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21–977 2017

S. HRG. 114–468 

CHALLENGES AND OPPORTUNITIES FOR OIL AND 

GAS DEVELOPMENT IN DIFFERENT PRICE ENVIRONMENTS 

HEARING 

BEFORE THE 

COMMITTEE ON 

ENERGY AND NATURAL RESOURCES 

UNITED STATES SENATE 

ONE HUNDRED FOURTEENTH CONGRESS 

SECOND SESSION 

APRIL 26, 2016 

( 

Printed for the use of the 

Committee on Energy and Natural Resources 

Available via the World Wide Web: http://fdsys.gov 

(II) 

COMMITTEE ON ENERGY AND NATURAL RESOURCES 

LISA MURKOWSKI, Alaska, Chairman 

JOHN BARRASSO, Wyoming 

JAMES E. RISCH, Idaho 

MIKE LEE, Utah 

JEFF FLAKE, Arizona 

STEVE DAINES, Montana 

BILL CASSIDY, Louisiana 

CORY GARDNER, Colorado 

ROB PORTMAN, Ohio 

JOHN HOEVEN, North Dakota 

LAMAR ALEXANDER, Tennessee 

SHELLEY MOORE CAPITO, West Virginia 

MARIA CANTWELL, Washington 

RON WYDEN, Oregon 

BERNARD SANDERS, Vermont 

DEBBIE STABENOW, Michigan 

AL FRANKEN, Minnesota 

JOE MANCHIN III, West Virginia 

MARTIN HEINRICH, New Mexico 

MAZIE K. HIRONO, Hawaii 

ANGUS S. KING, JR., Maine 

ELIZABETH WARREN, Massachusetts 

COLIN HAYES, Staff Director 

PATRICK J. MCCORMICK III, Chief Counsel 

TRISTAN ABBEY, Senior Professional Staff Member 

KIP KNUDSON, Professional Staff Member 

ANGELA BECKER-DIPPMANN, Democratic Staff Director 

SAM E. FOWLER, Democratic Chief Counsel 

SCOTT MCKEE, Democratic Professional Staff Member 

(III) 

C O N T E N T S 

OPENING STATEMENTS 

Page 

Murkowski, Hon. Lisa, Chairman and a U.S. Senator from Alaska ................... 1 

Heinrich, Hon. Martin, a U.S. Senator from New Mexico ................................... 50 

WITNESSES 

Bordoff, Jason, Founding Director, Center on Global Energy Policy, and Professor of Professional Practice in International and Public Affairs, Columbia 

University School of International and Public Affairs ...................................... 53 

Cass, Oren, Senior Fellow, Manhattan Institute for Policy Research ................. 64 

Minter, Suzanne, Manager, Oil and Gas Consulting, Platts Analytics ............... 72 

Palti-Guzman, Leslie, Director, Global Gas, The Rapidan Group LLC .............. 82 

Ratner, Michael, Specialist in Energy Policy, Congressional Research Service 87 

ALPHABETICAL LISTING AND APPENDIX MATERIAL SUBMITTED 

Bordoff, Jason: 

Opening Statement ........................................................................................... 53 

Written Testimony ............................................................................................ 55 

Responses to Questions for the Record ........................................................... 121 

Cass, Oren: 

Opening Statement ........................................................................................... 64 

Written Testimony ............................................................................................ 66 

Heinrich, Hon. Martin: 

Opening Statement ........................................................................................... 50 

Minter, Suzanne: 

Opening Statement ........................................................................................... 72 

Written Testimony ............................................................................................ 74 

Responses to Questions for the Record ........................................................... 129 

Murkowski, Hon. Lisa: 

Opening Statement ........................................................................................... 1 

‘‘The Alaska Exception: Energy and the Frontier’’ dated April 26, 2016 ..... 3 

Chart entitled ‘‘ANWR Development Timeline’’ ............................................. 107 

Palti-Guzman, Leslie: 

Opening Statement ........................................................................................... 82 

Written Testimony ............................................................................................ 84 

Response to Question for the Record .............................................................. 132 

Ratner, Michael: 

Opening Statement ........................................................................................... 87 

Written Testimony ............................................................................................ 89 

(1) 

CHALLENGES AND OPPORTUNITIES FOR OIL 

AND GAS DEVELOPMENT IN DIFFERENT 

PRICE ENVIRONMENTS 

TUESDAY, APRIL 26, 2016 

U.S. SENATE, 

COMMITTEE ON ENERGY AND NATURAL RESOURCES, 

Washington, DC. 

The Committee met, pursuant to notice, at 10:07 a.m. in Room 

SD–366, Dirksen Senate Office Building, Hon. Lisa Murkowski, 

Chairman of the Committee, presiding. 

OPENING STATEMENT OF HON. LISA MURKOWSKI, 

U.S. SENATOR FROM ALASKA 

The CHAIRMAN. Good morning. The Committee will come to 

order. 

