2035, natural gas demand for HDVs is 4.5 Bcf/d (see Figure 3-59). The DTG also reviewed the RFF LNG Trucks with Abundant Natural Gas (Scenario 6), which assumed that purchases of new HDV fueled by LNG as a share of total HDV purchases increased by 10% per year, reaching 100% of purchases in 2020.73 This results in 70% of all HDVs being fueled by LNG in 2030 with an associated natural gas demand of 11.2 Bcf/d.
POTENTIaL VEHICLE NaTuraL GaS aND ELECTrICITy DEmaND

The NPC Future Transportation Fuels study is examining the potential market penetration of NGVs and PEVs that could create some natural gas demand for NGVs, and indirectly for power generation to meet electricity demand from PEVs, as well as fuel cell electric vehicles using hydrogen reformed from natural gas. Since the FTF study will be completed after this one, this study examined high-potential-demand cases for NGVs and PEVs from published sources. For NGVs, the DTG looked at three public studies: EIA AEO2010 Reference Case; EIA 2010 sensitivity on heavy-duty vehicles; and an RFF study. The analysis also included a Proprietary Maximum Case, which had NGV natural gas demand of 2.0 Bcf/d for 2030. Except for the EIA AEO2010 Reference Case and its sensitivities, all of the other public studies are based on high-market penetration assumptions without any estimate of what it would take to achieve such penetrations. The only studies reviewed that competed gasoline and diesel vehicles against NGVs or PEVs were the AEO Cases.
PEV Electricity Demand

The DTG looked at one PEV study: an Electric Power Research Institute and National Resources Defense Council joint study done to assess potential reductions in GHG emissions if very rapid growth in PEVs for LDVs occurs.74 The DTG estimates of PEVrelated natural gas demand are based on the medium PEV fleet penetration and medium electric sector CO2 intensity scenario. PEVs are assumed to be 40% of the LDV fleet by 2030 and 57% by 2050. Electric demand is expected to grow to 316,560 GWh by 2030 and 548,061 GWh in 2050; but since most of the PEVs are hybrids that have on-board generators, not all gasoline or diesel fuel is displaced by electricity. The DTG prepared two estimates of natural gas demand that might result from the electricity requirement for this scenario. A low estimate was prepared using natural gas generation share of total generation from the AEO2011 Reference Case, about 20%. A high estimate was calculated based on all the electricity required for PEVs being generated by NGCC plants with a heat rate of 7,000 Btu/kWh. The low and high estimates for U.S. natural gas demand for 2035 are 1.5 and 7.6 Bcf/d, respectively, and for 2050 are 2.1 and 10.5 Bcf/d, respectively.
NGV Natural Gas Demand

The DTG looked at two EIA NGV cases: the AEO2010 Reference Case and the AEO2010 2027 Phaseout with Expanded Market Potential. The AEO2010 Reference Case, which competes gasoline and diesel vehicles against NGVs and PEVs, has nominal NGV natural gas demand of 0.5 Bcf/d by 2035 (see Figure 3-59). The AEO2010 2027 Phaseout with Expanded Market Potential case incorporates lower incremental costs for all NGVs for all classes ofheavyduty vehicles that begin in 2011 and are phased out by 2027. The lower incremental costs include: zero incremental cost relative to their diesel-powered counterparts after accounting for incentives of about $80,000 per truck; tax incentives for natural gas refueling stations ($100,000 per new facility); and credits for natural gas fuel ($0.50 per gallon of gasoline
Total Potential Natural Gas Demand for Vehicles

The range of potential direct and indirect natural gas demand for the studies is shown in Figure 3-57. For the purpose of stress testing
73 Resources for the Future, Abundant Shale Gas Resources: LongTerm Implications for U.S. Natural Gas Markets, August 2010. 74 Electric Power Research Institute and National Resources Defense Council, Environmental, Assessment of Plug-In Hybrid Electric Vehicles, Volume 1: Nationwide Greenhouse Gas Emissions, July 2007.
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Figure 3-59. potential U.S. Direct and Indirect Natural Gas Demand for Vehicles
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RFF LNG TRUCKS WITH ABUNDANT NATURAL GAS LDVS PEVS 57% OF SALES BY 2050 GAS GENERATION ONLY AEO2010 2027 PHASEOUT WITH EXPANDED MARKET POTENTIAL PROPRIETARY MAXIMUM LDVS PEVS 57% OF SALES BY 2050 GAS SHARE OF GENERATION AEO2010 REFERENCE CASE
Figure 3-59. Potential U.S. Direct and Indirect Natural Gas Demand for Vehicles
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Notes: For a description of cases, see Description of Projection Cases at the end of this chapter. RFF = Resources for the Future; LNG = liqueed natural gas; LDVs = light-duty vehicles; PEVs = plug-in electric vehicles.
natural gas supply, the DTG summed the results of one HDV and one LDV study. For HDV potential, the DTG used the AEO2010 2027 Phaseout with Expanded Market Case. U.S. natural gas demand for 2035 for this case is 4.5 Bcf/d. This estimate was increased by 8% to 4.9 Bcf/d to reflect Canadian HDV NGV demand potential based on the ratio of Canadian vehicles to U.S. vehicles.75 For LDVs, the DTG used the Electric Power Research Institute and National Resources Defense Council joint study on PEVs, assuming 100% of the electricity requirement was met by natural gas generation. U.S. natural gas demand for 2035 for this case is 7.6 Bcf/d. This estimate was increased by 8% to 8.2 Bcf/d to reflect Canadian LDV PEV demand potential based on the ratio of Canadian vehicles to U.S. vehicles. For purposes of stress testing North American natural gas supply, the DTG used the combined very high potential HDV NGV and LDV PEV natural gas demand for 2035 of 13.1 Bcf/d.
75 Canadian vehicles are equal to 8% of U.S. vehicles.
LNG ExPOrTS
A potential source of demand for U.S. and Canadian natural gas production is LNG exports to global markets. The United States has produced and exported LNG from its Kenai, Alaska, facility since 1969 using gas from the Cook Inlet near Anchorage. LNG was continuously produced from the 200 MMcf/d plant since its inception and sold to its long-term contract holders, Tokyo Gas and Tokyo Electric. The plant is expected to close in October 2011. The decision was based on low production volumes from the Cook Inlet that restricted liquefaction to approximately 80 MMcf/d and lack of interest in a contract extension from the two buyers. However, as a result of the substantial increase in U.S. and Canadian natural gas resources from unlocking shale gas resources, several new LNG export facilities have been proposed and some have filed for regulatory permits in both the United States and Canada.
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Given that liquefaction facilities can cost $2 to $3.5 billion depending on location and size, these LNG projects are unlikely to be developed unless they can obtain a long-term capacity agreement from a large creditworthy customer such as a major foreign buyer of LNG or a major oil and gas company. For producers, there is the potential of higher netbacks from buying U.S. or Canadian natural gas production at low North American natural gas prices, liquefying it, and selling as LNG at higher prices linked to oil prices. With the current high oil-to-natural gas price ratio, this is an attractive opportunity. However, only a very large, financially secure company can assume the financial risk that oil prices will remain high relative to natural gas and that LNG prices will continue to be linked to a high fraction of the oil price. For purposes of stress testing natural gas supplies, the DTG has assumed that the maximum LNG export potential for United States and Canada is 5.0 Bcf/d, equivalent to the initial liquefaction capacity of the first three filed North American LNG export projects.
4.3 Bcf/d for 2035. If Mexico decides to replace some of its LNG imports with pipeline imports from the United States, then Mexican demand for U.S. natural gas could be higher. On the other hand, Mexico has substantial natural gas resources that could be developed under the right legal and regulatory structure. For purposes of stress testing natural gas supplies, the DTG has assumed 2035 exports to Mexico of 4.3 Bcf/d.
u.S. LIQuIDS DEmaND

Total U.S. liquids demand for 2010 is estimated at about 19 million barrels per day. Liquids demand includes gasoline, distillate, residual fuel oil, LPGs, kerosene, jet fuel, and petrochemical feedstock. The transport and industrial sectors account for 72% and 22%, respectively, of total U.S. liquids demand (see Figure 3-60). The residential and commercial sectors, which use distillate and LPGs for heating, together account for about 2% of total U.S. liquids demand. The power sector accounts for only 1% of liquids demand. As for the future, the transport sector is expected to account for essentially all of the growth in U.S. liquids demand. The FTF study is addressing the outlook for liquids demand from the transportation sector. Residential, commercial, and industrial feedstock uses are expected to decline while industrial other (non-feedstock) uses are expected to increase slightly. Power sector liquids demand is expected to remain flat. Nearly 80% of industrial liquids demand is expected to come from LPGs (see Figure 3-61). The AEO2010 Reference Case does not fully reflect the impact of shale gas, which is likely to lead to higher LPG production. Historically, one of the most important long-term drivers of energy demand is the rate of economic growth. This is also applicable to the demand for U.S. liquids. The impact of economic growth on U.S. liquids demand can be seen by comparing the AEO2010 Reference Case with AEO2010 High Macro and Low Macro sensitivities, which had real GDP growth rates of 2.4%, 3.0%, and 1.8%, respectively. The AEO2010 Reference Case had U.S. total liquids demand growing from about 19 million barrels per day in 2010 to 22 million barrels per day per day in 2030 (see Figure 3-62). For the High and Low Macro Cases, 2035 total liquid demand was 25 million barrels per day) and 20 million barrels per day, respectively.
ExPOrTS TO mExICO
A source of demand for U.S. natural gas production is net exports to Mexico. EIA data show that net exports from the United States to Mexico have averaged 810 MMcf/d over the last five years (20052009). Import flows occur at 15 pipeline points along the Mexico-U.S. border with some points being bidirectional, capable of import and export. U.S. pipeline export capacity to Mexico is 3.3 Bcf/d and pipeline import capacity is 1.6 Bcf/d. The current plan of the Secretaria de Energa the Mexican Ministry of Energy (Sener) shows roughly 500 MMcf/d of net imports from the United States by 2024 versus an average for 2009 of 855 MMcf/d. If one assumes that Petrleos Mexicanos (Pemex) produces natural gas to the level forecast by Sener, that LNG is imported to Mexico using a 50% capacity factor for their 2 Bcf/d of regasification capacity, and that most of the new power capacity additions are natural gas-fired, then the amount of natural gas to be imported from the United States by Mexico by 2024 is closer to 2.5 to 3.0 Bcf/d. This is consistent with the EIA AEO2010 Reference Case that projects U.S. net exports to Mexico at 2.3 Bcf/d in 2025 and 2.8 Bcf/d for 2035. The EIA AEO2011 Reference Case projects U.S. net exports to Mexico at 3.0 Bcf/d in 2025 and
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Figure 3-60. U.S. Liquids Demand

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Figure 3-61. U.S. Industrial Liquids Demand

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Most of the range in 2035 total liquids demand occurs in the transport sector (about 70%) and in the industrial sector (about 29%). For the industrial sector, LPG demand accounts for about 37% of the total range between high and low forecasts in industrial liquids demand (see Figure 3-63). Other types of petroleum (includes petroleum coke, asphalt, road oil, lubricants, still gas, and miscellaneous petroleum products) account for about 36% of the total range in industrial liquids demand. How much non-transport liquids demand grows probably will depend on how much North American NGLs (LPGs and, more specifically, ethane, which comprises approximately half of all NGLs) are produced, and what the prices are for natural gas. Substitution of ethane and other LPGs for natural gas in industrial applications depends heavily on their relative prices. If the relative value of sending unprocessed wet natural gas to a consumer exceeds the value of extracting ethane, then in some cases a gas processing plant may not be built or may not be run.
However, there are strict limits in quality provisions of pipeline tariffs on how much ethane can be left in the natural gas stream. Eventually, capacity to deal with ethane and LPGs may have to be built or development of new wet natural gas productive capacity may have to be limited. Low ethane prices relative to natural gas, and/or any inadequacy of NGL gathering and processing infrastructure in liquids-rich shale plays, will tend to physically limit the development pace of shale gas, thereby curbing NGL production which will feed back to NGL prices and demand.
POLICy rECOmmENDaTIONS
Demand related policy recommendations can be grouped into four major categories: y Increase Energy Efficiency y Promote Efficient and Reliable Markets y Increase Effectiveness of Energy Policies y Conduct Carbon Capture and Sequestration Research and Development.
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6
AEO2010 REFERENCE CASE AEO2010 HIGH MACRO
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LIQUEFIED PETROLEUM GASES OTHER PETROLEUM PETROCHEMICAL FEEDSTOCKS RESIDUAL FUEL OIL DISTILLATE FUEL OIL MOTOR GASOLINE
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Increase Energy Efficiency

There is large scope for improving energy efficiency across the residential, commercial, and industrial sectors using existing technologies and practices as well as through development of newer technologies and approaches. The range of policy options that can apply is large and include, among others, codes and standards, financial and tax incentives, utility ratemaking processes, information and technical assistance, research and development, and putting a price on externalities (such as CO2).
menting energy efficiency, all other energy resources and technologies involve trade-offs among economic, environmental, and energy security objectives. The 2007 NPC Hard Truths report identified many energy efficiency policy options, most of which are still applicable today, as was corroborated in the current study as well. Implementing energy-efficient technologies can reduce the need to produce, deliver, and transform energy, thus avoiding emissions and resource use, mitigating environmental impacts, and enhancing energy security. For instance, if the United States used energy at 1973 efficiency levels in all sectors of the economy, about 56% more energy would be consumed today equal to another 52 quadrillion Btu that otherwise would have had to be extracted, delivered, combusted, or otherwise harnessed to produce usable energy for consumers needs. Increasing energy efficiency can thus provide long-term benefits. Gas and electric utilities are natural entities to provide some types of energy efficiency programs, such as installing weather-proofing or distributing appliance rebates, because those utilities have information about the consumption patterns of their customers,
Increase Residential and Commercial Energy Efficiency

Buildings constitute a major source of demand for power, heating, cooling, and lighting. In many situations, avoiding energy consumption through installation of more efficient appliances and equipment or improving a building shell can be the most costeffective strategy for satisfying customers energy needs. Efficiency opportunities also arise in industrial and public facility (e.g., street lighting, water, and wastewater plants) operations. Compared to imple316
have an ongoing relationship with them, and often have the expertise to implement energy efficiency programs. Moreover, treating energy efficiency as a resource in their portfolio of supply options can help utilities deliver supply for their customers at lower overall costs. In other cases, third parties such as local energy efficiency programs, weatherization providers (for low-income households), state energy offices, and energy efficiency utilities (such as Efficiency Vermont) may be well-positioned to operate programs supporting private sector implementation of energy efficiency measures. Significant energy savings have been achieved in the United States through building codes and appliance and equipment standards. Building codes are administered by the 50 states and by thousands of local authorities. To help state and local governments, the federal government can further support the development and periodic update of national model energy codes, allowing and encouraging states to adopt the most recent such codes. The International Energy Conservation Code issued by the International Code Council develops national model energy codes for residential buildings. The American National Standards Institute, the American Society of Heating, Refrigerating, and Air-Conditioning Engineers, and the Illuminating Engineering Society of North America Standard 90.1 serve as a basis for model energy codes for commercial buildings. These model codes are typically updated on a three-year schedule. The federal government can also provide technical assistance, training, and other measures to improve state and local ability to enact and enforce codes. While building codes typically apply only to new structures or major renovations, appliance and equipment standards can reduce energy consumption in existing buildings and facilities. Efficient new appliances in the residential and commercial sectors could reduce energy consumption and, in turn, carbon emissions from these sectors by 12% and 7%, respectively.76 Full fuel cycle analysis could provide the basis for these appliance standards. There are also opportunities for states and localities to advance building energy efficiency through other means, such as support for innovative energy retrofit finance (e.g., revolving funds, property assessed clean energy finance), requirements for commercial
76 See Table 4-5 of Chapter Four, Carbon and Other Emissions in the End-Use Sectors.
building energy audits and commissioning, and tax and land use incentives. There are also federal and state opportunities for improving consumer energy information (such as labeling and disclosure), supporting training and technical assistance (to architects, engineers, building trades, real estate professionals), and advancing research, development, and demonstration (RD&D) and commercialization of relevant technologies.
Recommendation
The NPC makes the following recommendations to support the adoption of energy efficiency in buildings, appliances, and equipment: y The federal government should continue to support the updating of national model building codes issued by the American National Standards Institute, American Society of Heating, Refrigerating, and Air-Conditioning Engineers, the Illuminating Engineering Society of North America (commercial codes) and the International Code Council (residential codes) and to provide technical assistance, training, and other support for state and local enactment and enforcement of the updated codes. y The federal government should continue to update energy efficiency standards for appliances and equipment over which it has statutory authority. y The federal government should continue to update energy efficiency standards for appliances and equipment over which it has statutory authority. y Federal and state governments should consider incentives for products and buildings that are more efficient than required by laws and standards, such as Energy Star qualifying products.
Increase Industrial Energy Efficiency

Another opportunity for energy savings comes from CHP facilities and waste heat recovery. Such facilities can function within industrial plants such as paper mills or chemical plants, and may also be found in large institutions such as universities or hospitals. CHP facilities produce steam for industrial purposes or heating and produce electricity as a secondary
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product for their own consumption or for sale. CHP can operate at nearly 70% energy-efficiency rates versus about 32% for baseload coal plants. Today, CHP accounts for almost 9% of electricity produced. Greater use of CHP, as well as waste heat recovery, can provide a significant opportunity to lower production costs and thus improve the competitiveness of manufacturing, while providing larger societal benefits such as improving overall efficiency of power generation, lowering emissions, increasing reliability of the electric grid, and reducing transmission losses. In many areas, regulatory barriers prevent otherwise economic investments in CHP. These barriers include rules relating to interconnecting CHP facilities to the grid, policies limiting the sale of CHP power to the market, problems with fair pricing, and the ability to enter into long-term contracts for the power output from CHP. Greater flexibility, for instance, is needed to allow manufacturing facilities to sell power to one another or in regulated states to wheel power from one facility to another. Additionally, typical environmental regulations also measure emissions of power combustion as a function of heat input (e.g., emissions per Btu consumed) rather than emissions associated with output (e.g., emissions per kilowatt-hour and useful thermal energy of output). This regulatory design disadvantages CHP units and other more-efficient technologies. Higher efficiency generally means lower fuel consumption and lower emissions of all pollutants. Other ways to encourage greater industrial energy efficiency include: y Greater support could be provided for technical assistance to help industry identify, assess, and implement cost-effective, competitiveness-improving energy options; such existing programs include the DOE-supported regional Clean Energy Application Centers (formerly the CHP Applications Centers), Industrial Assessment Centers, National Institute of Standards and Technology Manufacturing Extension Partnership, and other industrial resources. y The federal government can support and partner with industry in RD&D of more efficient and productive industrial technologies. y By lowering the cost of capital by providing grants, transferable investment tax credits, and low cost loan programs. 318
y Encourage investment in RD&D breakthrough technologies and by allowing annual write-off of all expenses associated with RD&D of breakthrough technologies, including everything from personnel costs to all physical and non-physical resources utilized. y Increase the funding of the DOE Industrial Technology Program. y Actions to encourage greater use of CHP should not create any preferences, but should give CHP an opportunity to compete fairly with other sources of energy.
Recommendation
The NPC makes the following recommendations to eliminate the barriers to CHP and thus increase the efficiency of electricity production in the United States: y State and federal utility regulators should adopt, for both natural gas and electric utilities, the removal of barriers to CHP in interconnection, power sales, and power transfers. y Policymakers should include CHP and energy efficiency in any clean energy standard. y The EPA should use output-based performance standards for emissions from power generation, including CHP, as means to reflect inherent energy efficiency differences in power generation technologies.
Increase Energy Efficiency Through Recycling

Further, much energy is embodied in materials in the energy needed to extract, process, transform, transport and, eventually, dispose of them. Reducing waste and scrap and effectively reusing and recycling those wastes and scrap that are produced are important means to save energy as well as materials and to improve productivity and reduce environmental impacts. Recycling of energyintensive products such as paper, steel, aluminum, glass, solvents, asphalt, concrete, and plastic is a very powerful tool for reducing energy consumption, greenhouse gas emissions, and other pollution and waste. Conservation and reuse of water also reduces significant energy costs of collection,
distribution, and treatment. Use of organic wastes (such as manures) can substitute in some cases for energy-intensive synthetic fertilizers, while in other cases energy can be recovered from biogas production or direct combustion. In 2009, the estimated avoided greenhouse gas emissions from recycling totaled over 142.2 million MtCO2e, about 3%, of 2009 total CO2 emissions.77 Despite these significant gains from recycling, there are still significant quantities of these products in the industrial, commercial, and residential sectors that are not recycled each year. Federal and state policies that encourage materials efficiency and cost effective reuse and recycling would improve energy efficiency.
Promote Efficient and Reliable Energy Markets

Natural gas and electric stakeholders and their regulators should take steps to promote more efficient and reliable natural gas and electric markets. Also, market participants, including regulated utilities, should have access to tools to address or mitigate price volatility in fuels, (e.g., through long-term contracts for natural gas, use of hedging instruments by regulated entities like utilities, and investment in storage facilities).
Harmonization of Natural Gas and Power Markets

From 2000 to 2010, the use of natural gas for power generation has increased from 16 to 24% of total electric sector generation. For the same period, natural gas demand for power generation grew from 14 to 20 Bcf/d, increasing power generations share of total natural gas demand from 22 to 31%. The continued increased use of natural gas for power generation will be driven by three factors: y A change in expectations about North American natural gas supply and costs due to the economic viability of shale gas development. Concerns about high and volatile natural gas prices, flat production, and increasing LNG imports have changed to forecasts of lower and more stable natural gas prices and abundant North American natural gas supplies that could meet almost any natural gas demand requirement.78 y An expectation of strong growth in intermittent renewable generation capacity that increasingly requires backup by gas-fired generation to stabilize grid operations. y An expectation of substantial retirements of coalfired generation in the next few years as a consequence of implementation of EPAs proposed nonGHG regulations, combined with lower natural gas price expectations. However, growth in power generation natural gas demand should not be taken for granted. The increased use of natural gas for electricity production,
78 See for example, EIA AEO Reference Case wellhead price forecast for 2030 declined from $7.80 (2007$) perMMBtu for the 2009 Reference Case to $5.66 (2009$) for the 2011 Reference Case.
Align Utility Incentives and Efficiency Goals

Under traditional ratemaking policies, utilities that sell electric power or natural gas to end-use consumers have the incentive to sell more of their product to consumers: higher sales means higher revenues, which usually mean higher profits, and lower sales mean the opposite. To overcome this disincentive, ratemaking policies should align the financial interests of both electric and gas utilities with those of their customers in providing cost-effective energy efficiency measures.
Recommendation
The NPC makes the following recommendation to remove the disincentives for natural gas utilities and electric utilities to deploy energy-efficiency measures: y State and federal utility regulators should adopt for utilities: Ratemaking policies to align utility financial incentives with the adoption of costeffective energy-efficiency measures Goals and targets for the deployment of cost-effective energy efficiency so as to support the adoption of cost-effective energy efficiency measures on a timely basis.
77 U.S. EPA, Source Environmental Benefits Calculator, 2009 Data.
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especially during peak periods in regional gas and electric markets, is raising concerns about potential serious operational problems for both pipeline operators and power generators. Some power generators have identified concerns about terms and conditions of natural gas services that are inhibiting them from building and operating gas-fired generation plants. Conversely, some pipelines have stated that they are not being adequately compensated for providing service to gas-fired generators that are backstopping intermittent renewables. Accordingly, federal and state regulators and industry leaders are calling for more formalized coordination between the electric and gas sectors. This will not be an easy task. Both the natural gas pipeline network and the electric transmission grid operate under different complex systems of rules and regulations that have evolved independently over decades. For example, the natural gas industry uses a standardized operating day, but the power sector has multiple operating days. Also, the scheduling rules and timelines for power generators, for day-ahead and real time markets may not synchronize between electric control areas or with pipeline capacity nomination schedules or rights. Gas-fired generators who do not hold firm pipeline transportation frequently have to commit power to the regional electricity grid before they have the assurance of pipeline capacity. Additionally, peaking facilities, may find it uneconomical to purchase firm transportation service from pipelines due to their current inability to recover those costs in the marketplace. With the prospects that natural gas will become an even larger supply source for power generation, and with the increasing need for natural gas generation to backstop intermittent renewable generation, coordinating these respective operating and regulatory systems will become increasingly complicated. A January 2004 cold snap in New England highlighted the fact that most merchant generators do not hold firm pipeline capacity and firm gas supply. During this period of record peak electricity demand, pipelines firm shippers of natural gas used the full contractual entitlements, most of which were held by local distribution companies, and the pipelines did not have excess capacity available to schedule for interruptible customers. Similarly in February 2011 in the Southwest, more than 50 electricity generation units stopped working overnight because of severe weather, reducing capacity by 6,000 megawatts and 320
leading to the rolling power outages. Other power plants found their fuel supplies curtailed by local distribution companies under natural gas priority rules that were last updated in the early 1970s. Some of the controlled electric outages also idled natural gas pipeline compressor stations, reducing pipeline pressure and hampering the ability of natural gas generation plants to get the fuel they needed. Both incidents highlight the need to resolve certain issues that sit at the intersection of gas and electric deliverability, and wholesale electric market reliability. As natural gas and electric markets become more entwined, greater coordination between the two will be required. One way to enhance this coordination and to minimize surprises is to increase the transparency of operations. The FERC has done this for natural gas markets by requiring interstate pipelines to post on the web extensive data on their operations. Increasing the information about generation and transmission operations would increase transparency and would benefit the smooth functioning of the market. Another interdependency issue that needs to be addressed is the recovery of costs incurred by pipelines in providing service to gas-fired generators and, in turn, the recovery of those costs by gas-fired generators from electric customers. The diversity of various organized and non-organized wholesale power markets requires different approaches. Finally, there is an expectation that any retirement related reduction in coal-fired generation can be met, to some extent, by existing gas-fired generation. However, none of the retirement studies examined whether there were any electric transmission bottlenecks to doing so.
Recommendation
The NPC recommends continuing the efforts to harmonize the interaction between the natural gas and electric markets: y The Federal Energy Regulatory Commission, the North American Electric Reliability Corporation, the North American Energy Standards Board, the National Association of Regulatory Utility Commissioners, and each formal wholesale market operated by the Regional Transmission Organizations, with
robust participation from market participants, should: Develop policies, regulations, and standardized business practices that improve the coordinated operations of the two industries and reduce barriers that hamper the operation of a well-functioning market Increase the transparency of wholesale electric power and natural gas markets Address the issue of what natural gas services generators should hold, including firm transport and storage, and what services pipeline and storage operators should provide to meet the requirements of electricity generators as well as compensation for such services for pipeline and storage operators and generators. y Transmission operators should identify any transmission bottlenecks or power market rules that limit the ability of natural gas combined cycle plants to replace coal-fired generation.
in ways that introduce questions about the prudency of those original contract decisions. Even where various contract instruments were used more recently for price hedging purposes, some utilities have been subject to hindsight review by state utility commissions and more recently have had to refund some hedging costs to ratepayers. These experiences with regulatory risk have made investment in gas-fired generation less attractive for utilities.
Recommendation
The NPC makes the following recommendations to allow natural gas utilities and electric power utilities to manage their natural gas price risk: y The NPC supports changes in regulatory policy that remove regulatory barriers from utilities managing their natural gas investment portfolios using appropriate hedging approaches, including long-term contracts. Any such rules should not impede the ability of utilities to appropriately hedge their price risk. y Regulators (such as state utility commissions) and other policymakers should allow market participants such as utilities to use mechanisms to mitigate and manage the impacts of price volatility. These mechanisms include long-term contracts for natural gas, use of hedging instruments by regulated entities like utilities, and investment in storage facilities.
Provide Utilities With Tools to Manage Price Volatility

Natural gas prices are currently low in comparison to recent history, making gas-fired generation attractive relative to coal in some situations. One form of risk faced by builders of new natural gasfired power plants is the perception that natural gas prices are more volatile than the prices of competing fuels such as coal. This perception is grounded in historical experience when utilities made investments in (or purchases of power from) natural gasfired power generation technologies only to have the prices unexpectedly rise. The gas price increases created customer difficulties, as increased costs needed to be passed along to consumers of some traditionally regulated electric utilities. Some regulators and electric utilities may fear another spike in prices, and may be reluctant to engage in another era of gasfired power generation investments. Also, in many states, the regulatory legacy resulting from out-ofmarket, take-or-pay contracts from several decades ago creates regulatory risk and a barrier for electric and gas utilities if they were to enter into long-term contracts for natural gas and then gas prices change
Increase Effectiveness of Energy Policies

Policies for increasing effectiveness of energy policies are: y Wider use of an FFC analysis when evaluating energy options y Evaluations of benefits and costs of proposed regulations, including feedback effects, should be done in a transparent and creditable way to enhance policy discussions y Align the long-term benefits of converting from distillate to natural gas with the short-term costs of the conversion.
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Full Fuel Cycle Analysis

FFC analysis measures energy consumption and includes, in addition to site energy use, the energy consumed or vented (addition to National Academy of Sciences definition) in the extraction, processing, and transport of primary fuels such as coal, oil, and natural gas; energy losses in thermal combustion in powergeneration plants; and energy losses in transmission and distribution to homes and commercial buildings. FFC analysis could be used in making and implementing certain energy-related policies at different levels of government (and by legislative and executive branch entities). An FFC analysis is a tool that is particularly useful in understanding the complete impact of energy-related decisions on total energy consumed and total emissions, especially when comparing two or more fuel options to achieve the same end-use result.79 The FFC analysis tool could be applied in various decision-making settings, such as: y Setting appliance and building efficiency standards y Comparisons of different technological choices, such as a natural gas water heater to an electric water heater y Home energy rating systems, such as the Home Energy Rating System (HERS) index. y For more detail, see the Full Fuel Cycle Analysis section earlier in this chapter.
Changes in Energy Policies Have Feedback Effects that Need to be Considered

Changes in policies and regulations, such as the proposed non-GHG EPA rules or implementation of a price for carbon, could increase natural gas and electricity prices for all end users. For example, the retirement of a coal plant, relative to an alternative scenario of investment to bring the plant in compliance with new emission rules, would likely increase power generation natural gas demand, thereby increasing natural gas prices while reducing coal demand and decreasing coal prices.80 Electric prices could be expected to go up as generators use more natural gas, which has a higher fuel cost per MWh than coal. Electric prices could go up even further if the retired generation needs to be replaced with new generation at todays costs or if regulated utilities seek to recover any undepreciated costs of the plants being retired.81 Higher natural gas and electricity prices will have additional economic effects as residential, commercial, and industrial customers respond to higher energy prices, either by reducing energy demand or reducing other expenditures, and as such price changes promote investment in alternative energy supplies. The analysis of regulatory or policy changes needs to take into account these economic costs, as well as the usual health benefits, in a comprehensive, transparent, and creditable manner to provide information about the merits of proposed regulatory and policy changes. Although federal departments and agencies are required to perform cost-benefit studies, these are typically prepared only on an incremental basis i.e., for individual rules. They generally do not reflect the combined effect of various proposed or pending regulations on a specific sector, such as the power or industrial sectors. The impact of major regulations should be evaluated where feasible using an economy-wide equilibrium model, in addition to the usual methods that rarely considers more tangible economic consequences, like its effects on employment, the price and reliability of energy, or the competitiveness of U.S. companies.82
80 The major increase in the gas resource base means that any increase in natural gas prices would likely be lower than what would have been expected before shale gas was unlocked. 81 Even old plants may have undepreciated costs flowing from prior life extension investments or prior environmental compliance investments. 82 Wall Street Journal Editorial, The Cost of Lisa Jackson Why the EPA Doesnt Consider Job Losses When It Creates New Rules, August 3, 2011.
Recommendation
The NPC makes the following recommendations for full fuel cycle analysis to enhance the evaluation of the environmental impact of energy choices: y The federal government should complete development of and adopt methodologies for assessing full fuel cycle effects. y As sound methodologies are established, regulators and other policymakers should use full fuel cycle analysis to inform regulatory decisions and implementation of other policies where fuel and technology choices involve energy and environmental trade-offs.
79 National Research Council, Review of Site (Point-of-Use) and Full-Fuel-Cycle Measurement Approaches to DOE/EERE Building Appliance Energy Efficiency Standards, National Academies Press, 2009.
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Further, the process of public notice and comment and review by the Office of Management and Budget does not always ensure neutral analysis of benefits and costs. It may not overcome natural tendencies of analysts to avoid reaching conclusions critical of policy choices of the political leadership. Studies of the cost and benefit of proposed major regulatory or policy changes need to address the aggregate or cumulative effects of multiple regulations while taking into account feedback effects on all sectors of the economy. Cost-benefits studies should be developed in a transparent and creditable manner, including a possible review by an independent nonpartisan agency such as the Congressional Budget Office. This would result in better and more credible information being available to both the government and the public about the impact of proposed and final rules.
utility to bear the first-cost burden to relieve the customer of the upfront cost associated with natural gas. y Defer customer contributions in aid of construction for natural gas main and service line extensions by creating a regulatory liability and amortizing payments over time. y Support utility infrastructure build-out as part of economic development programs through tax abatement, special pricing areas, direct contributions, etc., to support business development, job creation, plant expansions, and customer fuel savings. y Provide rebate programs for customers who upgrade to high-efficiency natural gas equipment. y Eliminate taxes on the customer contribution-inaid-of-construction for natural gas main and service line extensions.
Align the Long-Term Benefits and Short-Term Costs of Oil to Natural Gas Conversion Projects
There exists potential for use of natural gas to replace some portion of the 2.8 Bcf/d equivalent of U.S. distillate demand in the residential and commercial sectors to enhance energy security by lowering foreign oil imports, and to reduce energy and related emissions. However, there are many obstacles. The first-cost burden on customers equipment purchases and on utilities to extend service restricts natural gas availability and limits this potential. Consumers often make purchase decisions on the basis of first cost only, whereas economic and carbon-related benefits will occur over the life of gasusing equipment. Prudent public policy would promote a better alignment of benefits and costs over the life of a conversion project, and innovative policies and regulatory actions such as the following could help lower these barriers. To lessen the cost burden inhibiting natural gas conversions to replace distillate demand and main and service line extensions, state public utility commissions, and other government agencies could work with utilities to develop policies and implement innovative rate designs to improve project economics and enhance affordability for customers. Examples include: y Lease utility-owned equipment to customers or provide similar financial mechanisms allowing the
Support Carbon Capture and Sequestration Research and Development

Studies that looked at achieving a deep reduction in CO2 emissions generally assumed that CCS for natural gas- and coal-fired generation was needed to achieve such a goal. However, a pre-condition to moving to commercialization is an expectation of a significant cost for CO2. Direct and indirect policies to set a price for carbon emissions from fossil fuel combustion and delivery would value natural gass ability to provide energy with lower carbon emissions than other fossil fuels. However, if very deep reductions in carbon emissions are desired over the long run, fossil fuels, including natural gas, could play only a limited role in providing energy unless there is a means to capture and sequester the carbon emissions from burning fossil fuels. CCS could provide such a means. Currently, CCS research is focused on coal although much of the research work is applicable to both natural gas and coal. However, all fossil fuels would benefit from CCS, so CCS RD&D should be fuel neutral.83 Recent studies suggest that natural gas CCS has a lower cost of capture than coal CCS on a megawatt
83 National Energy Technology Laboratory, NGCC with CCS: Applicability of NETLs Coal RD&D Program, January 27, 2011.
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hour basis.84 The actual costs of capturing CO2 may be greater, however, because there is less concentration of CO2 in the flue gases of natural gas generation. Natural gas with CCS could have only 40% of the sequestration requirement that coal has for the same MWh of output. To avoid unnecessarily precluding CCS options, CCS research should also be technology neutral (e.g., pre- and post-combustion capture or various capture technologies). Further, CCS research should not be limited to the power sector, but should be available to all sectors such as processing plants, refineries, and industry.
recommendations regarding advanced technology for CCS: y The federal government should work with the states, universities, and companies in the electric, oil and gas, chemical, and manufacturing sectors to: Fund basic and applied research efforts on CCS, such as the cost of carbon Capture, geologic issues, and the separation of CO2 from combusted gases Develop some number of full-scale CCS demonstration projects on a range of technologies and applications Establish a legal and regulatory framework that is conducive to CCS Find mechanisms to support the use of anthropogenic CO2 without raising its cost to users in appropriate enhanced oil recovery applications Strive to be fuel, technology and sector neutral, and include a range of geologic storage options.
Recommendation
To keep the option open in the long run of using natural gas in a situation where deeper reductions in carbon emissions are desired or necessary, the NPC makes the following
84 AEO2011 Estimated Levelized Cost of New Electricity Generation Technologies in 2016.
Description of Projection Cases

aEO2011 reference Case EIA Annual Energy Outlook 2011 focuses on the factors that shape the U.S. energy system over the long term, under the assumption that current laws and regulations remain unchanged throughout the projection. A GDP growth rate of 2.7% per year was used. aEO2010 reference Case EIA Annual Energy Outlook 2010 focuses on the factors that shape the U.S. energy system over the long term, under the assumption that current laws and regulations then in effect remain unchanged throughout the projection. A GDP growth rate of 2.4% per year was used. aEO2010 Low macro Real GDP grows at an average annual rate of 1.8% from 2008 to 2035, whereas the AEO2010 Reference Case used 2.4%. Other energy market assumptions are the same as in the Reference Case. 324 aEO2010 High macro Real GDP grows at an average annual rate of 3.0% from 2008 to 2035 whereas the AEO2010 Reference Case used 2.4%. Other energy market assumptions are the same as in the Reference Case. aEO2010 Low Oil Price World light, sweet crude oil prices are $51 per barrel (2008 dollars) in 2035, compared with $133 per barrel (2008 dollars) in the Reference Case. Other assumptions are the same as in the Reference Case. aEO2010 High Oil Price World light, sweet crude oil prices are about $210 per barrel (2008 dollars) in 2035, compared with $133 per barrel (2008 dollars) in the Reference Case. Other assumptions are the same as in the Reference Case. aEO2010 Low Tech Greater cost and lower efficiency for more advanced equipment for all sectors and higher operating costs
for fossil fuel, nuclear, and renewable generation technologies. aEO2010 High Tech Earlier availability, lower cost, and greater efficiency for more advanced equipment for all sectors and lower operating costs for fossil fuel, nuclear, and renewable generation technologies. aEO2010 No Shale No drilling is permitted in onshore, lower-48, lowpermeability natural gas reservoirs after 2009 (i.e., no new tight gas or shale gas drilling). aEO2010 High Shale Shale gas resources in the onshore, lower-48 are assumed to be higher than in the Reference Case. aEO2010 2027 Phaseout with Base market Potential Incorporates lower incremental costs for all classes ofHDV NGVs (zero incremental cost relative to their diesel-powered counterparts after accounting for incentives), and tax incentives for natural gas refueling stations ($100,000 per new facility), and for natural gas fuel ($0.50 per gallon of gasoline equivalent) that begin in 2011 and are phased out by 2027. aggOGmax Highest results of proprietary oil and gas company cases. Aggregation was done by an independent third-party aggregator. aggOGmedian Median results of proprietary oil and gas company cases. Aggregation was done by an independent third-party aggregator. aggOGmin Minimum results of proprietary oil and gas company cases. Aggregation was done by an independent thirdparty aggregator. aggConsultantmax Highest results of proprietary consultant cases. Aggregation was done by an independent third-party aggregator. aggConsultantmedian Median results of proprietary consultant cases. Aggregation was done by an independent third-party aggregator.
aggConsultantmin Lowest results of proprietary consultant cases. Aggregation was done by an independent third-party aggregator. EIa KL Basic EIAs analysis of the Energy Market and Economic Impacts of the American Power Act of 2010 (KerryLieberman). The EIA KL Basic Case represents an environment where key low-emissions technologies, including nuclear, fossil with CCS, and various renewables, are developed and deployed on a large scale in a time frame consistent with the emissions reduction requirements of the Act without encountering any major obstacles. It also assumes that the use of offsets, both domestic and international, is not instantaneous, but is also not severely constrained by cost, regulation, or the pace of negotiations with key countries. EIa KL High Cost EIA KL High Cost case is similar to the EIA KL Basic case except that the overnight capital costs of nuclear, fossil with CCS (including CCS retrofit), and dedicated biomass generating technologies are assumed to be 50% higher than in the Reference Case. EIa KL High Gas EIA KL High Gas is similar to the EIA KL Basic case except that it assumes a larger resource for shale gas based on the High Shale Gas Resource sensitivity case in the AEO2010. EIa KL NoIntl Ltdalt The EIA KL NoIntl LtdAlt case severely limits international offsets and limits deployment of key technologies, including nuclear, fossil with CCS, and dedicated biomass, to their Reference Case levels through 2035. EIa Wm Basic EIAs analysis of the American Clean Energy and Security Act of 2009 (Waxman-Markey). The EIA WM Basic represents an environment where key low-emissions technologies, including nuclear, fossil with CCS, and various renewables, are developed and deployed on a large scale in a time frame consistent with the emissions reduction requirements of the Act without encountering any major obstacles. It also assumes that the use of offsets, both domestic and international, is not severely constrained by cost, regulation, or the pace of negotiations with key countries covering key sectors.
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EIa Wm NoIntl Ltdalt The EIA WM NoIntl LtdAlt case severely limits international offsets and limits deployment of key technologies, including nuclear, fossil with CCS, and dedicated biomass, to their Reference Case levels through 2030. mIT No Climate Policy Base case with no climate policy from MITs The Future of Natural Gas: An Interdisciplinary MIT Study Interim Report 2010. mIT With Climate Policy With a national economy wide price on carbon from MITs The Future of Natural Gas: An Interdisciplinary MIT Study Interim Report 2010. mIT regulatory Emissions reductions Renewable energy standard mandates 25% share of total generation by 2030 and forced retirement of coal plants equal to 55% of current coal generation is retired by 2050 from MITs The Future of Natural Gas: An Interdisciplinary MIT Study Interim Report 2010. NEB Base National Energy Board of Canadas 2009 Reference Case scenario. NEB High Price National Energy Board of Canadas 2009 Reference Case scenario with a high oil price. NEB Low Price National Energy Board of Canadas 2009 Reference Case scenario with a low oil price. 1992 NPC Case I 1992 National Petroleum Council Study on Natural Gas, Reference Case I, assuming trend growth. 1992 NPC Case II 1992 National Petroleum Council Study on Natural Gas, Reference Case II, assuming low natural gas demand growth. 1999 NPC reference 1999 National Petroleum Council Study, Natural Gas: Meeting The Challenges of the Nations Growing Natural Gas Demand. The 1999 study was designed to test the capability of the supply and delivery systems to meet the then-public forecasts of an annual U.S. market demand for natural gas of 30+ Tcf early in this century. 2003 NPC reactive Path 2003 National Petroleum Council Study, Balancing Natural Gas Policy: Fueling the Demand of a Growing Economy, Reactive Path case. 326
2003 NPC Balanced Future 2003 National Petroleum Council Study, Balancing Natural Gas Policy: Fueling the Demand of a Growing Economy, Balanced Future case. 2007 NPC Hard Truths max 2007 National Petroleum Council study, Hard Truths: Facing the Hard Truths About Energy: A Comprehensive View to 2030 of Global Oil and Natural Gas, high demand from study of studies. 2007 NPC Hard Truths min 2007 National Petroleum Council study, Hard Truths: Facing the Hard Truths About Energy: A Comprehensive View to 2030 of Global Oil and Natural Gas, low demand from study of studies. Proprietary maximum Represents the highest of all of the proprietary cases that were aggregated by an independent third party (see Agg cases). Proprietary medium Represents the medium of all of the proprietary cases that were aggregated by an independent third party (see Agg cases). Proprietary minimum Represents the lowest of all of the proprietary cases that were aggregated by an independent third party (see Agg cases). rFF Baseline Resources for the Futures business-as-usual case using EIA AEO2009 Reference Case estimate of natural gas resources (low). rFF abundant Shale Resources for the Futures higher natural gas resources case based on Potential Gas Committee 2009 resource estimate, not EIA AEO2009 Reference Case. rFF Low Carbon Policy Baseline Resources for the Futures carbon policy case using EIA AEO2009 Reference Case estimate of natural gas resources (low). rFF Low Carbon Policy With abundant Shale Resources for the Futures carbon policy using higher Potential Gas Committee estimate of natural gas resources. rFF Low Carbon Policy With abundant Shale, with Limits on Nuclear and renewable Resources for the Futures carbon policy using higher Potential Gas Committee estimate of natural gas resources, but with limits on new nuclear and renewables.
Chapter Four
Carbon and Other Emissions in the End-Use Sectors

Abstract
The growth in natural gas resources comes at a time when three very important issues have come to the forefront of public concern: energy security, environmental protection, and economic growth. This section of the report provides analysis surrounding the contribution natural gas can make towards a lower carbon energy future by reducing emissions of greenhouse gases* (GHGs) as well as criteria pollutants and mercury. In addition, policy and regulatory levers and technology options that could help achieve those reductions
* The major greenhouse gas emissions reviewed in this report are carbon dioxide, nitrous oxide, and methane.
are identified and the comparative life-cycle emissions of natural gas and coal in power generation are also analyzed. The chapter is sectioned into six areas, beginning with a summary and followed by the establishment of emissions baselines used throughout this report. An analysis of the life cycle of emissions of natural gas- and coal-fired generation appears third, which is followed by a discussion of natural gas end-use technologies and the potential for these to reduce emissions. The fifth segment covers the impact of non-GHG rules on the power sector, and the chapter ends with a series of policy recommendations. The analysis determined that expanded supplies of natural gas will significantly impact the economics of fuel choices and that natural gas could play a pivotal role in reducing emissions from various enduse segments including the electric power sector. Increased natural gas supplies, along with policies to place a price on carbon1 to reduce GHG emissions, may yield a market-driven substitution of natural gas for other fuels (mainly coal). This makes natural gas an attractive option in a suite of options for meeting emissions targets in the near- to midterm
1 See http://www.ipcc.ch/pdf/assessment-report/ar4/wg3/ar4wg3-annex1.pdf. Generally, the term price on carbon refers to the recognition of the negative externalities of GHG emissions and the associated economic value of reducing or avoiding one metric ton of GHG in carbon dioxide equivalent (1 MtCO2e). In this report, there is no differentiation between an explicit carbon price (e.g., under a cap and trade or carbon tax policy) and an implied carbon cost (e.g., specific regulatory limitations on the amounts of emissions).
chapter 4 carbon and other emissions
Summary
Given the abundance of natural gas supplies in the United States, natural gas can play a significant role in the energy consumption patterns of the country and the transition to a lower carbon energy future. Accelerated deployment of end-use natural gas technologies offers an important opportunity for reducing future GHG and criteria pollutant emissions. This chapter reviews the potential for reductions in U.S. emissions of air pollutants and greenhouse gases through the increased use of natural gas in end-use sectors and associated policies to support those goals. In addition, emissions reductions in the power sector as a result of upcoming Environmental Protection Agency (EPA) actions on non-GHG environmental rules were analyzed along with the life-cycle emissions of natural gas and coal in power generation.
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(i.e., to 2030) as well as in the longer term (e.g., a 50% reduction from a 2005 baseline by 2050). In the next few years, low natural gas prices combined with upcoming environmental regulations affecting relatively old and inefficient coal-fired power plants without adequate emission controls will likely result in the retirement of many coal plants. External reports estimate the retirement of roughly 18% of total U.S. coal-fired generation capacity (or about 58 gigawatts [GW]) by 2020. In addition, several technologies can be applied to various sectors of the economy that could reduce economy-wide emissions between 120 and 860 million metric tons of carbon dioxide equivalent per year (million MtCO2e/year) by 2030. A steeper long-term emissions reduction target (e.g., 80% below 2005 by 2050) will likely also require more aggressive emission control technologies like carbon capture and sequestration (CCS) for natural gas and coal to be utilized. To optimize the benefits of natural gas in promoting economic, energy, and environmental security, policymakers must work simultaneously and strategically on multiple policy fronts. These include providing regulatory certainty by finalizing the EPA proposed rules for coal-fired power plants and also addressing specific implementation hurdles, such as grid reliability. While a natural gas-fired power plant has about 5060% lower GHG emissions on a lifecycle basis than a typical coal-fired power plant, policies should be implemented to encourage natural gas system operators to minimize their GHG emissions by implementing appropriate GHG reduction technologies across the life cycle. However, even with updated natural gas resource estimates, coal-fired generation retirements, and the institution of favorable policies, the energy mix in a carbon-constrained economy will be comprised of a diverse mix of lowcarbon resources.
tency with the parallel Future Transportation Fuels study. The 2005 baseline year thus serves as the reference point with which emissions projections can be compared. The Energy Information Administrations (EIA) Annual Energy Outlook 2010 (AEO2010) Reference Case and Low and High Macroeconomic Cases were used to define the baseline and projected range of GHG emissions.3 For non-CO2 GHG emissions, data were used from the EPA for the baseline and projected emissions.4 Additionally, the AEO2010 provides emissions projections for power sector sulfur dioxide (SO2), nitrogen oxides (NOx), and mercury (Hg). The study used EPA data for 2005 baseline emissions of SO2, NOx, and Hg.5,6 The emissions projections in the AEO2011 Reference Case were also examined for CO2.7 In general, the AEO2010 Reference Case assumes that current laws and regulations affecting the energy sector remain unchanged throughout the projection. Currently, there are many pieces of legislation and regulation that would affect GHG emissions as well as proposed legislation that may be enacted in the near term. In addition, some laws include sunset provisions that may or may not be extended. However, it is difficult to discern the exact form that the final provisions of pending legislation or regulations will take, and to determine if sunset provisions will be extended. Even in situations where existing legislation contains provisions to allow revision of implementing regulations, there is uncertainty as to how those regulations will ultimately be implemented. Therefore, the AEO2010 provides a current policy and technology baseline for decision makers to use in assessing the implications of alternative scenarios that vary assumptions about
3 Annual Energy Outlook 2010 with Projections to 2035, DOE/ EIA-0383(2010), April 2010. AEO2010 is published in accordance with Section 205c of the U.S. Department of Energy (DOE) Organization Act of 1977 (Public Law 95-91) 2 S. 1733, Clean Energy. 4 U.S. Environmental Protection Agency, 2011 U.S. Greenhouse Gas Inventory Report, April 15, 2011. 5 SO2 and NOx emissions data can be found at: http://www.epa. gov/air/emissions/index.htm. 6 Mercury emissions data can be found at: http://cfpub.epa.gov/ eroe/index.cfm?fuseaction=detail.viewReference&ch=46&lSh owInd=0&subtop=341&lv=list.listByChapter&r=216615. 7 The AEO2011 was published in April 2011, after the vast majority of this report was finalized. Hence, the study team used the AEO2010 data for the majority of the analysis presented in the study.
EmISSIONS BaSELINE aND PrOJECTIONS

In order to compare the projected range of emissions of air pollutants and GHGs in the U.S. end-use sectors, an analysis was performed to determine the baseline level of emissions. The National Petroleum Council (NPC) study selected 2005 as the baseline year since legislation introduced in the 111th Congress employed 2005 as the baseline year,2 and also to ensure consis2 S. 1733, Clean Energy Jobs and American Power Act; H.R. 2454, American Clean Energy and Security Act of 2009.
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prUdent deVeLopment: realizing the potential of north americas abundant natural Gas and oil resources
Framing Questions
The End-Use Emissions and Carbon Regulation Subgroup of the Coordinating Subcommittee was asked to address several specific framing questions: 1. What are the current and projected ranges for emissions of air pollutants and greenhouse gases (GHGs) from U.S. natural gas end-use sectors? 2. What is the impact of carbon constraints on end-use natural gas consumption? 3. What are the life-cycle emissions of natural gas and coal, with special focus on the power generation sector? economics, regulations, or technology.8 The AEO2010 does include evolutionary technological progress based on ongoing investment by manufacturers and others, but it does not assume revolutionary technological breakthroughs. 4. What are the potential technologies for reducing U.S. natural gas end-use sector GHG emissions and the associated costs to deploy them at scale? 5. What is the impact of upcoming non-GHG rules on the power sector in terms of coal plant retirements, potential increased use of natural gas, and reduction of GHGs and other emissions? 6. What are the various policy designs that optimize GHG reductions with accelerated deployment of natural gas end-use technologies? driven substitution of natural gas for other fuels (mainly coal). This makes natural gas an attractive option in the near- to midterm (i.e., to 2030) and in the longer term with emissions targets (e.g., 50% reduction from a 2005 baseline by 2050). A steeper long-term emissions target (e.g., 80% by 2050) will likely also require more aggressive emission control technologies, like CCS, for both coal and natural gas power plants.
Summary of Findings
y Assuming no changes in current policy, U.S. GHG emissions are expected to be 9% higher than 2005 baseline emissions by 2035, or 7,900 million MtCO2e/year in the Reference Case scenario. y The recent decrease in emissions is mostly the result of the recent economic recession, which is expected to have a lasting impact on GHG emissions. In the Reference Case, GHG emissions remain below the 2005 baseline level until 2017. In the Low Economic Growth case, U.S. GHG emissions are projected to remain below 2005 levels until 2026, while in the High Economic Growth case, emissions return to 2005 levels by 2014. y In the absence of a national policy to constrain GHG emissions, breakthroughs in technology, or major changes in consumer behavior, economic growth has the largest impact on GHG emissions. In the High Economic Growth case, emissions rise to 8,400 million MtCO2e/year by 2035. In the Low Economic Growth case, emissions rise to 7,300 million MtCO2e/year by 2035. y Increased natural gas supplies, along with policies to reduce GHG emissions, will yield a market8 See the Carbon Subgroups Topic Paper #4-1, Baseline and Projections of Emissions from End-Use Sectors, for more detailed assumptions.
Greenhouse Gas Emissions: Unconstrained Cases

Figure 4-1 displays GHG emissions projections for four cases: three from the AEO2010 (Reference, High Economic Growth, and Low Economic Growth Cases), and the AEO2011 Early Release Reference Case.9 None of the four cases include any economywide constraints in the form of policy or regulation on GHG emissions.10 In the Reference Case, GHG
9 The AEO2011 has not updated emissions for other GHGs; thus, non-energy-related CO2 emissions have been estimated by the NPC. For more information on the AEO2011 emissions, please see http://www.eia.gov/forecasts/aeo/. 10 The AEO2010 includes State RPS programs and CAFE standards per EISA2007, Public Law 110-140. Please see http:// www.eia.gov/oiaf/archive/aeo10/leg_reg.html. The AEO2010 includes a 3-percentage point increase in the cost of capital for GHG intensive technologies, including CTL plants and coal-fired power plants without CCS, to reflect the behavior of utilities, other energy companies, and regulators concerning uncertainty created by the possible enactment of GHG legislation, which could mandate that owners purchase allowances, invest in CCS, or invest in other projects to offset their emissions in the future. For more information, please see http:// www.eia.gov/oiaf/archive/aeo10/electricity_generation.html.
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Figure 4-1. Greenhouse Gas Emissions 2005 Baseline and Projections
Figure 4-1. Greenhouse Gas emissions 2005 baseline and projections

9,500 MILLION METRIC TONS OF CO2 EQUIVALENT
HIGH ECONOMIC GROWTH REFERENCE CASE REFERENCE CASE (AEO2011) LOW ECONOMIC GROWTH 2005 BASELINE
CAGR: 0.7%
8,500
CAGR: 0.5% CAGR: 0.2%
7,500
6,500 2005
2010
2020
YEAR
2030
2040
2050
Notes: Dashed continuations represent linear extrapolations of AEO projections based on 20262035 values. CAGR = Compound Annual Growth Rate. Source: EIA AEO2010 and AEO2011 Preliminary Results.
emissions rise to about 7,200 million MtCO2e/year by 2015. Energy-related CO2 makes up 80% of GHG emissions with the remainder coming from methane (10%), non-energy CO2 (2%), nitrous oxide (5%), and fluorinated gases (4%).11 By 2035, GHG emissions rise to about 7,900 million MtCO2e/year, with minimal changes in the percentage share by gas. While the AEO2010 provides more than 30 alternative cases, the Low and High Economic Growth Cases bounded the range of GHG emissions (Table 4-1).12
11 Fluorinated gases include hydrofluorocarbons (HFCs) and other ozone-depleting substances (ODS) substitutes, perfluorocarbons (PFCs), and sulfur hexafluoride (SF6). 12 See http://www.eia.gov/oiaf/aeo/tablebrowser/ for alternative cases.
The abundant supply of natural gas that is now projected gives the United States the opportunity to use natural gas to displace more carbon-intensive fuels, primarily coal used in the power sector and oil used for transportation.13 Market prices have already begun to reflect a more robust North American gas supply. In turn, these lower natural gas prices have reduced wholesale electricity prices. Today, many large GHG emitters, especially those in the power sector, have already begun to alter their plans based on the long-term risk of GHG regulation. For example, many utilities today use carbon proxy prices in their resource planning to estimate the potential range of
13 The role of natural gas in the transportation sector is being addressed by the Future Transportation Fuels study.
Table 4-1. emissions data by case (million metric tons of carbon dioxide equivalent)
Case high reference Low
* 2050 figures based on extrapolations.
2005 7,231 7,231 7,231
2015 7,316 7,182 7,059
2035 8,433 7,872 7,304
2050* 9,133 8,268 7,405
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impact of future GHG regulation.14,15,16,17,18 As noted in Footnote 10, the AEO2010 reflects some carbon risk by increasing the capital cost of coal plants, but the incorporation of GHG risk into utility plans (as well as company decisions to proactively reduce GHG emissions on a case-by-case basis) may result in GHG emission reductions not reflected in the AEO Reference Case. The greater use of natural gas, in lieu of coal, has resulted in a decrease in the carbon intensity19 of the power sector by about 4%20 in 2009 (relative to 2008). Over 120 GW of efficient, natural gas combined cycle (NGCC) capacity was added from 2000 to 2008. The increased use of these new and efficient natural gas units decreased the GHG emissions by about 83 million MtCO2e,21 or about 1% of total U.S. emissions in 2005. Similarly, the carbon intensity of the industrial sector has dropped by over 3% due to lower-carbon natural gas and renewable fuel consumption instead of coal and oil.
14 Ernest Orlando Lawrence Berkeley National Laboratory, Environmental Energy Technologies Division, Reading the Tea Leaves: How Utilities in the West Are Managing Carbon Regulatory Risk in their Resource Plans, March 2008. http://eetd.lbl. gov/ea/emp/reports/lbnl-44e.pdf. 15 Direct Testimony of Kurtis J. Haeger, Public Service Company of Colorado, before the Public Utilities Commission of the State of Colorado, May 13, 2011. http://www.xcelenergy. com/staticfiles/xe/Regulatory/Regulatory%20PDFs/CO11A-XXXE_2012_RES_Haeger_DirectTestimony.pdf. 16 Tennessee Valley Authority, Integrated Resource Plan, TVAs Environmental & Energy Future, March 2011, page 97. http:// www.tva.gov/environment/reports/irp/pdf/Final_IRP_ complete.pdf. 17 Oklahoma Gas & Electric Co., Integrated Resource Plan, May 2011, page 62. http://occeweb.com/pu/OGE%202011%20IRP. pdf. 18 American Electric Power, Integrated Resource Plan, 20102019, July 2009, page 28. http://occeweb.com/pu/PSO%20 2011%20IRP.pdf. 19 Carbon intensity of energy is defined as carbon dioxide emissions per unit of energy consumed (CO2/Btu). 20 Energy Information Administration, U.S. Carbon Dioxide Emissions in 2009: A Retrospective Review, May 2010. http:// www.eia.doe.gov/oiaf/environment/emissions/carbon/. 21 Energy Information Administration, Monthly Energy Review, April 2011. Theoretical reductions computed relative to 2000 and computed as reductions in emissions had the emissions intensity of the gas generation fleet not changed. Similarly, in 2010, reductions were estimated by the EIA at 88 million MtCO2e.
Greenhouse Gas Emissions: Constrained Scenarios

The study team explored the impacts of carbon constraints on natural gas demand, specifically in the power sector. In this study, a carbon constraint is an implied or explicit limit on GHG emissions that may result in cost impacts for the end-user that did not exist previously and that reflects in some fashion the relative carbon intensity of fuel and technology choices. In practice, carbon constraints may take the form of a work practice or performance standard or a cap or tax on emissions. Rather than analyze and model the results of specific GHG reductions or targets, the role of natural gas in reducing GHGs was reviewed as reported in the various studies used to complete the study of studies. Long-term carbon constraints of a 50% reduction from a 2005 baseline by 2050 and steeper long-term emissions targets (e.g., 80% by 2050 or later) were reviewed as part of this analysis. There are very few studies in the public domain that incorporate the potential effects of increased natural gas resources,22 as in the cases presented in the AEO2011, suggesting that many currently available studies may underestimate the potential for natural gas use. To study the relationship of carbon constraints and the larger natural gas supplies, the NPC study team reviewed EMF (Energy Modeling Forum) 22: Climate Change Control Scenarios,23 The Future of U.S. Natural Gas Production, Use, and Trade,24 Natural Gas: A Bridge to a LowCarbon Future?,25
22 The estimate for technically recoverable unproved shale gas in the AEO2011 Reference Case is 827 Tcf. Alternative cases in AEO2011 examine the potential impacts of variation in overall domestic natural gas production from 22.4 to 30.1 Tcf in 2035, compared with 26.3 Tcf in the Reference Case. 23 See http://emf.stanford.edu/research/emf22/ for more information. EMF (Energy Modeling Forum) 22 is a compilation of results from six modeling teams that focused on 50 and 80% GHG emissions reductions from 1990 levels. As part of this study, results were averaged from the following model outputs (ADAGE, MRN-NEEM, EPPA, MERGE-Optimistic, and MiniCAM-EERE) to represent the outcomes from EMF. 24 Massachusetts Institute of Technology (MIT), The Future of U.S. Natural Gas Production, Use, and Trade, Interim Report, 2010. http://globalchange.mit.edu/pubs/abstract. php?publication_id=2066. 25 Stephen P. A. Brown, Alan J. Krupnick, and Margaret A. Walls, Natural Gas: A Bridge to a Low-Carbon Future?, Resources for the Future Issue Brief 9-11, December 2009.
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EIAs AEO2011 GHG price economy wide case, and private modeling results provided by Wood Mackenzie. The conclusions are: y Relative to a reference case without GHG emission limits,26 past studies have indicated carbon constraints result in lower energy consumption on an economy-wide basis and power sector emission intensity declines over time (Figure 4-2). As noted above, past studies have shown that carbon constraints typically resulted in reduced total energy demand relative to the Reference Case for the comparative year, including economy-wide demand for natural gas. However, under certain cases, even with carbon constraints, an increased market share of natural gas in the power sector was observed (Figure 4-3). Additionally, in cases with higher natural gas supplies, end-use natural gas consumption, on an economy-wide basis, may increase in absolute terms (Figure 4-4, EIA, and Wood Mackenzie)
26 The term Reference Case in this report implies the projection of emissions or gas/electric/energy demand that would have occurred under current regulatory or business-as-usual conditions for a particular year.
relative to a reference case without carbon constraints. However, due to the limited detailed analyses in the public domain, definitive conclusions were unable to be drawn about whether higher levels of natural gas supplies (such as those used in AEO2011) and carbon constraints would indeed result in higher gas consumption in the economy. y Even with updated resource natural gas resource estimates, the electricity mix in a carbon-constrained economy will be comprised of a diverse mix of low-carbon resources. Power sector natural gas demand will depend not only on natural gas supply and price but also its competition on with other low-emitting electricity technologies; policies designed to increase renewable technologies such as Renewable Energy Standards would alter that competition. Different assumptions of technology competition yield vastly different future power generation mixes (Figures 4-5 and 4-6). y The increased natural gas supplies and associated lower gas prices may significantly expand the role of natural gas as one among the suite of viable, economical options to meet GHG emissions
Figure 4-2. Power Sector Emissions Intensity Carbon-Constrained Scenarios
Figure 4-2. power sector emissions intensity carbon-constrained scenarios
1,200
POUNDS OF CO2 EQUIVALENT PER MEGAWATT HOUR
800
400
AEO2010 AEO2011 AEO2011 GHG ENERGY MODELING FORUM 50% ENERGY MODELING FORUM 80% RESOURCES FOR THE FUTURE
0 2010
Note: GHG = greenhouse gas.
2015
2020 YEAR
2025
2030
332
Figure 4-3. Natural Gas Generation as Percent of Total Generation
Figure 4-3. natural Gas Generation in carbon-constrained scenarios

40
2010
2020
2030
30
PERCENT
20
10
MASSACHUSETTS INSTITUTE OF TECHNOLOGY 50%
AEO2011 GHG
RESOURCES FOR THE FUTURE
Figure 4-4. Total Natural Gas Consumption in 2030
Figure 4-4. total natural Gas consumption in 2030

35
HISTORICAL NO GHG CONSTRAINTS, LOWER GAS RESOURCES NO GHG CONSTRAINTS, HIGHER GAS RESOURCES GHG CONSTRAINTS, HIGHER GAS RESOURCES
25 TRILLION CUBIC FEET
15
5 0
ENERGY INFORMATION ADMINISTRATION
WOOD MACKENZIE
RESOURCES FOR THE FUTURE

333
Figure 4-5. Massachusetts Institute of Technology: Energy Mix Under Carbon Policy 50% Reduction by 2050
Figure 4-5. massachusetts institute of technology: energy mix Under carbon policy, 50% Generation Mix with WAS Figure 5. Powerreduction by 2050 Carbon Policy (TWh)
REDUCED USE OIL HYDRO RENEWABLES NUCLEAR GAS COAL CARBON CAPTURE AND SEQUESTRATION COAL
THOUSANDS OF TERAWATT HOURS
2015
2030 YEAR
2050
Figure 4-6. Resources for the Future: Energy Mix Under Carbon Policy 42% Reduction by 2030
Figure 4-6. resources for the Future: energy mix Under carbon policy, 42% reduction by 2030
WAS Figure 5. Power Generation Mix with Carbon Policy (TWh) 7
RENEWABLE SOURCES (INCLUDING HYDRO) NUCLEAR GAS CARBON CAPTURE AND SEQUESTRATION (CCS) GAS INTEGRATED GAS COMBINED CYCLE WITH CCS COAL
THOUSANDS OF TERAWATT HOURS
1 0
NO CARBON (2020)
NO CARBON (2030)
CARBON POLICY (2020)
CARBON POLICY (2030)
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constraints of about 50% reduction from 2005 levels by 2050. However, under a more aggressive 80% GHG reduction target, natural gas, even with its relatively lower carbon intensity, cannot meet the carbon constraints alone without low- to zero-emitting technologies such as CCS. Hence, it is imperative that research, development, and demonstration (RD&D) efforts related to lower-carbon technologies, including CCS, continue if a steep, long-term target is established and substantial natural gas use is to be maintained over the longer term.
LIFE-CyCLE EmISSIONS OF NaTuraL GaS aND COaL IN POWEr GENEraTION

As noted in the previous sections, natural gas can play a significant role in a lower carbon-constrained environment. Besides lowering GHGs, displacement of coal and fuel oil can also result in lower SO2, NOx, and mercury emissions at the various end-use sectors. The demand for natural gas in the power sector is projected to increase in the next few decades. To fully analyze the emissions from the well to the burner tip, a life-cycle analysis (LCA) was conducted comparing natural gas to coal. The NPC analyzed the life-cycle emissions of natural gas in the power sector relative to coal employing similar methodologies as developed in the paper by Paulina Jaramillo et al.28 The life-cycle analysis of emissions from natural gas and coal in power generation in the United States was then evaluated using the updated EPA GHG emissions inventory for 2009.29 While the methane estimates presented in this EPA inventory have been questioned by both industry and
28 P. Jaramillo, W. M. Griffin, and H. S. Matthews, Comparative Life Cycle Air Emissions of Coal, Domestic Natural Gas, LNG, and SNG for Electricity Generation. Environmental Science & Technology (2007) 41(17): 62906296. Additional clarifications were provided by P. Jaramillo on February 5 and 7, 2011. 29 U.S. Environmental Protection Agency, Inventory of U.S. Greenhouse Gas Emissions and Sinks: 19902009, EPA 430R-11-005, April 15, 2011, http://www.epa.gov/climatechange/ emissions/usinventoryreport.html.
Sulfur Dioxide, Nitrogen Oxides, and Mercury

Table 4-2 displays 2005 baseline emissions for sulfur dioxide, nitrogen oxides, and mercury by sector. In the AEO2010 Reference Case (Figures 4-7 and 4-8), NOx and SO2 emissions decline due to the impact of existing regulations, such as the Clean Air Interstate Rule,27 and mercury emissions decline due to the impact of existing state regulations. Both NOx and SO2 emissions are expected to decline further due to the impact of proposed Clean Air Act rules, which remain to be finalized by the EPA, that are not incorporated in the Reference Case.
27 The Reference Case includes the Clean Air Interstate Rule that was temporarily reinstated by the U.S. Court of Appeals for the District of Columbia Circuit in December 2008, which includes a cap-and-trade system for SO2 and NOx emissions.
Table 4-2. 2005 baseline emissions: sulfur dioxide, nitrogen oxides, and mercury
Pollutant 2005 Baseline Emissions electric power sulfur dioxide transportation other total electric power nitrogen oxides transportation other total electric power mercury mobile sources other total Unit (Short Tons) 10 1 3 14 4 11 4 18 52 1 49 103 million tons million tons million tons million tons million tons million tons million tons million tons tons tons tons tons
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Figure 4-7. Emissions Projections Power Sector, Nitrogen Oxide and Sulfur Dioxide
Figure 4-7. emissions projections power sector, nitrogen oxide and sulfur dioxide
12
MILLION TONS
NITROGEN OXIDE
SULFUR DIOXIDE
0 2005 2010 2020 YEAR 2030 2040 2050
Note: Dashed continuations represent linear extrapolation of AEO projections based on 20262035 values.
Figure 4-8. Emissions Projections Power Sector, Mercury
Figure 4-8. emissions projections power sector, mercury

60
50
TONS
40
MERCURY
30
0 2005 2010 2020 YEAR 2030 2040 2050
Note: Dashed continuation represents linear extrapolation of AEO projection based on 20262035 values.
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Implications of methanes Global Warming Potential

The life-cycle emission estimates presented in this chapter employed a 100-year global warming potential (GWP) for methane of 25 (unless otherwise noted). Although most regulations and policy discussions consider the 100-year time horizon, this practice may not fully compare the impact of shortlived GHGs like methane versus longer lived GHGs like CO2. Conversely, considering a shorter time horizon can give a more complete understanding of the near-term effects of shorter-lived species. The Intergovernmental Panel on Climate Changes non-governmental stakeholders, they still represent the official inventory of the United States. Hence, the updated EPA inventory was employed in this LCA. A global warming potential (GWP) of 25 for methane rather than 21 was employed in the LCA.30 Also, emissions from energy consumption at mining operations were updated to 2007 using the latest coal mining fuel consumption statistics from the U.S. Census Bureau31 and certain emissions not considered by Jaramillo et al. (non-combustion CO2 emissions in natural gas systems32) were accounted in the NPC analysis.33
30 Based on a 100-year time horizon GWP value from the 2007 Intergovernmental Panel on Climate Change (IPCC) Fourth Assessment Report (AR4). For methane, the GWPs range from 72 (for 20-year time horizon) to 7.6 (500-year time horizon). See Table 2.14 (http://www.ipcc.ch/pdf/assessment-report/ ar4/wg1/ar4-wg1-chapter2.pdf). The 100-year time horizon is commonly adopted for various regulations (e.g., AB32, EPA Reporting Rule) and legislative proposals (e.g., 111th Congress). The 100-year time horizon is also the estimate employed by the EPA and EIA in its emissions estimates and projections. GWP of 21 for methane is used by the EPA in its annual inventory reports (See Footnote 24), but it is from the IPCCs Second Assessment Report (SAR) issued in 1995. 31 U.S. Census Bureau, 2007 Economic Census. http://factfinder.census.gov/servlet/IBQTable?_bm=y&-geo_id=&-ds_ name=EC0721I3&-_lang=en. 32 10.9 million MtCO2e of non-combustion CO2 were added to the natural gas LCA, Table 3-38, EPA. 33 The use of the Jaramillo et al. methodology or even adoption of the new revised EPA emissions in this report should not be viewed as an endorsement, but rather an attempt to place the analysis in the context of recent public discussions surrounding the impact of new EPA emissions data for the natural gas production sector and its impact on the overall natural gas life-cycle emissions.
current estimate of methanes 20-year GWP is 72. Using a 20-year GWP for methane would result in larger emissions estimates for the upstream portions of both coals and natural gas life cycles, although natural gas still produces lower overall equivalent CO2 emissions than coal. For example, using a 20-year GWP of 72 for methane yields 1,281 lbs of carbon dioxide equivalent per megawatt hour (CO2e/MWh) and 2,131 lbs of CO2e/ MWh for the heat rates of 7,000 British thermal units per kilowatt hour (Btu/kWh) and 9,000 Btu/ kWh for natural gas and coal, respectively. The boundaries of the LCA included direct combustion and fugitive and vented emissions from the production/extraction, processing, and transportation of coal and natural gas. To ensure current representation of the current power production sector, technologies like CCS or integrated gasification combined cycle are not included. Emissions related to construction and decommissioning of the facilities are also excluded.
Life-Cycle Analysis of Natural Gas and Coal in Power Generation

Because of the new, revised EPA estimate of fugitive and methane emissions and the inclusion of non-combustion CO2,34 the NPC estimate of emissions for the natural gas value chain was 409 million MtCO2e in 2009. Similarly, emissions from coal extraction, processing, and transportation were estimated at 136 million MtCO2e/year employing methane emissions from the 2009 EPA inventory, the higher GWP of methane and emissions from energy consumption at mining operations (updated to 2007). The natural gas and coal emissions were normalized to a heat content basis (pounds of CO2 equivalent per million British thermal units [lb CO2e/MMBtu]), based on higher heating value, for comparison as fuels without consideration of additional efficiency differences in end-use technologies and natural gas emissions were found to be about 35% lower than coal (see Figure4-9).
34 See Figure 4-9 for definitions.
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Since the real focus going forward will be on new NGCC plants (about 52% efficient35,36) replacing older, inefficient coal plants (about 30% efficient) or the replacement of the older/inefficient capacity with new coal plants (about 38% efficient37), the net efficiency range for consideration by policymakers is much smaller, with combined cycle plants in the range of 49% efficient and coal plants in the 3038% range. Figure 4-10 represents the LCA emission rates computed at an NGCC plant of 7,000 British thermal units per kilowatt hour (Btu/kWh) (49% efficiency), 9,000 Btu/kWh (37% efficiency) for a new coal plant, and 11,377 Btu/kWh (30% efficiency) for an inefficient coal plant. For this nominal heat rate range, the natural gas plant consistently has life-cycle GHG emissions about half those of the coal plants. See Table 4-3 for comparison of life-cycle emission rates in the electric power sector. EPA estimates an uncertainty of -19 to +30% for methane and non-combustion CO2. Uncertainty ranges38 from coal mining operations or fuel combus35 The Jaramillo et al. paper uses an efficiency range of 30 to 37% for coal and from 28 to 58% for natural gas. Although Jaramillo et al. report a maximum higher heating value efficiency of 58% for a U.S. NGCC plant with F-class gas turbines, that value appears to be in error for an electricity-only plant. Efficiencies from the EIAs Annual Energy Outlook, Table 8.2 Cost and Performance Characteristics of New Central Station Electricity Generating Technologies, at http://www.eia.gov/ oiaf/aeo/excel/aeo2010%20tab8%202.xls. The efficiency of an NGCC plant using EIAs estimate of an average heat rate of the first- and nth-of-a-kind (6,543Btu/kWh), is about 52%. Coal plant efficiency is estimated at 38% based on average heat rate of 8,970 Btu/kWh for the first- and nth-of-a-kind Scrubbed New Coal Plant. 36 Turbine manufacturers Siemens (SGT6-8000H: http://www. energy.siemens.com/hq/en/power-generation/gas-turbines/ sgt6-8000h.htm) and GE (FlexEfficiency 50: http://www.geflexibility.com/products/flexefficiency_50_combined_cycle_ power_plant/index.jsp) have announced gas turbines achieve fuel efficiencies greater than 60% on a lower heating value (LHV) basis. 37 Higher efficiencies, approaching 4445% higher heating value, are possible for new coal plants employing ultra-supercritical units. S. Yeh and E.S. Rubin, A Centurial History of Technological Change and Learning Curves for Pulverized CoalFired Utility Boilers, Energy, Vol. 32, p. 19962005 (2007). Technical Assessment Guide (TAG)-Power Generation and Storage Technology Options, Report No.1017465, Electric Power Research Institute, Palo Alto, CA, December 2009, pages 319, 20. 38 See Table 3-16 in the Environmental Protection Agencys Greenhouse Gas inventory found at: http://www.epa.gov/ climatechange/emissions/downloads11/US-GHG-Inventory2011-Chapter-3-Energy.pdf.
tion of coal (-4 to +10%) or natural gas (-3 to +5%) and uncertainties associated with methane emissions from coal mine operations (-13 to +16%) are not illustrated in Figure 4-10.39
Other LCA Studies

Besides Jaramillo et al., there have been other recent studies about the LCA of natural gas and coal. Figure 4-11 provides a comparative analysis of the LCA as reported by Jaramillo et al. (adjusted for a GWP of 25), NPC, National Energy Technology Laboratory,40 and the American Clean Skies Foundation.41 In comparing the power generation emissions, the assumptions on generation efficiency and, in the case of the updated Jaramillo et al. analysis, the estimates in methane emissions are the main reason for the differences in the LCAs. In a recent paper,42 Robert W. Howarth et al. conclude that [t]he large GHG footprint43 of shale gas undercuts the logic of its use as a bridging fuel over coming decades, if the goal is to reduce global warming. To arrive at this conclusion, Howarth et al. compute that 3.6 to 7.9% of methane in natural gas, produced over the life cycle of a well, is emitted to the atmosphere. For conventional wells, Howarth et al. find the range to be between 1.7 and 6%. Using these data points and considering the 20-year horizon, Howarth et al. find that the GHG footprint for shale gas is at least 20% greater than and perhaps more than twice as great as that for coal when expressed per quantity of energy available
39 See Table 3-31 in the Environmental Protection Agencys Greenhouse Gas inventory found at: http://www.epa.gov/ climatechange/emissions/downloads11/US-GHG-Inventory2011-Chapter-3-Energy.pdf. 40 National Energy Technology Laboratory, Life Cycle Greenhouse Gas Analysis of Natural Gas Extraction & Delivery in the United States (Timothy J. Skone, P. E., Cornell University Lecture Series, May 12, 2011). 41 American Clean Skies Foundation, The Climate Impact of Natural Gas and Coal-Fired Electricity: A Review of Fuel Chain Emissions Based on Updated EPA National Inventory Data, April 19, 2011. 42 Robert W. Howarth, Renee Santoro, and Anthony Ingraffea, Methane and the Greenhouse-Gas Footprint of Natural Gas from Shale Formations, Climatic Change, 2011. 43 GHG footprint is defined by Howarth et al. as the total GHG emissions from developing and using the gas, expressed as equivalents of carbon dioxide, per unit of energy obtained during combustion.
338
Figure 4-9. Comparison of Fuel and Upstream Emissions
Figure 4-9. comparison ES-7 in early draft WAS Fig. of Fuel and Upstream emissions
250
UPSTREAM NON-COMBUSTION CO2 COMBUSTION METHANE DOWNSTREAM END-USE COMBUSTION CO2
222
8
POUNDS OF CO2 EQUIVALENT PER MILLION BTU
200
150
148
9 19
100
209
117
50
NATURAL GAS
COAL
Notes: Non-combustion CO are emissions of CO associated with aring and removal of CO from natural gas at acid gas removal units. Combustion emissions are associated with combustion of natural gas in turbines, engines, boilers, and process heaters from the production, processing, transportation/storage, and distribution of natural gas. Methane emissions are predominantly either fugitive (unintentional) or vented (intentional) releases of natural gas along the natural gas value chain. End-use combustion CO are emissions resulting from the combustion of the fuel at a combustion source (e.g., boiler, turbine, etc.) at the end-use sector (power, residential, commercial or industrial).
Figure 4-10. Life Cycle Electricity Emissions Rate
Figure 4-10. Life cycle electricity emissions rate ALSO USED AS Figure ES-9
3,000 POUNDS OF CO2 EQUIVALENT PER MEGAWATT HOUR
2,528
2,000
2,000
1,000
1,034
NATURAL GAS COMBINED CYCLE (7,000 BTU/KWH HEAT RATE)
COAL PLANT (11,377 BTU/KWH)
COAL PLANT (9,000 BTU/KWH)

339
Table 4-3. comparison of Life-cycle emission rates in the electric power sector
Natural Gas Efficiency (percent)* 52 49 28 Heat Rate (Btu/kWh) 6,563 7,000 12,189 Coal Efficiency (percent) 38 37 30 Heat Rate (Btu/kWh) 9,000 9,224 11,377 NPC (lb CO2e/MWh) 2,000 2,050 2,528 NPC (lb CO2e/MWh) 970 1,034 1,800
* adjusted from 5828% range noted in the Jaramillo et al. paper (see Footnote 35). 7,000 btu/kWh assumed nominal heat rate for a new nGcc plant. adjusted from 3730% range noted in the Jaramillo et al. paper (see Footnote 35). 9,000 btu/kWh assumed nominal heat rate for a new coal plant.
Figure 4-11. Comparison of Life-Cycle Emissions Rates in the Electric Power Sector
Figure 4-11. comparison of Life-cycle emission rates in the electric power sector
3,000 POUNDS OF CO2 EQUIVALENT PER MEGAWATT HOUR
NATURAL GAS
COAL
2,453 2,264 2,000 1,980 1,997
1,111 1,000
1,096
969
1,034
AMERICAN CLEAN SKIES
NETL
JARAMILLO ET AL. (ADJUSTED)
NPC
Note: National Energy Technology Laboratory rates based on average coal and gas life-cycle emissions. NPC and Jaramillo et al. based on nominal heat rates of 7,000 Btu/kWh (gas) and 9,000 Btu/kWh (coal).
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during combustion. Over the 100-year frame, the GHG footprint is comparable to that for coal fuels are used to generate electricity, natural gas gains some advantage over coal because of greater efficiencies of generation. However, this does not greatly affect the overall conclusion: the GHG footprint of shale gas approaches or exceeds coal even when used to generate electricity. There are three major factors that contribute to the higher GHG footprint for natural gas, as computed by Howarth et al.: y The use of a higher 20-year GWP of 105 instead of a 100-year GWP y Potential overestimation of actual emissions due to the use of lost and unaccounted for gas (LAUF) as a proxy to arrive at 1.4% to 3.6% leakage of gas during transmission, storage, and distribution (about 3845% of the total leakage of methane computed by Howarth et al.) y Potentially an overestimation of emissions from well completions (about 2452% of the total leakage). The methodologies employed by Jaramillo et al. (and NPC) and also others, such as the American Gas Association and American Clean Skies Foundation, are based on annual average emissions and energy production or consumption. The NPC estimates here use the revised, higher EPA annual emissions estimates and EIAs estimates of natural gas production in 2009. Employing these methods, the NPC estimates the total methane emissions to be 2.2% of the total gross production an estimate consistent with other independent estimates and significantly less than the Howarth estimates.44,45 LAUF is essentially the metered difference in natural gas delivered into and out of the transmission and distribution pipeline system less fuel employed for compressor operations. The EPA in developing the Subpart W rule for GHG reporting for oil and gas facilities concluded that LAUF was
44 Ramon Alvarez, April 19, 2011, Environmental Defense Fund (EDF) at http://blogs.edf.org/energyexchange/2011/04/19/ mixed-news-coverage-of-report-on-climate-pollution-fromnatural-gas-underscores-the-need-for-better-data/. 45 See pages 24 of document EPA-HQ-OAR-2009-0923-0086 in the EPA docket for GHG reporting rule. http://www. regulations.gov/contentStreamer?objectId=0900006480afa1c 2&disposition=attachment&contentType=pdf.
not a good surrogate since there are several factors associated with LAUF, such as inaccuracies of gas measurement.46 The EPA estimates uncontrolled methane emissions from well completions (and workovers) to be about 120 billion cubic feet (Bcf), or 0.46%, of the 2009 gross production. As noted, these are uncontrolled estimates and do not account for green completions to reduce such emissions. Wood Mackenzie47 estimates that Howarth et al. may have overestimated the average volume of natural gas vented during the completion and flowback stages by 60%65% and that the practice of green completion is widely followed by many operators in various unconventional shale plays. The end-use combustion of gas or coal accounts for 79% of life-cycle emissions for gas and 94% in case of coal.48 Hence, leakage or emissions from the upstream (i.e., production, processing, transportation/storage, and distribution) has to be about 10% of the 2009 gross production for the life cycle of coal and gas to be similar.49 Efficiency of the enduse equipment can play a significant role in the LCA. Howarth et al. also do not employ the end-use efficiencies associated with natural gas equipment (e.g., efficiency of an NGCC plant versus a coal plant). The NPC finds the life-cycle GHG emissions from the end-use of natural gas at new NGCC plants in the power sector are approximately 5060% lower than coal-based generation based on the range of current U.S. power plants.
Methane Reduction Programs and Technologies

The EPA Natural Gas STAR program is a voluntary industry-government partnership that has encouraged reduction of over 900 Bcf of natural gas (over 400 million MtCO2e) through the application of over
46 Mandatory Greenhouse Gas Reporting Rule Subpart W Petroleum and Natural Gas: EPAs Response to Public Comments. Response to Comment No. EPA-HQ-OAR-2009-0923-1059-12, page 323. 47 Wood Mackenzie, Regional Gas and Power Services Insight, May 2011. 48 On a heat input basis (lb/MMBtu). 49 On a 100-year time period (GWP 25). See Section IV of Topic Paper #4-2, Life-Cycle Emissions of Natural Gas and Coal in the Power Sector, for the cross-over analysis.
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150 cost-effective technologies since 1993. In addition to the Natural Gas STAR program, segments of the industry are subject to National Emission Standards for Hazardous Air Pollutants rules. In 2009, EPA estimates over 62 million MtCO2e of reduction via the EPA Gas STAR program and about 19 million MtCO2e via regulations such as National Emission Standards for Hazardous Air Pollutants.50 The Natural Gas STAR program has been very successful in technology transfer between EPA Gas STAR members. Recommended practices, including cost-benefit analysis, have been developed by the EPA51 and the California Air Resources Board.52 The EPA Gas STAR program represents over 60% of the natural gas industry and its specific breakdown is as follows:53 y Production Sector: 30 Gas STAR production partners responsible for approximately 45% of total gas and oil production in the United States. y Processing: 12 Gas STAR processing companies accounting for approximately 52% of total gas processed in the United States. y Transmission: 32 gas transmission companies responsible for approximately 72% of total gas transported in the United States. y Distribution: 55 local distribution companies responsible for approximately 69% of gas distribution in the United States. Hence, greater penetration of these technologies in the industry will likely reduce methane emissions. A 2010 Government Accountability Office report showed that around 40% (around 50 Bcf/year, or over 22million MtCO2e) of currently vented and flared natural gas on federal leases alone could be economically captured, with current available control
50 ANNEX 3 Methodological Descriptions for Additional Source or Sink Categories, Tables A-125 and A-126. http://www. epa.gov/climatechange/emissions/downloads11/US-GHGInventory-2011-Annex-3.pdf. Methane reductions converted to CO2e based on GWP of 25. 51 See Environmental Protection Agencys Natural Gas STAR Program information found at: http://epa.gov/gasstar/tools/ recommended.html. 52 See the California Air Resources Boards information on GHG reductions at: http://www.arb.ca.gov/cc/non-co2clearinghouse/non-co2-clearinghouse.htm#Methane. 53 As of May 2011. EPA via electronic mail, May 9, 2011.
technologies.54 Reducing methane emissions in natural gas systems has resulted in significant savings for companies55; it will also increase the attractiveness of the downstream natural gas product to end users and also reduce loss of federal royalty payments (on leased federal lands and waters).
Conclusions
y The EPAs 2009 inventory shows about 130% increased methane emissions from the natural gas sector relative to its 2008 report. Based on the inventory, methane emissions from the U.S. natural gas systems56 are about 3% of the total U.S. GHG emissions. y As demonstrated by the significant revisions in the EPA estimates, industry comments on the inventory, and recent estimates independently computed by Howarth et al., the methane emissions from the natural gas sector will need refinement and improvement through actual measurements or development of robust, representative factors. y Applying the EPA methane projections from the 2009 inventory report, the life-cycle GHG emissions for natural gas are about 35% lower than coal on a heat-input basis (expressed as pounds of CO2 equivalent per million Btu). y For efficiencies typical of new coal- and natural gas-fired plants in the United States, the natural gas-fired plants are about 50% lower in GHGs (expressed as pounds of CO2 equivalent per megawatt hour [MWh]) than a supercritical pulverized coal plant on a life-cycle basis and about 60% lower than the older subcritical pulverized coal plants still in use.
54 United States Government Accountability Office (GAO), Federal Oil and Gas Leases, Opportunities Exist to Capture Vented and Flared Natural Gas, Which Would Increase Royalty Payments and Reduce Greenhouse Gases, GAO-11-34, October 2010, http://www.gao.gov/new.items/d1134.pdf. 55 GAO-11-34, page 23. 56 Natural gas systems include production, processing, transmission, storage, and distribution segments of the industry. The U.S. natural gas system encompasses hundreds of thousands of wells, hundreds of processing facilities, and over a million miles of transmission and distribution pipelines. See page 3-43 of Inventory of U.S. Greenhouse Gas Emissions and Sinks: 19902009, USEPA 430-R-11-005, April 2011. http://www. epa.gov/climatechange/emissions/usinventoryreport.html.
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y The NPC estimates the total methane emissions from the U.S. natural gas systems to be 2.2% of the total gross production, an estimate consistent with other independent estimates. y Other estimates have shown that NGCC plants have 99% lower SO2 and mercury emissions and about 82% lower NOx emissions relative to a pulverized coal unit on a life-cycle basis.57 y NPC estimates are within the range of similar lifecycle emissions estimates conducted by other entities, with the exception of Howarth et al. y Greater penetration and applications of various EPA Gas STAR technologies provide a proven avenue to reduce methane emissions.
about 60%; regardless of the uncertainty with the emissions estimates and measurements, continuing to adopt and employ EPA Gas STAR technologies60 or similar technologies will reduce methane emissions along the natural gas value chain while maintaining safety and reliability. Barriers to adoption of these technologies should be evaluated and the industry and government must work together to overcome these barriers.
NaTuraL GaS END-uSE TECHNOLOGIES

With the definition of a 2005 baseline year and a comparative examination of GHG emission forecasts complete, the study identified natural gas end-use technologies in power, industrial, commercial, and residential sectors that could reduce GHG emissions beyond those included in the baseline. Natural gasdriven GHG emission reduction opportunities in the transportation fuels sector using natural gas, battery, electric, and hydrogen fuel cell vehicles will be covered in the parallel NPC Future Transportation Fuels study. To calculate the cumulative impact of identified technologies would require an integrated modeling approach that avoids double-counting. Notwithstanding the challenges such an effort might require, new and integrated modeling was outside the scope of this working paper. Hence, the results in this subchapter present a palette of options for natural gas end-use technologies, not a prescriptive path.
Recommendations
1. More Rigorous Analysis Should Be Undertaken While the NPC analysis contained in this report provides a life-cycle estimate of GHG emissions for natural gas, a more rigorous analysis should be undertaken making use of the most recent EPA and EIA information on emissions and natural gas resources and also incorporating robust uncertainties in the emissions estimated. Further estimation refinements and improvements are already underway,58 including comprehensive nationwide measurements that are currently being undertaken by facilities subject to EPA reporting rules. The EPA should analyze these comprehensive compliance measurement data to develop future emission factors for use in LCAs to assist in the development of future policies for the sector. 2. Industry Should Continue to Adopt and Employ EPA Gas STAR Technologies to Reduce Methane Emissions Along the Natural Gas Value Chain while Maintaining Safety and Reliability Emissions of natural gas occur within natural gas systems prior to end-use (production, processing, and transportation) to facilitate safe and reliable operations (e.g., operations of actuators, control devices, and relief valves).59 EPA Gas STAR participation is
57 National Energy Technology Laboratory, Life Cycle Analysis: Power Studies Compilation Report, January 2011. 58 http://www.epa.gov/climatechange/emissions/downloads11/ US-GHG-Inventory-2011-Chapter-3-Energy.pdf. See page 48 (Planned Improvements). 59 As defined by U.S. EPA in the U.S. Greenhouse Gas Emissions and Sinks 1990-2008, IPCC Source Category 1B2b.
Methodology61
Data were gathered from 35 publicly available academic and industry studies that described 61 emissions reduction cases that quantified the potential GHG reduction volume and associated cost from natural gas end-use technologies.62 The final study sample set consisted of 15 studies detailing 15 end-use technologies in 32 cost-volume data points after
60 EPA, Natural gas STAR Program: Accomplishments. Last updated December 14, 2010. http://epa.gov/gasstar/accomplishments/index.html. 61 Full description of the methodology, results, and conclusions can be found in Topic Paper #4-3, Natural Gas End-Use GHG Reduction Technologies. 62 Studies reviewed did not consider reduction potentials attributed to non-GHG regulations identified in the section of this chapter entitled Impact of Non-GHG EPA Rules on the Power Sector.
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screening for quality and relevancy as described below. After determining the study sample set, the research team tabulated data for each natural gas enduse technology across three attributes: y Projected GHG emission reduction volumes63 y The projected abatement cost64 associated with those emission reduction volumes y A proxy measure of the uncertainty of these projections. Technologies were subsequently sorted into three categories (appliances and equipment, power generation, industrial applications) and 15 discrete subcategories (Table 4-4). An indicative potential of each subcategory was summarized by calculating the volume-weighted average cost (VWAC) and costweighted average volume (CWAV) for each technology. VWAC is the average marginal cost of avoiding emission of 1 metric ton of CO2e by deploying the end-use technology in question, weighted in proportion to the corresponding volumes projected in the study sample set. CWAV is the average volume of potential annual emission reductions projected to result from deploying the end-use technology in question, weighted in proportion to the corresponding costs projected in the study sample set. For subcategories with only one study case, the VWAC and CWAV equaled the cost and volume findings of the single study case. For technologies with multiple data points, an uncertainty score was computed using a proxy metric for the variance of projected results across available studies for each technology, calculated using a geometric average.65 The uncertainty metric is intended to encapsulate the dispersion of volume and cost projections among the studies. While the study-of-studies methodology required acceptance of the different assumptions used in the different forecasts, disparate units of measure could not be tolerated. Thus, cost and volume estimates had to be normalized. Study data expressed in different units (e.g., dollar-years or reduction target
63 For the purposes of this section, volume refers to the annual quantity of GHG reductions in metric tons of CO2e below reference case emissions. 64 For the purposes of this section, cost refers to the quantity in 2009 dollars of avoiding 1 metric ton of CO2e. 65 Uncertainty scores were calculated on a geometric basis using U = ((Cmax Cmin)^2 + (Vmax Vmin)^2)
years) or using different metrics (e.g., cumulative rather than annual emissions reductions) were normalized using simple, linear conversion factors. In cases where published reports did not stipulate, specify, or disclose parameters necessary to evaluate whether technologies could be deemed equivalent to technologies addressed in other studies, the research team contacted study authors to obtain additional data and clarifications. The research team excluded those studies where authors did not respond to data requests or data gaps could not be closed. In cases where the research team could not obtain usable, quantitative data for potentially significant natural gas end-use technologies, the research team prepared reasonable estimates of potential reduction volumes and marginal costs.66
Findings
y Table 4-5 provides GHG emissions reduction potentials for the 15 end-use technologies in the various end-use sectors and abatement costs. Costweighted average volumes by 2030 for the technologies within the sample set ranged from 7 million MtCO2e per year (commercial appliance conversions) to 571 million MtCO2e per year (natural gas CCS) with a median of 80 million MtCO2e per year. Volume-weighted average costs for the technologies within the sample set ranged from negative $40/MtCO2e (new industrial appliances and commercial combined heat and power [CHP]) to $317/MtCO2e (fuel cell generation) with a median VWAC of $38/MtCO2e. y Some combination of these 15 technologies may achieve reductions up to 864 million MtCO2e by 2030 (Figure 4-12). This amounts to roughly 12% of GHG emissions in 2005; reductions beyond this will likely require utilization of other technologies and options not identified in this report. While the sum of all reduction potentials of each technology is greater than 864 million MtCO2e (Table 4-5), the range provided in Figure 4-12 was computed by selecting the minimum and maximum value per end-use sector (power, residential, commercial, and industrial) to avoid potential double counting in each sector.
66 For further details on reduction volume and marginal cost estimates, see Topic Paper #4-3, Natural Gas End-Use GHG Reduction Technologies.
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Table 4-4. natural Gas end-Use technologies

Sector/Technology Residential appliance and equipment conversions new appliances and equipment Power Generation build new combined cycle Gas turbine natural Gas carbon capture and sequestration chp, commercial chp, industrial an electricity generation technology in which the exhaust of a combustion turbine is linked to a heat recovery steam generator and a steam turbine to produce additional electric output. Use of technology to physically separate co2 from other gases either precombustion or post-combustion. captured co2 is then disposed of via sequestration or conversion into other compounds. combined heat and power (chp) is a form of on-site generation in which a heat engine or a power station simultaneously generates both electricity and useful heat. heat output can be used for industrial and commercial processes and power consumed on-site with excess power sold to the grid. Form of on-site generation in which electricity conversion occurs via an electrochemical reaction. run (dispatch) existing natural gas combined cycle electric generation ahead of higher emitting coal-based generation. conversion of existing coal- or oil-fired boiler to burn natural gas as a replacement or supplement to coal or oil. conversion of existing coal- or oil-fired generating station by retaining a portion of steam generation equipment for use with new natural gas combustion turbine or combined cycle equipment. heating, cooling, and water appliances and equipment that serve residential buildings and are fueled by natural gas. Definition
Fuel cells redispatch refuel
repower Industrial efficiency
industrial facilities can improve the efficiency of their natural gas-fueled processes and systems through such measures as waste heat recovery, improved maintenance, process energy monitoring, and new processes. industrial facilities in energy-intensive industries, such as cement and metals, switch to natural gas for thermal energy. heating, cooling, and water appliances and equipment that serve industrial facilities and are fueled by natural gas.
Fuel switching new appliances and equipment Commercial appliance and equipment conversions new appliances and equipment
heating, cooling, and water appliances and equipment that serve commercial buildings and are fueled by natural gas.
y Irrespective of cost, natural gas with CCS presents the largest potential GHG reduction volume, with a potential 23% reduction in the power generation sectors emissions. No other individual end-use
technology can reduce its sectors emissions by more than 12% below 2030 reference case levels (and most technologies by themselves only reduce total sector emissions by 34%).
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Table 4-5. GhG emissions reduction potentials per technology versus projected sector emissions in 2030
Average Volume, Million MtCO2e Average Cost, $/MtCO2e Sector Emissions, Million MtCO2e, 2030 Reduction Potential as Percentage of Sectors Emissions#
Sector/Technology*
Power Generation natural Gas carbon capture and sequestration (ccs) refuel redispatch build new combined cycle Gas turbine combined heat and power (chp), industrial repower Fuel cells chp, commercial Residential new appliances and equipment appliance and equipment conversions Commercial new appliances and equipment appliance and equipment conversions Industrial new appliances and equipment Fuel switching efficiency
* please see table 4-4 for description of technologies. the average volume of potential emission reductions projected to result from deploying the end-user technology in question, weighted in proportion to the corresponding costs projected in the study sample set. the average marginal cost of avoiding emission of 1 metric ton of co2e by deploying the end-user technology in question, weighted in proportion to the corresponding volumes projected in the study sample set. eias aeo2010 reference case projection for energy-related co2 emissions in 2030 for relevant sector. For residential, industrial, and commercial sectors, emissions associated with electricity purchases are included. # the quotient of a technologys cost-weighted average volume (cWaV) and the total emissions of the corresponding sector. Limitations and Caveats: a. the technology options or the indicated reductions above are not intended to represent cumulative reduction potential from the concurrent deployment of different technologies. b. considering limited publicly available data to meet the study goals, the research methodology required the research team to exclude studies from consideration for two primary reasons: (1) the studies bundled technology performance projections with policy assumptions and did not identify whether GhG emissions reductions derived from technology or policy; and/or (2) the studies did not include a complete set of volume and cost data for the technologies they addressed. as a result, the results presented above from a limited data set of studies analyzing these end-use technologies. c. in order to common-size data for comparison purposes, the research team had to make simplifying assumptions. these simplifying assumptions produce results that are not intended to suggest precise costs and volumes, but to provide broad estimates for comparison purposes.
571 110 95 89 82 80 75 70 150 15 84 7 59 41 34
$79 $37 $40 $46 ($15) $67 $317 ($40) ($8) $7 ($16) $49 ($40) $38 $41 1,578 2,533
23% 4% 4% 3% 3% 3% 3% 3% 12% 1% 7% 1% 4% 3% 2%
1,255
1,261
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Figure 4-12. Illustration of Range of Potential Greenhouse Gas Emissions Reductions new rules have been or will be finalized in the next Figure 4-12. illustration of range of potential in the End-Use Sectors through Natural Gas Technologies (2030)
GhG emissions reductions in the end-Use sectors ALSO USED AS Figure ES-8 through natural Gas technologies (2030)
900
INDUSTRIAL COMMERCIAL RESIDENTIAL POWER 864 59 84 150
MILLION METRIC TONS OF CO2 EQUIVALENT PER YEAR
year or two and compliance is set to begin as early as next year for some rules and by mid- to late decade for others. Compliance costs associated with these regulations may cause some owners to retire inefficient coal-fired power plants rather than retrofit them to comply with the new environmental rules.68
700
500
300
571
100 0
7 15
126 34 70
MINIMUM
MAXIMUM
y Academic and industry literature examining the potential GHG reductions and costs associated with end-use natural gas technologies varies by technology in robustness and quality, limiting the ability to comprehensively assess the role of natural gas enduse technologies in reducing GHG emissions.
While significant uncertainty remains surrounding the level of stringency, required emissions controls, timing of the rules, impact to grid reliability, and availability of engineering resources, several analysts have recently published research regarding the amount of coal plant retirements that may occur as a result of these emerging environmental regulations. These reports69 indicate that an average of 58 GW of coal capacity may retire by 2020, representing a potential increase in natural gas-fired generation of about 295 terawatt hours (TWh) versus 2010 total natural gas generation of about 981 TWh.70 These results and reductions are specific to this section, which may differ from results in earlier sections that analyzed the impact of carbon constraints without a focus on EPA regulations. These sections operate independently and should not be combined in any manner. The review of these recent reports regarding potential coal plant retirements is discussed in more
68 These emerging environmental rules are already causing some coal plant owners to retire their facilities. For example, the Sierra Club reported in a December 22, 2010, press release (2010, Outlook Dimmed for Coal) that utilities announced 12 GW of coal plant retirements in 2010. However, offsetting these announcements were roughly 6.7 GW of new coal plant capacity that came online in 2010 (and additional coal plant capacity additions of roughly 6 to 7 GW are expected in 2011-2012). See Erik Shuster, Tracking New Coal-Fired Power Plants, National Energy Technology Laboratory (NETL), January 14, 2011. 69 The reports that were reviewed typically examine the collective impact of multiple environmental rules (or a subset of these rules) rather than any one rule individually. The EPA, however, has recently provided its estimates for how individual rules may impact coal retirements. For example, the EPA projects that about 0.51.6 GW of coal capacity would likely retire due to the Transport Rule and natural gas generation would increase only by 12% relative to a base case without the Transport Rule. With respect to the Utility MACT rule, the EPA projects a retirement of 9.9 GW of coal-fired capacity (3% of all coal-fired capacity and 1% of total generation capacity in 2015) by 2015 in addition to the 5 GW in the EPAs Base Case. Since the EPA completed their analysis of the MACT rule after the finalization of the analysis presented in this section, the EPA results were not incorporated in this section (MACT rules were proposed on March 16, 2011). 70 EIAs Electric Power Monthly.
ImPaCT OF NON-GHG EPa ruLES ON THE POWEr SECTOr

In the United States today, approximately 100 GW, or 32%, of coal-fired electric generating capacity is over 40 years old, and 14% is greater than 50 years old.67 The power sector will be subject to compliance with several key environmental rules over the next several years (Table 4-6), including the National Emissions Standards for Hazardous Air Pollutants regulations under Section 112 of the Clean Air Act requiring the application of Maximum Achievable Control Technology (MACT), and potential regulations regarding cooling water intake structures and coal combustion byproducts (coal ash). Some of the
67 M. J. Bradley & Associates LLC, Ensuring a Clean, Modern Electric Generating Fleet while Maintaining Electric System Reliability, August 2010.
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Table 4-6. background information on potential epa regulations

CATR* the clean air transport rule (catr) was designed to improve air quality in the eastern United states and limit interstate air pollution transport. the catr requires 31 states and the district of columbia to reduce power plant sulfur dioxide (so2) and nitrogen oxide (nox) emissions. combined with other state and epa actions, the catr would reduce so2 and nox by 71% and 52% below 2005 levels, respectively. the catr replaces the clean air interstate rule that was vacated in 2008. HAPs MACT hazardous air pollutants (haps) maximum achievable control technology (mact) are standards designed to reduce haps emissions, most notably, mercury. the epa proposed mact standards for coal and oil utilities on march 16, 2011, and plans to finalize rules by december of 2011. in general, the research reports analyzed in this report assumed that some combination of flue gas desulfurization (FGd, or a scrubber), activated carbon injection, and a fabric filter will suffice. Water this section of the clean Water act requires that the location, design, construction and capacity of cooling water intake structures reflect the best technology available for minimizing adverse environmental impact. the epa proposed these rules based on section 316(b) of the clean Water act on march 28, 2011, and plans to finalize the rules by July 2012. Coal Ash currently, the epa does not regulate coal combustion byproducts (coal ash). however, the resource conservation and recovery act (rcra) gave the epa the power to control hazardous wastes and the framework for managing non-hazardous wastes. the epa has proposed rules to regulate coal ash as either a hazardous or non-hazardous waste. Final rules are expected in early 2012.
* on July 6, 2011, the U.s. environmental protection agency finalized the cross-state air pollution rule (csapr) (known as the clean air transport rule when it was proposed) as the formal replacement for the clean air interstate rule. the final csapr was published in the Federal register (76 Fr 48208) and is available at http://www.gpo.gov/fdsys/pkg/Fr-2011-08-08/pdf/ 2011-17600.pdf. due to late release of the csapr, the npc study did not analyze the impact of the csapr to the power sector. the proposed rule can be found at http://www.gpo.gov/fdsys/pkg/Fr-2011-05-03/pdf/2011-7237.pdf. the proposed rule can be found at http://www.gpo.gov/fdsys/pkg/Fr-2011-04-20/pdf/2011-8033.pdf. the proposed rule can be found at http://www.regulations.gov/#!documentdetail;d=epa-hQ-rcra-2009-0640-0352.
detail in the Results section of this chapter. The next section discusses the factors that influence the coal plant retirement decision.
Retirement Decision
A plant owners decision to retire an existing coal unit will depend on a variety of factors, including the plants age, condition, and operating history, its efficiency, the cost of the emission controls required, the expected cost of its fuel supply, electric reliability and transmission issues, regional electric market conditions, future CO2 prices, and expected natural gas prices. For unregulated plants, the retirement decision will depend on the overall expected profitability of the plant (including the costs of retrofitting the plant) while for regulated units, the retirement decision will depend on the comparison of the expected cost of continuing coal plant operations relative to the 348
expected cost of the alternative generating resource (e.g., from a gas-combined cycle or combustion turbine, or conversion to biomass). When natural gas is relatively abundant, favorable fuel economics and relative lack of environmental control requirements may make natural gas-fired power plants an economical choice and greatly influence a power companys decision to retire or retrofit its coal plants. Figure 4-13 illustrates the retirement decision facing a regulated coal unit. It compares the levelized cost of electricity of two representative facilities: a 200-megawatt coal facility commissioned in 1950 and a new NGCC facility. On a $/MWh basis, the cost to retrofit a coal facility requiring controls for SOx, NOx, mercury, and coal ash is about 50% higher than the cost of a new NGCC facility. Although the short-run marginal cost of a retrofitted coal facility may be lower than a new NGCC facility, that same coal facility which may be nearing the end of its economic life due to
Figure 4-13. Levelized Cost of Electricity Due to Non-Greenhouse Gas Rules
Figure 4-13. Levelized cost of electricity due to non-GhG rules

100 DOLLARS PER MEGAWATT HOUR
FUEL OPERATIONS & MAINTENANCE (O&M) CAPITAL COSTS
60
20 0
200 MW 1950s VINTAGE COAL UNIT
NEW NATURAL GAS COMBINED CYCLE
Assumptions: 1. Retro t and new build capital cost and O&M assumptions are from Environmental Protection Agency estimates. 2. Coal combustion residual (CCR) capital cost is from industry estimates. 3. Uncontrolled coal unit (200 MW) requires ue gas desulfurization (FGD) + selective catalytic reduction (SCR) + CCR: Capital cost ~$1,450/kW; retro t life 15 years; 11,000 Btu/kWh heat rate; $3/million Btu coal price. 4. Natural gas combined cycle: Capital cost ~$1,000/kW; life 30 years; 7,000 Btu/kWh heat rate, $5/million Btu gas price. Source: American Electric Power, May 2011.
increasing maintenance requirements or potential CO2 pricing in the future may need to recover its capital expenditures over a shorter period of time than the useful life of the environmental equipment. The relationship between coal and natural gas prices also factors into the retirement decision in that it impacts the operating margins of coal units as well as the utilization (capacity factors) of both coal and gas units (i.e., the number of hours of the year the units are dispatched to serve load). In a recent paper,71 Richard Schmalensee and Robert N. Stavins concluded that [r]ecent market trends (fuel price spread) and technological developments (unconventional resources) have substantially lowered the cost of transitioning from coal-fired generation to alternative power sources. Figure 4-14 displays the historical relationship between delivered coal and natural gas prices, and the derived coal-gas electric generation cost difference;
71 Richard Schmalensee and Robert N. Stavins, A Guide to Economic and Policy Analysis of EPAs Transport Rule, March 2011, pages 16-17.
the generation spread has averaged about $30/MWh. However, the recent decline in natural gas prices (brought about by abundant reserves and increasing domestic production) and increasing coal prices have reduced the coal-natural gas electric generation price spread relative to the levels experienced during most of the prior decade. Since natural gas-fired generation is frequently the marginal (price-setting) source of electricity in many regions at different times of the year, lower natural gas prices may result in lower power prices.72 If lower power prices could be sustained (due to low natural gas prices or excess capacity conditions in power markets), a coal facilitys opportunity to recover the capital cost of retrofits is further deteriorated (especially if these low gas and power prices result in low coal plant capacity factors). In weighing these factors, many power plant operators may opt for plant retirement rather than retrofit their facilities that have reached the end of their useful life.
72 Federal Energy Regulatory Commission Electric Power Markets, see region-specific information (http://www.ferc.gov/ market-oversight/mkt-electric/overview.asp).
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Figure 4-14. Megawatt Hour-Weighted Fuel Cost of Generation and Coal-Gas Generation Cost Spread
Figure 4-14. megawatt hour-Weighted Fuel costs of Generation and coal-Gas Generation cost spread
14
GAS COAL COAL-GAS GEN COST SPREAD
80 COST SPREAD (DOLLARS PER MEGAWATT HOUR)
DOLLARS PER MILLION BTU
10
60
40 6
20 2 0 2000 0 2005 YEAR 2010
Sources: FERC Form 1; EIA 412; RUS 412; EIA 906/923; and Ventyx Energy Velocity.
Methodology
To conduct this analysis of the potential amount of coal plant retirements, these broad steps were taken: y Compiled relevant studies and extracted available data73 y Interviewed study authors to better understand their analysis and fill data gaps74 y Computed ranges and averages of key statistics across all studies, including estimated coal plant capacity at risk for retirement, lost coal plant generation from retiring plants, CO2 emission reductions, and increased natural gas demand. The 12 studies reviewed had varying assumptions and approaches. Some studies conducted qualitative assessments (e.g., filtering by age or lack of control
73 Twelve studies were used; the sample included research from private consultants, investment banks, trade associations, and the North American Electric Reliability Council. 74 Five research firms that conducted complex, integrated modeling of the impact of the new environmental rules on the U.S. coal-fired generation fleet were interviewed.
requirements) while other studies conducted integrated energy and emissions modeling. As a study of studies, the team paid particular attention to the differences in key variables among the studies: regulations/policies analyzed (e.g., CATR, HAPs MACT, coal ash, cooling water intake, and GHG regulation), base years, target years, heat rates, energy prices, modeling methodology, and control technology options and costs.
Results
The average estimated coal generating capacity retired through 2020 across all studies (regardless of scenario) is 58 GW, or roughly 18% of the 316 GW of total U.S. coal-fired generation capacity (Figure 4-15).75 All of the studies make the assumption that natural gas-fired generation will replace some or all of the retired coal generation capacity and, as a result, find (on average): a natural gas-fired generation increase of 295 TWh, with a natural gas
75 EIAs Electric Power Annual reports coal net-winter capacity of about 316GW; see http://www.eia.gov/cneaf/electricity/epa/ epat1p2.html.
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consumption increase of 2.2 trillion cubic feet (Tcf) per year (6 billion cubic feet per day), or about 10%, of current total U.S. natural gas demand. Additionally, studies find, on average, power sector GHG emissions fall by 254 million MtCO2e, or about 11%, of the 2005 power sector GHG emissions.76
2. Carbon Constraints Retirements are positively correlated to price on carbon i.e., cases with higher carbon prices saw increased retirements. Conversely, cases with lower (or zero) carbon prices had lower retirements. 3. Natural Gas Prices Retirements are negatively correlated to natural gas prices i.e., as natural gas price projections increase, the number of retirements decline, and vice versa. 4. Control Technology Costs Retirements are positively correlated to control technology costs i.e., the more expensive it is to comply with any or all regulations/policies, the greater the retirements.
Intra-Study Themes
While analyzing these studies in aggregate, four important themes emerged: 1. Stringency of Non-GHG Regulations Retirements are positively correlated to the stringency and the number of regulations applied to modeling exercises i.e., cases considering more uncertain regulations (e.g., coal ash and cooling water intake structures) in addition to more certain regulations (CATR and HAPs MACT) generally saw increased retirements.
76 Reductions are specific to this section, which may differ from results in earlier sections that analyze the impact of GHG emissions constraints without a focus on EPA regulations.
Other Considerations
As per the purpose of these rules, SO2, NOx, and mercury emissions will decrease, even if only accounting for the impact of retiring coal facilities. The studies
Figure 4-15. Summary of Results Average, Maximum, and Minimum Values across All Studies (2020) WAS Figure 8; ALSO Fig. 3-9 Figure 4-15. summary of results average, maximum, and minimum Valuesacrossall studies (2020)
MAXIMUM AVERAGE MINIMUM
700
700
101
496
4.7
326 58
295 254 2.2
12
70
68
50
0.4
COAL RETIREMENT GIGAWATTS
COAL RETIREMENT TERAWATT HOURS
INCREASED GAS GENERATION TERAWATT HOURS
CO2 REDUCTIONS MILLION METRIC TONS CO2 EQUIVALENT
INCREMENTAL GAS DEMAND TRILLION CUBIC FEET
Note: Only to scale within each statistic of interest.

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reviewed did not provide the reduction potential for these pollutants; however, reductions can be extrapolated using fleet-wide average emission factors. Table 4-7 summarizes the reduction potential.
POLICy CONSIDEraTIONS
Given the abundance of natural gas supplies in the United States, natural gas can play a significant role in the energy consumption patterns of the country. Accelerated deployment of end-use natural gas technologies may offer an important opportunity for reducing future GHG and criteria pollutant emissions.78 Earlier sections reviewed the macro impacts of carbon constraints on natural gas demand, the EPA rules impacting coal-fired power plants, and the lifecycle GHG emissions of natural gas relative to coal. In general, increased natural gas supplies, along with new environmental regulations, make natural gas an attractive option as a fuel in the electric power sector in the near- to midterm, particularly as a replacement fuel if there are significant coal plant retirements. However, in a scenario requiring deeper, long-term emission reductions (e.g., 80% reduction of GHGs by 2050), the contribution that natural gas would make to a lower carbon fuel mix may be less certain.
Limitations
Analyzing the impact of EPA regulations and carbon policy requires a comprehensive, dynamic modeling effort. This study of studies is not a substitute for such effort; rather, it is a collection of studies, some of which were conducted using modeling. Additionally, two important topics in this report were not covered: the impact of coal plant retirements on the reliability of the electric system and the need for improved/additional natural gas infrastructure (including both midstream and transmission pipeline infrastructure) to support the increased demand created by new gas-fired power generation. There is literature that discusses these issues, but at this time, these important considerations are beyond the scope of this report.77 The Federal Energy Regulatory Commission (FERC), the North American Electric Reliability Corporation (NERC), the EPA, the Department of Energy (DOE), and individual public utility commissions (PUCs) and independent system operators (ISOs) should carefully analyze these important issues.
77 See the North American Electric Reliability Corporations report (http://www.nerc.com/files/EPA_Scenario_Final.pdf), MJ Bradleys report (http://www.mjbradley.com/documents/ MJBAandAnalysisGroupReliabilityReportAugust2010.pdf), or CRAs report (http://crai.com/uploadedFiles/Publications/ CRA-Reliability-Assessment-of-EPAs-Proposed-TransportRule.pdf).
Methodology
The analysis in this section is based on a review of policy options that examined the wide range of policies that the United States could adopt as well as policies specific to the 15 clusters of technologies identified in Table 4-4 that hold special promise for
78 The term accelerated deployment has been defined by the National Research Council (2009) as the deployment of technologies at a rate that would exceed the reference scenario deployment pace, but at a less dramatic rate than an all-out crash effort, which could require disruptive economic and lifestyle changes that would be challenging to initiate and sustain.
Table 4-7. potential annual reductions in sulfur dioxide (so2), nitrogen oxides (nox), and mercury (hg)
Total Potential Switch from Coal to Gas Emissions (Short Tons) coal retirements natural Gas increases avoided emissions 295 terawatt hours
Sulfur Dioxide
1.9 million tons 0.0 million tons 1.9 million tons
Nitrogen Oxides
0.9 million tons 0.3 million tons 0.6 million tons
Mercury
6.0 tons 0.0 tons 6.0 tons
note: coal emissions factors for so2, nox, and hg 13 pounds per megawatt hour (lbs/mWh), 6 lbs/mWh, and 4.1x10^-5 lbs/ mWh, respectively. natural gas emissions factors for so2, nox, and hg 0.1 lbs/mWh, 1.7 lbs/mWh, and 0 lbs/mWh, respectively.
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utilizing natural gas as a means of reducing emissions. The study team commissioned eight case studies by combining some of those clusters. Each of those eight case studies then evaluated policies and technologies along seven dimensions: 1. Maturity of technology 2. Cost effectiveness of technology at reducing CO2 emissions 3. Public acceptance of technology 4. Regulatory and technical barriers 5. Role for government 6. Market barriers 7. Impact on jobs. It is instructive to explore how the seven evaluation criteria interact. To illustrate those interactions, there are two criteria that are likely to have a big impact on policy design: the cost of a technology (closely linked to maturity and ability to achieve a given level of emissions reduction) and barriers.
Figure 4-16 shows the results from plotting the eight case studies on these two dimensions for evaluation. Placement on this chart is sensitive to the definition of a relatively moderate cost as $20$40/MtCO2e out to 2030. For the bottom-left corner options, a carbon pricing policy can have a large impact if other market conditions favor a shift to gas (e.g., notably, lower natural gas prices). Indeed, if gas prices remain low relative to other fuels and conversion technologies, some opportunities in the bottom-left corner might unfold without much additional policy signal (but perhaps not to a degree to achieve substantial emissions reductions).79 Carbon price projections in many legislative actions that have been considered in the 111th Congress are expected to start off within this price range. However, in some cases e.g., higher carbon prices in the range of $66$80/MtCO2e competing lower/zero emitting
79 Many other factors are at work as well, such as regulations that affect the ability of incumbent coal plants to compete. For example, the levelized cost of emission controls due to EPA rules associated with the transport of air pollution, ash from combustion, and cooling water regulation (316(b)) could add up to $25/MWh to the cost of coal-fired generation.
Figure 4-16. Evaluating Natural Gas Use Options According to their Cost and Barriers for Policies Designed to Achieve Low to Moderate Reductions in GHG Emissions
Figure 4-16. evaluating natural Gas Use options according to their cost and barriers for policies designed WAS Figure 11 to achieve Low to moderate reductions in GhG emissions
RELATIVE COST OF GHG REDUCTIONS LOW MEDIUM HIGH
Carbon pricing, performance standards, incentives for retirements of existing plants have large e ect
FUEL CELLS NATURAL GAS CARBON CAPTURE AND SEQUESTRATION
NATURAL GAS APPLIANCES AVERAGE INDUSTRIAL COMBINED HEAT AND POWER INDUSTRIAL FUEL SWITCHING REFUELING/REPOWER BUILD NEW GAS FIRED PLANTS NGCC REDISPATCH LOW MEDIUM REGULATORY, MARKET, AND TECHNICAL BARRIERS
Regulatory reforms; research and development and other policies essential
HIGH
Notes: Low relative-cost of GHG reductions means that the technology is at or near competitive with low or zero cost per metric ton of CO2 emissions avoided. High relative-cost of GHG reductions means that much larger policy signals including possibly high costs for CO2 emissions would be needed for commercial deployment of the technology. GHG = greenhouse gas; NGCC = natural gas combined cycle.
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energy sources (e.g., nuclear and renewable energy sources) will become more attractive than natural gas.80 Deploying the technologies in the upper-right corner is much more complicated because they require a wider array of policies and higher price on carbon. RD&D incentives and subsidies will likely play a key factor in bringing many of these technologies to commercialization. However, accelerated deployment or even widespread adoption of these technologies will require overcoming significant regulatory, economic, and social barriers. For example lack of an adequate regulatory program, an overly stringent program, or public perception barriers may prevent the widespread penetration of natural gas CCS technology. The potential emissions reduction varies by each technology. Table 4-5 indicates CCS for natural gas, and natural gas appliances offer the largest theoretical reduction potentials through the use of natural gas. Other technologies have lower long-term emissions reduction potential, but offer the prospect of emission reductions that could appear more quickly and may also be less costly.
y Upcoming EPA regulations may result in substantial coal plant retirements, with corresponding increases in natural gas-fired generation and electric sector natural gas demand and decreases in carbon dioxide emissions. y Even with a price on carbon, market and regulatory barriers are many and complicated. Such obstacles include social barriers such as lack of education or information about the performance of technologies or public acceptance of infrastructure that prevent their adoption. Some technologies, such as higher efficiency appliances, could save users money at present, yet are not adopted due to such barriers. y For many opportunities, especially those in the power sector, the future role of natural gas depends heavily on the regulation and policy incentives that affect other energy sources (e.g., coal, nuclear, and renewables) and prudent development and operations of resources and infrastructure (e.g., management of hydraulic fracturing or methane emissions). For example, policies that accelerate coal plant retirements could result in significant increases in natural gas demand by the electric power sector. On the other hand, policies or congressional actions that maintain existing levels of coal-fired generation could result in reduced penetration of natural gas and reduced potential reductions of GHG and non-GHG emissions in the electric power sector. Similarly, requiring generation/sales quotas of renewable energy may also delay and reduce the penetration of natural gas. y For some technologies, such as natural gas-based fuel cells, the potential for significant emissions reductions will be realized only with sustained and targeted RD&D programs. While continued RD&D also is needed to reduce the cost of CCS for natural gas-fired power plants, a key need here is also for sound policies for CCS deployment (see Text Box, CCS Recommendations).
Findings
The analysis leads to these main findings about the context in which deployment of natural gas technologies might be pursued as a policy objective: y A portfolio of policies could enable accelerated deployment of several natural gas end-use technologies to effectuate both near-term and longterm emissions reductions. y A price on carbon (implied or explicit) or similar regulatory action that recognizes and prices the environmental externalities of fossil fuel emissions will help to accelerate shifts from power generation that burns coal to generation technologies that rely on natural gas, including higher use of existing natural gas-fired power plants as well as the construction of new natural gas-fired power plants.
80 See Steven H. Levine, Frank C. Graves, and Metin Celebi, Prospects for Natural Gas Under Climate Policy Legislation: Will There Be a Boom in Gas Demand? The Brattle Group Discussion Paper, March 2010, page 6. See also Steve Fine and Joel Bluestein, ICF International, GHG Regulatory Update and Economic Analysis, presented at INGAA Foundation Meeting, Miami, November 7,2009.
Evaluation of Policy Options and Frameworks

Employing the seven dimensions listed earlier, Table 4-8 summarizes the policies that could accelerate the deployment of the natural gas end-use technologies identified in the prior section. Within the suite of policies, there are many different factors to consider when choosing among different policies and
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Table 4-8. examples of policy options and Frameworks for accelerated deployment of natural Gas end-Use technologies
Type of Policy Possible Effects on Gas Consumption and Emissions Case Study Illustrations*
Regulatory policies that affect gas and other energy sources

a price on co2 emissions (cap &trade or carbon tax) power plant greenhouse gas emission performance standards alternative interconnection standards Would encourage shift from higher emission technologies (e.g., coal) to lower emissions for mature technologies in the near term similar effects on fuel mix as a price on carbon could allow some gas-based technologies to compete with incumbent power supplies more effectively could allow some natural gas technologies to earn valuable credit as renewable or clean energy source Would level the playing field for all sources of energy redispatch away from high carbon plants; repower/refuel high carbon plants; build new gas plants; carbon capture & storage redispatch away from high carbon plants; build new gas plants industrial combined heat and power (chp); redispatch redispatch/repower from high carbon plants; build new gas plants, industrial chp; commercial chp, carbon capture and sequestration (ccs) redispatch/repower from high carbon plants; build new gas plants, industrial chp; commercial chp
alternative clean energy mandates
elimination of long-term subsidies or preferential policies for competing energy sources (renewable, nuclear, and coal)
Incentive policies that could be focused on gas-based technologies

Financial incentives for gas-fired technologies, such as tax depreciation rules or limited assurances of market shares for early adopters Fast tracking of environmental permitting targeted research, development, demonstration, and deployment Loan guarantees, such as for infrastructure development or state/ utility low-interest loans to consumers could lower the cost of gas-fired technologies for some firms industrial chp; fuel cells
could make it easier to site and operate gas-fired technologies could lead to improved performance of gas-fired technologies, making them more competitive. could make it easier and less costly to purchase natural gas technologies
industrial chp; natural gas appliances; redispatch; repower/refuel; ccs industrial chp; distributed fuel cells; carbon capture & storage; fuel cells; highefficiency residential appliances natural gas appliances, redispatch, ccs, repower/refuel
Other policies
positive incentives to encourage retirement of high-emitting or inefficient plants, such as payments for stranded costs in existing plants stricter regulation of existing and new coal plants ease siting of co2 pipelines and clarify assignment of long-term post-closure liability for stored co2 building performance standards Would reduce high-emitting or inefficient power supply and require more dispatch and possible new building of gas-fired plants Would reduce coal-based power supply and require more dispatch and possible new building of gas-fired plants Would improve prospects for ccs, which could advantage both coal-based and gas-based ccs could improve ability to install and operate on-site technologies, such as natural gas appliances could improve awareness of emissionreducing opportunities redispatch away from high carbon plants; build new gas plants
redispatch away from high carbon plants; build new gas plants; repower/refuel coal and oil plants carbon capture & storage
natural gas appliances; fuel cells natural gas appliances
educational programs and labeling
* see topic papers under carbon and other emissions in the end-Use sectors for further illustration.
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CCS recommendations
The primary hurdles to implementation of carbon capture and sequestration (CCS) are the lack of a national policy for reducing GHG emissions; the high costs associated with constructing and operating CCS facilities, particularly the capture component; and lack of a clear and equitable policy on managing long-term responsibility for storage sites. The array of policy actions that could accelerate deployment of CCS technology include: y Support for sub-scale and full-scale demonstration and deployment of commercially ready CCS technology on natural gas plants. there are various trade-offs to pursuing some policies over others. Among these factors and tradeoffs are the following: y Timing. Some policies offer the prospect for relatively near-term emissions reductions (i.e., over the next 5 to 10 years) while others may only make a substantial impact in the long-term (20 years or more). For example, policies like finalization of EPA regulations, and methane reductions along the natural gas fuel cycle, offer opportunities for nearterm reductions. Other potential policies, such as requiring CCS on new gas-fired power plants, will not result in significant emission reductions for a few decades (when substantial deployment is achieved). To achieve long-term goals most effectively, CCS RD&D policies and policies surrounding residential/commercial appliances may need to be initiated in the near term. y Cost. Choosing policy options that cause substantial investment today in current technologies might risk abandoning other promising technology options that could be an important component of an overall policy designed to maximize emission reductions over the long run. y Environmental Impact. Policies that offer the largest long-term emissions reductions potential may also require the highest-cost alternative or an alternative that does not result in near-term emission reductions. Such trade-offs need to be carefully weighed. Clearly, there are other factors that could be important in the development of policies other than those listed (such as economic impact, job creation, etc.). Moreover, there is interplay between these different 356 y Legal and regulatory frameworks for the design and operation of CCS including capture, transport, and storage. These frameworks would include accelerated right-of-way and environmental approval for CO2 pipelines from the power plant to the storage site. y Policies that provide for a clear transfer of longterm responsibility for closed storage sites, after appropriate site integrity verification, to a government/public entity for long-term management. factors with some policies favorable to one factor but unfavorable to another. Some policies might serve to promote only a single technology while others may promote multiple technologies.
Recommendations
Because of well-known and documented market barriers, the main recommendation is that if the United States wants to adopt an energy and environmental strategy that promotes economic, energy, and environmental security, it must work simultaneously and strategically on multiple policy fronts. That is, policymakers when balancing energy, environment, and economic security should consider the tradeoffs between near-term opportunities (e.g., finalization of non-GHG EPA regulations) and long-term requirements (e.g., if large reductions in GHG emissions are required). Thus, policymakers should take a phased-in approach while recognizing the complexities of the energy industry related to infrastructure turnover, reliability, and sound environmental policies. The following policies should be pursued or considered as part of this portfolio approach to balance the environmental and energy goals of the study.81 y Provide regulatory certainty to the power sector by finalizing the non-GHG EPA regulations applicable to the power sector.82 Today, the uncer81 See the Study Request section in the Preface and the Executive Summary of this report. 82 EPA regulations include rules identified in the Impact of NonGHG EPA Rules on the Power Sector section of this chapter. The NPC does not take a position on scope and content of these EPA rules impacting the power sector other than the findings in that section.
tainty associated with the pending EPA regulations may prevent electric generating companies from making decisions regarding whether and when to retire aging coal-fired power plants. Policymakers should take into account the benefits for market conditions from the finalization of EPA regulations affecting the power sector, especially those regulations not related to controlling GHG emissions. These benefits include reduced uncertainty in the market and provision of near-term investment signals, as well as the reduction of emissions of sulfur dioxide, nitrogen oxide, mercury, and particulates, along with collateral reductions of GHG emissions from power generation. As discussed earlier, many of these plants are older plants that may be reaching the end of their useful life, some in excess of 50 years in age. A review of existing research suggests that roughly 58 GW of aging coal plant capacity might be retired due to potential EPA regulations. Much of the capacity associated with these retirements would be replaced by natural gas-fired generation and result in significant increases in natural gas demand and reductions in CO2 and other emissions. While there may be significant issues that need to be resolved that are beyond the scope of this chapter (e.g., reliability, specific control requirements, human resources, and infrastructure needs), power plant operators need regulatory clarity and certainty with respect to the type of required emissions controls and other environmental regulations. Resolution of the EPA rules, as well as compliance timelines and decisions affecting individual plants, must take into consideration reliability impacts, recognizing that there are a variety of tools avail-
able to address location-specific reliability issues. The FERC, NERC, EPA, DOE, and individual PUCs and ISOs must carefully analyze these important issues and develop a comprehensive plan to address these issues. Improved building codes/standards, appliance codes/standards, tax credits, and education programs to encourage more efficient energy use, which can include deployment/installation of new residential natural gas appliances, should be implemented through a joint government (federal/state/local) and industry (distribution and other companies) partnership. Specific barriers (e.g., social, contractual, zoning) in the residential and commercial sector must be overcome. Since new residential natural gas appliances offer such a significant emissions reduction potential over the long-term, a variety of policies must be pursued to achieve this potential. (See Text Box, New Residential Appliances and Equipment, for additional recommendations.) y Consider an appropriate carbon policy for internalizing the cost of carbon impacts into fuel prices. In his letter asking the NPC to conduct this study, the Secretary of Energy asked the NPC to examine the contribution that natural gas could make in a transition to a lower carbon fuel mix. He did not ask the NPC to weigh in on the merits of adopting a climate policy.83 The NPC recognizes that the United States, with its market-based economy,
83 The merits of a particular carbon policy are beyond the scope of the study and the NPC does not endorse a particular carbon policy. The study also did not review macroeconomic, international competitiveness, health or environmental benefits, or global energy security of a carbon policy.
New residential appliances and Equipment

The primary barriers to deployment of new residential gas appliances with efficiencies of over 90% are technology development, first cost, split incentives (owner vs. renter), and lack of gas mains (in some sections of the country). Policies that could accelerate new gas appliances include: y More aggressive federal energy efficiency standards for appliances based on full fuel cycle analysis, continued DOE support for model building energy code development, and enhanced DOE support (such as for training and technical assistance) for state and local adoption and enforcement of such codes. y State and local education programs to help consumers make more educated choices. y Tax credits for installing higher-efficiency, lowerCO2 emitting equipment. y Technology RD&D to help lower the cost of higher-efficiency natural gas equipment for the home, including condensing water heaters, instantaneous water heaters, and gas heat pumps.
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will find it difficult if not impossible to substantially further decrease its carbon emissions without introducing higher costs or regulatory controls associated with GHG emissions from development, delivery, or combustion of fossil fuels. Absent a price on carbon, energy efficiency, and those power sources with lower carbon intensity such as renewables, nuclear, and natural gas will tend to be undervalued as individuals, businesses, and governments make decisions. A price on carbon, implied or explicit, or similar regulatory action that prices the environmental costs of fossil fuel emissions, will help to accelerate shifts to lower carbonintensity sources of electric power. As policymakers consider energy and environmental policies, they should consider a carbon policy that recognizes the abundant natural gas resource base while ensuring the carbon price signal is not distorted to favor one energy source (i.e., without subsidies or preferential programs or policies). Such a policy could take the form of an explicit carbon price through market-based policies such as a carbon tax or other market mechanism that allows for trading of carbon emission permits. Designed appropriately, a GHG policy could reduce GHG emissions, provide the economic incentive for increased natural gas use as well as for the development of other low- to zero-emitting technologies including renewables, nuclear, coal with CCS, and natural gas with CCS. Decision makers could also consider other policies with an implied price on carbon, such as a performance standard, a clean energy standard, or coal plant retirement incentives. For example, if the United States proceeds with a Clean Energy Standard (CES),84 then such a CES policy should evaluate the inclusion of natural gas as a qualified clean energy source for both new and existing natural gas power plants. Preliminary research indicates that inclusion of natural gas for existing and new natural gas plants may have a significant effect on
84 Clean Energy Standard is a market-based policy approach that mandates a certain percentage of electricity generation from clean energy sources beyond non-hydro renewables.
cumulative CO2 emissions relative to scenarios that do not include emissions-based market mechanisms.85 y Consider long-term strategies for prudent development in the development of existing and new natural gas capacity. These actions should include:
A robust industry-government partnership
to promote technologies, protocols, and practices to measure, estimate, and manage (reduce) natural gas emissions in all cycles of production and delivery. A significant amount of the emissions in the natural gas value chain occurs to facilitate safe and reliable operations (e.g., operations of actuators and relief valves). However, regardless of the uncertainty with the emissions estimates and measurements, continuing to adopt and employ EPA Gas STAR technologies or equivalent technologies will reduce methane emissions along the natural gas system while maintaining high safety and reliability standards. Barriers to adoption of these technologies should be fully evaluated and the industry and government must work together to overcome these barriers. CCS for gas-fired power plants. The development of CCS for gas-fired power plants is important in that a significant amount of natural gas-fired combined cycle capacity is expected to be built in the next two decades. If deep GHG emissions reductions are ultimately required (e.g., 80% by 2050), CCS or other lower emitting technologies are vital to meet the emissions goals. A coherent long-term vision, dedicated focus, and adequate funding must be made by all stakeholders nowto implement the required RD&D and deploy commercially ready technologies to meet longerterm, deeper reduction targets. (For additional recommendations, see Text Box entitled CCS Recommendations earlier in this chapter.)
Research, development, and demonstration of
85 Karen Palmer, Richard Sweeney, and Maura Allaire, Modeling Policies to Promote Renewable and Low-Carbon Sources of Electricity, Resources for the Future. June 2010; revised October 2010.
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Chapter Five
Macroeconomics
Abstract
This chapter is separated into four major sections to address four framing questions (discussed in the text box at the end of the Summary section). First, the Macroeconomic Impacts section addresses the natural gas and oil industrys significant impact on U.S. GDP, employment, and government revenues. Second, the Workforce Challenges section examines the aging workforce of natural gas and oil technical professionals and reviews enrollment trends in educational focus areas of importance to the industry. Third, the Volatility section addresses the historical drivers of natural gas and oil price variations, the impacts that price shocks can have on the economy, and the impacts of unconventional resource development on commodity price elasticity. Lastly, the Business Models section outlines the process that successful companies have used to identify and develop the U.S. natural gas and oil resources, and the governments role in domestic natural gas and oil resource development. for, produce, refine, transport, and market natural gas and crude oil products employ millions of Americans directly and indirectly. These companies also pay taxes at the federal, state, and local levels. The natural gas and oil industry is the third largest payer of federal corporate income taxes after the manufacturing and finance industries. The natural gas and oil industry, however, faces serious challenges to its productivity and growth. Compared to other industries, the average age of the workforce in the natural gas and oil industry is older. A large gap exists between the number of retiring technical professionals and the number of graduates coming out of junior college, college, and graduate school with the knowledge and skills required to work in the natural gas and oil industry. Part of this is pure demographics as the baby boomer generation has begun to retire from the workforce. Another part is not enough industry activity on university campuses and insufficient government study grants to undergraduate and graduate-level engineering and geosciences projects that relate to the natural gas and oil industry. Despite a recent uptick in enrollments in petroleum
CHAPTER 5 MACROECONOMICS
SUMMARY
The benefits of plentiful natural gas and crude oil reach far beyond their use as transportation, power generation, or direct home heating fuels. Manufacturers rely on petrochemical products as building blocks for the production of electronics (including computers and cell phones), plastics, medicines (and medical equipment), cleaning products, fertilizers, building materials, adhesives, clothing, and much more. The vital role natural gas and crude oil play in almost every aspect of our personal and professional lives underscores the importance of safely and efficiently producing our domestic resources, conserving their use through energy-efficient end-use products and practices, and developing technologies to reduce the environmental impact of producing and consuming them. In addition to fueling vehicles, heating homes, generating electricity, and functioning as a necessary component of many of the products upon which people rely, natural gas and crude oil serve as a significant contributor to the U.S. economy. Companies that explore
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engineering and natural gas- and oil-focused geosciences programs, the student population will not have the raw numbers or experience to replace the number of retiring, experienced professionals. Natural gas and crude oil price volatility, like the workforce demographics, poses a challenge for the natural gas and oil industry and the consumers of its products. Crude oil remains a global commodity, subject to global supply and demand fundamentals, and as a dollar-denominated commodity the impact of U.S. dollar currency movements. However, natural gas, with vast domestic supplies, is more insulated from global supply and demand shocks. The development of drilling, completion, and production technologies that enable producers to unlock natural gas resources from unconventional sources has created a unique opportunity for U.S. natural gas end users. Prior to this unconventional resource revolution, uncertainty regarding expectations of future natural gas price levels led many consumers, such as electricity producers or vehicle manufacturers, to avoid becoming more exposed to natural gas price volatility. However, our nations unconventional natural gas resources now present end users with a more reliable source of natural gas that has the ability to be more responsive to price movements than conventional natural gas sources. The business model employed by private-sector, forprofit companies in the United States to develop our domestic natural gas and oil resources relies on many of the same fundamentals as other industries, includ-
ing free markets, rule of law, regulatory oversight, and appropriate taxation. Other countries have chosen different business models that vary from (1) somewhat similar to the U.S. model on one extreme to (2) significantly more government involvement in the development of their resources on the other extreme. The business model in the United States helps explain the success that U.S. companies (and many foreign companies operating in the United States) have had exploring for, developing, transporting, and selling natural gas and crude oil in the United States. This business model also fits well with the extensive amount of development required to produce our domestic unconventional natural gas and crude oil resources. Unconventional resources present the United States with a new opportunity to enhance its energy security, promote economic growth and environmental stewardship, and advance technological leadership in the natural gas and oil industry.
MACROECONOMIC IMPACTS OF THE NATURAL GAS AND OIL INDUSTRY ON THE DOMESTIC ECONOMY
The natural gas and oil industry is an important contributor to the U.S. economy, touching almost every aspect of the energy market, including transportation, power generation, home heating, and industrial processes. The industry is a major contributor to the United States gross domestic
Framing Questions
The Macroeconomic Subgroup of the Coordinating Subcommittee was asked to address several specific framing questions: 1. What are the contributions to the domestic economy of the U.S. natural gas and oil industry? y Employment direct, indirect, and induced y Economic activity y Federal, state, and local revenues y Regional composition and contributions. 2. What are the current age demographics in the workforce in the natural gas and oil industry (and its regulators)? What steps can the industry (and the government) take to address any workforce needs? 3. What are the primary causes of natural gas and oil price volatility? What impact does this have on natural gas and oil consumers? How does this influence capital investment in natural gas and oil production and consumption technologies? 4. Are current industry business models adequate for the successful deployment of new domestic natural gas and oil production and end-use consumption technologies? Are new business models needed, and if so, what might they look like?
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Figure 5-1. Largest 2010 Global GDPs Compared to the U.S. Oil And Gas Industry (Billions of product (GDP), employment, labor income, and tax Figure 5-1. Largest 2010 Global GDPs revenues to federal, state, and local governments. Compared to the U.S. Oil And Gas Industry (Billions of U.S. Dollars) In 2010, the U.S. GDP exceeded $14.5 trillion, approximately 50% larger than the next largest (but UNITED STATES $14,720 rapidly growing), the Chinese economy, as measured by purchasing power parity.1 Estimates for the comCHINA $9,872 bined operational and capital investment impacts of the domestic natural gas and oil industry on the U.S. JAPAN $4,338 economy range as high as $1 trillion of value added to GDP.2 Using this estimate, the domestic natural gas and oil industry is responsible for over 7% of the U.S. INDIA $4,046 economy. To put this in perspective, Figure 5-1 illustrates where the natural gas and oil industry sits relaGERMANY $2,960 tive to the GDP of the 20 largest global economies.
The natural gas and oil industrys impact goes beyond the operations of the companies actively engaged in exploration and production (upstream), transportation (midstream), and refining and marketing (downstream) of crude oil, natural gas, and petroleum products. Through their operations and capital investment activities, natural gas and oil companies buy goods and services from suppliers and contractors, who in turn employ people and buy goods and services of their own. In addition to finding, developing, processing, and delivering critical natural gas and oil resources that fuel our economy, the natural gas and oil industry employs millions of Americans. Estimates of the total direct, indirect, and induced3 number of people in the United States employed as a result of the natural gas and oil industry range as high as 9.2 million jobs.4 Using this figure, the natural gas and oil industry is directly and indirectly responsible for approximately 6.7% of non-farm payrolls. Of these 9.2 million total jobs, 2.2 million jobs are directly engaged in upstream, midstream, and downstream activities.5
1 A nations GDP at purchasing power parity exchange rates is the sum value of all goods and services produced in the country valued at prices prevailing in the United States. 2 PricewaterhouseCoopers, The Economic Impacts of the Oil and Natural Gas Industry on the U.S. Economy in 2009: Employment, Labor Income, and Value Added, May 2011, page E-2. 3 The term indirect includes impacts from businesses that supply goods and services to the natural gas and oil industry. The term induced includes impacts from household spending of income generated either directly or indirectly from the natural gas and oil industry. 4 PricewaterhouseCoopers, Economic Impacts, page E-2. 5 PricewaterhouseCoopers, Economic Impacts, page 12.
RUSSIA $2,229 BRAZIL $2,194 UNITED KINGDOM $2,189 FRANCE $2,160 ITALY $1,782 MEXICO $1,560 SOUTH KOREA $1,467 SPAIN $1,376 CANADA $1,335 U.S. OIL AND GAS INDUSTRY $1,037 INDONESIA $1,033 TURKEY $958 AUSTRALIA $890 IRAN $864 TAIWAN $824
Sources: CIA World Factbook, 2010; PricewaterhouseCoopers, The Economic Impacts of the Oil and Natural Gas Industry on the U.S. Economy in 2009, May 2011.
361
Jobs focused on the exploration and production of domestic natural gas and oil resources, by their nature, must be performed domestically with only a few limited exceptions. They cannot be performed in another country by lower-paid labor. Also, people employed in the natural gas and oil industry, particularly those involved in exploration and production, refining and distribution, earn above-average wages. Figure 5-2 illustrates average annual wages for several of the categories of natural gas and oil industry jobs as reported by the U.S. Bureau of Labor Statistics for the most recent available data (May 2010). Estimates of total labor income (defined as wages, salaries, and benefits) from the U.S. natural gas and oil industry range as high as $534 billion.6 Most of the studies on the North American industrys macroeconomic impact have used input-output analysis in one way or another. Input-output models relate a specific industrys or regions output value to the goods and services it purchases as inputs from other industries and/or regions. In practice, a single direct impact measure, such as employment, is usu6 PricewaterhouseCoopers, Economic Impacts, page E-2.
ally used first to estimate other direct impacts, such as gross output, value added, income, and government revenue. Then, these direct measures are fed into the IMPLAN system (a regional economic analysis system, short for IMpact on PLANning) to obtain the overall impacts on all variables. In addition to reporting the direct, indirect, and induced impacts in levels, researchers also use the input-output multipliers to describe the combined impacts. For example, an employment multiplier describes the ratio between the overall number of jobs gained in the economy versus one additional job in a particular industry and/ or region. This standardized representation of the macroeconomic impact is particularly useful in comparing different studies findings. Input-output modeling is a powerful tool, but it does have some limitations. By its nature, inputoutput analysis relies on a static snapshot of the economy, based on fixed linear relationships between inputs and outputs that hold at a particular point in time. In reality, however, technological change modifies the technical relationships between inputs and outputs. A good example is improvements in drilling technology that require less of everything (steel,
Figure 5-2. Oil and Gas Industry Average Annual Wages Compared to U.S. Average Figure 5-2. Oil and Gas Industry Average Annual Wages Compared to U.S. Average (U.S. Dollars) (U.S. Dollars)
U.S. AVERAGE $44,410
GASOLINE STATIONS PETROLEUM AND PETROLEUM PRODUCTS WHOLESALERS PETROLEUM AND COAL PRODUCTS MANUFACTURING NATURAL GAS DISTRIBUTION PIPELINE TRANSPORTATION OIL AND GAS EXTRACTION
$21,890 $44,750 $66,280 $64,450 $64,820 $77,410
Source: U.S. Department of LaborBureau of Labor Statistics, May 2010.
362
drilling services, labor) for any given amount of reserve additions. In addition, input-output modeling cannot analyze directly the effect of relative prices, which lead both producers and consumers to substitute, to the extent they can, less costly goods and services, or do with less. This effect works more powerfully in the longer run. For example, expensive gasoline induces people to either drive less or replace their cars with higher mileage cars. Despite the differences in scope of analysis of various studies, industry definition, data source, and modeling treatments, the multiplier effects estimated by the studies are remarkably consistent for all three economic variables employment, labor income, and
value added. Many of the studies include impacts of operating expenses or capital expenditures, or both. The operational impact is felt mostly in services, finance/insurance/real estate/leasing, wholesale and retail trade, transportation, manufacturing, and construction. The capital investment impact goes mainly to services, manufacturing, trade, and transportation. Table 5-1 summarizes the multipliers for several national and regional studies that analyzed impacts of both operational and capital expenditures on employment and value added. Employment multipliers ranged from 1.53 total jobs for each direct job in West Virginia (principally focuses on upstream activity in the Marcellus Shale) to 4.54 total jobs for each
Table 5-1. Summary of Multipliers Observed in Economic Impact Studies

Scope Marcellus Shale Gas* Marcellus Shale Gas Marcellus Shale Gas Marcellus Shale Gas Oil and Gas# O shore Oil and Gas Oil and Gas

Table 5-1. Summary of Multipliers Observed in Economic Impact Studies Employment Multipliers (Jobs) 1.53 1.57 2.05 2.02 1.92 2.67 3.56 1.86 4.18 4.54 1.0X 3.5X 6.0X 1.0X
State / Region West Virginia West Virginia Pennsylvania Pennsylvania New York Colorado
**
Year 2008 2009 2008 2009 2015 2008 2007 2010 2007 2007
Value-Added Multipliers ($) 1.48 1.99 1.96 1.98 1.73 1.34 2.33 2.24 2.5X 4.0X
Marcellus Shale Gas
Gulf of Mexico Texas U.S. Total U.S. Total
Eagle Ford Shale Oil and Gas Natural Gas
* # **
National Energy Technology Laboratory, Projecting the Economic Impact of Marcellus Shale Gas Development in West Virginia: A Preliminary Analysis Using Publicly Available Data, U.S. Department of Energy, March 31, 2010, page IV. Considine, Timothy, The Economic Impacts of the Marcellus Shale: Implications for New York, Pennsylvania, and West Virginia, National Resource Economics, Inc., July 2010, page 24. Considine, Timothy and Robert Watson, An Emerging Giant: Prospects and Economic Impacts of Developing the Marcellus Shale Natural Gas Play, The Pennsylvania State University, College of Earth and Mineral Sciences, July 24, 2009, pages 25-26. Considine, Timothy, Economic Impacts, pages 20-21. Considine, Timothy, Economic Impacts, page 29. McDonald, Lisa, Booz Allen Hamilton, and David Taylor, Oil and Gas Economic Impact Analysis, Colorado Energy Research Institute, Colorado School of Mines, June 2007, page XI. IHS Global Insight, The Economic Impact of the Gulf of Mexico O shore Oil and Natural Gas Industry and the Role of the Independents, July 2010, pages 8-9. Americas Natural Gas Alliance, Economic Impact of the Eagle Ford Shale, Center for Community and Business Research, The University of Texas at San Antonio, February 2011, page 4. PricewaterhouseCoopers, Economic Impacts, page 17. IHS Global Insight, The Contributions of the Natural Gas Industry to the U.S. National and State Economies, September 2009, page 1.
363
direct natural gas industry job in the United States as a whole (based on a broader analysis of the entire value chain from extraction through delivery). Valueadded multipliers ranged from $1.34 of total value added in the Eagle Ford Shale for every $1 of direct value added to $2.33 of total value added for every $1 of value added from the U.S. natural gas and oil industry as a whole. Most of the variance in multipliers for regional studies compared to broader, national studies is due to the fact that many of the domestic onshore unconventional developments are relatively new in their development (e.g., Marcellus and Eagle Ford) and the regional studies, in some cases, were published several years ago. Many states rely heavily on natural gas and oil industry participants as critically important employers and economic contributors. Since many variables beyond the presence of natural gas and oil company activity (e.g., geographic issues, presence or absence of other industries, population distribution, etc.) contribute to a states economic well-being, one cannot conclude that natural gas and oil industry activity alone causes a state to rank highly on employment, per capita income, or other economic comparisons. However, all of the states that rank in the top 10 in terms of natural gas and oil value added as a percent of state GDP have state unemployment rates below the U.S. national average. Six of those ten states have state GDP per capita in excess of the U.S. national average. Figure 5-3 shows the ten states with the greatest and least value-added contribution from the natural gas and oil industry as a percentage of total state GDP, and their corresponding state unemployment and state GDP per capita.
Coal Industry
Studies that estimate the impacts of the coal industry on the domestic economy use a similar input-output model approach as studies on the impacts of the natural gas and oil industry on the domestic economy. Penn States 2006 study used the IMPLAN model to estimate that the coal industry will contribute, directly and indirectly, $1.05 trillion (in 2005 dollars) of gross economic output, $362 billion of annual household incomes, and 6.8 million jobs in the year 2015.7 However, the scope of the Penn State (2006) study included end users of coal (specifically, coal-fired electricity generators) in its model that generated these statistics, which complicates any comparison to PricewaterhouseCoopers (2011) statistics related to the natural gas and oil industry. Moore Economics, in another study using input-output modeling methodology, estimates that each coal mining job creates 3.5 additional jobs and that each $1 of direct payroll in the coal mining industry generates an additional $1.98 of indirect payroll.8 Moore Economics also estimates that the coal mining industry pays $8.1 billion in total payroll and income taxes. The electricity generation industry accounts for over 90% of the total U.S. coal consumption. As a result of this predominance, developments in the power sector directly affect the coal industry. From 2008 to 2009, domestic coal consumption decreased by 10.7% following an equivalent reduction in coalfired generation. This was due to the recessions impact on electricity demand and, in some regions, the displacement of coal by natural gas, which benefitted from low prices.9 The narrowing price differentials between coal and natural gas observed in 2008 were further exacerbated by a rapid increase in coal spot prices that followed a surge of Appalachian coal demand from overseas during that year. (See Figure 4-14 in ChapterFour for an illustration of the megawatt hour-weighted fuel costs and coal-gas generation cost spread.)
7 Rose, A. Z., & Wei, D., The Economic Impacts of Coal Utilization and Displacement in the Continental United States, 2015, 2006, page 4. 8 Moore Economics, The Economic Contributions of U.S. Mining in 2007 Providing Vital Resources for America, February 2009, page 20. 9 National Mining Association, 2009 Coal Producer Survey, 2010, page 1.
Related Industries
A healthy domestic natural gas and oil industry promotes economic growth as described above and the support of an increased use of natural gas as a transportation and/or power generation fuel promotes energy security and environmental benefits. However, the growth of the domestic natural gas and oil industry, particularly that of natural gas which displaces other energy sources, could negatively affect employment and value added from industries providing other fuel sources, such as coal, and businesses that are significantly supported by the coal industry, such as large freight railroads, also called Class I railroads. 364
Figure 5-3. Comparison of Unemployment and GDPs per Capita in States with and without a Significant Oil and Gas Presence
STATE UNEMPLOYMENT U.S. AVERAGE = 9.0% 27.1% 6.1% 8.1% 6.2% 8.1% $42,755 $63,846 $44,970 $39,913 $32,859 $34,360 $61,248 7.4% 3.6% 6.8% 7.4% 8.1% 8.4% $65,199 $43,032 $39,881 24.3% 24.3% 22.8% 16.9% 11.8% 10.8% 10.7% 10.6% 10.5% U.S. AVERAGE = $41,632 STATE GDP PER CAPITA
Figure 5-3. Comparison of Unemployment and GDPs per Capita in States with and without a Signi cant Oil and Gas Presence
OIL AND GAS VALUE ADDED AS % OF GDP
OKLAHOMA
WYOMING
TEXAS
LOUISIANA
ALASKA
TOP 10 STATES
NORTH DAKOTA
KANSAS
MONTANA
NEW MEXICO
DELAWARE
ARIZONA 3.0% 3.0% 2.9% 2.9% 7.4% 10.0% 6.3% 9.9% 11.1% 6.9% 9.5% 2.8% 2.8% 2.7% 2.6% 2.2% 1.4% 9.7% 8.0%
9.5%
$35,000 $49,976 $38,437 $38,140 $36,252 $46,609 $30,845 $35,653 $44,917 $146,359
NEW YORK
NORTH CAROLINA
WISCONSIN
GEORGIA
VIRGINIA
BOTTOM 10 STATES
SOUTH CAROLINA
FLORIDA
MARYLAND
DISTRICT OF COLUMBIA
365
Sources: PricewaterhouseCoopers, 2009; U.S. Bureau of Labor Statistics, March 2011; and Bureau of Economic Analysis, 2009.
Furthermore, economic, regulatory and, more recently, environmental concerns have led to a shift in the supply of new power generation capacity. Although coal generated approximately 45% of the nations electricity in 2009, approximately half of all new electric power generation capacity additions were natural gas-based. In general, coal remains the lowest cost fuel for electric power generation. That advantage is largely offset, however, by the much larger capital investments required for coal generation plants versus natural gas plants and the better efficiency rates and operational flexibility available with the latter. The cost of coal for electricity generation increased from $1.20 per million British thermal units (MMBtu) in 2000 to $2.21 per MMBtu in 2009, or 84.2%. By comparison, the cost of natural gas for electricity generation increased from $4.30 per MMBtu in 2000 to $4.74 per MMBtu, or 10.2%, although with much greater volatility than coal. That volatility was prominent in 2009, when the average delivered cost of natural gas fell by 47.5% to $4.74 per MMBtu.10 The
10 U.S. Energy Information Administration, Electric Power Annual.
historical volatility in natural gas prices has been a disadvantage in comparison to coal as a fuel for electricity generation. The increase in the elasticity of supply of natural gas due to technological innovation has the ability to mitigate this historical disadvantage. In 1996, natural gas-fired power generation capacity accounted for 23.5% of total installed capacity in the United States. In September 2010, that share had grown to 40.8%. In fact, while coal-fired installed capacity has remained largely unchanged over the last 20 years, natural gas-fired capabilities have almost tripled. Productivity improvements, efficiency measures, environmental concerns, regulatory challenges, and other factors have contributed to the 40.4% decrease in coal mining employment from 1988 to 2008. Figure5-4 illustrates the significant decline in direct coal mining employment from 1988 to 2008. According to the Bureau of Labor Statistics, the median earnings for people in the coal mining industry were $23.11 per hour for the May 2010 period, the latest for which data are available. This equates to approximately $48,069 per year.
Figure 5-4. Direct Employment in the Coal Mining Industry

160
OFFICE WORKERS INDEPENDENT SHOPS AND YARDS PROCESSING PLANTS MINING SURFACE AND UNDERGROUND
Figure 5-4. Direct Employment in the Coal Mining Industry
1,400 1,200 1,000 800
EMPLOYEES THOUSANDS
120
DOMESTIC COAL PRODUCTION MILLIONS OF TONS
80 600 400 200 0 0
40
1988
1990
1992
1994
1996
1998 YEAR
2000
2002
2004
2006
2008
Source: Based on National Mining Association, Mining Industry Employment in the United States by Sector, 19852008, January 2010; Energy Information Administration.
366
COAL PRODUCED MILLIONS OF TONS
Railroad Industry
Domestic coal production is focused on a few key coal-rich areas like the Appalachian Mountain and the Rocky Mountain regions and several Midwestern states. However, coal is consumed widely across the country. The United States extensive railroad system accounts for approximately 70% of coal deliveries and makes this wide distribution of coal logistically possible and cost-effective. In 2008, coal accounted for approximately 25% of carloads, 45% of tonnage, and 23% of the $60.5 billion of gross freight revenue for the Class I railroads.11 Clearly, the performance of the railroad industry and the coal industry are linked. By comparison to the figures previously mentioned for the coal and the natural gas and oil industries, the U.S. freight railroad industry employed 183,743 people in 2008 who earned an average of $71,303 in 2008.12
In addition, natural gas and oil companies pay significant amounts in other forms of taxes, including excise fuel taxes, sales, property, and use taxes ($86 billion), and by generating employment income they indirectly support federal, state, and local governments ($140 billion). Once all of these sources of government revenue are added together, they amount to approximately $276 billion for our 2007 reference year. This total does not include excise and other taxes levied by states and localities on piped natural gas, and several other industry products.
Federal Corporate Income Taxes

Corporate income taxes are a function of a companys taxable income, the rate at which that income is taxable and any tax credits available to the company. The natural gas and oil industry as a whole has been taxed at a steady rate of around 35%, with tax credits varying slightly over the years. Figure 5-5 illustrates the annual federal corporate income taxes paid by natural gas and oil corporations. The wide variations in federal corporate income taxes paid since 2001 are mostly due to changes in taxable income. The industry represents a growing share of the federal governments tax revenue. In 2007, the natural gas and oil industry contributed to 9% of the U.S. government receipts from active corporations, up from 2% in 2002. The vast majority of those receipts come from refiners (65% in 2007). Extraction activities come in second at 16%. When compared to all other industry segments reported by the IRS, the natural gas and oil industry ranks third out of 20 broad industry segments. Figure 5-6 illustrates the contributions of each industry group to the total federal income taxes paid bycorporations.
Taxes and the Natural Gas and Oil Industry

Aside from the economic benefits the consuming public derives from the natural gas and oil industry in the forms of employment, value added, and resource availability, the industry also benefits the public by paying a significant amount of taxes. Literature on the topic of taxation refers to total government take, or the total amount of revenues that the federal, state, and local governments collect in all forms of taxes or revenue receipts from the industry. Much of the information available on total government take from the natural gas and oil industry focuses on the upstream exploration and production sector. These companies pay the standard federal and state corporate income taxes that firms in other industries pay. Upstream companies also pay severance and ad valorem taxes based on the amount of hydrocarbons they produce and pay bonuses and royalties to the owners of the mineral interests from whom they are leased. The largest of these mineral interest owners are federal and state governments. For 2007, direct payments by natural gas and oil corporations to the federal and state governments were approximately $50 billion: $29.8 billion in federal corporate income taxes, $10.7 billion in state severance taxes, and $9.4 billion in federal royalties.
11 Association of American Railroads, Railroads and Coal, 2010, page 1. 12 Association of American Railroads, Class I Railroad Statistics, 2010, page 4.
Severance Taxes
Twenty-seven states collect severance taxes from natural gas and oil producers. Table 5-2 highlights the 16 states that receive over 1% of their state tax collections from severance taxes. The remaining states either do not collect severance taxes or their severance tax collections account for less than 1% of their total state tax collections. The increased drilling activity targeting the Marcellus Shale in the New York, Pennsylvania, and West Virginia region has prompted Pennsylvania to review
367
Figure 5-5. Federal Income Taxes Paid by Corporations
Figure 5-5. Federal Income Taxes Paid by Corporations

100
PIPELINE TRANSPORTATION OIL WTI GAS HH
80
20
60
40 10 20
2001
2002
2003
2004
YEAR
2005
2006
2007
2008
Notes: HH = Henry Hub, used as the point of delivery for the natural gas futures contract of the New York Mercantile Exchange (NYMEX). WTI = West Texas Intermediate. Source: U.S. Department of the Treasury.
its alternatives for balancing priorities of supporting communities in which extraction activities take place and of enabling natural gas and oil companies to operate competitively within the state. Pennsylvania Governor Corbett assembled an advisory commission to recommend a solution to address these priorities. In July 2011, this commission recommended that Pennsylvania institute a drilling impact fee in lieu of a severance tax.
Royalties
Producers of natural gas and crude oil pay royalties to the owners of the mineral rights for the privilege of extracting the resources. Royalty rates vary by commodity and by jurisdiction and are applied to gross revenues from the sale of natural gas and oil. Onshore, the federal government charges a statutory minimum of 12.5% royalty, and offshore, the royalty rate ranges from 12.5% to 18.75%. Under the Mineral Revenue Management program, the Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE, formerly known as the Minerals Management Service) collects, accounts 368
for, and distributes revenues associated with offshore and onshore oil, gas, and mineral production from leased federal and American Indian lands. Figure 5-7 shows the reported royalty revenues collected by the BOEMRE for crude oil, natural gas, and NGLs from 2001 to 2009. The 45% decrease in royalty revenue in 2009, compared to 2008, resulted from the decrease in crude oil and natural gas prices, which averaged $61.99 per barrel and $4.94 per thousand cubic feet (Mcf) in 2009, respectively, compared to $99.92 per barrel and $8.89/Mcf, respectively, in 2008. The BOEMRE collected over $72 billion from 2001 to 2009. Each year, the BOEMRE disburses its revenue to states, counties, parishes, the U.S. Treasury, American Indian Tribes, individual American Indian mineral owners, the Reclamation Fund for water projects, the Land and Water Conservation Fund, and the Historic Preservation Fund. In fiscal year 2009, the BOEMRE disbursed approximately $10.7 billion from revenues collected from energy and mineral production on federal and American Indian lands. Thirty-five states received a total of almost $2.0 billion directly from the BOEMRE as part of this disbursement.
DOLLARS PER BARREL OR PER MMBTU
30
BILLIONS OF U.S. DOLLARS
GASOLINE STATIONS PETROLEUM AND PETROLEUM PRODUCTS WHOLESALERS PETROLEUM AND COAL PRODUCTS MANUFACTURING NATURAL GAS DISTRIBUTION OIL AND GAS EXTRACTION
Figure 5-6. 2007 Federal Taxes Paid by Corporations Figure 5-6. 2007 Federal Taxes Paid by Corporations (Millions of U.S. Dollars) (Millions of U.S. Dollars)
MANUFACTURING EXCL. PETROLEUM PRODUCTS MANUFACTURING FINANCE AND INSURANCE OIL AND GAS INDUSTRY RETAIL TRADE EXCL. GASOLINE STATIONS MANAGEMENT OF COMPANIES HOLDING COMPANIES WHOLESALE TRADE EXCL. PETROLEUM AND PETROLEUM PRODUCTS INFORMATION PROFESSIONAL, SCIENTIFIC, AND TECHNICAL SERVICES TRANSPORTATION AND WAREHOUSING EXCL. PIPELINE TRANSPORTATION MINING EXCL. OIL AND GAS EXTRACTION UTILITIES EXCL. NATURAL GAS DISTRIBUTION CONSTRUCTION HEALTH CARE AND SOCIAL ASSISTANCE ADMINISTRATIVE AND SUPPORT, AND WASTE MANAGEMENT AND REMEDIATION SERVICES ACCOMMODATION AND FOOD SERVICES REAL ESTATE AND RENTAL AND LEASING EDUCATIONAL SERVICES OTHER SERVICES AGRICULTURE, FORESTRY, FISHING, AND HUNTING ARTS, ENTERTAINMENT, AND RECREATION
Source: U.S. Department of the Treasury.
$61,113 $36,531 $29,816 $19,914 $17,919 $17,415 $17,016 $6,395
$5,232 $4,993 $4,462
$3,695 $2,822 $2,700 $2,370 $2,274
$738 $680 $591
$549
369
Table 5-2. 2007 State Severance Taxes

Collections (U.S. $ Millions) United States Alabama Alaska Colorado Kansas Kentucky Louisiana Mississippi Montana Nevada New Mexico North Dakota Oklahoma Texas Utah West Virginia Wyoming 10,728.9 144.2 2,216.0 136.9 132.3 275.3 904.2 81.8 264.7 62.2 843.9 391.3 942.1 2,762.9 101.5 328.3 803.6 As a % of State TaxCollections 1.4% 1.6% 64.4% 1.5% 1.9% 2.8% 8.3% 1.3% 11.4% 1.0% 16.2% 21.9% 10.6% 6.9% 1.7% 7.1% 39.7% 13 1 14 11 10 7 15 5 16 4 3 6 9 12 8 2 Rank
Source: National Conference of State Legislatures.
Figure 5-7. Reported Royalty Revenues

14
NATURAL GAS LIQUIDS NATURAL GAS CRUDE OIL
Figure 5-7. Reported Royalty Revenues
120
605
10
206 286 183 156 2,749 4,235 240 4,770 5,151
285
5,766
368
5,818
80
258
4,644 6,172 3,977 4,401
5,358
2,737
40
3,838
2 0
2,363
1,872
2,594 1,553 1,539
2001
2002
2003
2004
2005 YEAR
2006
2007
2008
2009
Notes: HH = Henry Hub, used as the point of delivery for the natural gas futures contract of the New York Mercantile Exchange (NYMEX). WTI = West Texas Intermediate. Sources: Bureau of Ocean Energy Management; John S. Herold, Inc.
370
DOLLARS PER BARREL OR PER MMBTU
OIL WTI GAS HH
Other Taxes Generated Directly by the Industry

The natural gas and oil industry pays significant federal and state excise taxes on fuels. The combined weighted average tax rates per gallon were 38.6 cents for gasoline and 45.2 cents for diesel in 2007.13 Applied to the 139 billion gallons of gasoline and 40 billion gallons of diesel sold in 2007, these tax rates generated approximately $72 billion, which is the largest tax item paid by the industry and, ultimately, by gasoline and diesel consumers. Natural gas and oil companies also pay significant amounts of sales, use, and property taxes, which were estimated at $3.2 billion in 2007.14 However, this is not the full story. Most gasoline stations are not directly owned by natural gas and oil companies, and convenience stores associated with gas stations sell approximately $180 billion of non-fuel merchandise.15 Applying the national sales tax average rate of 7.3% to that amount provides an estimate of $13billion in sales taxes generated by the broader natural gas and oil retail industry.
eight tax deductions and one R&D program will generate over $43 billion in additional tax revenue over the next 10 years. Eliminating these tax provisions will reduce investment in domestic production across the industry by reducing company cash flow available for investment and making some domestic projects uneconomic. These provisions are particularly important for independent exploration and production companies that, on average, outspend their cash flow from operations by drilling new wells or acquiring new properties. Without these tax provisions, these companies would have less capital available to invest in their businesses. Table 5-3 summarizes the tax deductions and the R&D programs that are proposed for elimination. Supporters of the elimination of these tax deductions argue that they primarily benefit multibillion-dollar oil companies that would remain profitable without these tax deductions.16 Opponents of the elimination of these tax deductions maintain that this system has evolved over time to direct capital to critical industries to develop our domestic resources and mitigate our dependence on foreign sources of fossil fuels.17 Wood Mackenzie analyzed the impacts of the elimination of two of the tax deductions: the expensing of intangible drilling costs and the domestic manufacturing tax deduction for natural gas and oil companies. This analysis included the evaluation of the economic viability of 230 discrete domestic natural gas and oil plays under current commodity price conditions. Assuming that natural gas and oil companies lose both the manufacturing tax deduction and the ability to expense intangible drilling costs, Wood Mackenzie estimates that the average natural gas price needed to achieve a 15% internal rate of return would increase by $0.60/Mcf to $6.00/Mcf. Using this 15% internal rate of return as the breakeven threshold puts approximately 3 billion cubic feet per day of incremental natural gas production at risk in 2011 and 27 trillion cubic feet of natural gas resources at risk through 2020.18 Another provision proposed by the Senate to be repealed would further limit foreign tax credits and subject only U.S.-based natural gas and oil companies
16 Gandhi, S. J., Eliminating Tax Subsidies for Oil Companies, Center for American Progress, 2010. 17 Hodge, S. A., Who Benefits Most from Targeted Corporate Tax Incentives? Tax Foundation, 2010. 18 Wood Mackenzie, Evaluation of Proposed Tax Changes on the US Oil & Gas Industry, commissioned by the American Petroleum Institute, 2010, page 4.
Tax Deductions for the Natural Gas and Oil Industry

A review of the tax burden on the natural gas and oil industry would be incomplete without referencing the tax deductions used solely by the industry or directed towards multiple industries, including the natural gas and oil industry. President Obamas 2012 budget includes proposals to eliminate eight of these tax deductions and one natural gas and oil research and development (R&D) program. Several of these tax deductions proposed for elimination are specific to the natural gas and oil industry (e.g., the ability to expense rather than capitalize intangible drilling costs). Other tax provisions targeted for elimination, such as the domestic manufacturing deduction, are available to multiple industries, but the president proposes targeting the natural gas and oil industry (and the coal industry) to end their use of the deduction. According to President Obamas 2012 budget, eliminating these
13 Federal Highway Administration, February 2008 Monthly Motor Fuel Reported by States, 2007. 14 American Petroleum Institute, Americas Oil and Gas Industry: Paying Their Share, 2010. 15 National Association of Convenience Stores.
371
Table 5-3. Summary of Proposed Federal Budget Elimination Impacting the Natural Gas and Oil Industry (Millions of U.S. Dollars)
2012 Total proposed changes from current law Repeal enhanced oil recoverycredit Repeal credit for oil and gas produced from marginal wells Repeal expensing of intangible drilling costs Repeal deduction for tertiary injectants Repeal exception to passive loss limitations for working interests in oil and natural gas properties Repeal percentage depletion for oil and natural gas wells Repeal domestic manufacturing tax deduction for oil and natural gas companies Increase geological and geophysical amortization period for independent producers to seven years Terminate oil and gas research and development program (3,492) 0 2013 (5,400) 0 2014 (4,908) 0 2015 (4,631) 0 2016 (4,586) 0 20122016 (23,017) 0 20122021 (43,762) 0
(1,875) (6)
(2,512) (10)
(1,762) (10)
(1,403) (10)
(1,331) (10)
(8,883) (46)
(12,447) (92)
(23)
(27)
(24)
(22)
(21)
(117)
(203)
(607)
(1,038)
(1,079)
(1,111)
(1,142)
(4,977)
(11,202)
(902)
(1,558)
(1,653)
(1,749)
(1,842)
(7,704)
(18,260)
(59)
(215)
(330)
(306)
(230)
(1,140)
(1,408)
(20)
(40)
(50)
(30)
(10)
(150)
(150)
Source: Office of Management and Budget, Fiscal Year 2012 Terminations, Reductions, and Savings: Budget of the U.S. Government, pages 5253.
to double taxation of foreign earnings. This would make domestic companies less competitive than their foreign-based counterparts in the United States and abroad. The natural gas and oil industry is not the only energy-related industry to benefit from federal tax deductions. In fact, as a percentage of total U.S. consumer spending by energy source, the natural gas and oil industry is among the lowest recipients of federal tax deductions or subsidies compared to other energy sources. Table 5-4 summarizes the estimated federal 372
government taxpayer incentives by energy source as a percentage of total U.S. consumer spending on each energy source in 2006.
NATURAL GAS AND OIL WORKFORCE CHALLENGES

Like most industries, the natural gas and oil industry is experiencing the initial stages of a large wave of retirements as the oldest members of the baby boomer generation (those born between 1946
Table 5-4. Estimated Federal Government Financial Incentives by Energy Source in2006* (Millions of U.S. Dollars)
Government Financial Incentives $4,708 $1,187 $383 $458 $92 $2,755 $295 $29 $3,503 $210 Total Spending on Energy Source $17,791 $5,694 $3,114 $3,960 $933 $39,984 $56,419 $5,854 $775,907 $50,631 Government Financial Incentives as a Percent of Total Spending 26.5% 20.9% 12.3% 11.6% 9.9% 6.9% 0.5% 0.5% 0.5% 0.4% Government Financial Incentives per Million Btu of Consumption $10.13 $0.14 $5.32 $1.73 $2.80 $0.12 $0.10 $0.09 $0.06 $0.06
Energy Source
Ethanol Nuclear Solar Wind Biodiesel Coal Hydroelectric Power Geothermal Natural Gas and Oil Biomass
* Federal fiscal years run from October 1 to September 30. Natural gas and oil includes natural gas, crude oil, and natural gas liquids plant production. Source: Energy Information Administration and Texas Comptroller of Public Accounts.
and 1964) reach age 65 this year. Similar to most industry sectors dependent on a robust technical workforce, the natural gas and oil industry faces crucial challenges in replacing that talent, particularly highly skilled technical positions such as petroleum engineers and geoscientists. University-level programs that directly feed into natural gas and oil careers have contracted over the past several decades, resulting in a supply of new employees that will be unable to replace the talent vacated by baby boomer retirements. The recession that ended in June 2009 (according to the U.S. National Bureau of Economic Research) negatively impacted retirement savings for many baby boomers and thus delayed their ability and/or willingness to retire. This recession thus may have deferred the onset of critical shortages of talent and provided a narrow window to enable appropriate knowledge transfer and development for younger workers. However, the recession, combined with weak natural gas prices in the United States, also led to a decrease in recruiting efforts by natural gas and oil companies and limited the rate at which companies
took on new hires that would have allowed them to leverage the delayed retirements. As seen in the student response to contraction in the 1980s, and in student attitude surveys taken of geosciences majors, when the industry limits its hiring, that trend is quickly communicated within the student community. This, plus existing prejudices against natural gas and oil careers by students, further dissuades them from degrees that map to the needs of the industry. This process can often limit the potential new hires market for nearly a decade, as impacted high school and college students enter the workforce six to ten years later.
Challenge #1 Aging Natural Gas and Oil Workforce

The natural gas and oil industry relies heavily on petroleum engineers and geoscientists to explore for, evaluate, and quantify subsurface natural gas and oil resources. As Figures 5-8 and 5-9 illustrate, a significant percentage of the petroleum engineer and geologist population is within 10 years of retirement. Also of note, approximately 52% of Society of Petroleum Engineers (SPE) members are in the baby boomer
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Figure 5-8. Age Distribution of Society of Petroleum Engineers (SPE) Membership ALSO used as Figure ES-12 Figure 5-8. Age Distribution of Society of Petroleum Engineers (SPE) Membership 20
1997 PERCENT OF SPE MEMBERSHIP 15
10 2010
0 0 <20 20 24 25 29 30 34 35 39
Source: Society of Petroleum Engineers.
40 44 45 49 AGE RANGE
50 54
55 59
60 64
65+
Figure 5-9. Geoscientist Age Distributionby Membership Society (2008) Figure 5-9. Geoscientist Age Distribution by Membership Society (2008)
30
PETROLEUM GEOLOGISTS AAPG ECONOMIC GEOLOGISTS SEG EXPLORATION GEOPHYSICISTS SEG HYDROLOGISTS NGWA
PERCENT OF MEMBERSHIP
15
<30
31 40
41 44
45 49
50 54 AGE RANGE
55 59
60 64
65 69
70+
Sources: AGI Geoscience Workforce Program; data provided by the Society of Exploration Geophysicists (SEG), American Association of Petroleum Geologists (AAPG), Society of Economic Geologists (SEG), and the National Ground Water Association (NGWA).
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generation or older, the segment of the population that has begun to reach retirement age. This compares to 38% for the U.S. population as a whole. Figure 5-9 illustrates the relative age distribution imbalance of exploration geophysicists and petroleum geologists compared to disciplines such as hydrology that have attracted more young talent over the past decades. Hydrologists in the National Ground Water Association aged 45 and older represent only 42% of that groups membership. By comparison, 61% and 69% of American Association of Petroleum Geologists and Society of Economic Geologists members, respectively, are over age 45. Similarly, Figure 5-10 highlights the spike in the population of geoscientists in the natural gas and oil industry that are in the 50 to 54 age range. The private sector will not face the challenge of an aging workforce alone. The public sector demographic looks even worse, with 75% of petroleum engineers and 72% of geologists in U.S. government jobs aged 45 or older. Figures 5-11 and 5-12 illustrate the migration of the age demographics of
petroleum engineers and geologists in the U.S. government over the time period from 2003 through 2010. Figures 5-11 and 5-12 illustrate that the natural gas and oil industry, and the federal government institutions responsible for regulation, face an aging and shrinking experienced workforce over the next 10 years; and in the case of geoscientists in federal agencies, the so-called Great Crew Change is already underway.
Challenge #2 Long Decline in University-Level Population Seeking Natural Gas and Oil Careers
Compounding the aging workforce issue is the inability of our current pipeline of university graduates to fill the natural gas and oil industrys hiring needs. As illustrated in Figure 5-13, university-level petroleum engineering enrollment in the United States peaked in 1983 with over 12,000 students working on petroleum engineering degrees. Enrollment in petroleum
Figure 5-10. Age Distribution of Geoscientists in the Oil and Gas Industry Figure 5-10. Age Distribution of Geoscientists in the Oil and Gas Industry 25
PERCENT OF GEOSCIENTISTS
15
0 <30 30 34 35 39 40 44 45 49 50 54 55 59 60 64 65 69 70+ AGE RANGE

Source: AGI Geoscience Workforce Program.
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Figure 5-11. Age Distribution of Petroleum Engineers in the U.S. Government Figure 5-11. Age Distribution of Petroleum Engineers in the U.S. Government
2003 PERCENT OF PETROLEUM ENGINEERS
20 2010
0 <30 30 34 35 39 40 44 45 49 AGE RANGE

Sources: AGI Geoscience Workforce Program; data derived from the O ce of Personnel Management FedScope database.
50 54
55 59
60 64
65+
Figure 5-12. Age Distribution of Geologists in the U.S. Government
Figure 5-12. Age Distribution of Geologists in the U.S. Government

30
PERCENT OF GEOLOGISTS
20
2003
2010
10
<30
3034
3539
4044
4549 AGE RANGE
5054
5559
6064
65+
Sources: AGI Geoscience Workforce Program; data derived from the O ce of Personnel Management FedScope database.
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Figure 5-13. U.S. Petroleum Engineer Enrollment (19722011)

12
DOCTORATE MASTERS SENIOR JUNIOR SOPHOMORE FRESHMAN
Figure 5-13. U.S. Petroleum Engineer Enrollment (19722011)
STUDENTS THOUSANDS
0 1972
1975
1978
1981
1984
1987
Source: Dr. Lloyd Heinze, Texas Tech University.
1990 1993 1996 ACADEMIC YEAR
1999
2002
2005
2008
2011
engineering programs dropped sharply to just under 1,900 students by 1997, an 84% decline. However, petroleum engineering enrollments have been on an upward trend since 2004 and now stand at approximately 6,400 students. Similarly, undergraduate-level geosciences enrollment peaked in 1983 with almost 37,000 undergraduate students working on geosciences degrees. Since that year, U.S. undergraduate geosciences enrollment decreased to a low in 1990 and then began a slow recovery. Enrollment, however, is still down by 35% compared to 1983. Figure 5-14 illustrates the trends in U.S. undergraduate and graduate geosciences programs from 1955 through 2010. Enrollment in both petroleum engineering and geosciences programs faced a steep decline through the late 1980s as commodity prices, rig counts, and industry hiring activity all dramatically decreased and the U.S. economy swung into the 1990-1991 recession (see Figure 5-15). As seen in the enrollment numbers, the petroleum engineering and geosciences academic situa-
tion responded dramatically to the changes in fortune in the energy sector. Students left the geosciences for other fields as natural gas and oil opportunities decreased. Perhaps more importantly, the faculty within the geosciences departments shifted to fields that distinctly do not lead towards the targeted skill sets needed by the natural gas and oil industry. This shift led to the current situation where there is insufficient university staff available to teach the courses and support the majors needed to produce sufficient numbers of graduates that would meet the needs of the natural gas and oil industry. The divergence of geosciences programs from some of the technical areas desired by the natural gas and oil industry was further institutionalized by several key actions: (1) in times of rapid expansion, companies hired away key university faculty that were needed to maintain sufficient educational capacity in those departments; (2) companies cut university recruiting and training programs in times of business contraction; and (3) students sought careers in less-cyclical industries. Other drivers included the increased popularity of alternate careers, such
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Figure 5-14. U.S. Geosciences Enrollments (19552010)
Figure 5-14. U.S. Geosciences Enrollments (19552010)

40
UNDERGRADUATE
30 STUDENTS THOUSANDS
20
10
GRADUATE
0 1955
1960
1965
1970
1975
1980 1985 YEAR
1990
1995
2000
2005
2010
Source: American Geological Institute.
Figure 5-15. 5-15. Average Annual U.S. Rig Count Compared to Average Annual Crude Oil Oil and NaturalPricesPrices Figure Average Annual U.S. Rig Count Compared Average Annual Crude and Natural Gas Gas
20 6
OIL WTI SPOT PRICE INDEX NATURAL GAS HH SPOT PRICE INDEX RIG COUNT
16 RIG COUNT HUNDREDS
SPOT PRICE INDEX
12
8 2 4
1990
1995
2000 YEAR
2005
2010
Notes: HH = Henry Hub, used as the point of delivery for the natural gas futures contract of the New York Mercantile Exchange (NYMEX). WTI = West Texas Intermediate. Sources: Baker Hughes; Bloomberg.
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as technology and environmental sciences, and the elimination of most upstream research centers in the domestic industry. The latter led faculty and students to solely focus on federal research grants for monetary support, and the vast majority of the funded research has little application towards topics and skills of interest in the natural gas and oil industry. The cyclical nature of the natural gas and oil industry has resulted in a series of large-scale workforce early retirements or layoffs in times of weak commodity prices and declining capital investment, followed by periods of rapid hiring in times of stronger commodity prices and expanding capital investment. During these cycles, a portion of the workforce elects to leave the industry to work in an entirely different market, or to retire, and does not return. In addition, the industry must contend with an annual attrition rate of 10% for petroleum engineers with 10 to 15 years of experience.19 The result is a shrinking
19 University of Houston Boyden, The Workforce Crisis in the Upstream Oil and Gas Sector, 2007, page 15.
population of experienced technical professionals necessary to meet the needs of industry and government and to train the next generation of technical professionals. Also, the natural gas and oil industry has transformed itself over the decades through waves of corporate mergers and acquisitions. Since 1990, the volume of annual corporate natural gas and oil mergers and acquisitions activity has ranged from less than $1 billion in 1992 to almost $180 billion in 1998, averaging $45 billion per year (see Figure 5-16). Companies often cite opportunities for greater scale, access to additional resources, improved growth outlooks, and competitive positioning as drivers for consolidation. Companies also benefit from cost savings in the form of improved efficiencies and headcount reductions. The combination of the aging workforce and constrained pipeline of new, well-educated talent leads to images like that in Figure 5-17. Even in a lowdemand scenario, the quantity of students enrolled in geosciences programs today will be insufficient
Figure Total Annual U.S. Oil and Gas Industry Corporate Mergers and Acquisitions Volume Figure 5-16.5-16. Total Annual U.S. Oil and Gas Industry CorporateMergers and Acquisitions Volume Compared to Average Annual Crude Oil and Natural Gas Prices Compared to Average Annual Crude Oil and Natural Gas Prices
NATURAL GAS HH SPOT PRICE INDEX OIL WTI SPOT PRICE INDEX DEAL VALUE
200
$178
160
4 $91 $94 $72 2 $30 $1 1990 $1 1992 $8 1994 1996 1998 2000 YEAR $7 2002 2004 2006 $32 $12 2008 2010
120
80
40
Notes: HH = Henry Hub, used as the point of delivery for the natural gas futures contract of the New York Mercantile Exchange (NYMEX). WTI = West Texas Intermediate. Sources: John S. Herold Inc.; Bloomberg.
379
SPOT PRICE INDEX
Figure 5-17. Oil and Gas Industry Demand for Geoscientists

Figure 5-17. Oil and Gas Industry Demand for Geoscientists 80
CURRENT WORKFORCE INDUSTRY PROFILE CURRENT WORKFORCE WITH U.S. AND NON U.S. NEW ENTRIES TOTAL DEMAND MED CURRENT WORKFORCE + U.S. NEW ENTRIES TOTAL DEMAND HIGH TOTAL DEMAND LOW
GEOSCIENTISTS THOUSANDS
60
40
20
0 1995
2000
2005
2010 YEAR
2015
2020
2025
2030
Source: AGI Geoscience Workforce Program.
to meet the domestic natural gas and oil industrys needs later this decade and beyond. Also, new university graduate hires, by definition, will not have the experience and, therefore, the ability to replace retiring 30+ year veterans of the natural gas and oil industry.
Challenge #3 The U.S. Need for Increased Investment in K-12 Mathematics and Science Education
The discussion above focused on university and postgraduate level education; but the natural gas and oil industry, and the United States as a whole, needs an improved kindergarten through high school (K-12) education system. The need for improvement is particularly acute in the mathematics and science disciplines, which provide the foundation for university-level engineering and geosciences studies. In 2005, the National Academies conducted a study of Americas competitiveness and released a report referred to as Gathering Storm. The highest priority recommendation and actions in this report involved K-12 education, where the United States, on aver380
age, lags other industrial economies. In 2010, the National Academies reviewed the U.S. progress since 2005 in Rising Above the Gathering Storm, Revisited: Rapidly Approaching Category 5. The participants unanimously agreed that the nations outlook has worsened since 2005 and, despite some bright spots, the 14,000 public school systems have shown little sign of improvement, particularly in mathematics and science. These results lead the participants to assert that the recommendations made five years ago, of which the highest priority was strengthening the public school system and investing in basic scientific research, appear to be as appropriate today as they were in 2005. The 2010 National Academies study listed three specific implementing actions in support of the recommendation to move the U.S. K-12 education system in science and mathematics to a leading position by global standards: y Funding four-year scholarships for 10,000 U.S. citizens annually to obtain degrees in mathematics, science, or engineering with a requirement that they teach in a public school for five years thereafter
y Strengthening skills of 250,000 current teachers by subsidizing advanced training and workshops, and also create a new mathematics and science curriculum for voluntary adoption across the country y Increasing the number of teachers qualified to teach Advanced Placement courses and the students taking such courses by offering financial bonuses both to high-performing teachers and to students who excel.
Responding to the Workforce Challenges

In the short-term, companies have several unattractive options to mitigate their workforce challenges, including: abandoning projects, taking a nonoperator role in projects, delaying projects, and/or operating projects with less staffing than needed for efficient operations. The long-term solution to the emerging talent gap is increased engagement by natural gas and oil companies with campus communities in meaningful ways. Expansion of recruitment efforts by broadening the range of institutions that are visited allows the industry to show itself as an attractive alternative to competing technical careers. Firms can showcase the high-tech nature of the industry and the potential for long and rewarding careers for technical professionals. Even more importantly, natural gas and oil companies need to change the nature of their relationship with the appropriate departments on a broad range of campuses. This will require direct investment in these programs through research partnerships and funding, scholarships, sabbatical exchanges, and other activities that can impact academic culture and focus on a campus. Yet, even with increased recruiting efforts and improved relationships with academic programs, natural gas and oil companies will be forced to promote people faster than they have done historically, which will require additional investments in training programs. The shortage of technical professionals will likely result in higher personnel costs across the industry. Other short-term solutions include retaining retirees as consultants and hiring experienced professionals from abroad. The federal government has potential solutions it can contribute to this workforce dilemma. As part of a broader national energy policy, government research grants can be directed towards disciplines
and topics designed to address those natural gas and oil energy policy goals. Also, an easier and less costly contribution the government can make would be to acknowledge the importance of the natural gas and oil industry. If students and young professionals view the industry as critical to the nations economic, environmental, and energy security goals, the industry will have a better chance of attracting new technical professionals. Lastly, the petroleum engineering and geosciences student enrollment numbers mentioned above only tell part of the story. A significant percentage (greater than 25%) of students in these programs are not U.S. nationals. Under a modified immigration program for these types of professionals, the domestic natural gas and oil industry would have a larger pool of potential talent to recruit.
NATURAL GAS AND CRUDE OIL VOLATILITY IMPACTS ON PRODUCERS AND CONSUMERS Commodity Price Volatility
Natural gas and oil producers and consumers, capital providers to these companies, governments, and other stakeholders each have individual views on volatility. The main differences lie in how each party defines volatility and responds to volatility as observed in its markets. Traditionally defined commodity price volatility is a healthy signaling mechanism for market participants about supply and demand information.20 If price changes rapidly over short periods of time, then price is said to have high volatility. If price changes slowly over time, then price is said to have low volatility. Regular variation in price, provided there is a means of mitigating price risks through well-functioning financial markets, need not be disruptive. It is incorrect to argue that prices that have high, routine variability are more problematic than prices that are very stable for a period of time but which suddenly change. In fact, investment planning is much more difficult in the latter case, and it has been shown in various studies that unexpected changes in price have a much larger negative impact.
20 Price volatility is estimated by calculating the annualized standard deviation of the periodic (usually daily or weekly) changes in price.
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When discussing energy security, we often discuss either the level of price or the volatility of price, yet neither of these metrics is sufficient. Rather, unexpected changes in the supply-demand balance (and hence price) are what generate difficulties at the macroeconomic level.
Background: Commodity Prices

Oil Prices
Energy sources derived from oil and natural gas make up the majority of consumer energy expenditures and a significant share of expenditures by the production sectors. According to the Energy Information Administration (EIA), during the 60-year period from 1950 through 2009, 37% to 48% of total annual U.S. energy consumption was fueled by petroleum products, with petroleum always being the dominant energy source (averaging 41% of total consumption over that time frame), followed by natural gas (25%) and coal (22%). The share of petroleum-based products has followed a somewhat parabolic trajectory during that time frame: rising during most of the first three decades until peaking at 48% in 1977 and falling gradually since. Due to the volatility of petroleum prices as well as their dominant share as an energy source, economists have primarily focused on oil price shocks in their analyses of the effects of energy prices on the economy. In fact, no published research has empirically examined the relationship between natural gas prices and aggregate economic activity.
decrease in the winter when it is warmer than normal, in the summer when it is colder than normal, when production initially lost to hurricane damage is regained, and when natural gas storage is above seasonal norms. Industry experts also observe that industrial activity has a powerful influence on natural gas demand and affects natural gas prices. These price movements show the influence of variations in supply and demand. Natural gas supply and demand can be extremely inelastic in the short run, which means that small variations in either the supply or demand would lead to sharp movements in natural gas prices. These significant movements, as well as seasonal variation in the natural gas price, are reduced considerably by natural gas in storage. It follows that when storage is low, a shock to supply or demand can lead to extreme price movements. Such an incident occurred in 2000-2001, when there was strong demand for natural gas to generate electric power in California during that states power crisis.
Macroeconomic Impacts of Changing Commodity Prices

Consumption
Changing energy prices have a tangible impact on consumption as households modify spending patterns to accommodate energy prices that may suddenly increase or decrease the energy share of their budgets. The magnitude of this effect upon direct energy purchases is inversely proportional to the consumer price elasticity of energy. A price rise causes a direct reduction in energy expenditures, as well as a shift in spending patterns away from energy-intensive goods to more energy-efficient appliances, and also a general reduction in consumption of goods that consume energy. Consumer expectations about the duration of energy price changes weigh heavily on larger consumer decisions regarding energy consumption such as purchasing a more fuel-efficient vehicle or more energy-efficient appliance. Reductions in energy expenditures also affect complementary goods and services. For example, reduced driving might result in a collateral reduction in fast food sales. Indirect effects on general consumption activity also stem from changing energy prices. Uncertainty about future price movements may lead to a general conservatism in spending as consumers engage
Natural Gas Prices

Seasonality, variations in normal weather patterns, deviations of natural gas in storage from seasonal norms, and disruptions in natural gas production (for example, hurricanes in the Gulf of Mexico) directly affect natural gas supply and demand and exert an important influence on natural gas prices. In particular, natural gas prices show: (1) a pronounced seasonal rise in the winter months; (2) an increase in response to colder than normal winter weather due to increased heating demand; (3) an increase in response to warmer than normal summer weather due to increased demand to generate electricity; (4) a rise when hurricanes disrupt production in the Gulf of Mexico; and (5) a rise when natural gas storage is below seasonal norms. Conversely, prices 382
in precautionary saving and postpone purchases of durable goods. Reduced earnings expectations lead to falling stock prices and, ultimately, a perceived decline in wealth, which further spurs saving. When commodity price inflation leads to economy-wide inflation, increasing interest rates meant to suppress economy-wide inflation further stifle general consumption patterns. The shifts in spending patterns described above may create a need for the reallocation of resources across or within sectors of the economy, which in turn may lead to at least a transitional rise in unemployment and a consequent further decline in consumption. However, if there is a strong expectation that a price increase is temporary, then consumers may actually tap into their savings and/or borrow more. A shift to more liquid asset portfolios and increase in the demand for money will cause interest rates to rise, a macroeconomic mechanism which also leads to economy-wide price inflation.
Summary
Some studies have attempted to draw general conclusions about the effects of commodity price changes on the macroeconomy. For example, one study estimated that the first-year impact of a $10/barrel increase in crude oil prices caused a decrease in GDP ranging from -0.15% to 0.80%, with an average estimate of -0.23%, rising in the second year to a range of 0.24% to -1.61%, with an average estimate of -0.49%.21 However, other experts have concluded that one cannot interpret time series data outside of the context of expectations regarding changing prices and sources of the changing prices. In either of the two scenarios described above in the Consumption section (sticky commodity price inflation or commodity price volatility characterized by inflation followed by a return to pre-inflation levels), the economy faces price inflation. However, while sticky commodity price inflation results in the somewhat paradoxical outcome of a decline in consumption coupled with rising prices, or stagflation, temporary commodity price volatility can be expected to only have temporary effects. Stagflation is also a likely outcome in a third scenario, long-term commodity price volatility, as uncertainty around energy costs would cause consumers to save more for their uncertain future spending needs and suppliers to maintain prices at levels that would cover any increases in energy costs. The cause of energy price shocks is a critical determinant of both the magnitude and timing of their effect on the economy. For example, a sudden restriction of supply leads to a sudden but relatively moderate decline in GDP that peaks after about seven quarters from the incidence of the event. On the other hand, an increase in aggregate global demand has the immediate effect of a rise in GDP over the first three quarters, followed by a protracted and more significant decline. A third type of price shock, termed an oil-market specific shock, often occurs as the result of a surge in precautionary oil demand in response to a perceived threat to supply. It may result in a simultaneous shift of both the supply and demand curves for oil, with a resulting compounding of the effects of either.
21 Huntington, H., The Economic Consequences of Higher Crude Oil Prices, prepared for the U.S. Department of Energy, October 3, 2005, pages 153.
Manufacturing
The manufacturing sector is also affected by energy price shocks through a number of channels. As described above for households, industrial sales decline as a result of the drop in consumption. Another direct effect of an increased price is through the higher cost of manufacturing inputs as prices rise for materials that have energy as a significant input. A rise in the general level of prices may either cause real wages to fall, which will result in a decline of the labor supply, or an increase in labor costs as employees demand higher wages to contend with their own higher energy costs. A drop in energy prices, of course, causes the reverse of these processes. Uncertainty about both the future of sales and the future of production costs induces manufacturers to curtail or postpone investment expenditures, particularly expenditures that are irreversible. This phenomenon persists particularly in periods of volatility, which only reinforces the sense of uncertainty about future price movements. As such, the persistent uncertainty effect may counteract the positive effects of an energy price drop, leading to asymmetric impacts of energy price changes. If, however, a rise in commodity prices is expected to persist, then manufacturers will tend to shift purchases to more energyefficient factors of production (or to other countries), similar to the shift in consumer purchasing choices described earlier.
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An oil-market specific demand shock will result in a persistent and relatively significant decline in GDP that will not reach a maximum until after an estimated three years. This framework provides a possible explanation for why the run-up in oil prices during the past 10 years did not produce an immediate recession in the United States and other economies, as the cause of these was clearly due to strong global economic growth and a concomitant general surge in demand for all industrial commodities. Conversely, each of the supply-driven energy price shocks in the 1970s almost certainly included an oil-specific demand shock as at least a contributing factor to its occurrence.
drilling activity in other countries, drilling activity in the United States reacts relatively quickly to long-term commodity price changes. This short reaction time may be due to the flexible rig market, more established regulations in the United States, and the fact that oil drilling in the United States is a mature industry so any new drilling activity is done at the margin and is highly sensitive to commodity prices. An additional factor that may influence company spending decisions during periods of increased commodity price volatility is the practice of hedging. Companies that run hedging programs typically secure their hedges 6 to 18 months in advance. As such, these companies are better protected in the short- and medium-term against commodity price fluctuations. Because hedged companies have better visibility of their future cash flows, they are less likely than unhedged companies to significantly alter their capital spending programs due to changing commodity prices. Unhedged companies are better able to capture upside in rising commodity price environments and may also be more likely to decrease their capital spending plans if commodity prices, and thus cash flows, drop significantly in the near term.
Energy Sector-Specific Impacts of Changing Commodity Prices

Commodity prices and commodity price fluctuations also impact investment by companies in the natural gas and oil industry. When examined as an isolated variable, analysis indicates that [investment in] mining structures and mining and oil field machinery is large and statistically significant, with elasticities of 1.39 and 2.13, respectively.22 These results indicate that increasing commodity prices have a strong, positive effect on the investment decisions made by oil, gas, and mining companies while decreasing commodity prices have the opposite effect. A study of the effects of short-term and long-term crude oil price changes on oil rig activity found that an increase in commodity price that is expected to be shortlived will not influence investment decision-makers to take on a new field development project because it is costly to develop an oilfield and the investment is spread over a long period of time. For price changes that are expected to be longer term, there exists a clear positive relationship between oil rig activity in nonOPEC regions and crude oil prices in the long-run in North America.23 When price increases are expected to be long-term, the long-term elasticity observed is 1.28, and typically about half of the long-run response is obtained after five months.24 Also, when compared to
22 Killian, L., The Economic Effects of Energy Price Shocks, Energy Journal, 2008. 23 Ringlund, G. B., Rosendahl, K. E., and Skjerpen, T., Does Oilrig Activity React to Oil Price Changes? An Empirical Investigation. Energy Economics, 2008, page 373. 24 Ringlund et al., Does Oilrig Activity React to Oil Price Changes? page 381.
Impacts on Volatility
Commodity price expectations have experienced a great deal of variability, and this plays an important role in the types of investments that market participants (e.g., utilities and utility rate-payers) are willing to make. Factors that can mitigate volatility (both in the traditional definition of the term and in the sense of accuracy of price expectations) include: y Increased elasticity of supply A higher elasticity of supply means that a given change in price will result in a larger increase in supply, so that the supply curve is relatively flat. Examples include increased shale gas production, increased storage capacity and flexibility, and the ability to import/ export supplies from/to external sellers/buyers. y Increased elasticity of demand A higher elasticity of demand means that a given change in price will result in a larger change in demand; for example, transparency of pricing to allow greater consumer responsiveness to prices. The emergence of unconventional gas is making the supply curve of natural gas in the United States
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more elastic. Prices are lower because technology and operational advances have led to increased supply availability at lower development and production costs. As consumption grows, the potential for development of unconventional natural gas resources in many small increments that can be brought online relatively quickly will tend to reduce upside price volatility. Excess liquefied natural gas (LNG) import capacity adds incremental flexibility for supply to respond to increased demand. This dramatic increase in physical liquidity has enhanced the diversity of potential supplies in the natural gas market and will serve as a key vehicle for achieving overall market flexibility. As a matter of policy, promoting flexibility within markets is an important step to ensuring secure delivery of energy supplies. Greater unconventional gas production, combined with declines in offshore Gulf of Mexico production as a result of basin maturity and slower post-Macondo development of new offshore fields, has led to a shift in the proportion of U.S. natural gas production that comes from onshore sources. As onshore, unconventional gas production grows, it continues to reduce weather-related volatility caused by hurricanes or severe weather in the Gulf of Mexico. Only storage or excess capacity in wells, the natural gas collection system, and pipelines can provide a nearly flat supply curve that would dampen price volatility originating from short-term fluctuations in demand, because supply would be better able to respond to short-term price fluctuations. The ability of natural gas system to meet short-term fluctuations in demand has not been tested in the shale-gas era because natural gas use experienced a cyclical downturn in 2009 that, combined with robust natural gas production growth, led to substantial excess capacity.
free markets, established legal systems, and appropriate and reasonable government oversight, taxation, and regulation. This differs materially from business models employed in many other natural gas and oil producing countries and defines why companies in the United States (and private-sector companies in other countries with market-based economies) have succeeded at developing new technologies, finding new natural gas and oil resources, and creating value for stakeholders. As illustrated in Figure 5-18, the domestic unconventional natural gas and oil resource base dwarfs the conventional resource base. Historically, the conventional resource base was the source of most of our domestic natural gas supplies and a large percentage of our domestic oil supplies. Unconventional natural gas resources have the potential to meet all of our domestic demand needs for decades (see Chapter One, Oil and Gas Resources and Supply). The keys to developing these unconventional resources are also the strengths of the domestic natural gas and oil business model. Realizing the full potential of the vast unconventional natural gas and oil resources will require a market transformation resulting from structural changes (some of which have already begun), such as: y More complete integration of the physical delivery system in the North American market y Increases in high deliverability storage capacity y Massive reallocation of capital and human resources y Huge influx of nontraditional operators and investors y Increased emphasis on repeatability within unconventional resource plays driving the industry towards larger scale activities and specialization y Continued delinkage of oil and natural gas prices from each other. These will change the market dynamics by having the ability to rapidly increase supply when market needs require, coupled with storage additions in line with growth in market demand. This presents a unique opportunity for the United States to make progress towards its economic, environmental, and energy security goals through new industry and government initiatives.
ASSESSING THE BUSINESS MODEL OF THE NATURAL GAS AND OIL INDUSTRY
The competitive business model for natural gas and oil companies in the United States has worked well to identify, develop, produce, process, and deliver significant volumes of crude oil, natural gas, and petroleum products. Private-sector, for-profit natural gas and oil (and other) industry business models in the United States rely on many common, fundamental needs:
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Figure 5-18. The Resource Pyramid
Figure 5-18. The Resource Pyramid
CONVENTIONAL RESERVOIRS: SMALL VOLUMES, EASY TO DEVELOP
OIL
GAS
INCREASED PRODUCT PRICE
IMPROVED TECHNOLOGY
UNCONVENTIONAL RESERVOIRS: LARGE VOLUMES, HARD TO DEVELOP
TIGHT OIL; HEAVY OIL; BITUMINOUS SANDS
TIGHT GAS SANDS; COALBED METHANE; GAS SHALES
HUGE VOLUMES, VERY DIFFICULT TO DEVELOP
OIL SHALE
GAS HYDRATES
PROVINCE RESOURCE SIZE

Source: Steve Sonnenberg, Colorado School of Mines.
Company Roles within the Unconventional Natural Gas Business

The unconventional onshore natural gas business was pioneered by the independent exploration and production companies in North America. As a rule, the major (integrated) natural gas and oil companies slowly exited the U.S. onshore over the past two decades in order to find resources of the scale necessary to allow them to sustain and grow their business. Medium- and small-sized independents, often lacking the skills and financial resources necessary to compete internationally, focused on trying to more fully exploit or rejuvenate U.S. basins and reduce costs to create profitable projects. Large independents often sought out niche positions internationally, but in most cases derived the bulk of their production and reserves from North America (both Canada and the United States, which are highly integrated both in terms of infrastructure andcorporations). 386
As natural gas prices began to rise in the middle of the last decade, it was the independents that began to perfect the technologies to unlock shale gas. The process of successfully discovering and developing a new unconventional play requires companies to be very nimble, make rapid decisions, and strive for growth. The independents exemplify these qualities and were therefore uniquely able to develop this technology and deploy it rapidly. As the development of shale and other unconventional plays has progressed, the sector has seen the entry of the large integrated and international firms. While they may not have been pivotal in the inception of the key unconventional plays in North America, these firms have the ability to take unconventional natural gas even further. These giant companies bring strong technical skills, immense financial resources, the ability to manage world-scale projects, and disciplinedprocesses. It is also essential to understand the critical role played by the oilfield service companies. These firms provide the technology, logistics, knowledge,
equipment, and manpower that have driven the gas revolution. Simply put, unconventional natural gas cannot survive much less flourish without a vibrant service sector. The continued presence of these three sets of players independents, large integrated/international companies, and the oilfield service providers (along with governments) will provide the tools and resources necessary to meet the challenges of tapping unconventional natural gas (and unconventional oil) to produce abundant, clean, safe affordable energy for consumers. They will also create jobs and have a positive economic impact on the country at large through both direct and indirect means.
How the Business Model Works: Process of Unconventional Development

Each unconventional play is different in its pace, scale, and exact path of development. However, as detailed in Table 5-5, it is possible to generalize somewhat about the various stages that individual plays pass through and the characteristics of each.
participants may be willing to share information (such as drilling techniques, frac spacing, number of frac stages, etc.), since each will benefit. Thus, consortia for technical collaboration may develop. Moreover, even if companies sought to protect their proprietary information, the structure of operations largely prevents this. While there are exceptions, exploration and production companies do not drill and complete wells themselves. Rather, they outsource this to the service sector companies, who not only provide equipment and crews, but also often have deep knowledge and technical capabilities. Thus, the experience accrues to these entities, who then seek to leverage the success of a given exploration and production company onto others. In this way, the stream of lessons learned and improvements in technology migrate to all the players, which allows for optimization of the entireplay.
Stage 3: Standardize It
In the third stage of a plays life, companies have cracked the code and the goal is to bring down unit costs by creating large programs focused on aboveground efficiencies. This involves reducing idle time for equipment and raising utilization. It also plays to the strengths of companies that can adequately fund activities across the commodity price cycle and avoid the inefficiencies of stop and start programs. By this time, the core area(s) of the play are well known and the bulk of activity will take place in these high-productivityregions. The bulk of the spending and activity for the play development takes place in this third phase. At this stage, the development of unconventional plays has been compared to an industrial assembly line process, and many observers call the development of these resources gas manufacturing. The developer attempts to repeat a particular set of tasks hundreds or even thousands of times in an identical way and in doing so, reduces costs and gains efficiencies. Also, companies have the ability in this phase to bring in numerous concepts, lessons, and best practices from unrelated industries. These include supply chain analysis, inventory management, coordination of multiple parties, etc. Many of these concepts have historically had very limited application in conventional upstream natural gas and oil efforts, since geologic risk was the overriding determinant of success and because these fields require vastly fewer wells to fully develop. For unconventional plays, geologic
Stage 1: Prove It
The earliest stages of the life of a play involve companies efforts to demonstrate geologic and reservoir potential and secure a leasehold position. It should be noted that cash flows during this period are negative or meager. Funding must come from other assets or from equity investments.
Stage 2: Optimize It by Trial and Error

If the industry establishes potential, the next stage involves an attempt by individual companies to raise the productivity and economics of the wells to an optimal level. In this regard, each company will experiment with a number of drilling and completion techniques. At this point, play development benefits from the participation of more firms since it leads to a greater variety of techniques, quantity of data, and experience. Many wells drilled in this phase will be relatively high cost and potentially uneconomic. In general, companies seek to hold data and information proprietary. However, if most of the acreage in a particular play has been leased, then
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risk is reduced and the emphasis is on gaining aboveground efficiencies. While these manufacturing concepts have great potential, it is worth noting one difference between
manufacturing of industrial goods and gas manufacturing: a factory aims for precision and efficient inputs to achieve identical, high-quality products as the output. In the upstream business, companies also aim to optimize the chain of inputs; however,
Table 5-5. General Stages of Unconventional Resource Development

Stage Prove Major Activities y Perform geosciences and other analyses to determine technical properties and suitability for exploration y Acquire leases y Drill pilot and test wells for information Keys to Success y Amount of relevant geotechnical and engineering information gathered per dollar spent y 13 technical champions with financial capabilities y Presence of service sector partners with science/experience y Constantly raise well productivity y Constantly decrease costs y Rapidly integrate diverse data streams y Draw correct conclusions and apply learning to current and future drilling programs y Engage in heavy scouting or form partnerships with other operators y Presence of multiple service sector partners with science/experience Standardize y Large, steady programs y Focus on above-ground efficiencies y Standardization grinds down unit costs y Effective coordination of chain of input y Efficiency gains y Adequate and timely ancillary infrastructure such as midstream and transport y Economies of scale and volume discounts y Low cost of capital and adequate free cash flow at bottom of cycle y Sequential unit cost reduction (opex and capex) Rethink y Transfer of ownership y Downspace further y Rework and refracture y Expansion y Strong cost control y Leveraging of existing wellbores, infrastructure, and field personnel y Discovery of new zones y Application of new technologies
Optimize
y Try everything y Interpret mass amounts of data y Ramp drilling/create local operational and service sector hubs
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the quality of the outputs (i.e., the production of gas from a well) will still be controlled by the unique characteristics of the well and producing reservoir. Unfortunately, no matter how well companies manufacture the gas, the difference in economics and price thresholds within and between plays will still be significant.
natural gas and oil resource base and are seeking to prepare bid rounds. While the long-term potential is real, a number of nations lack many of the characteristics listed above. In general, there are four large obstacles: 1. Government dominance of the sector. The fact that governments own the resource creates several problems for development of unconventional resources: Governments lack the technical capabilities to unlock the plays. The dominance of one or two state entities prevents the kind of competition that speedslearning. Government ownership of land/minerals can result in slower development than private ownership. Countries with tax/royalty regimes (such as Canada or the U.K.) may have good experience, but in most places, it can take years simply to access land. In a private ownership regime, such as the United States, this can be accomplished in weeks or even days. Governments tend to be reluctant to take the technical risk that is necessary. When the government owns the resource, surface rights owners and their communities can receive negligible benefits and compensation. 2. Lack of infrastructure and service sector equipment. North America drills the bulk of wells globally and, therefore, has the lions share of trained personnel, technical expertise, and equipment. Accessing this infrastructure is relatively easy in the United States. This is not the case in mostcountries. 3. Transparent and fair pricing. Worldwide, natural gas prices are sometimes regulated at a very low level to subsidize industry or local consumers. Without fair pricing or a viable forward market to reduce risk, most U.S. companies have been hesitant to develop natural gas internationally except as liquefied natural gas, which can access international markets and is usually linked by contract to oil prices. 4. Lack of experience in unconventional natural gas production. The business of unconventional
Stage 4: Rethink It
The final phase is typically characterized by falling unit productivity and rising unit costs as the core acreage is saturated with wells and companies are forced to develop less desirable areas. At this point, a change in ownership is common since the asset often becomes non-core to the primary developer. The field almost always benefits from this renewal of focus. The new operator typically pursues one or more of the following possibilities: y Drill the field more densely, as economics and geology allow. y Find overlooked upside usually in the form of new zones or reservoirs. y Spend capital and undertake operational measures to stem the decline of existing wells. In this regard, re-fracturing of wells may be a material source of new supply for certain fields. y Reduce costs enough to make previously uneconomic wells economic. All fields have a finite life, but that life can also occur in several cycles as technology progresses and/or price increases to create new ability and incentive to more fully exploit the resource. Table 5-6 describes the vital elements needed for an unconventional resource base to be prudently developed.
International Unconventional: Will It Work?

Shale gas, tight gas, and coalbed methane resources appear to be widespread around the globe. Many nations are keen to achieve the same results in their own countries as has been achieved in North America. To date, only Australia, with its large coalbed methane reserves, has made significant progress and is on track to produce meaningful volumes in the next five years. In many countries, governments own the entire
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Table 5-6. Necessary Ingredients to the Unconventional Business Model

Geologic quality Geologic quantity y Must have excellent basins y Basins must be large enough to gain economies of scale and sustain many competitors y Must have multiple plays since many of the plays will fail Property rights clarity y Landowner and local cooperation is very important for effective development y Process is unavoidably busy y Risks are manageable, but they exist y Local communities must receive benefits since they bear real costs Cooperative and capable local and national governments y Governments are key stakeholders, both in terms of regulation and lease ownership y Agencies must have the funds, staff, experience, and resources to effectively and efficiently regulate and facilitate y Many public goods/common resources need to be developed (e.g., roads) Abundant service sector capacity y System needs to have large fleets of equipment y Site preparation y Drilling rigs y Pressure pumping equipment y Water hauling y Waste disposal y Efficiencies and critical mass of experience and data are not possible if services are difficult to access or too costly Multiplicity of players Capital availability via private and public equity and debt markets Willingness to spend money y Helps to speed learning and creates competition y Private markets are the best determinant of efficient flows of capital to produce the greatest returns and create prosperity y Reinvestment rates and the desire to grow are absolutely essential y Ability to retain gas price upside is an important incentive to the exploration and production companies to compensate for the substantial financial risks involved Favorable commodity prices y Inducement to drill futures prices y Ability to fund spot prices Ease of processing and delivering gas Voluntary (or not) technical collaboration y Midstream facilities and gas pipelines must be in place or growth will stall
y The speed of dissemination of technical information determines the overall pace of learning
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natural gas is intellectually, physically, and organizationally challenging. The wave of international players signing joint venture agreements with U.S. independents in order to gain exposure to and experience in this sector to transfer abroad is proof both of its complexity and the inexperience of the international players. The difficulties of transferring the unconventional natural gas revolution abroad offer an excellent chance for U.S. companies to play a vital role in that process. While there are many issues that host governments must tackle on their own, partnerships between U.S. companies and international players offer a good opportunity for job creation and international clean energy goals attainment.
Gulf of Mexico shelf has been insufficient to maintain natural gas output, which has fallen by more than 50% since 2000. While certain companies continue to experience success in this area, many of the larger companies have preferred to focus on lower risk, less expensive onshore unconventional operations. Rockies: The low natural gas prices prevailing in the market since mid-2008 have forced many companies to reduce their activity level and devote scarce resources to a smaller number of assets. While the Rockies contain a number of world-class plays and resources, most companies have reduced their focus on and spending level in the Rockies (though that activity remains quite substantial). Northeast States (primarily Pennsylvania, New York, West Virginia): The advent of the Marcellus play has led to a rapid expansion of activity. This area has a very long history of natural gas and oil activity, of course, but in the modern era, these states have witnessed nothing like the tidal wave of investment and ensuing rush of activity they are now experiencing. The phenomenon may be long-lasting, as the Marcellus formation covers such an extensive area that full development will require decades of drilling. Also, the Northeast contains other shale plays besides the Marcellus that may prove beneficial to develop. This rapid migration of natural gas and oil activity to the Northeast is leading to challenges, as regulators, infrastructure, companies, workforces, and local populations seek to adapt to the scale of the opportunity and mitigate risks appropriately. Greater areal extent: Since conventional fields represent a concentrated accumulation of oil or natural gas with a relatively high recovery factor, most conventional deposits cover a relatively small surface area. Unconventional plays are sometimes thought of as blanket resources. Sweet spots with more productive wells are important to find, but all the major shale plays cover vast areas by comparison, multiple counties and sometimes multiple states. The natural result of this is to distribute the royalty lease and production benefits over a wider number of mineral rightsholders. More wellbore-intensive: Because unconventional wells tap into low-permeability reservoirs, they necessarily drain a small area around the wellbore (even after intensive fracturing) compared to conventional wells. As a result, effective and full development of a reservoir necessitates more intensive development than a
Implications of the Shift to an Unconventional Natural Gas Business Model

Unconventional natural gas development began with coalbed methane and tight gas, and has been an important contributor to U.S. supply for several decades. However, with the advent of shale gas development, unconventional drilling has come to dominate natural gas activity in almost every major onshore basin in the nation. When compared to historical activities and business models, this new prominence has a number of implications for industry, mineral owners, regulators, shippers, and consumers. New geographic distribution: The gas patch has historically been comprised of the contiguous area formed by Texas, Louisiana, Oklahoma, New Mexico, and the shallow waters of the Gulf of Mexico. According to EIA data, this region accounted for 75% of lower48 production in 2000. Over the course of the 1990s and 2000s, significant growth was seen in the Rockies states Colorado, Utah, and especially Wyoming. The very large Appalachian Basin (the first basin to be produced in the country) remained a relatively minor, if steady, source of natural gas drilling and production. The advent of unconventional natural gas has led to a shift in the pattern of activity. While the gas patch has reestablished itself as the heart of the movement, there are important implications for other regions. Gulf of Mexico: In light of the relatively high expense of drilling offshore, the geologic risk, and the maturity of the basin, new investment into the
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conventional reservoir covering the same surface area. If a shale reservoir were developed using only vertical wells, then the surface land-use would be commensurate with the subsurface coverage. However, two developments are currently reducing the surface footprint materially: first, horizontal wells allow the subsurface drainage volume associated with one surface location to increase, with minimal impact on the size of that surface facility. Second, companies are increasingly drilling multiple horizontal wells in different directions from the same surface pad. Companies are adopting this pad drilling technique both to improve economics and to reduce the footprint of operations for environmental and/or regulatory reasons. More service sector-intensive: Compared to onshore conventional wells, drilling and completing unconventional wells requires significantly more oilfield services (per unit of reserves or dollars expended). This is primarily due to the extent of equipment, expertise, and time associated with horizontal drilling and hydraulic fracturing, as well as a relatively small amount of reserves per well. During 20052007, natural gas production suffered from a shortage of rigs, qualified service sector employees, and fracturing equipment, and drilling and completion costs rose as a consequence. The service sector responded by building and employing new equipment. While the overall shortage is easing, services are still tight in a number of areas. More people-intensive: The combination of the factors above leads to more job creation than either onshore conventional or offshore investment. The global natural gas and oil industry is one of the most capital-intensive in the world, with extremely high investment levels (to combat natural decline) and a relatively low ratio of employees-to-capital expenditures. While this is still true for unconventional resources compared to other industries, the migration of the industry towards a model dominated by unconventional resource development is likely to generate substantially more jobs than a model focused on conventional natural gas and oil.
overall market approach.25 This has allowed the North American private market to determine prices as a result of the dynamic interaction of supply and demand. The emergence of significant quantities of technically recoverable unconventional natural gas resources presents the government with the opportunity to redefine its business model for interacting with the domestic natural gas industry, its goals for the industry, and how it can facilitate achieving those goals. The federal government has three primary objectives for the development of domestic supplies of natural gas and oil: 1. Enhance national energy security by becoming less reliant on foreign sources of oil. 2. Enhance the economic welfare of the country by promoting economic activity in the natural gas and oil industry. This creates high-pay, high-skill jobs for U.S. workers. It also increases the governments tax revenues (and royalty revenues from federal lands) with the increase in industry activity. This has particular value to the government because 29% of the estimated remaining technically recoverable U.S. natural gas resources and 45% of the estimated remaining technically recoverable U.S. oil resources are on federal lands (both on and offshore) as these lands are developed, the U.S. Treasury receives considerable bonuses, rents, and royalties.26 3. To protect the environment by promoting the development of more efficient and environmentally sensitive exploration and production technologies and operating practices, and substituting clean natural gas for other fossil fuels where possible.
Governing Principles for the Government

While the government approaches the domestic natural gas and oil industry as a market-based and competitive industry where supply and demand
25 An exception to this is the period following the Supreme Court Phillips decision in 1954, which caused wellhead price regulation for sales into the interstate system. The Natural Gas Policy Act of 1978 changed the pricing mechanisms, but wellhead prices were still controlled. These price controls were not eliminated until the Natural Gas Wellhead Decontrol Act of 1989. 26 Energy Information Administration, Annual Energy Outlook, 2009.
The U.S. Governments Role in the Business Model for Unconventional Gas Development
Historically, the federal government has generally, as with most U.S. industries, treated the domestic natural gas exploration and production industry with an 392
conditions direct the industrys activities, the government does have important and distinct roles to play in conjunction with the industry: 1. In the area of R&D, the government does not want to duplicate the work of the industry, but it has an important role to play in addressing long-term, high-risk R&D that the industry cannot perform because the time horizon for commercial development is too long to warrant the research efforts required. The governments R&D also provides the government with expertise to effectively oversee the industrys operations, and also to understand and manage the risks associated with petroleum operations in complex and demanding geologic settings. 2. The government has, at times, provided financial incentives for the industry to develop new frontier resource areas or to develop new technologies needed to find and produce new resources. With financial incentives, the governments goal is to stimulate industry activity that would not otherwise occur, and to have the cost of these incentives be balanced by new revenues collected by the U.S. Treasury and/or balanced by benefits to the country in terms of enhanced energy security and more competitive petroleum prices. 3. The governments regulatory responsibilities have a wide-ranging effect on how and where the industry operates. The government oversees environmental regulations for the whole industry, as well as regulating leasing, development, and production standards for all natural gas and oil development on federal lands. In all these regulatory activities, the governments goals are to fully protect the environment and to promote development where it can be achieved safely.
Conducting R&D to Develop New Technologies and Operating Practices for the Industry
This work should not duplicate what the industry is doing on its own, and should support new frontier area development or technologies that may be too risky or expensive for the private sector to pursue on its own. The government (through the Department of Energy [DOE]) has traditionally conducted R&D that: y Examines areas of technology that are ignored since companies find them difficult or impossible to monetize (e.g., basic research or multi-industry application) y Takes advantage of government-owned assets (e.g., supercomputers or key personnel/skill sets) whose costs cannot be economically justified within the context of a single company y Provides government regulators with the technical expertise to effectively oversee the industrys operations. The 2010 Deepwater Horizon oil spill in the Gulf of Mexico also highlighted the need to understand and manage the risks associated with petroleum operations in complex and demanding geographic and geological settings. In response to this, the DOE has initiated R&D to help the government understand the risks associated with petroleum operations and the capabilities needed to respond to problems. Historically, the federal government has conducted effective R&D programs that do not duplicate or compete with private industry R&D. This R&D has made significant contributions to many aspects of technology development benefiting the industry and the nation, including basic research, new drilling technologies, seismic mapping, and fracture technology. With a long history of government R&D, the implications of continuing this work or taking it in new directions are clear: y Basic and long-term, high-risk R&D that is not pursued by the industry is appropriate to be performed by the government because the private sector will not pursue these R&D efforts on which it cannot achieve an adequate risk-adjusted return on investment. The governments research in this area will
The Governments Choice of Tools to Employ in the Natural Gas and Oil Industry Business Model
The tools the federal government has to promote the development of domestic natural gas and oil resources include: y Conducting R&D to develop new technologies and operating practices for the industry y Financial incentives y Regulatory actions that promote development.
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benefit current technology development as well as helping to bring long-term, high-risk resources (e.g., methane hydrates) to commercial viability in a more timely manner. y Studying the risks associated with petroleum operations and the capabilities needed to respond to any problems helps manage the risks associated with petroleum operations in complex and demanding geologic settings. For the deepwater and ultra-deepwater, government R&D should collaborate with industry efforts and include: y Development of technology to recognize previously unknown and changing downhole conditions that threaten overall safety of operations y Researching effective strategies for remote intervention, including quantifying risks associated with deepwater exploration and production and determining appropriate safeguards to include blow out preventer standards. For gas shale resources, government study and R&D could include: y Water demand for use in fracturing y Protection of drinking water aquifers during hydraulic fracturing; evaluation of the safety of chemicals used in hydraulic fracturing y Air quality impacts resulting from increased drilling, natural gas production, and truck transportation activity y Community safety issues surrounding hydraulic fracturing operations in populatedareas y Water treatment and management technologies to address water requirements, fracture fluid flowback, and produced water y Potential mitigation steps should groundwater contamination occur y The DOE could also conduct R&D to help bring the nations long-term, high-risk natural gas resources (such as methane hydrates) to commercial viability.
slowly and to a lesser degree). These financial incentives have taken the form of tax incentives in the federal tax code or royalty incentives for development on federal lands. These incentives have generally been used to promote the development of new frontier resource areas of the industry and the development of new technologies needed to develop these new resources. Examples of effective use of financial incentives to promote the development of new resources and technologies include: y The Section 29 tax credit for the development of unconventional natural gas resources. This tax credit, which was instituted in 1979, provided a significant push to the development of the new technologies and practices needed to produce these unconventional resources. This tax credit was eventually eliminated in the 1990s when it was determined that the new technologies were in widespread use and that the industry no longer needed this incentive. Today, unconventional gas resources are a significant source of the nations production of natural gas and are expected to be the major incremental source of supplies in thefuture. y The deepwater royalty holiday to promote the development of new natural gas and oil resources in deep waters of the Gulf of Mexico. With this incentive, the industry has proceeded to create new technologies and operating practices to develop the vast petroleum resources found in the deep waters to the point where this region is among the largest sources of petroleum supplies in the country. The deepwater royalty relief program expired in 2000, as provided for in the Deepwater Royalty Relief Act of 1995, which instituted this program. y Accelerated depreciation of new transportation infrastructure (pipelines). In 2005, as part of the Energy Policy Act, the term over which a pipeline company could write off new investment in natural gas pipelines was shortened from 20 to 15 years. This helped promote the development of new pipelines by allowing the pipeline companies to recapture their investment more quickly.
Financial Incentives
Historically, the federal government (and many states) has used financial incentives to promote the development of domestic natural gas resources that might not be developed (or would be developed more 394
Regulatory Actions That Promote Development

An example of a regulatory action to promote development is the 2008 decision by then President Bush to remove the presidential moratorium on developing certain areas of the federal Outer Continental
Shelf. Regulatory action also includes the concept of removing or clarifying duplicative and/or confusing regulations that interfere with the markets ability to function properly (see Chapter Two, Operations and Environment). As the federal government regulations and standards have developed and evolved over time, some of these regulations have not been coordinated or made clear. This has created situations where the industry is unsure about the regulations it needs to comply with
and, as a result, responds with inefficient and more costly compliance strategies to ensure standards are met. Just as importantly, this regulatory uncertainty can inhibit investment and delay project schedules, which decrease supply, again raising costs to consumers and leaving resources undeveloped. This situation is further complicated by widely varying state regulatory standards that frequently govern the same issues as the federalregulations. It is, therefore, to the benefit of the government, natural gas and oil industry, and consumers if regulatory uncertainty is reduced.
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Employment, Labor Income and Value Added. May 2011. http://www.pwc.com/us/nes. Ringlund, G. B., Rosendahl, K. E., and Skjerpen, T. Does Oilrig Activity React to Oil Price Changes? An Empirical Investigation. Energy Economics. 2008. Rose, A. Z., and Wei, D. The Economic Impacts of Coal Utilization and Displacement in the Continental United States, 2015. The Pennsylvania State University. 2006. Tax Foundation. Fiscal Facts. 2011. Retrieved March 16, 2011. http://www.taxfoundation.org/ research/show/27023.html. U.S. Department of Commerce, Bureau of Economic Analysis. Economic Downturn Widespread Among States in 2009. 2010. Retrieved March 16, 2011. http://www.bea.gov/newsreleases/regional/gdp_ state/2010/pdf/gsp1110.pdf. U.S. Department of Labor. May 2009. http://www. bls.gov/data/. U.S. Department of the Treasury. Internal Revenue Service, SOI Tax StatsReturns of Active Corporations. Retrieved March 16, 2011. http://www.irs.gov/ taxstats/article/0,,id=170542,00.html. U.S. Energy Information Administration. Federal Financial Interventions and Subsidies in Energy Markets, 2007. April 2008. U.S. Energy Information Administration. (n.d.). Electric Power Annual. http://www.eia.doe.gov/cneaf/ electricity/epa/epa_sum.html. University of Houston-Boyden. The Workforce Crisis in the Upstream Oil & Gas Sector. 2007. Wood Mackenzie. Evaluation of Proposed Tax Changes on the US Oil & Gas Industry. 2010.
PricewaterhouseCoopers. The Economic Impacts of the Oil and Natural Gas Industry on the U.S. Economy:
396
Appendix A
APPENDIX A rEquEst lEttErs AND DEscrIPtIoN of thE NPc
A-1
A-2
PruDENt DEVEloPMENt: realizing the Potential of North Americas Abundant Natural Gas and oil resources
A-3
A-4
DESCRIPTION OF THE NATIONAL PETROLEUM COUNCIL

In May 1946, the President stated in a letter to the Secretary of the Interior that he had been impressed by the contribution made through government/industry cooperation to the success of the World War II petroleum program. He felt that it would be beneficial if this close relationship were to be continued and suggested that the Secretary of the Interior establish an industry organization to advise the Secretary on oil and natural gas matters. Pursuant to this request, Interior Secretary J. A. Krug established the National Petroleum Council (NPC) on June 18, 1946. In October 1977, the Department of Energy was established and the Council was transferred to the new department. The purpose of the NPC is solely to advise, inform, and make recommendations to the Secretary of Energy on any matter requested by the Secretary, relating to oil and natural gas or the oil and gas industries. Matters that the Secretary would like to have considered by the Council are submitted in the form of a letter outlining the nature and scope of the study. The Council reserves the right to decide whether it will consider any matter referred to it. Examples of studies undertaken by the NPC at the request of the Secretary include: y Industry Assistance to Government Methods for Providing Petroleum Industry Expertise During Emergencies (1991) y Petroleum Refining in the 1990s Meeting the Challenges of the Clean Air Act (1991) y The Potential for Natural Gas in the United States (1992) y U.S. Petroleum Refining Meeting Requirements for Cleaner Fuels and Refineries (1993) y The Oil Pollution Act of 1990: Issues and Solutions (1994) y Marginal Wells (1994) y Research, Development, and Demonstration Needs of the Oil and Gas Industry (1995) y Future Issues A View of U.S. Oil & Natural Gas to 2020 (1995) y U.S. Petroleum Product Supply Inventory Dynamics (1998) y Meeting the Challenges of the Nations Growing Natural Gas Demand (1999) y U.S. Petroleum Refining Assuring the Adequacy and Affordability of Cleaner Fuels (2000) y Securing Oil and Natural Gas Infrastructures in the New Economy (2001) y Balancing Natural Gas Policy Fueling the Demands of a Growing Economy (2003) y Observations on Petroleum Product Supply (2004) y Facing the Hard Truths about Energy: A Comprehensive View to 2030 of Global Oil and Natural Gas (2007) y One Year Later: An Update on Facing the Hard Truths about Energy (2008). The NPC does not concern itself with trade practices, nor does it engage in any of the usual trade association activities. The Council is subject to the provisions of the Federal Advisory Committee Act of 1972. Members of the National Petroleum Council are appointed by the Secretary of Energy and represent all segments of the oil and gas industries and related interests. The NPC is headed by a Chair and a Vice Chair, who are elected by the Council. The Council is supported entirely by voluntary contributions from its members. Additional information on the Councils origins, operations, and reports can be found at www.npc.org. A-5
NATIONAL PETROLEUM COUNCIL MEMBERSHIP 2010/2011 Term

Gary A. Adams George A. Alcorn, Sr. Robert Neal Anderson Thurmon M. Andress Robert H. Anthony Alan S. Armstrong Gregory L. Armstrong Robert G. Armstrong Gregory A. Arnold Philip K. Asherman Ralph E. Bailey Fredrick J. Barrett Riley P. Bechtel Michel Bnzit Anthony J. Best Donald T. Bollinger John F. Bookout James D. Boyd Ben M. Brigham Jon S. Brumley Philip J. Burguieres Matthew D. Cabell Kateri A. Callahan Robert B. Catell Clarence P. Cazalot, Jr. Eileen B. Claussen Kim R. Cocklin T. Jay Collins Theodore F. Craver, Jr. William A. Custard Patrick D. Daniel Vice-Chair and Commissioner Chairman, President and Chief Executive Officer Chief Executive Officer Chief Executive Officer President President Chairman, Advanced Energy Research and Technology Center Chairman, President and Chief Executive Officer President President and Chief Executive Officer President and Chief Executive Officer Chairman, President and Chief Executive Officer President and Chief Executive Officer President and Chief Executive Officer Vice Chairman, Oil and Gas President Head of Consulting Managing Director Commissioner President and Chief Executive Officer Chairman and Chief Executive Officer President President and Chief Executive Officer President and Chief Executive Officer Chairman Emeritus Chairman and Chief Executive Officer Chairman and Chief Executive Officer President, Refining and Marketing President and Chief Executive Officer Chairman of the Board and Chief Executive Officer Deloitte LLP Alcorn Exploration, Inc. Wood MacKenzie, Ltd. BreitBurn Energy LP Oklahoma Corporation Commission The Williams Companies, Inc. Plains All American Pipeline, L.P. Armstrong Energy Corporation Truman Arnold Companies Chicago Bridge & Iron Company N.V. Fuel Tech, Inc. Bill Barrett Corporation Bechtel Group, Inc. Total S.A. SM Energy Company Bollinger Shipyards, Inc. Houston, Texas California Energy Commission Brigham Exploration Company Enduro Resource Partners LLC EMC Holdings, L.L.C. Seneca Resources Corporation Alliance to Save Energy Stony Brook University Marathon Oil Corporation Pew Center on Global Climate Change Atmos Energy Corporation Oceaneering International, Inc. Edison International Dallas Production, Inc. Enbridge Inc.
A-7

Charles D. Davidson D. Scott Davis Chadwick C. Deaton David R. Demers Claiborne P. Deming David M. Demshur John M. Deutch Laurence M. Downes W. Byron Dunn Bernard J. Duroc-Danner Gregory L. Ebel Randall K. Eresman Ronald A. Erickson Behrooz Fattahi John A. Fees Fereidun Fesharaki William L. Fisher James C. Flores Douglas L. Foshee Paul L. Foster Randy A. Foutch Robert W. Gee Asim Ghosh James A. Gibbs John W. Gibson Russell K. Girling Lawrence J. Goldstein Andrew Gould Simon Greenshields James T. Hackett Gary L. Hall Frederic C. Hamilton Chairman and Chief Executive Officer Chairman and Chief Executive Officer Chairman and Chief Executive Officer Chief Executive Officer Chairman of the Executive Committee Chairman of the Board, President and Chief Executive Officer Institute Professor, Department of Chemistry Chairman and Chief Executive Officer Principal Chairman, President and Chief Executive Officer President and Chief Executive Officer President and Chief Executive Officer Chief Executive Officer 2010 President Chairman Chairman Professor and Barrow Chair, Jackson School of Geosciences Chairman of the Board, President and Chief Executive Officer Chairman and Chief Executive Officer President and Chief Executive Officer Chairman and Chief Executive Officer President President and Chief Executive Officer Chairman Chief Executive Officer President and Chief Executive Officer Director Chairman Co-Head of Global Commodities Chairman and Chief Executive Officer President Chairman and Chief Executive Officer Noble Energy, Inc. UPS Baker Hughes Incorporated Westport Innovations Inc. Murphy Oil Corporation Core Laboratories N.V. Massachusetts Institute of Technology New Jersey Resources Corporation Tubular Synergy Group, LP Weatherford International Ltd. Spectra Energy Corp Encana Corporation Holiday Companies Society of Petroleum Engineers International The Babcock & Wilcox Company FACTS Global Energy The University of Texas Plains Exploration & Production Company El Paso Corporation Western Refining, Inc. Laredo Petroleum, Inc. Gee Strategies Group, LLC Husky Energy Inc. Five States Energy Company, LLC ONEOK, Inc. TransCanada Corporation Energy Policy Research Foundation, Inc. Schlumberger Limited Morgan Stanley Anadarko Petroleum Corporation Hall-Houston Exploration Partners, L.L.C. The Hamilton Companies LLC
A-8

Harold G. Hamm John J. Hamre John A. Harju Jeffrey O. Henley John B. Hess Jack D. Hightower Stephen L. Hightower Jeffery D. Hildebrand John D. Hofmeister Forrest E. Hoglund Stephen A. Holditch Chairman of the Board and Chief Executive Officer President and Chief Executive Officer Continental Resources, Inc. Center for Strategic & International Studies
Associate Director for Research, University of North Dakota Energy & Environment Research Center Chairman of the Board Chairman, President and Chief Executive Officer Chairman, President and Chief Executive Officer President and Chief Executive Officer President and Chief Executive Officer Founder and Chief Executive Officer Chairman and Chief Executive Officer Noble Endowed Chair and Head of the Harold Vance Department of Petroleum Engineering Executive Director Chairman of the Board, President and Chief Executive Officer Executive Director, Energy Modeling Forum General Partner Executive Chairman Chairman and Chief Executive Officer President and Chief Executive Officer Past President Chairman Chairman Chairman and General Counsel President Executive Chairman Former Chairman of the Board Chairman and Chief Executive Officer Chairman of the Board and Chief Executive Officer President and Chief Executive Officer Oracle Corporation Hess Corporation Bluestem Energy L.P. Hightowers Petroleum Co. Hilcorp Energy Company Citizens for Affordable Energy, Inc. SeaOne Maritime Corp. Texas A&M University
Martin J. Houston Ray L. Hunt Hillard G. Huntington John R. Hurd Ray R. Irani Eugene M. Isenberg Terrence S. Jacobs Robert J. Johnson A. V. Jones, Jr. Jon Rex Jones Jerry D. Jordan Fred C. Julander Andy Karsner Richard C. Kelly Richard D. Kinder Peter D. Kinnear Frederick M. Kirschner John Krenicki, Jr.
BG Group plc Hunt Consolidated, Inc. Stanford University Hurd Enterprises, Ltd. Occidental Petroleum Corporation Nabors Industries, Inc. Penneco Oil Company National Association of Black Geologists and Geophysicists Van Operating, Ltd. Jones Management Corp. Knox Energy, Inc. Julander Energy Company Manifest Energy, Inc. Xcel Energy Inc. Kinder Morgan Inc. FMC Technologies, Inc. Bryn Mawr, Pennsylvania GE Energy Infrastructure
A-9

Fred Krupp Vello A. Kuuskraa Stephen D. Layton Virginia B. Lazenby David J. Lesar Nancy G. Leveson Michael C. Linn Andrew N. Liveris Daniel H. Lopez Amory B. Lovins Aubrey K. McClendon W. Gary McGilvray Lee A. McIntire Lamar McKay James T. McManus, II Rae McQuade Cary M. Maguire Kenneth B. Medlock, III President President President Chairman and Chief Executive Officer Chairman of the Board, President and Chief Executive Officer Professor of Aeronautic and Astronautics Executive Chairman Chairman, President and Chief Executive Officer President Chairman and Chief Scientist Chairman of the Board and Chief Executive Officer President and Chief Executive Officer Chairman of the Board and Chief Executive Officer Chairman and President Chairman, President and Chief Executive Officer President President and Chief Executive Officer James A. Baker III and Susan G. Baker Fellow in Energy and Resource Economics and Deputy Director, Energy Forum, James A. Baker III Institute for Public Policy Adjunct Professor, Economics Department Chairman, President and Chief Executive Officer Chairman and Chief Executive Officer Partner Chairman, President and Chief Executive Officer President Chairman President and Chief Executive Officer Chairman, President and Chief Executive Officer Environmental Defense Fund Advanced Resources International, Inc. E&B Natural Resources Management Corporation Bretagne, LLC Halliburton Company Massachusetts Institute of Technology Linn Energy, LLC The Dow Chemical Company New Mexico Institute of Mining and Technology Rocky Mountain Institute Chesapeake Energy Corporation DeGolyer and MacNaughton CH2M HILL Companies, Ltd. BP America Inc. Energen Corporation North American Energy Standards Board Maguire Oil Company Rice University
F. H. Merelli Augustus C. Miller David B. Miller Merrill A. Miller, Jr. Michael J. Miller T. O. Moffatt Jack B. Moore Michael G. Morris
Cimarex Energy Co. Miller Oil Co., Inc. EnCap Investments L.P. National Oilwell Varco, Inc. Miller Energy Company The Energy Council Cameron American Electric Power Co., Inc.
A-10

Steven L. Mueller James J. Mulva David L. Murfin Mark B. Murphy Richard S. Neville James E. Newsome J. Larry Nichols Patrick F. Noonan Gerardo Norcia John W. B. Northington Thomas B. Nusz Marvin E. Odum David J. OReilly Geoffrey C. Orsak James W. Owens C. R. Palmer Mark G. Papa Robert L. Parker, Jr. Donald L. Paul President and Chief Executive Officer Chairman and Chief Executive Officer President President President Principal Executive Chairman Chairman Emeritus President and Chief Operating Officer President President and Chief Executive Officer President Chairman of the Board, Retired Retired Chairman of the Board Chairman Emeritus Chairman and Chief Executive Officer Executive Chairman Executive Director of the Energy Institute and William M. Keck Chair in Energy Resources Executive Director, Center for Energy Studies Chairman of the Board, President and Chief Executive Officer President and Chief Executive Officer Chairman Former Chair President and Chief Executive Officer President and Chief Executive Officer Chairman, President and Chief Executive Officer Chairman of the Board Chief Executive Officer Chief Executive Officer Chairman of the Board and Chief Executive Officer President Former Chair Southwestern Energy Company ConocoPhillips Murfin Drilling Co., Inc. Strata Production Company Western Petroleum Company Delta Strategy Group Devon Energy Corporation The Conservation Fund Michigan Consolidated Gas Company Northington Strategy Group Oasis Petroleum, LLC Shell Oil Company Chevron Corporation Caterpillar Inc. Rowan Companies, Inc. EOG Resources, Inc. Parker Drilling Company University of Southern California
Dean, Bobby B. Lyle School of Engineering Southern Methodist University
Allan G. Pulsipher Daniel W. Rabun W. Matt Ralls Keith O. Rattie Lee R. Raymond June Ressler Corbin J. Robertson, Jr. James E. Rogers Henry A. Rosenberg, Jr. Paolo Scaroni David T. Seaton Peter A. Seligmann S. Scott Sewell Bobby S. Shackouls
Louisiana State University Ensco plc Rowan Companies, Inc. Questar Corporation National Petroleum Council Cenergy Companies Quintana Minerals Corporation Duke Energy Corporation Crown Central LLC Eni S.p.A. Fluor Corporation Conservation International Delta Energy Management, Inc. National Petroleum Council
A-11

Philip R. Sharp R. Gordon Shearer Scott D. Sheffield Adam E. Sieminski Timothy Alan Simon Robert C. Skaggs, Jr. Carl Michael Smith Frederick W. Smith Frank M. Stewart John P. Surma Cindy B. Taylor Dean E. Taylor Berry H. Tew, Jr. Susan F. Tierney Rex W. Tillerson Scott W. Tinker President President and Chief Executive Officer Chairman and Chief Executive Officer Chief Energy Economist, Global Markets/Commodities Commissioner, Public Utilities Commission President and Chief Executive Officer Executive Director Chairman, President and Chief Executive Officer President and Chief Operating Officer Chairman, President and Chief Executive Officer President and Chief Executive Officer Chairman, President and Chief Executive Officer Managing Principal Chairman, President and Chief Executive Officer Director, Bureau of Economic Geology and State Geologist of Texas Jackson School of Geosciences Managing Director Partner Chairman and Chief Executive Officer Chairman, President and Chief Executive Officer Executive Director Chairman and President David Mitchell Encana Professor Haskayne School of Business President President and Chief Executive Officer President and Chief Executive Officer President and Chairman Chairman, President and Chief Executive Officer Resources for the Future Inc. Hess LNG LLC Pioneer Natural Resources Company Deutsche Bank AG State of California NiSource Inc. Interstate Oil and Gas Compact Commission FedEx Corporation American Association of Blacks in Energy U.S. Steel Corporation Oil States International, Inc. Tidewater Inc.
State Geologist and Oil and Gas Supervisor Geological Survey of Alabama Analysis Group, Inc. Exxon Mobil Corporation The University of Texas
William Paschall Tosch H. A. True, III Robert B. Tudor, III William P. Utt W. Bruce Valdez J. Craig Venter Philip K. Verleger, Jr. Bruce H. Vincent John B. Walker Douglas J. Wall Cynthia J. Warner Michael D. Watford
J.P. Morgan Securities Inc. True Oil LLC Tudor, Pickering, Holt & Co., LLC KBR, Inc. Southern Ute Indian Tribe Growth Fund J. Craig Venter Institute University of Calgary Swift Energy Company EnerVest, Ltd. Patterson-UTI Energy, Inc. Sapphire Energy, Inc. Ultra Petroleum Corp.
A-12

John S. Watson Roger P. Webb J. Robinson West Craig E. White David W. Williams Mary Jane Wilson Timothy E. Wirth Patricia A. Woertz David M. Wood Patrick Wood, III Martha B. Wyrsch George M. Yates John A. Yates J. Michael Yeager Daniel H. Yergin John F. Young Chairman of the Board and Chief Executive Officer Interim Executive Director The Strategic Energy Institute Chairman and Chief Executive Officer President and Chief Executive Officer Chairman of the Board, President and Chief Executive Officer President and Chief Executive Officer President Chairman, Chief Executive Officer and President President and Chief Executive Officer Principal President President and Chief Executive Officer Chairman of the Board Group Executive and Chief Executive Petroleum Chairman President and Chief Executive Officer Chevron Corporation Georgia Institute of Technology PFC Energy, Inc. Philadelphia Gas Works Noble Corporation WZI Inc. United Nations Foundation Archer Daniels Midland Company Murphy Oil Corporation Wood3 Resources Vestas Americas, USA HEYCO Energy Group, Inc. Yates Petroleum Corporation BHP Billiton Petroleum IHS Cambridge Energy Research Associates, Inc. Energy Future Holdings Corp.
A-13
Appendix B
Study Group Rosters
STUDY PARTICIPATION
Study group and outreach participants contributed in a variety of ways, ranging from full-time work in multiple study areas, to involvement on a specific topic, to reviewing proposed materials, or to participating solely in an outreach session. Involvement in these activities should not be construed as endorsement or agreement with all the statements, findings, and recommendations in this report. Additionally, while U.S. government participants provided significant assistance in the identification and compilation of data and other information, they did not take positions on the studys policy recommendations. As a federally appointed and chartered advisory committee, the National Petroleum Council is solely responsible for the final advice provided to the Secretary of Energy. However, the Council believes that the broad and diverse study group and outreach participation has informed and enhanced its study and advice. The Council is very appreciative of the commitment and contributions from all who participated in the process. This appendix lists the individuals who served on this studys Committee, Coordinating Subcommittee, Task Groups, and Subgroups, as a recognition of their contributions. In addition, the National Petroleum Council wishes to acknowledge the numerous other individuals and organizations who participated in some aspects of the work effort through workshops, outreach meetings, and other contacts. Their time, energy, and commitment significantly enhanced the study and their contributions are greatly appreciated.
APPENDIX B STUDY GROUP ROSTERS
B-1
TABLE OF CONTENTS
NPC Committee on Resource Development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .B-3 Coordinating Subcommittee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .B-6 Policy Subgroup . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-7 End-Use Emissions & Carbon Regulation Subgroup . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-8 Emissions Team . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-9 Life-Cycle Analysis Team . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-10 Technology Team . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-10 EPA Regulations Team . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-11 Policy Team . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-11 Macroeconomic Subgroup . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-12 Integration Subgroup. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-13 Report Writing Subgroup . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-13 Antitrust Advisory Subgroup . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-14 Presentations & Other Assistance to the Coordinating Subcommittee . . . . . . . . . . . . . . . . . . . B-14 Resource & Supply Task Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-16 Resource Endowment Subgroup . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-17 Data & Studies Subgroup . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-17 Offshore Subgroup . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-18 Arctic Subgroup . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-18 Onshore Oil & EOR Subgroup . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-19 Unconventional Oil Subgroup . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-19 Oil Infrastructure Subgroup . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-20 Onshore Gas Subgroup . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-20 Gas Infrastructure Subgroup . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-20 Operations & Environment Task Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-21 Environmental & Regulatory Subgroup . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-22 Offshore Operations Subgroup . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-23 Technology Subgroup . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-24 Onshore Operations Subgroup. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-25 Demand Task Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-27 Power Subgroup . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-28 Residential/Commercial Subgroup . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-29 Industrial Subgroup . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-30 Gas Transportation Subgroup . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-30
B-2

Chair James T. Hackett Government Cochair Daniel B. Poneman Vice Chair Demand Daniel H. Yergin Chairman and Chief Executive Officer Deputy Secretary of Energy Chairman IHS Cambridge Energy Research Associates, Inc. Chesapeake Energy Corporation Anadarko Petroleum Corporation
Vice Chair Operations & Environment Aubrey K. McClendon Chairman of the Board and Chief Executive Officer Vice ChairResource & Supply Marvin E. Odum President Vice ChairPolicy Philip R. Sharp Ex Officio David J. OReilly Ex Officio Douglas L. Foshee Secretary Marshall W. Nichols Members George A. Alcorn, Sr. Robert Neal Anderson Robert H. Anthony Alan S. Armstrong Fredrick J. Barrett Kateri A. Callahan Clarence P. Cazalot, Jr. Theodore F. Craver, Jr. Patrick D. Daniel Charles D. Davidson Chadwick C. Deaton Randall K. Eresman Behrooz Fattahi President Chair Vice Chair Executive Director President Head of Consulting Commissioner President and Chief Executive Officer Chairman and Chief Executive Officer President Chairman, President and Chief Executive Officer Chairman, President and Chief Executive Officer President and Chief Executive Officer Chairman and Chief Executive Officer Chairman and Chief Executive Officer President and Chief Executive Officer 2010 President
Shell Oil Company Resources for the Future Inc. National Petroleum Council National Petroleum Council National Petroleum Council Alcorn Exploration, Inc. Wood Mackenzie Inc. Oklahoma Corporation Commission The Williams Companies, Inc. Bill Barrett Corporation Alliance to Save Energy Marathon Oil Corporation Edison International Enbridge Inc. Noble Energy, Inc. Baker Hughes Incorporated Encana Corporation Society of Petroleum Engineers International
B-3

John W. Gibson Russell K. Girling Andrew Gould Simon Greenshields Harold G. Hamm John J. Hamre John A. Harju Jeffrey O. Henley Stephen A. Holditch Chief Executive Officer President and Chief Executive Officer Chairman Co-Head of Global Commodities Chairman of the Board and Chief Executive Officer President and Chief Executive Officer Associate Director for Research, Energy & Environment Research Center Chairman of the Board Noble Endowed Chair and Head of the Harold Vance Department of Petroleum Engineering Executive Director Executive Chairman Chairman and Chief Executive Officer President and Chief Executive Officer President Chairman and Chief Executive Officer President and Chief Executive Officer President Chairman of the Board, President and Chief Executive Officer Chairman, President and Chief Executive Officer Chairman Chairman, President and Chief Executive Officer Chairman and Chief Executive Officer Executive Chairman Chairman and Chief Executive Officer Executive Chairman Chairman President and Chief Executive Officer Chief Energy Economist, Global Markets/Commodities President and Chief Executive Officer Executive Director Chairman, President and Chief Executive Officer State Geologist ONEOK, Inc. TransCanada Corporation Schlumberger Limited Morgan Stanley Continental Resources, Inc. Center for Strategic & International Studies University of North Dakota Oracle Corporation Texas A&M University
Martin J. Houston Ray R. Irani Eugene M. Isenberg Terrence S. Jacobs Fred C. Julander Richard D. Kinder John Krenicki, Jr. Stephen D. Layton David J. Lesar Andrew N. Liveris T. O. Moffatt Michael G. Morris James J. Mulva J. Larry Nichols Mark G. Papa Robert L. Parker, Jr. Keith O. Rattie June Ressler Adam E. Sieminski Robert C. Skaggs, Jr. Carl Michael Smith John P. Surma Berry H. Tew, Jr.
BG Group plc Occidental Petroleum Corporation Nabors Industries, Inc. Penneco Oil Company Julander Energy Company Kinder Morgan Inc. GE Energy Infrastructure E&B Natural Resources Management Corporation Halliburton Company The Dow Chemical Company The Energy Council American Electric Power Co., Inc. ConocoPhillips Devon Energy Corporation EOG Resources, Inc. Parker Drilling Company Questar Corporation Cenergy Companies Deutsche Bank AG NiSource Inc. Interstate Oil and Gas Compact Commission U.S. Steel Corporation Geological Survey of Alabama
B-4

Rex W. Tillerson Scott W. Tinker Chairman, President and Chief Executive Officer Director, Bureau of Economic Geology and State Geologist of Texas Jackson School of Geosciences President Chairman, President and Chief Executive Officer Chairman of the Board and Chief Executive Officer Chairman and Chief Executive Officer President and Chief Executive Officer Principal President Exxon Mobil Corporation The University of Texas
Bruce H. Vincent Michael D. Watford John S. Watson J. Robinson West Craig E. White Patrick Wood, III Martha B. Wyrsch
Swift Energy Company Ultra Petroleum Corp. Chevron Corporation PFC Energy, Inc. Philadelphia Gas Works Wood3 Resources Vestas Americas, USA
B-5
Chair D. Clay Bretches Government Cochair Christopher A. Smith Assistant Chair A. Scott Moore Secretary John H. Guy, IV Members Robert H. Anthony Porter B. Bennett Randy L. Broiles Kenneth S. Bromfield Mark S. Brownstein Christopher L. Conoscenti Scott E. Davis* Vice President, E&P Services and Minerals Deputy Assistant Secretary for Oil and Natural Gas, Office of Fossil Energy Vice President, Marketing Deputy Executive Director Commissioner President and Chief Executive Officer Vice President, Americas U.S. Commercial Director, Energy Business Chief Counsel, Energy Program Executive Director, Energy Investment Banking Vice President, MidContinent/Alaska SBU Anadarko Petroleum Corporation U.S. Department of Energy
Anadarko Petroleum Corporation National Petroleum Council Oklahoma Corporation Commission BENTEK Energy, LLC ExxonMobil Production Company Dow Hydrocarbons and Resources LLC Environmental Defense Fund J.P. Morgan Securities Inc. Chevron North America Exploration and Production Company U.S. Department of Energy U.S. Department of the Interior El Paso Corporation Chesapeake Energy Corporation E&B Natural Resources Management Corporation Halliburton Company Resources for the Future The Dow Chemical Company Federal Energy Regulatory Commission U.S. Department of Energy
Jonathan H. Elkind Edward Farquhar Fiji C. George Paul D. Hagemeier Stephen D. Layton Stephen K. London Jan W. Mares Douglas A. May** Philip D. Moeller Richard G. Newell***
Principal Deputy Assistant Secretary, Office of Policy and International Affairs Deputy Assistant Secretary for Land and Minerals Management Director, Carbon Strategies Vice President, Regulatory Compliance President Account Vice President Senior Policy Advisor Vice President, Investor Relations Commissioner Administrator Energy Information Administration
* Represented by Jack Derickson commencing April 2011. ** Replaced by Kenneth S. Bromfield in March 2011. *** Individual has since changed organizations but was employed by the specified company while participating in the study.
B-6
Frank P. Prager Kyle M. Sawyer Timothy Alan Simon Andrew J. Slaughter Susan F. Tierney Frank A. Verrastro Kenneth L. Yeasting Vice President, Environmental Policy Manager Commissioner, Public Utilities Commission Business Environment Advisor Upstream Americas Managing Principal Senior Vice President and Director, Energy and National Security Program Senior Director, Global Gas and North American Gas Xcel Energy Inc. El Paso Corporation State of California Shell Exploration & Production Company Analysis Group, Inc. Center for Strategic & International Studies IHS Cambridge Energy Research Associates, Inc. Chesapeake Energy Corporation Shell Oil Company U.S. Department of Energy
Assistants and Task Group Assistant Chairs William M. Fowler Director, Environmental and Regulatory Affairs Marianne Funk Director, CO2 Advocacy Nancy L. Johnson Director, Environmental Science and Policy Analysis, Office of Oil and Natural Gas, Office of Fossil Energy Kevin A. Kelly Manager, Gas Marketing Fundamentals Kevin M. ODonovan* Director, Policy and State Government Relations, Government Affairs James A. Osten Director, North American Natural Gas
Anadarko Energy Services Company Shell Oil Company IHS Global Insight
Policy Subgroup
Chair Susan F. Tierney Assistant Chair Robert L. Earle Members Douglas J. Arent Managing Principal Vice President Executive Director, Joint Institute for Strategic Energy Analysis National Renewable Energy Laboratory Senior Associate, Climate and Energy Program Co-Founder and Executive Director Senior Vice President Deputy General Counsel for Energy Policy Planning Manager, Corporate Strategic Planning Member Analysis Group, Inc. Analysis Group, Inc. U.S. Department of Energy
James Bradbury Armond Cohen David W. Conover Robert H. Edwards, Jr. Thomas R. Eizember Lisa E. Epifani
World Resources Institute Clean Air Task Force Bipartisan Policy Center U.S. Department of Energy Exxon Mobil Corporation Van Ness Feldman, PC
* Replaced by Marianne Funk in April 2011. Individual has since changed organizations but was employed by the specified company while participating in the study.
B-7
James E. Ford Robert W. Gee John R. Hanger* R. Maynard Holt J. Bennett Johnston Melanie A. Kenderdine Henry Lee Vice President, Federal and State Government Affairs President Secretary, Department of Environmental Protection Co-President Executive Director, MIT Energy Initiative Jassim M. Jaidah Family Director of the Environment and Natural Resources Program, Belfer Center for Science and International Affairs John F. Kennedy School of Government President Senior Policy Advisor Science Fellow Partner Senior Fellow Washington Representative Climate Technology Innovation Coordinator Senior Scientist Associate Director for Energy Security ConocoPhillips Gee Strategies Group, LLC State of Pennsylvania Tudor, Pickering, Holt & Co., LLC Johnston & Associates LLC Massachusetts Institute of Technology Harvard University
Rae McQuade Jan W. Mares Elizabeth Anne Moler Briana Mordick Larry W. Nettles John A. Riggs Robin K. Roy Richard N. Sawaya Assistants Mike Fowler L. Bruce Hill David Rosner
North American Energy Standards Board Resources For the Future McLean, Virginia Natural Resources Defense Council Vinson & Elkins LLP The Aspen Institute Natural Resources Defense Council Devon Energy Corporation Clean Air Task Force Clean Air Task Force Bipartisan Policy Center
End-Use Emissions and Carbon Regulation Subgroup

Chair Fiji C. George Assistant Chair Timothy T. Cheung* Members Randy Armstrong Kevin D. Book Bruce H. Braine Steven Caldwell Ronald Edelstein Director, Carbon Strategies Senior Carbon Analyst Environmental Issues Director, Environmental Department Managing Director, Research Vice President, Strategic Policy Analysis Senior Solutions Fellow Director, Regulatory and Government Relations El Paso Corporation El Paso Corporation Shell Upstream Americas SE & SD ClearView Energy Partners, LLC American Electric Power Co., Inc. Pew Center on Global Climate Change Gas Technology Institute
* Individual has since changed organizations but was employed by the specified company while participating in the study.
B-8
Bryan J. Hannegan Paul D. Holtberg Vice President, Environment and Renewables Acting Director, Office of Integrated and International Energy Analysis Energy Information Administration Senior Technical Advisor, Office of Clean Coal, Office of Planning and Environmental Analysis, Office of Fossil Energy R&D Director Principal Senior Research Associate, Energy, Economics, and Policy Senior Operations Research Analyst, Clean Air Markets Division Vice President, Marketing Principal Financial Advisor, Strategy and Market Analysis Director, Clean Air Markets Division, Office of Atmospheric Programs Analyst, Strategic Policy Analysis Technical Advisor, Upstream Safety, Health and Environment Senior Consultant General Manager, Climate Change, Strategic Planning Professor of Engineering & Public Policy and Mechanical Engineering Head of U.S. Carbon Markets Finance Advisor, Center for Market Innovation Professor, School of International Relations and Pacific Studies and Co-Director, Laboratory on International Law and Regulation Manager, Strategic Policy Analysis Electric Power Research Institute U.S. Department of Energy
Sikander R. Khan
U.S. Department of Energy
Neil Leslie Steven H. Levine Rohan Ma William Meroney A. Scott Moore Erling Mowatt-Larssen Samuel Napolitano Rodney Nespeca Michael E. Parker Heidi J. Pervin David E. Rogers Robin K. Roy Edward S. Rubin Milo Sjardin Andy Stevenson* David G. Victor
Gas Technology Institute The Brattle Group ClearView Energy Partners, LLC U.S. Environmental Protection Agency Anadarko Petroleum Corporation El Paso Corporation U.S. Environmental Protection Agency American Electric Power Co., Inc. ExxonMobil Production Company Chevron Corporation Chevron Corporation Natural Resources Defense Council Carnegie Mellon University Bloomberg New Energy Finance Natural Resources Defense Council University of California, San Diego
Scott A. Weaver
American Electric Power Co., Inc.
Emissions Team
Members Timothy T. Cheung** Fiji C. George Senior Carbon Analyst Director, Carbon Strategies El Paso Corporation El Paso Corporation
* Replaced by Robin K. Roy in April 2011. Individual has since changed organizations but was employed by the specified company while participating in the study. ** Individual has since changed organizations but was employed by the specified company while participating in the study.
B-9
Bryan J. Hannegan Paul D. Holtberg Vice President, Environment and Renewables Acting Director, Office of Integrated and International Energy Analysis Energy Information Administration Principal Financial Advisor, Strategy and Market Analysis Electric Power Research Institute U.S. Department of Energy
Erling Mowatt-Larssen
El Paso Corporation
Life-Cycle Analysis Team

Lead Fiji C. George Members Ramon Alvarez Grover Campbell Ronald Edelstein Christopher J. Freitas Bryan J. Hannegan Paul D. Holtberg Director, Carbon Strategies Senior Scientist Manager Regulatory Affairs Air Regulations Director, Regulatory and Government Relations Senior Program Manager, Office of Oil and Natural Gas, Office of Fossil Energy Vice President, Environment and Renewables Acting Director, Office of Integrated and International Energy Analysis Energy Information Administration General Manager, Climate Change, Strategic Planning El Paso Corporation Environmental Defense Fund Chesapeake Energy Corporation Gas Technology Institute U.S. Department of Energy Electric Power Research Institute U.S. Department of Energy
David E. Rogers
Chevron Corporation
Technology Team
Coleads Kevin D. Book Rohan Ma Members Steven Caldwell Timothy T. Cheung* Ronald Edelstein Fiji C. George Neil Leslie Erling Mowatt-Larssen Managing Director, Research Senior Research Associate, Energy, Economics, and Policy Senior Solutions Fellow Senior Carbon Analyst Director, Regulatory and Government Relations Director, Carbon Strategies R&D Director Principal Financial Advisor, Strategy and Market Analysis ClearView Energy Partners, LLC ClearView Energy Partners, LLC
Pew Center on Global Climate Change El Paso Corporation Gas Technology Institute El Paso Corporation Gas Technology Institute El Paso Corporation
B-10
Rodney Nespeca Michael E. Parker Milo Sjardin Scott A. Weaver Analyst, Strategic Policy Analysis Technical Advisor, Upstream Safety, Health and Environment Head of U.S. Carbon Markets Manager, Strategic Policy Analysis American Electric Power Co., Inc. ExxonMobil Production Company Bloomberg New Energy Finance American Electric Power Co., Inc.
EPA Regulations Team

Members Timothy T. Cheung* Fiji C. George Bryan J. Hannegan Paul D. Holtberg Senior Carbon Analyst Director, Carbon Strategies Vice President, Environment and Renewables Acting Director, Office of Integrated and International Energy Analysis Energy Information Administration Principal El Paso Corporation El Paso Corporation Electric Power Research Institute U.S. Department of Energy
Steven H. Levine
The Brattle Group, Inc.
Policy Team
Coleads Randy Armstrong David G. Victor Environmental Issues Director, Environmental Department Professor, School of International Relations and Pacific Studies and Co-Director, Laboratory on International Law and Regulation Vice President, Strategic Policy Analysis Senior Carbon Analyst Director, Regulatory and Government Relations Director, Carbon Strategies Vice President, Environment and Renewables Acting Director, Office of Integrated and International Energy Analysis Energy Information Administration R&D Director Principal Senior Operations Research Analyst, Clean Air Markets Division Principal Financial Advisor, Strategy and Market Analysis Shell Upstream Americas SE & SD University of California, San Diego
Members Bruce H. Braine Timothy T. Cheung* Ronald Edelstein Fiji C. George Bryan J. Hannegan Paul D. Holtberg
American Electric Power Co., Inc. El Paso Corporation Gas Technology Institute El Paso Corporation Electric Power Research Institute U.S. Department of Energy
Neil Leslie Steven H. Levine William Meroney Erling Mowatt-Larssen
Gas Technology Institute The Brattle Group, Inc. U.S. Environmental Protection Agency El Paso Corporation
B-11
Michael E. Parker Robin K. Roy Edward S. Rubin Andy Stevenson* Technical Advisor, Upstream Safety, Health and Environment Professor of Engineering & Public Policy and Mechanical Engineering Finance Advisor, Center for Market Innovation ExxonMobil Production Company Natural Resources Defense Council Carnegie Mellon University Natural Resources Defense Council
Macroeconomic Subgroup
Chair Christopher L. Conoscenti Executive Director, Energy Investment Banking Members Stephen P. A. Brown Nonresident Fellow and Co-Director, Center for Energy Economics & Policy Director of Economics Controller, Drilling & Measurements Segment Associate, Energy Investment Banking Senior Economist, Corporate Strategic Planning Director, Generation Fuels & Market Analysis James A. Baker III and Susan G. Baker Fellow in Energy and Resource Economics and Deputy Director, Energy Forum, James A. Baker III Institute for Public Policy Adjunct Professor, Economics Department Director, Fuels, Technology and Commercial Policy Petroleum Economist Technical Advisor, Upstream Safety, Health and Environment Senior Economist Planning & Economics Walter W. McAllister Centennial Chair in Financial Services and Professor, Department of Finance Managing Director, Capital Structure Advisory & Solutions J.P. Morgan Securities Inc.
Resources for the Future
John Caldwell Joy V. Domingo Allison P. Fleming Dong Fu Lola Infante Kenneth B. Medlock, III
Edison Electric Institute Schlumberger Oilfield Services, North and South America J.P. Morgan Securities Inc. Exxon Mobil Corporation Edison Electric Institute Rice University
Karen Obenshain Yorgos Papatheodorou Michael E. Parker John J. Pyrdol David Sederis Sheridan Titman
Edison Electric Institute Marathon Petroleum Company L.P. ExxonMobil Production Company U.S. Department of Energy Total E&P USA The University of Texas
Marc P. Zenner
J.P. Morgan Securities Inc.
* Replaced by Robin K. Roy in April 2011. Individual has since changed organizations but was employed by the specified company while participating in the study.
B-12
COORDINATING SUBCOMMITTEE Integration Subgroup

Chair Porter B. Bennett Assistant Chair Andrew Bradford Members Lana B. Billeaud Sandee Mourey President and Chief Executive Officer Manager, Energy Analysis Consultant Project Manager BENTEK Energy, LLC BENTEK Energy, LLC Anadarko Petroleum Corporation BENTEK Energy, LLC
Report Writing Subgroup

Cochairs Kyle M. Sawyer A. Scott Moore Members Porter B. Bennett Kevin D. Book D. Clay Bretches Mark S. Brownstein Christopher L. Conoscenti Robert L. Earle Thomas R. Eizember William M. Fowler Fiji C. George Paul D. Hagemeier H. William Hochheiser Nancy L. Johnson Manager Vice President, Marketing President and Chief Executive Officer Managing Director, Research Vice President, E&P Services and Minerals Chief Counsel, Energy Program Executive Director, Energy Investment Banking Vice President Planning Manager, Corporate Strategic Planning Director, Environmental and Regulatory Affairs Director, Carbon Strategies Vice President, Regulatory Compliance Senior Energy and Environment Manager Director, Environmental Science and Policy Analysis, Office of Oil and Natural Gas, Office of Fossil Energy Vice President, Environment, Health and Safety Senior Policy Advisor Business Environment Advisor Upstream Americas Deputy Assistant Secretary for Oil and Natural Gas, Office of Fossil Energy Managing Principal Senior Director, Global Gas and North American Gas Counsel, Compliance & Ethics El Paso Corporation Anadarko Petroleum Corporation BENTEK Energy, LLC ClearView Energy Partners, LLC Anadarko Petroleum Corporation Environmental Defense Fund J.P. Morgan Securities Inc. Analysis Group, Inc. Exxon Mobil Corporation Chesapeake Energy Corporation El Paso Corporation Chesapeake Energy Corporation ALL Consulting U.S. Department of Energy
David McBride Jan W. Mares Andrew J. Slaughter Christopher A. Smith Susan F. Tierney Kenneth L. Yeasting Michael V. Young
Anadarko Petroleum Corporation Resources for the Future Shell Exploration & Production Company U.S. Department of Energy Analysis Group, Inc. IHS Cambridge Energy Research Associates, Inc. Anadarko Petroleum Corporation
B-13
COORDINATING SUBCOMMITTEE Antitrust Advisory Subgroup

Cochairs Michael V. Young Douglas R. Melin Members Adam J. Coates* Steven M. Feisal Paul R. Frontczak, Jr. William J. Haynes II Courtney M. Lynch Barbra J. Moran R. Kenly Webster Christine C. Wilson Counsel, Compliance & Ethics General Attorney Associate Regulatory Attorney Senior Antitrust Counsel Chief Corporate Counsel, Law Department Senior Counsel, Corporate Unit, Law Department Senior Corporate Counsel Attorney at Law Partner, Antitrust and Competition Practice Anadarko Petroleum Corporation Marathon Petroleum Company L.P. OMelveny & Myers LLP Chesapeake Energy Corporation Shell Oil Company Chevron Corporation Chevron Corporation Caterpillar Inc. Washington, D.C. Kirkland & Ellis LLP
Presentations & Other Assistance

The National Petroleum Council also wishes to recognize the contributions of the following individuals, most of whom were not members of specific study groups: Presentations to the Coordinating Subcommittee Topic: Lessons Learned from NPC Studies Thomas R. Eizember Planning Manager, Corporate Strategic Planning Topic: Human Resources for Oil & Gas Brian Forbes Vice President Topic: INGAA Infrastructure Report Richard R. Hoffmann Executive Director Topic: Fracture Stimulation Ron Hyden Technology Director, Production Enhancement Christopher M. Keane Technology and Communications Director Topic: RFF Kaiser Study on Energy Policy Alan J. Krupnick Research Director, Senior Fellow and Director, Center for Energy Economics and Policy Exxon Mobil Corporation
Schlumberger Business Consulting INGAA Foundation Halliburton Company American Geosciences Institute Resources for the Future
B-14
Topic: Price Volatility Kenneth B. Medlock, III James A. Baker III and Susan G. Baker Fellow in Energy and Resource Economics and Deputy Director, Energy Forum, James A. Baker III Institute for Public Policy Adjunct Professor, Economics Department Rice University
Topic: MIT study The Future of Natural Gas Anthony J. M. Meggs Visiting Engineer and Co-Chair, MIT Study: The Future of Natural Gas Topic: INGAA Infrastructure Report Donald F. Santa, Jr. President and Chief Executive Officer
MIT Energy Initiative (MITEI)
Interstate Natural Gas Association of America (INGAA)
Topic: Report of the National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling Christopher A. Smith Deputy Assistant Secretary for Oil and U.S. Department of Energy Natural Gas, Office of Fossil Energy Assistance in Data Extraction from Other Studies Burcu Cigerli Graduate Student Gizem Keskin Graduate Student Islam Likeleli Graduate Student
Rice University Rice University Rice University
Assistance in Draft Report Review Development of Findings & Recommendations Matrix Jesse D. Filip Mechanical Engineering Rice University/Marathon Oil Corporation Intern Victor A. Leyva Mechanical Engineering Rice University/Marathon Oil Corporation Intern Samuel R. Stanbery Petroleum Engineering University of Houston/Marathon Oil Corporation Intern
B-15
RESOURCE & SUPPLY TASk GROUP

Chair Andrew J. Slaughter Government Cochair Christopher J. Freitas Assistant Chair Kevin M. ODonovan* Marianne Funk Business Environment Advisor Upstream Americas Senior Program Manager, Office of Oil and Natural Gas, Office of Fossil Energy Director, Policy and State Government Relations, Government Affairs Director, CO2 Advocacy Shell Exploration & Production Company U.S. Department of Energy
Shell Oil Company Shell Oil Company U.S. Department of Energy
Alternate Government Cochair John R. Duda Director, Strategic Center for Natural Gas and Oil National Energy Technology Laboratory Secretary John H. Guy, IV Members Richard P. Desselles, Jr. Deputy Executive Director Chief Resource Evaluation Methodologies Branch, Resource Evaluation Division Bureau of Ocean Energy Management, Regulation and Enforcement Director, Global Oil
National Petroleum Council U.S. Department of the Interior
Jackie Forrest Thomas A. Menges Brenda S. Pierce
Kevin P. Regan Robert C. Scheidemann, Jr. Charles E. Sheppard, III Don K. Thompson Douglas J. Tierney Alan P. Wilson Gerry A. Worthington** Gregory J. W. Zwick
Program Coordinator, Energy Resources Program U.S. Geological Survey Manager, Long-Term Energy Forecasting Geological Advisor Independent Industry, Government and Public Service Vice President, Green Energy Vice President, Business Development Team Leader, Business Development U.S. & Argentina Joint Interest Director, Energy Market Analysis
IHS Cambridge Energy Research Associates Houston, Texas U.S. Department of the Interior
Chevron Corporation Shell Upstream Americas Kingwood, Texas Enbridge Inc. Encana Corporation Encana Oil & Gas (USA) Inc. ExxonMobil Production Company TransCanada PipeLines Limited
* Replaced by Marianne Funk in April 2011. Individual has since changed organizations but was employed by the specified company while participating in the study. ** Retired April 2011.
B-16
RESOURCE & SUPPLY TASK GROUP Resource Endowment Subgroup

Chair Brenda S. Pierce Program Coordinator, Energy Resources Program U.S. Geological Survey Manager, Strategy & Market Analysis Vice President, Unconventional Oil and Gas Project Leader New Business Development Senior Petroleum Geologist, Office of Oil and Gas Energy Information Administration Senior Director, Worldwide Reserves and Reservoir Engineering Vice President, Industry Relations U.S. Department of the Interior
Members David Haas Creties D. Jenkins Keith C. King David F. Morehouse
El Paso Corporation DeGolyer and MacNaughton ExxonMobil Exploration Company U.S. Department of Energy
John E. Ritter Philip H. Stark
Occidental Petroleum Corporation IHS Cambridge Energy Research Associates, Inc.
Data & Studies Subgroup

Cochairs Kevin P. Regan Charles E. Sheppard, III Members Robert H. Hugman Keith C. King J. Paul Matheny Richard D. Nehring R. Hill Vaden E. Harry Vidas Colin J. Yeo Database Team Members Burcu Cigerli Richard D. Farmer John T. Foote Gizem Keskin Islam Likeleli Kenneth B. Medlock, III Manager, Long-Term Energy Forecasting Independent Industry, Government and Public Service Senior Consultant New Business Development Vice President and Chief of Staff President Senior Analyst, U.S. Upstream Research Vice President Business Development Advisor Graduate Student Consultant Decision Analysis Staff Analyst Graduate Student Graduate Student James A. Baker III and Susan G. Baker Fellow in Energy and Resource Economics and Deputy Director, Energy Forum, James A. Baker III Institute for Public Policy Adjunct Professor, Economics Department Chevron Corporation Kingwood, Texas
ICF International, Inc. ExxonMobil Exploration Company QEP Energy Resources, Inc. Nehring Associates, Inc. Wood Mackenzie Inc. ICF International, Inc. Encana Corporation Rice University National Petroleum Council Chevron Corporation Rice University Rice University Rice University
B-17

Maili Montgomery Victor Cora Nazario Jonathan X. Weinert Assurance Principal Project Manager Planning Engineer, Low Carbon Energy Team Argy, Wiltse & Robinson, P.C. Business & Technology System Integrators, LLC Chevron Energy Technology Company
Offshore Subgroup
Chair Richard P. Desselles, Jr. Chief Resource Evaluation Methodologies U.S. Department of the Interior Branch, Resource Evaluation Division Bureau of Ocean Energy Management, Regulation and Enforcement Director, Energy Engineering Technologist Advisor Research Scientist, Quebec Division Senior Reservoir Engineer Geoscience Advisor, Deepwater Gulf of Mexico Economist, Bureau of Ocean Energy Management, Regulation and Enforcement Geological Survey of Canada Anadarko Petroleum Corporation Geological Survey of Canada Anadarko Petroleum Corporation Anadarko Petroleum Corporation U.S. Department of the Interior
Members John D. Harper Sally A. Kemp Denis Lavoie Dawn W. Peyton Paul Schlirf Thierno S. Sow
Arctic Subgroup
Chair Gerry A. Worthington* Robert C. Scheidemann, Jr. Assistant Chair Carl R. Mazzo Members Tim F. Fleming Darryl Jordan Bill Scott Brent J. Sheets** U.S. & Argentina Joint Interest Geological Advisor Geologic Advisor Alaska Asset Manager GBS Public Sector General Manager, Chevron Arctic Center Regional Manager, Strategic Center for Natural Gas and Oil National Energy Technology Laboratory Chief Operating Officer Arctic Manager ExxonMobil Production Company Shell Upstream Americas ExxonMobil Production Company Anadarko Petroleum Corporation IBM Global Business Services US Federal Team Chevron Canada U.S. Department of Energy
Daniel D. Smallwood Geir Utskot
Marine Well Containment Company, LLC Schlumberger Canada Limited
* Replaced by Robert C. Scheidemann, Jr., in April 2011. ** Individual has since changed organizations but was employed by the specified company while participating in the study.
B-18

Jennifer Wyatt Environment/Regulatory, Chevron Arctic Center Chevron Canada
Onshore Oil & EOR Subgroup

Chair Thomas A. Menges Members Philip M. Budzik Operations Research Analyst, Office of Petroleum, Natural Gas & Biofuels Analysis Energy Information Administration Founder CO2 Specialist Engineer Technology Manager CO2 & Energy Vice President, Engineering and Technical Development North American Conventional Chief Reservoir Engineer Houston, Texas U.S. Department of Energy
L. Stephen Melzer James P. Mosher Lanny G. Schoeling Paul J. Tauscher
Melzer Consulting Aera Energy LLC Kinder Morgan CO2 Company
Marathon Oil Company
Unconventional Oil Subgroup

Chair Jackie Forrest Members Kevin Birn Stephen Brink Taylor J. Comb Barclay Cuthbert R. B. Dunbar John A. Harju Eddy Isaacs Fiona Jones Paul Khanna D. Glen Snarr James A. Sorensen T. J. Wall Dan Whitney Director, Global Oil IHS Cambridge Energy Research Associates, Inc. Natural Resources Canada Cenovus Energy Inc. Cenovus Energy Inc. US Oil Sands Inc. Strategy West Inc. University of North Dakota Alberta Innovates Energy and Environment Solutions Suncor Energy, Inc. Natural Resources Canada US Oil Sands Inc. University of North Dakota US Oil Sands Inc. Shell Exploration & Production Company
Senior Economist, Oil Sands Market Advisor Vice President, Fundamental Analysis & Risk Management Fundamentals Analyst, Market Fundamentals and Hedging Vice President, Operations President Associate Director for Research, Energy & Environmental Research Center Chief Executive Officer Director, Energy and Climate Policy Senior Policy Advisor, Oil Sands and Energy Security President & Chief Financial Officer Senior Research Manager, Energy & Environmental Research Center Vice President, Engineering Colorado Oil Shale and Grosmont Development Manager
B-19
RESOURCE & SUPPLY TASK GROUP Oil Infrastructure Subgroup

Chair Don K. Thompson Members Timothy J. Adams Mark J. Gorman Morgan Keith Robert C. Lombardi Rafael Lopez Damir Raos Jeff M. Ray Vice President, Green Energy Vice President, Business Development and Joint Ventures Senior Vice President, Business Development and Operations Business Development Advisor Team Lead, Operations and Infrastructure Business Planning Advisor Business Planning Advisor TAPS Coordinator Enbridge Inc. ExxonMobil Pipeline Company Plains All American GP LLC Enbridge Pipelines Inc. Shell Gas Midstream Enbridge Pipelines Inc. Enbridge Pipelines Inc. ExxonMobil Pipeline Company
Onshore Gas Subgroup

Cochairs Douglas J. Tierney Alan P. Wilson Members Clayton A. Carrell Vice President, Business Development Team Leader, Business Development Senior Vice President, Chief Engineer Encana Corporation Encana Oil & Gas (USA) Inc. El Paso Exploration & Production Company Talisman Energy Wood Mackenzie Inc. Devon Energy Corporation National Energy Board Cirque Resources LP
R. Dean Foreman Chief Economist Edward M. Kelly Vice President, North American Gas & Power Christopher M. McMahon Manager Engineering Corporate New Ventures Paul Mortensen Technical Leader, Hydrocarbon Resources Robert H. Sterling, Jr. Senior Geologist
Gas Infrastructure Subgroup

Chair Gregory J. W. Zwick Members Cynthia L. Armstrong John Bridges William D. Wible Jeff C. Wright Director, Energy Market Analysis Director of Marketing and Business Development Manager, Market Analysis Manager, Strategy Director, Office on Energy Projects TransCanada PipeLines Limited Portland Natural Gas Transmission System TransCanada PipeLines Limited El Paso Energy Services Company Federal Energy Regulatory Commission
B-20
OPERATIONS & ENVIRONMENT TASk GROUP

Chair Paul D. Hagemeier Government Cochair Stephen J. Harvey Assistant Chair William M. Fowler Vice President Regulatory Compliance Assistant Administrator for Energy Statistics Energy Information Administration Director Environmental and Regulatory Affairs Chesapeake Energy Corporation U.S. Department of Energy
Chesapeake Energy Corporation
Assistant Government Cochair Leslie A. Hummel Senior Policy Advisor, Office of Policy and International Affairs Alternate Government Cochair Douglas W. Morris Director, Reserves and Production Division Energy Information Administration Secretary John H. Guy, IV Members Environment & Regulatory Subgroup Cochair David McBride Vice President, Environment, Health, and Safety Environment & Regulatory Subgroup Cochair A. Scott Anderson Senior Policy Advisor, Climate & Air Program Environment & Regulatory Subgroup Assistant Chair Alan Higgins Vice President, Special Projects Offshore Operations Subgroup Chair Kent Satterlee III Manager, Regulatory Policy Offshore, Upstream Americas Offshore Operations Subgroup Assistant Chair David L. Smith, Jr. Chief Global Technical Advisor Onshore Operations Subgroup Chair Byron Gale Vice President, Environment, Health, and Safety Onshore Operations Subgroup Assistant Chair Jill E. Cooper Group Lead Environment Technology Subgroup Chair J. Daniel Arthur Managing Partner Deputy Executive Director
Anadarko Petroleum Corporation
Environmental Defense Fund Anadarko Energy Services Company Shell Exploration & Production Company Halliburton Company Encana Oil & Gas (USA) Inc.
Encana Oil & Gas (USA) Inc. ALL Consulting

B-21

Technology Subgroup Assistant Chair H. William Hochheiser Senior Energy and Environment Manager At-Large Members AiJaz Rizvi William Standifird Technical Manager, The Digital Asset Director Solutions, The Digital Asset ALL Consulting Halliburton Company Halliburton Company
Environmental & Regulatory Subgroup

Cochairs A. Scott Anderson David McBride Assistant Chair Alan Higgins Members Ramon Alvarez Grover Campbell Thomas H. Clayson Charles M. Clusen Jill E. Cooper Eileen D. Dey Kevin Robert Easley Karl D. Fennessey Amy Hardberger Mike Mathis Briana Mordick Jeff Ostmeyer Richard L. Ranger Bill Scott Denise A. Tuck Richard Ward Michael E. Webber Senior Policy Advisor, Climate & Air Program Vice President, Environment, Health and Safety Vice President, Special Projects Senior Scientist Manager, Regulatory Affairs Air Regulations Senior Staff Environment and Regulatory Analyst Director, National Parks and Alaska Projects Group Lead Environment Regulatory Manager, Mid-Continent Natural Gas Policy Analyst, Office of Policy & International Affairs Senior Consultant, Climate Change & Sustainable Development Attorney, Climate & Air Program and Land, Water & Wildlife Program Manager, Regulatory Affairs Water Programs Science Fellow Environment, Health and Safety Manager Senior Policy Advisor, Upstream General Manager, Chevron Arctic Center Global Manager, Chemical Compliance, Health, Safety and Environment Director, Energy Initiatives Assistant Professor, Department of Mechanical Engineering and Associate Director, Center for International Energy and Environmental Policy Environment, Health & Safety Advisor Senior Environmental Policy Analyst Environmental Defense Fund Anadarko Petroleum Corporation
Anadarko Energy Services Company Environmental Defense Fund Chesapeake Energy Corporation Anadarko Petroleum Corporation Natural Resources Defense Council Encana Oil & Gas (USA) Inc. ConocoPhillips U.S. Department of Energy ConocoPhillips Environmental Defense Fund Chesapeake Energy Corporation Natural Resources Defense Council Anadarko Petroleum Corporation American Petroleum Institute Chevron Canada Halliburton Energy Services, Inc. Aspen Science Center The University of Texas
Kent M. Weissling Brian Woodard
Anadarko Petroleum Corporation Devon Energy Corporation
B-22

Sharon R. Zubrod Ad Hoc Member Douglas W. Morris Manager, Stakeholder Engagement and Regulatory Affairs Director, Reserves and Production Division Energy Information Administration ConocoPhillips
Offshore Operations Subgroup

Chair Kent Satterlee III Assistant Chair David L. Smith, Jr. Members Jennifer J. Barringer Brad J. Blythe Manager, Regulatory Policy Offshore, Upstream Americas Chief Global Technical Advisor Health, Safety and Environment Manager, Upstream BD Support & New Ventures Oceanographer, Bureau of Ocean Energy Management, Regulation and Enforcement Marine Science and Regulatory Policy, Upstream Americas Geologist Group Lead Environment Offshore Safety Consultant Safety Research Engineer, Bureau of Ocean Energy Management, Regulation and Enforcement Technical Applications Manager/ Administrator, Industry Regulations/ Product Certification/Strategic Initiatives Manager & Senior Consultant Senior Technical Advisor Consultant Asset Development Geologist Senior Policy Advisor Senior Facilities Consultant Senior Regulatory Specialist, Bureau of Ocean Energy Management, Regulation and Enforcement Independent Consultant Drilling Fluids Specialist Shell Exploration & Production Company Halliburton Company ConocoPhillips U.S. Department of the Interior
Louis P. Brzuzy Catherine E. Campbell Jill E. Cooper Elmer P. Danenberger, III Michael Else
Shell Exploration and Production Company Encana Oil & Gas (USA) Inc. Encana Oil & Gas (USA) Inc. Reston, Virginia U.S. Department of the Interior
Austin Freeman
Halliburton Energy Services
James L. Gooding C. Webster Gray Carliane D. Johnson Kevin Lyons Jan W. Mares James M. Morris Kumkum Ray
Black & Veatch Corp. Federal Energy Regulatory Commission SeaJay Environmental LLC WesternGeco Resources for the Future ExxonMobil Production Company U.S. Department of the Interior
Thomas A. Readinger Paul D. Scott
Harrisburg, Pennsylvania ConocoPhillips
B-23

E. J. Thomas Senior Principle HSE Consultant, New Ventures & Business Development Upstream HSE Global Manager, Chemical Compliance, Health, Safety and Environment Environmental Science Specialist ConocoPhillips
Denise A. Tuck Ian Voparil David Wilson Mark S. Witten John V. Young Ad Hoc Member Douglas W. Morris
Halliburton Energy Services, Inc. Shell International Exploration and Production B.V. WesternGeco Chevron Corporation
Operations Manager Former Senior Regulatory Advisor, Gulf of Mexico Senior Technical & External Network Advisor, ExxonMobil Exploration Company Strategic Capabilities Marine Sound Director, Reserves and Production Division Energy Information Administration U.S. Department of Energy
Technology Subgroup
Chair J. Daniel Arthur Assistant Chair H. William Hochheiser Members Mark D. Bottrell Andr Brown John Candler Lance Cole David DeLaO Larry W. Dillon Donald J. Drazan Managing Partner Senior Energy and Environment Manager Manager Field, Eastern Division Associate Manager, Environmental Affairs Operations Manager Manager, Drilling Engineering, Southern Division Completions Manager, San Juan Business Unit Chief Technical Assistance Section, Bureau of Oil and Gas Permitting and Management, Division of Mineral Resources, Department of Environmental Conservation Professor of Geological Engineering, Department of Earth & Environmental Sciences Commissioner President ALL Consulting ALL Consulting Chesapeake Energy Corporation W. L. Gore & Associates, Inc. M-I SWACO Petroleum Technology Transfer Council Chesapeake Energy Corporation ConocoPhillips State of New York
Maurice B. Dusseault
University of Waterloo
Catherine P. Foerster Linda Goodwin
Alaska Oil & Gas Conservation Commission DOT Matrix Inc.
B-24

Edward Hanzlik Ron Hyden Jake Jacobs Valerie A. Jochen Bethany A. Kurz Matthew E. Mantell John P. Martin* Dag Nummedal Jerry R. Simmons Steve Thomson Denise A. Tuck Mike Uretsky John A. Veil* Donnie Wallis Chris R. Williams Ad Hoc Member Douglas W. Morris Senior Consultant, Petroleum Engineering, Heavy Oil & Unconventional Resources Technology Director, Production Enhancement Environment, Health and Safety Advisor Technical Director, Production Unconventional Resources Senior Research Manager, Energy & Environmental Research Center Senior Environmental Engineer Senior Project Manager, Energy Resources R&D Director, Colorado Energy Research Institute Executive Director Manager, DeSoto Water Resources Global Manager, Chemical Compliance, Health, Safety and Environment Member, Board of Directors Executive Committee Manager, Water Policy Program Argonne National Laboratory Manager Regulatory Affairs, Air Programs and Design Group Lead, Special Projects, Environment, Health and Safety Director, Reserves and Production Division Energy Information Administration Chevron Energy Technology Company Halliburton Company Encana Oil & Gas (USA) Inc. Schlumberger University of North Dakota Chesapeake Energy Corporation New York State Energy Research and Development Authority Colorado School of Mines National Association of Royalty Owners Southwestern Energy Company Halliburton Energy Services, Inc. Northern Wayne Property Owners Alliance U.S. Department of Energy Chesapeake Energy Corporation Encana Oil & Gas (USA) Inc.
Onshore Operations Subgroup

Chair Byron Gale Assistant Chair Jill E. Cooper Members Catherine E. Campbell Donald W. Hackler Vice President, Environment, Health and Safety Group Lead Environment Geologist Senior HES Professional, Corporate Environmental Support Encana Oil & Gas (USA) Inc.
Encana Oil & Gas (USA) Inc. Encana Oil & Gas (USA) Inc. Marathon Oil Company
* Individual has since retired but was employed by the specified company while participating in the study.
B-25

Edward Hanzlik Jennifer L. R. Hoffman* Robert D. Lawrence Richard Luedecke Amy Mall Kathryn M. Mutz Michele OCallaghan Bill Scott Katherine Sinding Denise A. Tuck Chris R. Williams Ad Hoc Members Douglas W. Morris Rodney F. Nelson Senior Consultant, Petroleum Engineering, Heavy Oil & Unconventional Resources Section Chief, Monitoring & Assessment Senior Policy Advisor Energy Issues Vice President, Environment, Health and Safety Senior Policy Analyst Senior Research Associate, Natural Resources Law Center Technical Asset Manager, Marcellus USA Onshore, Global Unconventional Gas Manager, Chevron Arctic Center Senior Attorney, Urban Program Global Manager, Chemical Compliance, Health, Safety and Environment Group Lead, Special Projects, Environment, Health and Safety Director, Reserves and Production Division Energy Information Administration Vice President, Government and Community Relations Chevron Energy Technology Company Susquehanna River Basin Commission U.S. Environmental Protection Agency Devon Energy Corporation Natural Resources Defense Council University of Colorado Law School Statoil Chevron Canada Natural Resources Defense Council Halliburton Energy Services, Inc. Encana Oil & Gas (USA) Inc.
U.S. Department of Energy Schlumberger Limited
B-26
DEMAND TASk GROUP

Chair Kenneth L. Yeasting Government Cochair James M. Kendell Senior Director, Global Gas and North American Gas Director, Office of Oil, Gas and Coal Supply Statistics Energy Information Administration Director, North American Natural Gas IHS Cambridge Energy Research Associates, Inc. U.S. Department of Energy
Assistant Chair James A. Osten
IHS Global Insight U.S. Department of Energy
Assistant Government Cochair Raymond J. Braitsch General Engineer, Office of Planning and Environmental Analysis Secretary John H. Guy, IV Members Industrial Subgroup Chair Kenneth S. Bromfield U.S. Commercial Director, Energy Business Industrial Subgroup Assistant Chair Scott Engstrom Director, Global Energy Sourcing Power Subgroup Chair Kurtis J. Haeger Managing Director, Wholesale Planning Deputy Executive Director
Dow Hydrocarbons and Resources LLC International Paper Company Xcel Energy PNM Resources, Inc.
Power Subgroup Assistant Chair Jeanette Pablo Director of Federal Affairs and Senior Climate Advisor Residential/Commercial Subgroup Chair Thomas J. Massaro, Jr. Vice President, Marketing & Business Intelligence Residential/Commercial Subgroup Assistant Chair Richard D. Murphy Senior Vice President, Energy Solution Services Transportation Subgroup Chair William C. Lawson Director of Finance At-Large Members James Edward Burns John P. DeGeeter Leslie J. Deman Clean Energy & Innovation Senior Counsel Antitrust President
New Jersey Natural Gas Company
National Grid
The Williams Companies, Inc. Shell Upstream Americas ConocoPhillips Les Deman Energy Consulting
B-27
DEMAND TASK GROUP

John Hull Jose Alberto Torres Lima Robert L. Perez Managing Director, Fundamentals Vice President, LNG, Gas Monetization, and Wind Energy Vice President, Mexico Ventures Iberdrola Renewables Shell Upstream Americas Tennessee Gas Pipeline Company
Power Subgroup
Chair Kurtis J. Haeger Assistant Chair Jeanette Pablo Members Thomas M. Blake Susan C. Charlton Luciano Dalla-Longa Managing Director, Wholesale Planning Director of Federal Affairs and Senior Climate Advisor Consultant, Chief Economist Office Managing Director, Intergovernmental Affairs Group Lead, Natural Gas Economy, Business Development and Policy Power Generation Director, Advanced Energy Systems Senior Advisor Investment Appraisal, Global Business Development Manager, Fuel Planning and Analysis Manager, Environmental Policy Gas Supply Manager Chief Economist, Planning and Strategy Policy Analyst Industry Economist, Office of Electricity Coal, Nuclear and Renewables Analysis Energy Information Administration Managing Director, Federal Affairs Senior Vice President, Regulation and Integrated Planning Manager, Reliability Assessment Strategic Business Management, Power System Sales Executive Director, New York Energy Policy Institute and Assistant Professor, Department of Technology and Society President Vice President, Fuel Services Principal Xcel Energy PNM Resources, Inc.
ConocoPhillips Dominion Resources, Inc. Encana Corporation
Leo D. Eskin Thomas M. Grasso Jeffrey R. Grubb Jack Ihle Jim Jessee Marianne S. Kah Salud A. Layton Michael T. Leff
Combustion Science & Engineering, Inc. ConocoPhillips Southern Company Generation Xcel Energy Inc. Duke Energy Corporation ConocoPhillips Dominion Virginia Power U.S. Department of Energy
Bruce C. McKay James K. Martin John N. Moura Bruce W. Rising Guodong Sun
Dominion Resources, Inc. Dominion Resources, Inc. North American Electric Reliability Corporation Siemens Energy, Inc. Stony Brook University
Terence H. Thorn Jeffrey L. Wallace Patrick H. Wood, III
JKM Consulting Southern Company Generation Wood3 Resources
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DEMAND TASK GROUP Residential/Commercial Subgroup

Chair Thomas J. Massaro, Jr. Assistant Chair Richard D. Murphy Members Stanley Blazewicz Christopher R. Brown William O. Comstock Vice President Senior Vice President Vice President, Global Head of Technology Director Central Services Operations Research Analyst, Office of Energy Consumption and Efficiency Analysis Energy Information Administration President and Chief Executive Officer Gas Demand Forecast and Economic Analysis Manager, Regulatory Affairs Department Senior Vice President, Policy and Planning General Manager, Energy Services Director, Marketing Chair, Energy Sciences and Technology Department Brookhaven National Laboratory Manager, Natural Gas Policy, Planning and Strategy President Director, Resource Planning Manager Power Analytics Director, Strategic Partnerships & Alliances Energy Analyst Manager, Reliability Assessment Technology Specialist, Strategy and Analysis Manager, Marketing and Business Support Services Vice President, Corporate Communications and Chief Marketing Officer Director, Marketing and Sales Senior Policy Manager Senior Director, Energy Policy, Planning and Analysis Vice President of External Affairs Vice President of Finance, Kentucky/ Mid-States Division New Jersey Natural Gas Company National Grid National Grid UGI Utilities, Inc. U.S. Department of Energy
Arthur C. Corbin Herb Emmrich Paula A. Gant Jonathan R. Gruchala James E. Hearing William C. Horak
Municipal Gas Authority of Georgia Southern California Gas Company American Gas Association National Fuel Gas Distribution Corporation Laclede Gas Company U.S. Department of Energy
Sini Jacob Carl W. Levander King Look Russell Lovelace Yvonne Merkel Richard Meyer John N. Moura Ken Newel Cassandra Newsome Donna N. Peeples Colin G. Shay Rodney Sobin Todd Strauss Mary Usovicz Gregory K. Waller
Pacific Gas & Electric Company Columbia Gas of Virginia Consolidated Edison, Inc. Shell Energy North America AGL Resources Inc. American Gas Association North American Electric Reliability Corporation National Energy Board Piedmont Natural Gas Company, Inc. AGL Resources Inc. Washington Gas Light Company Alliance to Save Energy Pacific Gas and Electric Company Repsol Energy North America Atmos Energy Corporation B-29
DEMAND TASK GROUP

Paul L. Wilkinson Vice President, Policy Analyst American Gas Association
Industrial Subgroup
Chair Kenneth S. Bromfield Assistant Chair Scott Engstrom Members Paul N. Cicio Leslie J. Deman Michelle Michot Foss U.S. Commercial Director, Energy Business Dow Hydrocarbons and Resources LLC International Paper Company Industrial Energy Consumers of America Les Deman Energy Consulting The University of Texas
Director, Global Energy Sourcing President President Chief Energy Economist and Head, Center for Energy Economics, Bureau of Economic Geology Jackson School of Geosciences Senior Petroleum Economist Head of Energy and GHG Initiatives Vice President, Public Affairs Director, Feedstocks & Energy Procurement Research Specialist Industrial Team Analyst, Office of Energy Consumption and Efficiency Analysis Energy Information Administration Corporate Energy Manager Senior Purchasing Manager North Region
Thomas R. McManness Frederick J. Mannion Rosemary OBrien Ray L. Ratheal David M. Rohaus Elizabeth D. Sendich
Marathon Petroleum Company L.P. United States Steel Corporation CF Industries, Inc. Eastman Chemical Company United States Steel Corporation U.S. Department of Energy
Ray Siada Mark R. Stillwagon
Guardian Industries Corp. Lehigh Hanson, Inc.
Gas Transportation Subgroup

Chair William C. Lawson Members Joseph G. Benneche Director of Finance Operations Research Analyst, Oil and Gas Division Energy Information Administration Commercial Rep Processing Senior Vice President, Processing and Natural Gas Liquids The Williams Companies, Inc. U.S. Department of Energy
Nolan M. Rome Steve Spaulding
Crosstex Energy, L.P Crosstex Energy, L.P
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Appendix C
Additional Materials Available Electronically

additional study materials available for viewing and downloading in the Prudent Development: Realizing the Potential of North Americas Abundant Natural Gas and Oil Resources report section of the National Petroleum Councils (NPC) publicly accessible website (http://www.npc.org), which contains the following files: y Final Report y Report Slide Presentation y Webcast of NPC Meeting and Press Conference y Study Topic and White Papers y Study Survey Data Aggregations.
This appendix provides detailed descriptions of
Chapter Three: Natural Gas Demand Chapter Four: Carbon and Other Emissions in the End-Use Sectors Chapter Five: Macroeconomics y Appendices Appendix A: Request Letters and Description of the NPC Appendix B: Study Group Rosters Appendix C: Additional Materials Available Electronically y Acronyms and Abbreviations y Conversion Factors.
Final Report
The final report, Prudent Development: Realizing the Potential of North Americas Abundant Natural Gas and Oil Resources, as approved by the members of the NPC and submitted to Secretary Chu, is available electronically on the NPC website. This copy of the printed report is in PDF format, contains hyperlinks among sections, and is searchable using Adobe software. It provides report sections as follows: y Transmittal Letter to Secretary Chu (two-page summary of report) y Table of Contents y Preface y Executive Summary y Report Chapters Chapter One: Crude Oil and Natural Gas Resources and Supply Chapter Two: Operations and Environment
Report Slide Presentation

On September 15, 2011, a detailed slide presentation on the report, Prudent Development: Realizing the Potential of North Americas Abundant Natural Gas and Oil Resources, was delivered to Secretary of Energy Steven Chu and the membership of the NPC. This slide presentation is included on the reports website to allow readers access to materials that will be used to help explain the study process and results to various interested parties. The slide presentation is provided in PDF format.
Webcast of NPC Meeting and Press Conference

The reports website also contains a webcast of the September 15, 2011, NPC meeting as follows: y Presentation on the report to the NPC membership
APPENDIX C ADDItIoNAl mAtErIAls
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y Report approval and delivery to Secretary of Energy Steven Chu y Remarks by Secretary Chu y Press conference on September 15, 2011, following the NPC meeting.
y The distinction between proved reserves and other classes of petroleum resources; y Reserves growth; y The distinction between conventional and unconventional resources; y Current estimates of North American petroleum resources; and y Study observations and suggestions for future estimates.
STUDY TOPIC AND WHITE PAPERS

On September 15, 2011, the NPC in approving its report, Prudent Development: Realizing the Potential of North Americas Abundant Natural Gas and Oil Resources, also approved making available certain materials used in the study process, including detailed, specific subject matter papers that were part of the analyses that led to the development of the summary results presented in the reports Executive Summary and Chapters. The Topic Papers were prepared by the Task Groups and their Subgroups, and the White Papers were prepared for these study groups. These papers are available on the NPCs website (www.npc.org). These Topic and White Papers represent the views and conclusions of the authors. The National Petroleum Council has not endorsed or approved the statements and conclusions contained in these documents but approved the publication of these materials as part of the study process. The NPC believes that these papers will be of interest to the readers of the report and will help them better understand the study results. These materials are being made available in the interest of transparency. A list of these Topic and White Papers with brief abstracts for each follows.
Paper #1-2: Data and Studies Evaluation

The data/studies team was established to evaluate the wide spectrum of industry, government, and public supply outlooks. Our primary objective was to understand the uncertainty surrounding the size of North Americas conventional and unconventional oil and natural gas resource base, and the challenges and enablers to convert this endowment into production/supply volumes that can help meet the future energy needs of North America. The industry, government, and public data and outlooks indicate a large North America gas resource base, but a more limited oil resource base. North American resources can provide all natural gas needs over the study time frame (20352050), but approximately only 50% of current and forecast demand for U.S. liquid petroleum requirements. Using natural gas to displace foreign oil and some domestic coal as an energy source would increase the United States selfsufficiency and reduce reliance on foreign supply. Achieving this level of North American production would require an aggressive development plan and agreement between industry, regulators, policymakers, and the public as to the appropriate balance between supply development, environmental protection, and economic growth. Consumer preferences and future demand requirements will be met by multiple energy sources. We can optimize the supply mix by growing U.S./North American natural gas (in the power and transportation sectors) and optimizing the remaining North American oil resources, thereby: y Reducing the need for foreign imports; y Increasing investment in the U.S. workforce and infrastructure; and y Promoting investment in research and technology in all viable energy sources.
Resource & Supply Task Group Subgroup Topic Papers

Paper #1-1: Oil and Gas Geologic Endowment
This paper focuses on the gaseous and liquid hydrocarbons that form the North American hydrocarbon endowment. It describes: y The major types of petroleum resource endowment hydrocarbons and how they are formed; y Commonly used North American petroleum endowment classification systems; C-2
PrUDENt DEVEloPmENt: realizing the Potential of North Americas Abundant Natural Gas and oil resources
Paper #1-3: Offshore Oil and Gas Supply

Development and production of offshore hydrocarbons are significant to total North American (United States and Canada) supply of crude oil and natural gas. U.S. lower-48 offshore oil production is expected to grow annually by 0.2 to 0.9%, while natural gas production will increase by 0.4 to 0.7% annually. Canadian offshore production of oil and gas, confined to the eastern shore in Newfoundland/ Labrador and Nova Scotia, is relatively lower in comparison to the U.S. lower-48 offshore. These production outlooks are contingent upon expanded access to offshore lands currently under moratoria, and specific technological challenges. Those technologies are: reservoir characterization, extended system architecture, high-pressure and high-temperature (HPHT) completion systems, seismic technologies, controlled electromagnetism, interpretation technology, earth systems modeling, and metocean (meteorological and subsurface) forecasting and system analysis. The topic paper describes North American offshore hydrocarbons production prospects, the impacts of increased access to lands, and the factors of technological progress inherent to increased oil and natural gas production in more challenging environments.
supply, representing over 40% of total production. The historical production decline trend has moderated in the last few years and even increased as technology improvements and economic viability generated significant investment activity. This topic paper provides background information, identifies key technologies and issues, and describes a potential supply fairway for the segment. Growth in enhanced recovery using carbon dioxide is considered along with perspective on the large resource targets, which still exist. Based on this foundation work, findings were developed and areas for possible action by industry or government institutions are identified.
Paper #1-6: Unconventional Oil

North Americas unconventional resource is massive oil in the ground is over 3.5 trillion barrels nearly two times larger than all of the worlds economically recoverable conventional oil. Even though only a fraction of this oil can be commercially produced, it is already an important pillar of North American oil supply equivalent to 14% of total U.S. crude oil demand. Today, the majority of unconventional production comes from the Canadian oil sands. Oil supply from North Americas unconventional resources is forecast to grow. In our likely scenario, unconventional supply grows from 2 million barrels per day now to 7 million barrels per day by 2035. By 2035, unconventional production is equivalent to 50% of U.S. crude oil demand. The majority of the growth stems from the Canadian oil sands. However, tight oil oil produced from tight formations using a combination of horizontal wells and fracturing also makes a sizable contribution. Tight oil production grows from 400,000 barrels per day now to between 2 and 3 million barrels per day by 2035. These are early days for tight oil production, and its full potential could even exceed current estimates. The Canadian oil sands, by far the worlds largest source of unconventional oil supply, offer a constructive example for unconventional resource development. Ingredients for success include long-term investment supported by public-private partnerships and fiscal measures aimed at risk reduction. These factors, combined with high-cost investments in actual field trials (an activity critical to advancing new methods and ideas), were critical in the development of the Canadian oil sands industry. For noncommercial unconventional resources in the United
Paper #1-4: Arctic Oil and Gas

The North American Arctic contains significant oil and natural gas volumes and is believed to contain substantial unproven reserves in Alaska, Canada and Greenland. This topic paper describes: (1) the onshore and offshore exploration and development history of this region; (2) the significant volumes discovered and produced to date; (3) the mean, risked, undiscovered oil and gas resource potential of each prospective basin; (4) the challenges facing future oil and gas exploration and development in this cold and remote region; (5) an attempt to describe a range of future production forecast scenarios; and (6) Findings and Recommendations that attempt to frame the issues and stimulate a rational approach to enabling the safe and timely evaluation of Arctic oil and gas resources (with a focus on Alaska). This last item takes on an even greater significance, as dwindling oil input into the Trans-Alaska Pipeline System is providing operational challenges and may limit the lifespan of this important delivery option.
Paper #1-5: Onshore Conventional Oil Including EOR

The conventional oil/enhanced recovery segment is an important part of U.S. and Canadian oil
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States (oil shale and oil sands), the ingredients that were critical to the development of the Canadian oil sands are, for the most part, absent. Actions most likely to foster sustainable economic and environmentally sustainable growth of North American unconventional oil supply include; clarifying environmental and regulatory aspects of unconventional supply that are uncertain, and creating an environment that fosters continuous technical innovation and healthy investment.
Paper #1-7: Crude Oil Infrastructure

Changing supply and demand fundamentals in North America have driven significant changes in oil infrastructure. Falling onshore domestic supply in some regions, combined with significant growth in offshore Gulf of Mexico production and unconventional supply from existing basins have transformed North Americas oil infrastructure. Supportive, market responsive policies and oversight along with predictable regulatory regimes have enabled the investments in oil infrastructure to take place in a timely fashion. Redeploying underutilized assets in new services has allowed low cost infrastructure to be put in place rather than requiring new construction. Low cost, accessible transportation infrastructure, in turn, has been a key enabler to developing emerging supply in the North American context. This relationship is expected to continue into the future. North American crude oil infrastructure is not without challenges. Continuing service in some of the traditional corridors is occurring on infrastructure, which was constructed in the mid-1950s. The maintenance requirements and costs of this aging infrastructure continue to grow. The industry has responded accordingly by investing in integrity management programs and technology to understand and improve safety and reliability. Future developments in oil infrastructure will be required to continue to link emerging supply with future demand. The combination of existing and new infrastructure will ensure the efficient, orderly development of North Americas resource potential.
These advances in technology have been instrumental in reversing the decline in North American natural gas production, onshore particularly, virtually eliminating the need for natural gas (and LNG) imports into the region. This phenomenon is creating expanded natural gas utilization; opening avenues for affordable, abundant energy and higher employment. This topic paper examines the U.S. lower-48 and non-arctic Canada onshore natural gas resource and its ability to provide reliable energy over many decades under various scenarios and ultimate recoverable gas resource volumes.
Paper #1-9: Natural Gas Infrastructure

The natural gas infrastructure topic paper explores issues and trends impacting the natural gas gathering and processing, transmission pipeline, and storage industries and the need for new infrastructure in these industry segments. Dramatic growth in shale gas supply has driven strong recent investment in gathering and processing facilities and transmission pipelines. Future infrastructure requirements in these industry segments will also be significant, while investment in storage facilities is expected to be relatively modest. Strong oil prices are driving development to areas rich in natural gas liquids and may create a need for new pipelines to transport these liquids. Growing shale gas supply and related infrastructure improves the reliability of natural gas supply and supports both significant switching from coal to natural gas for electricity generation and the use of natural gas as a transportation fuel. It will also put competitive pressure on existing infrastructure in high cost supply regions.
Task Group White Papers

Paper #1-10: Liquefied Natural Gas (LNG)
LNG, or liquefied natural gas, comprises a small but important and growing part of the global natural gas market. According to the BP Review of World Energy, LNG consumption in 2009 was 23.5 billion cubic feet per day (Bcf/d), or 8.2% of total world demand for natural gas. Although 2009 natural gas consumption in its entirety declined by 2.1% in 2009 due to the recession, LNG demand grew by 7.2%. This continues a multi-decadal growth pattern of 6 to 7% per year, far faster than the overall growth in the total natural gas market of 2 to 4%. The United States imported 1.24 Bcf/d in 2009, or approximately 5.2% of the global trade of 23.5Bcf/d.
Paper #1-8: Onshore Natural Gas

New techniques, particularly cost-effective multiple-stage fracture stimulations in horizontal wellbores, have recently and rapidly enabled production from vast resources of shale gas and tight gas never before considered economic at any reasonable price. C-4
The inclusion of Canada and Mexico raises that volume to 1.67 Bcf/d for slightly over 7% of the worldwide total. North America is thus having a demonstrable effect on the LNG industry, although the rapid expansion of shale gas production has called into question the regions future share of the market.
Paper #1-13: Natural Gas Liquids (NGLs)

Assuming dry gas supply grows from 60 to 110 Bcf/d by 2035, this white paper examines estimated NGL production, NGL infrastructure requirements, processing and refining constraints, as well as supply and demand dynamics for ethane, propane, n-butane, isobutane, and natural gasoline. This white paper provides conclusions on the changing and evolving natural gas liquids market.
Paper #1-11: Methane Hydrates

Gas hydrate is a solid, naturally occurring substance consisting predominantly of methane gas and water that occurs broadly in shallow sediments in Arctic regions and on the outer continental shelves. The scientific consensus is that gas hydrate occurs in large volumes in nature and, therefore, has potentially significant, but as yet poorly constrained, implications for both long-range energy supply and for a variety of natural environmental processes. This topic paper provides a status report on ongoing research into natural gas hydrate, with a primary focus on U.S. domestic energy supply potential through the year 2050.
Operations & Environment Task Group Environmental & Regulatory Subgroup Topic Papers
Paper #2-1: Water/Energy Nexus
The exploration, production, and use of oil and gas are dependent on water resources and typically generate water as a byproduct. Water use requirements for oil and gas production vary depending on the source of oil and gas and the region. This paper provides an overview of water requirements for both traditional and newer types of production and recovery techniques, including the quantity of water for hydraulic fracturing for natural gas production and for extraction and processing of oil from oil sands and shale. Estimates are given for water consumption by the different resources and technologies and for the water intensity of transportation fuels. Water quality issues are identified for the water needed for the energy production. In most instances, water is also produced as a byproduct with oil and gas, and the quality and quantity of this produced water varies significantly by region.
Paper #1-12: Mexico Oil and Gas Supply

Mexico has been a long-term supplier of oil to the United States and partner in natural gas trade. Significant two-way trade in oil and gas occurs along the southern border of the United States. At times, Mexico was the biggest exporter of crude oil into the United States. Recent trends in Mexicos oil and gas sector, both on the supply and demand side, indicated that the dynamic between the United States and Mexico will be quite different than was historically the case. Increasing demand for natural gas in Mexico, particularly in the electricity sector, is likely to encourage Mexico to import more natural gas from the United States and elsewhere. The decreasing production of oil in Mexico will likely restrict Mexicos ability to export oil to the United States in the medium to long term. Additionally, the call on crude oil products in Mexico will further cut into Mexicos potential exports to the United States. Similarly, growing Mexico natural gas demand coupled with slowing growth in Mexico gas production could lead to sustained increases in Mexicos need to import natural gas, with the United States clearly well-placed to supply a significant portion of this gas. These market dynamics will take place in a context where the Mexican government will be assessing its framework for hydrocarbons production, which has historically limited foreign investment.
Paper #2-2: Regulatory Framework

The regulations associated with the production of oil and natural gas provide a framework to ensure protection of public health, safety, and the environment. This paper traces the evolution of regulations from the early 1900s, when the states focus was on protecting the production of oil and gas, to the current federal, state, and local concerns and regulatory schemes. Significant events have influenced developments on both a state and federal level. Regulations have to address the concerns of landowners and neighboring communities, and the interest in having production take place. This paper discusses the complex array of concerns beyond the traditional development of the energy resources.
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Paper #2-3: U.S. Oil and Gas Environmental Regulatory Process Overview
The U.S. government has various roles in the development of oil and gas, including the leasing of the federal lands and federal mineral rights, and implementation of federal environmental regulations. This paper discusses the laws and regulations regarding, and federal agencies involved in leasing and management of the federal oil and gas leases. The structure and cooperation between federal agencies, state agencies, and private surface owners is described. Several of the more significant federal environmental laws are discussed. The roles of the tribal governments and U.S. agencies in oil and gas development on tribal lands and applicable federal laws and regulations are described. The paper highlights how companies are required to work with various federal agencies and tribal governments, and the processes between the tribes and the EPA national, regional, and program offices policies and plans.
holdings include lands located in national parks, Indian reserves, and military bases. The Canadian government, through its boards and agencies, regulates international and interprovincial aspects of the oil, gas, and electric utility industries. This includes oil and gas in Frontier lands and offshore areas not covered by provincial/federal management agreements. Most of the mineral rights for natural gas are held by the provincial government (about 80% in Alberta) and the remaining are held by an individual or the government of Canada. The programs in Alberta are described as examples of the role of the provincial governments.
Paper # 2-6: Evolving Regulatory Framework

In response to the recent growth and change in the oil and gas industry, there is greater public interest in the operations. Federal and state regulators have been reviewing existing policies, legislative mandates, and regulations. This paper highlights several of the emerging trends that may reshape and advance the regulatory framework for environmental protection and human safety in oil and gas operations. Water use and discharge, waste management, and air emissions management, among other issues, are discussed.
Paper #2-4: U.S. Environmental Regulatory and Permitting Processes

Oil and gas exploration and production is regulated at the federal, state, and local levels in the United States. This paper identifies the major federal environmental laws and regulations as applied to oil and gas exploration and production. This includes the broad categories for air, water, and waste laws and regulations, highlighting many of the specific requirements for different aspects of oil and gas operations. Other federal requirements, such as spill prevention and control, wetlands and wildlife protection, and cultural and archaeological preservation are discussed. The use of water resources by industry and the different regional approaches are described. Examples of some state environmental and wildlife requirements and the role of the states in regard to federal regulations are included. The recent increase in regulation through zoning ordinances or other means by local governments, particularly in urban areas, is also discussed.
Offshore Operations Subgroup Topic Papers

Paper #2-7: Safe and Sustainable Offshore Operations
This paper brings together the key elements of each of seven individual topic papers originated in the Offshore Subgroup of the Operations and Environment Task Group and summarizes findings derived. All topical areas in offshore oil and gas development are affected both by technology and policy. Each topical area is affected in specific ways and some effects are common to all topical areas. The sense of each finding is an observation by subject-matter specialists and practitioners on how development is generally conducted in the offshore context and whether significant gaps exist between what currently is done and what might be developed by industry and/or government into an improved best practice.
Paper #2-5: Canadian and Provincial Permitting and Environmental Processes

Oil and gas development in Canada is regulated by the Canadian federal government and the provincial governments. This paper discusses the processes and applicable regulatory requirements, including environmental, for leasing and exploration through production and reclamation. The government of Canada C-6
Paper #2-8: Offshore Environmental Footprints and Regulatory Reviews

In the context of offshore oil and gas development, the environmental footprint refers to the spatial
extent of exploration and production activities that may produce perceptible modifications to the sea bottom or sea surface as well as to air, water, or marine life. Minimizing and managing environmental footprints is the shared purview of technology and regulations. This topic report discusses why the prudent development of offshore oil and gas resources requires effective management and safe operation in conjunction with a coordinated regulatory process that can quickly adjust to changing technological capabilities and environmental conditions.
Paper #2-9: Offshore Environmental Management of Seismic and Other Geophysical Exploration Work
This topic report describes the use of geophysical exploration for offshore oil and gas resources and the associated environmental concerns. Offshore geophysical exploration relies heavily on seismic techniques where sound waves penetrate through, and are reflected from, sub-surface geologic structures and rock units. Seismic noise generated by offshore natural gas and oil exploration activities is recognized as a concern for whale populations and other marine life, including fish. Mitigating impacts of seismic noise on marine life can involve attention to performance protocols as well as implementation of upgrades in specific equipment. In the United States, the National Marine Fisheries Service (NMFS) and/ or the Bureau of Ocean Energy Management, Regulation and Enforcement (BOEMRE) require seismic operators to use ramp-up (or soft start) and visual observation procedures when conducting seismic surveys. Other requirements may be implemented by NMFS to place certain seasons and locations offlimits in recognition of vital marine animal activities such as breeding, calving, foraging, or migration.
past two decades, technologies have been developed to reduce the number of facilities required, and thus reduce the physical footprints of oil and gas facilities. Pipelines are the safest, most reliable, and economical method to transport oil and gas from offshore waters around the United States. There are approximately 33,000 miles of liquid and gas pipelines on the U.S. Outer Continental Shelf (OCS) and many more miles in shallow, offshore waters and coastal areas. Platforms and pipelines around the world are designed to resist location-specific environmental forces, ranging from hurricane winds, waves, currents, tides, mudslides, earthquakes, and ice.
Paper #2-11: Subsea Drilling, Well Operations, and Completions

One of the remarkable accomplishments of the oil and gas industry has been the development of technology for drilling wells offshore to access additional energy resources. This topic report explains that offshore drilling rigs have become larger and more complex with workers who are more highly skilled, as drilling has extended farther offshore into deeper water. This also requires a mechanically stable offshore platform or floating vessel from which to drill. The types of rigs range from permanent offshore fixed or floating platforms to temporary bottomsupported or floating drilling vessels. A well completion involves a set of actions taken to convert an individual borehole into an operational system for controlled recovery of the hydrocarbon resources. A subsea completion refers to a system of pipes, connections, and valves that reside on the ocean bottom and serve to gather hydrocarbons produced from individually completed wells and direct those hydrocarbons to a storage and offloading facility that might be either offshore or onshore.
Paper #2-10: Offshore Production Facilities and Pipelines, Including Arctic Platform Designs
The development of offshore oil and gas reserves requires the construction and installation of facilities to produce and process the oil and gas, the construction and operation of pipelines to transport oil and gas to shore, combined with design requirements to withstand regional environmental conditions. This report explains the purpose and operation of production facilities, which are needed to separate the produced oil from natural gas. Historically, this has required the installation of numerous platforms on structures fixed to the seafloor and located in the immediate proximity of the target reserves. Over the
Paper #2-12: Offshore Transportation

This topic report discusses the types of offshore transportation required to develop and maintain offshore oil and gas facilities, and the environmental considerations regarding their use. Offshore service vessels may include crew and supply boats, utility boats, seismic ships, anchor handling tugs, diving support, well stimulation ships, lift boats, and pipe laying vessels. Helicopters are also routinely used to service offshore facilities, primarily for transporting crew and conducting emergency evacuations, but they may transport equipment and supplies, as well. Ocean vessels and helicopters may involve different sets of potential environmental impacts.
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Helicopters are associated with air emissions, potential noise disturbances of birds and marine mammals, and also with potential collisions with birds in flight. Ocean vessels are associated with air emissions, liquid discharges, and potential noise disturbances of marine mammals or collisions with marine mammals. In addition, ocean vessels can be associated with the release of invasive (non-native) species and with the disturbance of coastal waterways and wildlife habitats. Noise or potential chemical pollution from vessels is regulated by a collection of federal regulations that are enforced by the United States Coast Guard (USCG).
cannot ensure that a lesson learned yesterday by one operator can be applied today by another operator. To ensure prudent development of offshore oil and gas resources, improvement in data management systems are needed.
Technology Subgroup Topic Papers

Paper #2-15: Air Emissions Management
Natural gas production, processing, and transmission include activities that result in emissions of regulated air pollutants. Emission sources are broken down into five categories: (1)fugitive dust from vehicular traffic; (2) combustion emissions; (3) glycol dehydrators; (4)sources of methane and volatile organic compounds (VOC; both fugitive and point); and (5) acid gas emissions from sour gas sweetening. Best practices and appropriate application of emission control technologies can reduce emissions of air pollutants. For every source of air emissions from oilfield and gasfield operations, technologies have been developed to reduce emissions although widespread deployment of those technologies are not always economical for commercial projects. Ongoing challenges are to make retrofits of newer technologies easier and more economical for older systems and to make new technologies more affordable during construction of new systems. The more promising approaches include: y Reduce road dust by reducing the vehicle miles traveled through consolidating and sharing roads, using existing roads wherever possible, and designing and managing operations to eliminate or reduce trips. Suitable consolidations would include multiple wells per pad and three-phase gathering (gas, petroleum liquids, produced water), which can eliminate the need to haul water and condensate. y Reduce emissions from combustion sources using fuel cells can be used in lieu of combustion engines. However, additional research and development is needed to make fuel cells economical at the scale needed for oil and natural gas production. y Reduce emissions from dehydration using an alternative process to glycol dehydrators. In areas where it is applicable, a desiccant dehydrator can substantially reduce methane, VOC, and hazardous air pollutant (HAP) emissions. y Reduce VOC and methane emissions from storage tanks and loading by reducing the number of
Paper #2-13: Offshore Well Control Management and Response

This report examines the understanding that well control is a multifaceted endeavor meant to assure commercially successful and environmentally responsible drilling and completion of oil and gas wells and the subsequent operation of such wells after they are placed into production. Well control includes the prevention of uncontrolled hydrocarbon releases (blowouts) of wells, the contingency plans aimed at preventing oil spills or responding to spills if they cannot be prevented, and the prevention or control of fires that could be fueled by uncontrolled releases of oil or gas. The assembly of pipes, rams, and valves that are applied to blowout prevention at a wellhead is called a blowout preventer (BOP). The primary response objectives in any open water marine spill are to stop or reduce the source of hydrocarbon; recover as much hydrocarbon as possible; protect sensitive ecological, economic, and cultural resources; and speed the removal of unrecovered oil to minimize harm to the ecosystem. Offshore fire control is divided into a succession of topics that include prevention (failure), loss of containment, flammable atmosphere, occurrence of fire, and control of fire.
Paper #2-14: Offshore Data Management

Imagine a data management system that not only provides all regulatory agencies with their needs but also allows lease operators and other interested organizations to access historical information and lessons learned that would help them make decisions for protecting the environment. This topic paper explores the need for a data management system with the attributes to easily provide data and information and also retrieve the same in a manner that is understood and applicable to an end users need. Although prescriptive practices may help, they C-8
tanks and loading demand on trucks. Closed-loop and three-phase gathering systems can reduce the number of tanks in a field and the need for loading into trucks. y Reduce fugitive emissions from other equipment through an enhanced directed inspection and maintenance (DI&M) program, beginning with a baseline survey and followed by a comprehensive repair plan. y Reduce acid gas emissions using underground injection of the acid gases where that avenue is available. Otherwise, work to optimize combustion flares where sulfur recovery is not practical.
accomplished with directional and horizontal drilling that allows many wells to be drilled from a single well pad, thus removing the need for multiple locations and associated roads. Biodiversity challenges will be met with a combination of proactive programs and technology. Social responsibility programs and related biodiversity protection programs will move toward reduced impacts from E&P operations. Biodiversity technology will involve the following: y Advanced systems of monitoring biodiversity resources and documenting existing resources; y Advanced systems for planning to protect biodiversity resources; y Advanced products, drilling techniques, seismic techniques, production techniques all moving toward lowering footprint and negative impacts on biodiversity; y Developing systems for monitoring the effectiveness of biodiversity protection technology; and y Advanced systems for recovery, remediation, and offsetting negative impacts to biodiversity resources form E&P activities.
Paper #2-16: Biodiversity Management and Technology

Exploration and production (E&P) technologies and business practices have the ability, motivation, and demonstrated case histories to drive forward biodiversity protection along with hydrocarbon resource development. Some common polarized viewpoints such as all development is bad for biodiversity or that biodiversity protection is prohibitively expensive to commerce are rendered obsolete by many global case studies where development and biodiversity have enjoyed balanced, positive outcomes thanks to thoughtful collaborations among stakeholders. Technology plays a significant role in the E&P efforts to protect biodiversity in three ways. First, in the area of direct impacts, technology can play a key role in reducing the footprint of E&P operations. Secondly, the science of measuring biodiversity indicators to evaluate the effectiveness of biodiversity protection can be enhanced. Finally, communication technology and practices are key elements to manage secondary E&P impacts to biodiversity. Global citizenship programs and social responsibility programs are a growing element of the cultural evolution that includes health, safety, and environmental protection. One of the key aspects of biodiversity protection in the E&P industry has been a focus on reducing the operational footprint of E&P activities. Major progress has been made to reduce the number of well pads that must be built to recover available oil and gas resources. Refinements in seismic prospecting techniques have led to many fewer dry holes, thereby allowing emphasis to shift toward developing hydrocarbon fields with a minimum number of well locations. Smaller-footprint development typically is
Paper #2-17: Management of Produced Water from Oil and Gas Wells
Produced water is water that is returned to the surface through an oil or gas well. It is made up of natural formation water as well as the uphole return of water injected into the formation (flowback water) that was sent downhole as part of a fracture stimulation (frac) process or an enhanced recovery operation. Produced water is typically generated for the lifespan of a well. Although produced water varies significantly among wells and fields, several groups of constituents are present in most types of produced water. The major constituents of concern in produced water are: salt content (expressed as salinity, total dissolved solids, or electrical conductivity); oil and grease (identified by an analytical test that measures the presence of families of organic chemical compounds); various natural inorganic and organic compounds (e.g., chemicals that cause hardness and scaling such as calcium, magnesium, sulfates, and barium); chemical additives used in drilling, fracturing, and operating the well that may have some toxic properties (e.g., biocides, corrosion inhibitors); and naturally occurring radioactive material (NORM).
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Technologies and strategies applied to produced water comprise a three-tiered water hierarchy: (1) minimization; (2) recycle/reuse; and (3) disposal. Techniques to minimize produced-water volumes are tailored as is feasible for individual locations but disposal must ultimately be addressed. Most onshore produced water is reinjected to underground formations, either to provide additional oil and gas recovery or for disposal, under permits issued by state agencies or regional offices of the U.S. Environmental Protection Agency (EPA). Most offshore produced water is disposed as discharge to the ocean following treatment according to requirements of the National Pollutant Discharges Elimination System (NPDES) as permitted by EPA regional offices. Techniques to minimize produced-water volumes are tailored as is feasible for individual locations. Recycling or reuse of produced water is an ongoing area of focused research and development that has equipped the oil and gas industries with numerous technological solutions that can be tailored for individual applications. Produced water is an inescapable fact of life for oil and gas production that offers both opportunities and challenges for sustainable recovery of hydrocarbon resources. Based on a review of current practices and future outlooks, key findings are: y For most forms of oil and gas production, produced water is by far the largest byproduct stream (estimated at 21 billion barrels per year in the United States in 2007) and has given rise to numerous technologies that treat different components of produced water to allow discharge, injection, or beneficial reuse. y Flowback water tends to be very salty and can contain high concentrations of various chemical constituents. Flowback water is often injected into commercial disposal wells where they are available, although over the past few years, the gas industry has utilized various approaches to collect the flowback, treat it, and reuse the water for future frac operations. y Many companies have developed technologies to treat produced water and flowback water, in part because this sector has great potential for business growth. Treatment performance has increased and costs have become more competitive. y Two of the most important emerging and future opportunities for management or produced water through reuse are: (1) treatment and reuse as a C-10
water supply for towns, agriculture, and industry; and (2) secondary industrial processes such as extraction of minerals from produced water or repurposing as the working fluid into geothermal energy production. y Future water management technologies are likely to focus on: (1) reduced treatment costs; (2) reduced air emissions, including CO2; (3) minimizing transportation; (4) minimizing energy inputs; (5) capturing secondary value from the repurposed water.
Paper #2-18: Oil Production Technology

There are three main categories of hydrocarbons that are liquid phase in their native-state underground reservoirs: conventional oil, heavy oil, and bitumen. That sequence of categories represents substantial increases in density and viscosity and, therefore, in the amount of effort required to produce the petroleum from its reservoir. Conventional oil typically is produced, at least initially, using the natural drivers of flow that are native to the reservoir, including gas pressure or geologic formation pressure. In contrast, heavy oil is resistant to flow, and bitumen typically does not flow, without significant artificial intervention by engineering techniques. The developmental techniques used for oil production recognize the category of petroleum to be produced as well as the maturity stage of the reservoir to be developed. The three established developmental categories are: primary recovery, secondary recovery, and enhanced oil recovery (EOR). Primary recovery denotes initial stages of production whereas secondary recovery and EOR denote increasing levels of effort to re-work previously produced reservoirs. Specific findings are: y Technologies are well-established for producing a variety of petroleum categories (conventional oil, heavy oil, bitumen) through a succession of production stages (primary recovery, secondary recovery, enhanced recovery). For every type of petroleum deposit, there exist technologies to produce at least some fraction of the recoverable oil. y Likewise, long-proven technologies exist for separating the oil, gas, and water streams that are the typical outputs from petroleum wells. Those technologies include methods for upgrading bitumen to be more transportable and marketable and for making heavy oils easier to refine.
y EOR has been accomplished through several different variations, including polymer water flooding, CO2 flooding, and solvent flooding, in addition to steam flooding and other thermal methods. Significant industry experience has been accumulated through tailoring EOR technologies and practices for individual petroleum reservoirs. y Non-conventional petroleum deposits, including oil shales and gas hydrates, comprise the most conspicuous challenges for development of new technologies for safe, sustainable, and economical recovery of the subject hydrocarbon resources. Retorting of oil shales can be viewed as already operational, although the techniques require additional research to reduce input-energy requirements and environmental footprints. In contrast, production of gas hydrates remains highly experimental and significantly distant from operational status.
Board (NTSB), Environmental Protection Agency (EPA), Bureau of Land Management (BLM), and the Fish and Wildlife Service (FWS). In addition, intrastate pipelines are subject to regulation by individual state commissions. All federal and state regulations either directly or indirectly reference federal statutes under 49 CFR Part 192 (updated 2010). Excavation damage has been addressed using OneCall Centers (call before you dig clearinghouse phone banks), pipeline marking, public education, and rights-of-way patrols by pipeline operators. In addition, special industry-government collaborative programs have been established to track incidents, analyze trends, and develop better preventive measures. Notable special programs include the Common Ground Alliance (CGA) and the Pipelines and Informed Planning Alliance (PIPA). In fact, the CGA Information Reporting Tool (DIRT) is regarded as the best consolidated pipeline-incident database in the United States. Progress in control of excavation damage must be proactively led by the pipeline industry but with substantial involvement by regulators, excavation contractors, municipal planners and other stakeholders. Solutions must include not only improved encroachment-detection technologies but also establishment and enforcement of regulations to prevent and document incidents of excavation-related damage. Progress in corrosion control must be led by a pipeline industry commitment to develop and deploy improved technologies for prevention of corrosion as well as for earlier and more reliable detection of corrosion. Solutions must include continuous improvements and adoption of pipeline materials, coatings, and cathodic protection methodologies as well as retrofitted inline inspections for un-piggable pipelines in addition to ongoing use of smart pigs.
Paper #2-19: Natural Gas Pipelines Challenges

Expanding the utilization of natural gas in the United States will require development of additional pipeline systems and increased use of existing pipeline infrastructure. In order to achieve this augmented natural gas utilization while avoiding a proportionate rise in adverse pipeline incidents, it will be necessary for pipeline operators to reduce the overall rate of adverse natural gas pipeline incidents. The two leading causes of significant pipeline incidents, excavation damage and corrosion, have been addressed through improved technologies, although industry emphasis historically has focused on detection as a higher priority than prevention. Detection evolved as the focus of efforts, in part, because the complementary regulatory components needed for prevention have been uneven and not consistently enforced. Prevention requires clear, robust and diligently enforced regulations for all pipelines. But historically, different rules and authorities (federal and state) have existed for different types of pipelines including production (flow) lines, gathering lines, transmission lines, and distribution lines. Although the Pipeline and Hazardous Materials Safety Administration (within the U.S. Department of Transportation) commonly is regarded as the nexus for pipeline safety standards, other federal agencies with various degrees of authority over pipelines include the Federal Energy Regulatory Commission (FERC), National Transportation Safety
Paper #2-20: Regulatory Data Management

State oil and gas regulators are required to enforce regulatory requirements, properly track oil and gas activities throughout the well life cycles; and provide data to local governments, other state and federal agencies, as well as the regulated industry and public. The majority of oil- and gas-producing states currently operate data systems that allow commercial developers to make online reports and also allow stakeholder to make online queries of permit and
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production data. Many of those systems are based on the Risk Based Data Management System (RBDMS) that was developed in the 1990s through a joint effort of the U.S. Department of Energy (DOE) and the American Petroleum Institute (API). Operational capabilities of RBDMS are complemented by the State Review of Oil and Natural Gas Environmental Regulations (STRONGER) which is a non-profit, compliance-attainment service to state agencies and which resulted from another 1990s collaboration between the Interstate Oil and Gas Compact Commission (IOGCC) and the U.S. Environmental Protection Agency (EPA). Online data management systems offer many environmental and economic benefits, including reduction of administrative costs, time and errors associated with manual systems and overall reduction of paperwork and associated wastes. Even though progress in data management has been substantial, additional investments both by developers and regulators are necessary to achieve the goal of a national oil and gas data portal. Success of the RBDMS and STRONGER initiatives provide examples of how joint government-industry collaborations can accomplish mutually beneficial goals of improved data management.
dedicated to fossil-fuel energy. Applied research is carried out by a combination of federal and business organizations, with business operating at twice the level of the federal government. Most O&Grelated research is, in fact, funded privately by energy companies. As a result of federal government legislation from 1980 through 2007, government-sponsored research, development, and technology transfer has increasingly favored collaborations comprising consortia of government, academic, nonprofit, and industry researchers and technologists. As part of that trend, three main initiatives by the DOE have included: (1) Energy Innovation Hubs, involving large numbers of distributed efforts but led by a central institution to integrate fundamental research through commercial technology deployment; (2) Energy Frontier Research Centers, comprising a few dozen senior investigators at multiple institutions and focused on fundamental research to overcome technology roadblocks; and (3) ARPA-E projects, based on small groups at single institutions who focus sharply on high-risk/highreturn technologies of near-term payoff. However, none of those three initiatives have emphasized or substantially included O&G-related projects. Technology deployment includes training of personnel to understand and effectively use new technologies in productive, commercial applications. Indeed, the technology-sociology theory of Charles Perrow holds that the inability of effective training to keep pace with complicated growth of advanced technologies is a contributor to normal accidents in all technology-dependent enterprises, including O&G. Even so, there currently is no clearinghouse of information to assess how effectively training is accomplished during the rollout of new technologies during O&G developments. Accomplishing safe and environmentally sustainable O&G developments, as needed for the nations energy security during transition to renewable sources of energy, improvements must be made to better include O&G concerns in the nations overall R&D programs and priorities. Key findings and related recommendations are that: y Funding is not well aligned with the critical role of O&G among balanced national priorities. The majority of the funds dedicated to hydrocarbonbased energy R&D are focused on carbon capture and sequestration (CCS) rather than on minimizing
Paper #2-21: Research, Development and Technology Transfer

Research, product development, and technology transfer comprise different stages in a continuum of progress based on growth of knowledge, improvement of capabilities, and deployment of those capabilities to improve the quality of life. Technology development turns knowledge into actionable goods and services while technology transfer enables permeation of technology from its origins into a wide variety of applications. The ongoing and future importance of oil and gas (O&G) industrial progress requires well-planned and vigorous research and development (R&D) as well as effective technology transfers both to and from the O&G enterprises. The U.S. Department of Energy (DOE) invests more in basic and applied research than any federal agency other than the National Institutes of Health (NIH) and the National Science Foundation (NSF). But DOE investment in O&G-related R&D is almost entirely through the National Energy Technology Laboratory (NETL), which is the only national laboratory C-12
the life-cycle footprint of O&G development. More attention is needed on sustainable production of petroleum and, especially, natural gas which is an abundant domestic resource. y Consortia have become the dominant and most beneficial R&D performance platform. A formal infrastructure should be created to facilitate communication between organizations and projects involved in O&G-oriented R&D. Establish an Energy Frontier Research Center or Hub that is focused on low-environmental-impact O&G exploration, processing, and use. y Communication of R&D progress on energy topics remains ineffective. The federal government could organize an annual Energy Research Summit, which brings together leading researchers working in fields having or having the potential on energy advances, including but not limited to researchers working in energy and in environmental, computer and social sciences. y Crossover of other technology into O&G is underappreciated. The communication gap should be addressed through the proposed Energy Research Summit or other equivalent clearinghouse. y Effectiveness of training in O&G technology deployment is not well documented. The federal government should a make meaningful participation in setting standards for training in the industry. There should be an immediate effort to set standards for training in the O&G field, including content, trainee performance levels, along with company processes to monitor the level of the training effort.
plishing, beneficial outcomes. Prospects for positive outcomes are enhanced by early collaborations among developers and stakeholders, including summation of agreements in written documents that can be referenced by all parties as the benchmarks for evaluating progress and compliance. Key factors in planning and execution of oil or gas projects with the best levels of community acceptance include context-sensitive designs and a deliberate approach to the balance between socioeconomic benefits and environmental impacts. Plans must be customized individually to accommodate different stages and extents of development as well as different metrics for benefits or impacts. Furthermore, the extent and magnitude of benefits and impacts must be accommodated differently for situations that include rural communities, small towns or villages or cities/ urban complexes. Principal milestones by development stage comprise: (1) exploration/early development; (2) moderate development; (3) large/full-scale development; and (4) post-development production. Main metrics by benefit or impact include: (a) economics (employment and economic activity); (b) population; (c) Housing Services (Community Infrastructure, Facilities and Services); (d) Fiscal (State and Local Government Fiscal Conditions); (e) Attitudes and Values; (f) Quality of Life and Social Conditions; and (g) Community Character. The interplay among the various milestones and metrics must be anticipated according to population density and lifestyle namely, rural, town, or city environments. Experience has shown that both perceptions and realities can be expected to change almost continuously as development begins, matures, and concludes. The crucial first step in organizing a successful outcome from the socioeconomic and environmental perspectives is to establish full and open communication among all stakeholders. Modern communication tools, including websites and social media, can be utilized to advantage, although the most important attribute is to make available easily accessible information that is timely and reliable, including an expression of uncertainties where appropriate.
Paper #2-22: Siting and Interim Reclamation

Balancing positive and negative aspects of oil and gas developments on environmental and socioeconomic outcomes remains one of the most important and challenging aspects of successful development of oil and natural gas resources. Creating a win-win situation for developers and community stakeholders usually requires a larger up-front investment of time and effort by all parties but returns value through smoother and more mutually agreeable outcomes in the long term. There exist examples where negative impacts of oil and gas development have dominated socioeconomic outcomes but there also are case studies that demonstrate success in planning for, and accom-
Paper #2-23: Sustainable Drilling of Onshore Oil and Gas Wells

Although not always recognized or appreciated in the public arena, the technologies and practices of
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drilling oil and gas wells have followed pathways of continuous improvement for many decades. Motivations for improvements have been not only the tightening regulations for environmental protection, but also geotechnical factors that have impeded the cost-effectiveness and production potential of resource-development projects. In almost every case, innovations driven by commercial factors also have brought substantial improvements in environmental safety and sustainability. A critical area of focus in the drilling process is the proper management and disposal of drilling fluids and waste products. Drilling wastes can include drilling mud, produced water, or other byproducts that can have a harmful impact on the environment in the event of an uncontrolled release. The containment and disposal of the wastes is a main priority. Specific findings include: y Extended-reach drilling (ERD), and the associated technologies needed to support it, has contributed toward substantially reduced spatial footprints of drill pads by allowing multiple wells to be drilled and completed from a single pad. Not only is the required acreage needed for drilling significantly reduced, but collateral impacts likewise are reduced, including truck traffic, noise and air emissions. Development of emerging resources, such as shale-gas, will further drive optimization of multiwell pad practices. y Muds and other fluids required to enable rotary drilling through rocks, are essential enablers of drilling and significant efforts have been made to reduce total fluid volumes as well as to reduce environmental incompatibilities in the fluid compositions. Recycling or reuse of fluids, involving a wide array of water-treatment technologies, has reduced the per-well magnitudes of disposal issues and spillage concerns. y Construction and operation of drill rigs has benefited from evolving diesel-electric and all-electric options for powering drill-rig motors. Reduced dependence on diesel technologies has led to reductions of noise, petroleum fuel transportation, and storage and air emissions at drill pads. y Reliable construction and verification of well integrity has improved with advances in cementing technologies and with technologies for downhole logging of cement, casing, and formation properties. C-14
Future drilling and delivery of onshore oil and gas wells will depend upon ongoing cooperation between operators and government regulators to find mutually agreeable solutions to overlapping commercial and environmental issues.
Paper #2-24: Waste Management

Waste management technology is a critical element of successful drilling and production operations. Proper application of waste management principles is required for both efficient drilling operations and environmental protection. Use of any given wastemanagement approach will continue to be decided by the interplay of economic, technical and operational barriers. During drilling the largest potential waste stream is used drilling fluids and cuttings that are produced while drilling the well. Options for handling the fluids and cuttings, or muds, can be organized into a three-tiered water-management or pollutionprevention hierarchy: y Tier 1 Minimization: The generation of waste is minimized within the processes for drilling a well. This approach is mutually beneficial across all three objectives of minimizing the cost of drilling the well, meeting the technical of the drilling operation, and minimizing the impacts on the receiving environment. When feasible, inhibitive drilling fluids and efficient mechanical solids-control equipment can often save money for operators and results in greater protection of the environment. y Tier 2 Recycle/Reuse: For the drilling fluid and cuttings that cannot be managed through water minimization approaches, operators can plan for reuse or recycling of drilling byproducts. The most common ways to reuse drilling fluids is to re-deploy them at another drilling location or at least to recover the most valuable constituents of the drilling fluids from one location and move them to another drilling location. Substantial efforts are ongoing to develop economic methods to treat drilling fluids and drill cuttings so they can be beneficially reused in oilfield and non-oilfield applications. y Tier 3 Disposal: When drilling waste cannot be managed through minimization, reuse, or recycle, operators must dispose of it. Four main lines of technology have been developed to address drilling waste management, which is
centered on handling muds that can include water, oil, and certain chemical additives: y Thermal treatment uses heat to separate more objectionable components from less objectionable components based on differences in volatility. It is a common process applied to oil-based mud and cuttings where centralized processing is feasible and disposal options are available for the objectionable residuals. y Injection technology sends treated or untreated waste streams underground into geologic formations that can accept and safely isolate the waste. If geology and regulations permit, injection can serve to substantially simplify waste management while also reducing the surface footprint. y High-order beneficial reuse on land comprises a combination of bioremediation and re-deployment of treated wastes as soil amendments. It is most readily applied to water-based muds although variations have been developed for some synthetic-based muds. y Lower-order beneficial includes re-deployment as construction aggregates. The treatment criteria for aggregate use can focus more on stabilization rather than complete remediation so that the stabilized waste is rendered environmentally inert. Future waste-management technologies and practices most likely will find growing attention on biodiversity protection; changing energy policy with increasing focus on greenhouse gas emissions; progressively more difficult drilling environments such as offshore deep water, Arctic conditions, and extendedreach wells; and reduced landfill space available for waste disposal with implied greater reliance on beneficial reuse options.
most wells, although progress has been made in use of additives to customize the cements and muds for specific types of wells. Recent shale-gas developments have rediscovered some P&A issues in the forms of older oil or gas wells that never were adequately plugged, but which now pose possible cross-contamination or leakage risks. Furthermore, eventual retirement of uneconomical shale-gas wells must address P&A practices that are specific to issues affecting gas wells and especially horizontal gas wells. The lack of progress in P&A practices is attributable to absence of a long-term vision, and inattention to corresponding research, that recognizes the benefits of P&A to oil and gas development projects. Specific findings are that: y Benefits from reduced operational costs and/or increased production, especially in redeveloped, older fields, generally has been underappreciated. y By plugging wells correctly, future environmental issues, related to fluid or gas leakage, can be avoided and thereby preserve savings otherwise eroded by remediation or litigation costs. y Research has lagged on materials and methods for plugging wells although advances in technologies for drilling and completion should be applicable to practices in plugging and abandonment.
Onshore Operations Subgroup Topic Papers

Paper #2-26: Life Cycle of Onshore Oil and Gas Operations
This document provides a high level overview of the life cycle of onshore oil and gas from undisturbed ground prior to exploration or drilling, through reclamation and abandonment of a location, and follows the produced oil, gas, and liquids up to refining and transportation of products. The processes in the life cycle of oil and gas exploration and production that influence the environment, and how different environments particularly the Arctic require different processes, are described.
Paper #2-25: Plugging and Abandonment of Oil and Gas Wells

Modern regulatory standards in all U.S. jurisdictions require specific provisions for plugging and documenting oil and natural gas wells before they are abandoned. Plugging and abandonment (P&A) regulations vary to some degree among states but all state regulations prescribe the depth intervals that must be cemented as well as the materials that are allowable in plugging practices. The basic technologies associated with the plugging and abandoning of wells has not changed significantly since the 1970s. Water-based slurries of cement and drilling mud are still the basic materials used to plug
Paper #2-27: North American Oil and Gas Play Types

North American onshore oil and gas resources are found throughout the continent contained within the earth by numerous geologic factors.
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Each resource location and geologic containment type is considered a play and each of these plays is unique. Due to this diversity, it is important to understand the drivers and constraints that control the extraction of the resource from each location. Specific technologies are essential to some plays, but hinder obtaining the resource in others, a distinction that is important to optimize recovery of North American resources.
Paper #2-29: Hydraulic Fracturing: Technology and Practices Addressing Hydraulic Fracturing and Completions

Paper #2-28: Environmental Footprint Analysis Framework
All energy source development can cause positive and negative environmental and community impacts, including those affecting air, water, land, wildlife and habitat, visibility, and community or quality of life resources. The combined effects of such environmental impacts from production to end-use are defined as the environmental footprint (EF) of the energy source. It is important that those making decisions affecting choices among energy sources take into account science-based, consistent, comparative information on the environmental impacts of each energy resource. EF can provide decision makers this environmental information to weigh against social, political and other considerations to select the energy resources appropriate for a specific circumstance consistent with national, regional and local priorities. An equitable definition and comparative analysis of the EF for each of the energy options requires a complex methodology that must incorporate a number of factors, including consistent and compatible metrics to facilitate comparative analyses, and recognition that not all criteria for comparison are quantitative so that qualitative or semi-quantitative data must be analyzed. In addition, it has been found that some of the information and data needed for an EF analysis may not exist or exist in a form that is not easily accessible. EF analyses can be informative and instructive. An objective understanding of impacts will enhance the decision-making process. The value of conducting an EF analysis includes support for planning and should be done in a transparent fashion involving interested stakeholders. That approach can increase an understanding of the issues and institutionalize objective analysis in public and private decision making. C-16
Hydraulic fracturing has become an integral part of oil and gas development across North America. Use of hydraulic fracturing can provide an effective means to lessen environmental impacts from the development of oil and natural gas resources, and makes the recovery of resources economically feasible. Application of this technology increases production while dramatically reducing the environmental footprint of oil and gas development and commercializing historically undevelopable resources. Today, when the technology is used on up to 95% of new wells, hydraulic fracturing design is continuously refined and modified to optimize fracture networking and to maximize resource production. While the technology and practices for hydraulic fracturing are similar across all resource types, variations in design and impacts occur among locations and resource types. Potential environmental impacts associated with hydraulic fracturing include air emissions, surface water and ground water withdrawals, produced water management, surface impacts, biological impacts, vibrations, noise, and visual and community impacts. As hydraulic fracturing technology has progressed, operators and regulators have identified and developed extensive mitigation measures to alleviate potential adverse impacts. New advances in the areas of green chemistry, water management, hydraulic fracturing design and job management, and success tracking are expected to enhance both the environmental and economic performance of this technology in the future. As hydraulic fracturing has been applied to unconventional resources in previously undeveloped areas, it has become the focus of many regulatory modifications at the federal, regional, state, and local levels. Although hydraulic fracturing is currently regulated at all of these levels (most prominently the state), many groups and individuals have called for additional federal regulation. The U.S. Environmental Protection Agency is currently studying hydraulic fracturings potential impact on drinking water resources.
Demand Task Group Subgroup Topic Papers

Paper #3-1: Power Generation Natural Gas Demand
The expectation is that there will be a significant shift in the U.S. power generation sector over
the coming years, with natural gas fired generation increasing its market share. The positive change in our gas supply situation and prospects for longer term competitive natural gas prices occurs at the same time as the United States is faced with an aging infrastructure of older, and often less efficient, fossil (thermal) plants, many built at the time the interstate highway system was initially conceived and constructed. These facilities typically release more of the criteria pollutants than a modern gas-fired facility. They also face a gauntlet of new regulations, perhaps so many that a large number of these facilities might be considered candidates for early closure as the solutions to meet these new environmental requirements make the operation of the plants uneconomic. Moreover, the most recent developments in power technology are designed primarily for gaseous fuel operation the gas-turbine-powered Natural Gas Combined Cycle (NGCC) plants. NGCCs are highly advanced and very efficient. Because they can be essentially factory produced, they also have the lowest capital costs ($/kW) available. NGCCs also have the flexibility to operate efficiently over a wide range of utilization rates and complement the growing reliance on intermittent renewable generation sources. In sum, given that we see no excessive economic or regulatory hurdles to overcome, the prospects for a substantial expansion of gas generation in the United States is a benefit as well as a practical solution to mesh with other power generation sources available.
entire energy chain in order to maximize the value of energy resources. Energy efficiency improvements have weakened the link between economic and population growth and energy demand and there remains significant technological potential for efficiency improvements for both natural gas and electricity to reduce long-term demand. However, significant investment and R&D in new residential and commercial end-use technologies and applications will be required to realize these potential improvements, particularly on the gas side, which has already demonstrated major gains. The direct use of natural gas equipment in residential and commercial applications has demonstrated success in economically reducing carbon emissions and there is considerable potential in the Northeastern United States to reduce greenhouse gas emissions and lower energy usage by displacing fuel oil with natural gas as a primary heating fuel. It would be prudent to focus increased attention, particularly over the next 1020 years, on expanding the efficient use of natural gas in the residential and commercial sectors.
Paper #3-3: Industrial Natural Gas and Electricity Demand

Industrial consumers will play an increasingly important role in encouraging increased gas supply by demanding more as prices go down and volatility eases. In 2009, industry used 32% of the natural gas consumed and 24% of the electrical power produced with 23% of the power used generated from natural gas increasing overall gas usage by industry (direct and indirect) to 38%. History shows that when natural gas is plentiful, affordable, and reliable, industry grows stimulating local investment, creating jobs, and strengthening the U.S. industrial and economic base. Over the last decade, natural gas, petroleum, and electricity price increases contributed to plant shutdowns, decreased investment and a loss of over 5 million U.S. manufacturing jobs. Natural gas is a key raw material for chemicals and manufacturing. U.S. companies use natural gas as both a fuel source and a feedstock to create high-value, high-margin products that are used every day. Industry uses fossil fuels efficiently to create jobs. This is good for the economy and also good for the environment. When natural gas is used as a feedstock or is embodied in energy-intensive products, the value is leveraged over and over, resulting in a tremendous value-added proposition for the economy and the environment. This is in contrast to the one-time use created when natural gas is used as fuel in a power plant, truck, or automobile.
Paper #3-2: Residential and Commercial Natural Gas and Electricity Demand
Residential and commercial energy demand since 1970 has been driven by growth in electricity sales and related system losses, in turn driven by increasing electricity use per customer. In 2010, energy system losses from the generation, transmission, and distribution of electricity represented approximately half of all the energy consumed in the residential and commercial sectors. These factors are expected to continue driving energy consumption upwards over the long-term in these sectors. In contrast to electricity, the consumption of natural gas in the residential and commercial sector has remained level since 1970, as efficiency improvements have contributed to lower gas use per customer, thereby offsetting growth in demand despite a 71% increase in the total number of natural gas customers. To assist in optimizing energy resource utilization, energy usage and efficiency should be measured and assessed across the
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Paper #3-4: Transmission Natural Gas Demand

The North American natural gas lease, plant, pipeline, and distribution (Natural Gas Transmission) system is an intricate network that reliably and efficiently delivers significant quantities of natural gas from the wellhead to end-users throughout the entire continent. This elaborate system is the culmination of decades of investment by countless participants and combines legacy components with state of the art improvements. Most of the natural gas infrastructure capacity added in the last 30 years has been to deliver new supply to existing load or to load that has shifted regionally. Today, lease and plant fuel consumption for the United States is about 3.5 Bcf/d, or 6%, of dry gas production while pipeline and distribution fuel consumption is about 1.7 Bcf/d, or 3%, of natural gas demand. Total natural gas transmission fuel (lease and plant, pipeline and distribution) is about 5.2 Bcf/d, or 8.5%, of throughput (total natural gas demand). These percentages have varied little over time and are not expected to do so in the future. It is important to note that each lease, plant, pipeline, and distribution supply and delivery system is unique. Consequently, a one-size-fits-all approach to seeking efficiency improvements will not work. Due to this reality, the greatest opportunity for maximizing either economics or efficiency is in the initial design and construction phase of a major facility.
trends in energy intensity (or energy efficiency) were not borne out by actual trends in later years. There are often future surprises that change the landscape from what a study assumed. The inherent uncertainty of a single reference case was recognized from the start and led to preparing multiple scenarios in the 1992 and subsequent NPC natural gas studies, resulting in a demand fairway bounded by a maximum and minimum case useful for stress testing the industrys ability to meet demand and identifying policy recommendation commensurate with the challenges facing the industry. For the 2007 NPC study, a survey of existing forecasts, or a study of studies, was used to broaden coverage and bring a wider array of assumptions and results into consideration.
Paper #3-6: Natural Gas Exports to Mexico

The current Secretaria de Energa the Mexican Ministry of Energy (Sener) plan shows roughly 500 million cubic feet (MMcf/d) of net imports from the U.S. by 2024. The average for 2009 was over 800 MMcf/d. If we assume that Petrleos Mexicanos (Pemex) produces natural gas to the level forecast by Sener, that liquefied natural gas is imported to Mexico using a 50% capacity factor for their 2.0 Bcf/d of regasification capacity, and that most of the new power capacity additions are natural gas-fired, then the amount of natural gas to be imported from the United States by Mexico by 2024 is closer to 2.5 to 3.0 Bcf/d. This is consistent with the Energy Information Administrations Annual Energy Outlook 2010 Reference Case that projects U.S. exports to Mexico at 2.33 Bcf/d in 2025.

Paper #3-5: What Past Studies Missed
In 1992, 1999, and 2003 the National Petroleum Council (NPC) conducted three major studies of natural gas supply and demand. The purpose of these previous NPC studies were to identify measures to promote efficient natural gas markets and to propose a menu of policy choices focused upon advancing the environment, energy security, and economic well-being. An evaluation of these studies of the NPC identifies the big things that past studies have missed; however, past projections of the demand fairway (or range of projections) for natural gas were generally accurate enough to be useful for testing policies and indicating necessary increments to supply. Though increasing reliance upon unconventional gas was featured in each NPC study, the focus was on coalbed methane and tight sands formations while the potential role of shale gas was limited. While the models employed to prepare the studies worked reasonably well, assumptions about price of oil and gas, GDP growth rates, and C-18
Paper #3-7: Liquids Demand

For 2010, the transport and industrial sectors account for 72% and 22%, respectively, of total U.S. liquids demand with the residential and commercial sectors accounting for about 2% and the power sector about 1%. The study of transportation fuels was not part of the North American Resource Development (NARD) study, rather transportation issues are addressed in the NPC Future Transportation Fuels (FTF) Study, which will not be completed until after this report is published. Thus liquids demand is obtained from the Energy Information Administrations Annual Energy Outlook 2010 (AEO2010) cases. In AEO2010, U.S. liquids demand increases from 40.6 quads in 2010 to 42.0 quads in 2035, with a range of 37.5 quads in the Low Macroeconomic case to a high of 46.8 quads in the High Macroeconomic case. The transport and industrial sectors show
potential for growth in demand while the residential, commercial, and power sectors show decreasing demand in all three cases.
Carbon and Other End-Use Emissions Subgroup Subgroup Topic Papers

Paper #4-1: Baseline and Projections of Emissions from End-Use Sectors
In this report, the Carbon and End-Use Emissions Subgroup describes the current and projected ranges for emissions of air pollutants and greenhouse gases (GHG) in the U.S end-use sectors. As part of its efforts, the subgroup reviewed multiple publicly available reports on historical and projected U.S. emissions and concluded that the Energy Information Administrations Annual Energy Outlook 2010 provides the best source of emissions projections for GHGs and power sector sulfur dioxide (SO2), nitrogen oxides (NOx), and mercury.
that natural gas combined cycle plants have 99% lower SO2 and mercury emissions and about 82% lower NOx emissions relative to a pulverized coal unit on a life-cycle basis. Greater penetration and applications of various EPA Gas STAR technologies provide a proven avenue to reduce methane emissions.
Paper #4-3: Natural Gas End-Use GHG Reduction Technologies

This working paper identifies natural gas enduser technologies that could reduce greenhouse gas (GHG) emissions below 2030 projections on an economy-wide and sectoral basis. The research team that prepared this report distilled data from 35 publicly available academic and industry studies that quantified the volume and cost of projected GHG emissions. Quantitatively incomplete studies and studies that did not differentiate impacts on a technologyspecific basis were excluded from consideration if researchers could not obtain additional data from study authors or independent industry experts. The final study sample set consisted of 15 studies detailing 15 end-user technologies in 32 cost-volume data points. For technologies where multiple data points were available, researchers computed weighted averages of cost, volume, and a proxy index for uncertainty (the variation in results across different studies).
Paper # 4-1a: Addendum: GHG Constrained Cases

In this addendum, the Carbon and End-Use Emissions Subgroup assessed the impacts of GHG constraints on the economy, and specifically, natural gas demand. The subgroup examined the relationship of GHG constraints and the larger gas supplies from unconventional sources.
Paper #4-4: Impact of EPA Regulations on the Power Sector

This paper specifically reviews existing literature related to the impact of upcoming EPA rules on coalfired power plants and addresses the range of potential emissions reductions and increased natural gas demand associated with replacing the coal-fired generation with gas-fired generation.
Paper #4-2: Life-Cycle Emissions of Natural Gas and Coal in the Power Sector
This paper reviews the life-cycle analysis (LCA) of emissions from natural gas and coal in the power sector in the U.S. using updated 2009 EPA greenhouse gas (GHG) emissions inventory, global warming potential for methane from the Intergovernmental Panel on Climate Change (IPCC) Fourth Assessment Report (AR4). The NPC finds that the life-cycle GHG emissions (expressed as lbs. CO2e/ million Btu) for natural gas are about 35% lower than coal on a heat input basis. For efficiencies typical of new coal- and natural gas-fired plants in the United States, the natural gas-fired plants are about 5060% lower in GHGs (expressed as lbs. CO2e/MWh) than a coal plant on a life-cycle basis. The NPC estimates the total methane emissions from the U.S. natural gas systems to be 2.2% of the total gross production. Other studies have shown
Paper #4-5: Policy Options for Deployment of Natural Gas End-Use GHG Reduction Technologies
Given the abundance of natural gas supplies in the United States, natural gas can play a significant role in the energy consumption patterns of the country. Consistent with Secretary Chus directive to the National Petroleum Council, this paper identifies policy options that allows for accelerated deployment of natural gas and associated technologies in various end-use sectors with the goal of reducing greenhouse gas emissions and maintaining energy and economic security. The paper finds that if the United
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States wants to adopt an energy and environmental strategy that enhances the role of natural gas in the economy, it must work simultaneously and strategically on many policy fronts. In general, increased natural gas supplies, along with new environmental regulations, make natural gas an attractive option as a fuel in the end-use sectors, especially the electric power sector in the near- to midterm, particularly as a replacement fuel if there are significant coal plant retirements. Simple and seemingly attractive environmental policy approaches, such as adopting a price on carbon, must play a central role but will not by themselves realize the goals laid out by the Secretary for this study. Under a scenario requiring deeper, long-term emission reductions (e.g., 80% reduction of GHGs by 2050 from a 2005 baseline level), the contribution that natural gas would make to a lower carbon fuel mix may be less certain.
stock returns, and producers and consumers of oil and gas. We also deconstruct commodity price volatility to determine how commodity prices react to specific factors. Finally, we provide a brief overview on the correlation between oil and natural gas prices.
Paper #5-3: U.S. Oil and Gas Industry Business Models

Different countries have taken different approaches to the development of their natural gas and oil resources. In the United States, our system of private sector companies interact with private and public mineral owners, and the governmental bodies with regulatory authority, to determine who has the right to develop, produce, and market our natural gas and oil. The business model employed by natural gas and oil companies in the United States has adapted to the unconventional resource plays that, when compared to conventional resource development, are more broadly distributed geographically, have a greater areal extent, and are more wellbore, service sector and people intensive. This paper details this business model and explores the tools available to the Federal government to promote its policy objectives with respect to natural gas and oil development.
Macroeconomic Subgroup Subgroup Topic Papers

Paper #5-1: Macroeconomic Impacts of the Domestic Oil and Gas Industry
This paper reviews recent studies and data sources regarding the impact that the domestic oil and gas industry has on U.S. gross domestic product, employment, labor income, and local, state and federal government revenue. In all of these categories, it is clear that the oil and gas industry is a significant contributor to the U.S. economy. In addition to supplying the critical feedstocks for many everyday consumer products, the oil and gas industry employs millions of Americans directly and supports the addition of millions of jobs needed to supply the industry and its employees with goods and services. Federal, state and local governments benefit from tax and royalty revenue generated by oil and gas activity in their respective jurisdictions.
STUDY SURvEY DATA AGGREGATIONS

To ensure a broad review of current knowledge, the study groups examined a broad range of available analyses on North American oil and gas resources, supply, demand, and industry operations. To supplement these publicly available analyses, the NPC conducted a broad survey of proprietary energy outlooks. As an integral part of this process, the public accounting firm Argy, Wiltse & Robinson, P.C. received, aggregated, and protected the proprietary data responses. The aggregated data used by the study groups is available electronically on the NPC website (http://www.npc.org).
Paper #5-2: Commodity Price Volatility

In this paper, we address commodity price volatility and the related effects on the broader economy,
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Acronyms and Abbreviations

AAPG AEO AESF AGA ANGA ANSI ANWR API Bcf Bcf/d BOEM BOEMRE BOP BPA BSEE Btu CAD CAGR CATR CBNG CCS CEQA CFR CHOPS CHP CMSP American Association of Petroleum Geologists Annual Energy Outlook, EIA Applied Energy Studies Foundation American Gas Association Americas Natural Gas Alliance American National Standards Institute Arctic National Wildlife Refuge American Petroleum Institute billion cubic feet billion cubic feet per day Bureau of Ocean Energy Management, DOI Bureau of Ocean Energy Management, Regulation and Enforcement, DOI blowout preventer Bonneville Power Administration, DOE Bureau of Safety and Environmental Enforcement, DOI British thermal units computer-aided design compound annual growth rate Clean Air Transportation Rule coalbed natural gas carbon capture and sequestration California Environmental Quality Act Code of Federal Regulations cold heavy oil production with sand combined heat and power coastal and marine spatial planning
ACRONYMS AND ABBREVIATIONS
AC1

CNLOPB CNSOPB CO2 CO2e CWA CWAV CZMA DOE DOI DOT EF EHS EIA EMS EOR EPA ERCB FERC FFC FTF FWPCA GDP GHG GRI GW GWP GWPC HAP HDV IEA INGAA IOCC IOGCC IOR AC2 Canada-Newfoundland and Labrador Offshore Petroleum Board Canada-Nova Scotia Offshore Petroleum Board carbon dioxide carbon dioxide equivalent Clean Water Act cost-weighted average volume Coastal Zone Management Act U.S. Department of Energy U.S. Department of the Interior U.S. Department of Transportation environmental footprint environmental, health and safety U.S. Energy Information Administration Environmental Management Systems enhanced oil recovery U.S. Environmental Protection Agency Energy Resources Conservation Board, Alberta U.S. Federal Energy Regulatory Commission full fuel cycle Future Transportation Fuels (NPC study) Federal Water Pollution Control Act gross domestic product greenhouse gas Global Reporting Initiative gigawatt global warming potential Ground Water Protection Council hazardous air pollutants heavy-duty vehicles International Energy Agency Interstate Natural Gas Association of America Interstate Oil Compact Commission (became IOGCC in 1991) Interstate Oil and Gas Compact Commission improved oil recovery

IPAA ISO kWh LAUF LCA LCOE LDC LDV LNG LPG MACT MMBtu Mcf MIT MMcf/d MMS MWh NAESB NEB NEMS NEPA NERC NETL NGCC NGL NGSA NGV NOAA NOx NPC NPR-A NYMEX OCS OCSLA Independent Petroleum Association of America independent system operators kilowatt hour lost and unaccounted for gas life-cycle assessment levelized cost of electricity local distribution companies light duty vehicles liquefied natural gas liquefied petroleum gas Maximum Achievable Control Technology million British thermal units thousand cubic feet Massachusetts Institute of Technology million cubic feet per day Minerals Management Service, DOI megawatt hour North American Energy Standards Board National Energy Board of Canada National Energy Modeling System, EIA National Environmental Policy Act North American Electric Reliability Corporation National Energy Technology Laboratory, DOE natural gas combined cycle natural gas liquids Natural Gas Supply Association natural gas vehicle National Oceanic and Atmospheric Administration nitrogen oxides National Petroleum Council National Petroleum ReserveAlaska New York Mercantile Exchange Outer Continental Shelf Outer Continental Shelf Lands Act
AC3

OPEC PADD(s) PEV RD&D RFF ROZ RTO SAGD SARA SCO SDWA SOx STRONGER TAPS Tcf UIC USCG USGS Organization of the Petroleum Exporting Countries Petroleum Administration for Defense Districts plug-in electric vehicles research, development, and demonstration Resources for the Future residual oil zones regional transmission operators steam-assisted gravity drainage Superfund Amendments and Reauthorization Act synthetic crude oil Safe Drinking Water Act sulfur oxides State Review of Oil and Natural Gas Environmental Regulations Trans-Alaska Pipeline System trillion cubic feet underground injection control U.S. Coast Guard United States Geologic Survey, DOI
AC4
Conversion Factors
Measurement 1 barrel = 42 U.S. gallons = 159 liters = 0.16 cubic meters (m3) 1 cubic foot = 0.0283 cubic meters (m3) 1 cubic meter = 35.314 cubic feet (ft3) 1 short ton = 2000 lb = 0.91 metric tons
Energy 1 joule = 948,200 Btu 1 barrel of crude = 5.8 million Btu = 5.604 cubic feet of gas = 0.022 tons bituminous coal 1 cubic foot of natural gas = 1,028 Btu = 0.000178 barrels of oil = 0.000040 tons of bituminous coal 1 billion cubic feet per day of natural gas = 0.375 quadrillion Btu per year 1 short ton of coal = 20.06 million Btu 1 kilowatt hour of electricity = 3,412 Btu 1 barrel of motor gasoline = 5.082 million Btu 1 barrel of distillate fuel = 5.775 million Btu 1 barrel of residual fuel oil = 6.287 million Btu

Prudent Development: Realizing The Potential of North America's Abundant Natural Gas and Oil Resources by The National Petroleum Council, 2011

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Prudent Development: Realizing The Potential of North America's Abundant Natural Gas and Oil Resources by The National Petroleum Council, 2011

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PRUDENT

U.S. DEPARTMENT OF ENERGY Steven Chu, Secretary

Outline of Report Materials

Outline of Full Report

outline of report materials

Chapter Two: Operations and Environment

Chapter Three: Natural Gas Demand

Chapter Four: Carbon and Other Emissions in the End-Use Sectors

Chapter Five: Macroeconomics

List of Study Topic and White Papers

Operations & Environment Task Group

Demand Task Group

Carbon and Other End-Use Emissions Subgroup

Figure 1. Structure of the North American Resource Development Study Team

RESOURCE & SUPPLY TASK GROUP

OPERATIONS & ENVIRONMENT TASK GROUP

DEMAND TASK GROUP

ANTITRUST ADVISORY SUBGROUP

END-USE EMISSIONS AND CARBON REGULATION SUBGROUP

REPORT WRITING SUBGROUP

Table 1. North American Resource Development Study Leaders

Figure P-2. Study Participant Diversity

CONSULTANT/ FINANCIAL/ LEGAL END USERS OIL AND GAS INDUSTRY

NGOs GOV'T FEDERAL AND STATE

ACADEMIA AND PROFESSIONAL SOCIETIES

Study rePort StruCture

AMERICAS ENERGY FUTURE

BILLION CUBIC FEET PER DAY

SAUDI INDONESIA ALGERIA ARABIA

Source: BP Statistical Review of World Energy.

TRILLION CUBIC FEET

NATIONAL PETROLEUM COUNCIL (NPC)

POTENTIAL GAS COMMITTEE

ENERGY INFORMATION ADMINISTRATION/ DEPARTMENT OF ENERGY/MINERALS MANAGEMENT SERVICE

INTERSTATE NATURAL GAS ASSOCIATION OF AMERICA

ICF INTERNATIONAL, INC.

MASSACHUSETTS INSTITUTE OF TECHNOLOGY

AMERICAS NATURAL GAS ALLIANCE

NPC SURVEY LOW

NPC SURVEY MID

NPC SURVEY HIGH

Figure ES-3. North American Technically Recoverable Natural Gas Resources

4 3 0 1,000 TRILLION CUBIC FEET 2,000 3,000

NATURAL GAS CARBON CAPTURE AND SEQUESTRATION

REFUEL OR REPOWER EXISTING COAL- OR OIL-FIRED PLANTS

GHG REDUCTION POTENTIAL

MILLION BARRELS PER DAY

Source: BP Statistical Review of World Energy.

MILLION BARRELS PER DAY

BILLION CUBIC FEET PER DAY

COAL PLANT (38% EFFICIENCY)

BILLION CUBIC FEET PER DAY

EXPORTS TO MEXICO VEHICLE DEMAND

24 MIT 2011 Gas Report, page 31.

* Interstate Oil and Gas Compact Commission, Testimony

Environmental and Public Health Concerns

Environmental Regulation of the Natural Gas and Oil Industry

Submit Bid to SLO

Collect Seismic Data Evaluate Data

5. DRILLING AND COMPLETION

DEP PERMIT TO DRILL

7. RESTORATION AND RELEASE