The subject of challenges and opportunities in oil and gas development under different price environments is certainly one of national significance. There has been a lot of discussion in the news 

about what these low oil prices mean for us as a nation and truly 

given the geopolitics of oil, but it has impact, certainly, for our security, for our economy and for the environment itself. 

A special thank you to our witnesses today, all of whom had 

agreed to testify last week but you were bumped and we apologize 

for that. But we do not apologize that we were able to get the energy bill to the floor. So we are sorry for any inconvenience but 

hope that you find some comfort in the fact that you were moved 

off to the sidelines for a very important legislative priority here. It 

allowed the first significant energy reform package to clear the 

Senate in nearly a decade. I think the Committee is proud of that 

and I thank all of my colleagues for their support in making that 

happen. 

Oil and gas prices are low today, but I think we all recognize 

they are not going to be low forever. They come and they go. In 

fact, the only way that drawdowns from the Strategic Petroleum 

Reserve fill revenue gaps on paper is because CBO assumes price 

levels in the future to double to perhaps $80 or more from today’s 

level hanging around $40 a barrel. 

Oil and gas production is heavily capital intensive. It takes a 

long time for these projects to come online. The Energy Information 

Administration (EIA), for example, we were just speaking about 

this when I came in, estimates that the development in the nonwilderness portion of ANWR would take 8 to 12 years after legislaVerDate Nov 24 2008 07:42 Mar 10, 2017 Jkt 021977 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 C:\TARSHA\HEARINGS\21977\D21977.TXT D21977
2 

tion is enacted to open up the 10 02 area for exploration or production. 

I joined the Alaska State Legislature at a time when oil was at $9 a barrel. For an oil producing state, that was a pretty tough reality for us. As we were looking at legislative issues, we were actually debating whether or not we had enough funding within the 

state’s budget to provide for bullets for the state troopers as they 

go out to provide for a level of safety. 

We had some really tough decisions to make. Our executive and 

legislative branches, at the time they were controlled by Democrats 

and Republicans so it was not all tilted in favor of one party, but 

they all worked diligently to ensure that our public policy remained 

attractive to resource development because we are a resource development state so we needed to be able to attract resource investment. I think that that should be part of our goal, to ensure that 

America remains an attractive place to produce the resources that 

we need and will use right here at home. 

When you look at our energy mix that means that we need to 

provide new access, we need to establish reasonable systems for 

leasing and development and we need to reform what is often an 

overly cumbersome permitting process. 

Right now, we do not have that system at the Federal level, but 

with policy improvements I think we can get there. I think we 

should be tackling this right now not the next time that oil is sitting at $100 a barrel or even more. 

So today I am pleased to announce to my colleagues, and you 

should be receiving a copy, but we have launched a new series of 

white papers. For those of you that have been on the Committee 

for some time, you know that we like to provide you with these 

thoughtful, insightful papers about major initiatives in the energy 

space that we have been focused on. We take a pretty rigorous 

analysis, and we build the case. We built the case for oil exports. 

We built the case with the Energy 20/20 white paper that we had 

released at the start of 2013. 

We have moved through a series of other initiatives where, 

again, we lay forth the efforts that we are focusing on. So it was 

the efforts to expedite LNG exports, again, lift the ban on oil exports. These were all supported by a series of staff reports on condensate, on cross border swaps and much else that we actually saw 

got adopted by the Administration. 

Today I have got a new report out there, a new white paper. We 

are calling it the ‘‘Alaska Exception, Energy and the Frontier.’’ It 

is the first in a series that we are entitling ‘‘Alaska, First in Energy.’’ 

[The information referred to follows:] 

3 


Insert offset folio 1 here 21977.001
4 


Insert offset folio 2 here 21977.002

The Alaska Exception: 

Energy and the Frontier 

Prepared by Majority Staff for Chairman Lisa Murkowski 

U.S. Senate Committee on Energy & Natural Resources 

April 26, 2016 

Introduction 

To describe the State of Alaska as "unique" would be an understatement. The U.S. Energy 

Information Administration (EIA) summarizes its exceptional attributes as follows: 

"Alaska, the largest U.S. state by area, is one-fifth the size of the Lower 48 states and, 

with the Aleutian Island chain, as wide as the Lower 48 states from east to west. It is 

the only state with territory north of the Arctic Circle, and it has the highest 

mountains and longest coastline of any state. Alaska's winters are frequently severe, 

but its climate varies significantly from north to south and from winter to 

summer .... Large areas of Alaska remain uninhabited. It has the fourth-smallest 

population and is the least densely populated of any state."1 

These geographic dimensions shape Alaskan demographics and economics, particularly in 

the energy sector. This report highlights several ways in which the federal government's 

energy policies bestow a degree of special status on the State. 

50~0----1----•';;,;00~--_;;;1000 Miles 

The True Size of Alaska (Source: USDA) 

1 EIA, Alaska State Profile (October 15, 2015): https://www.eia.gov/state/analysis.cfm?sid=AK. 

1 
5 


Insert offset folio 3 here 21977.003

Trans-Alaska Pipeline 

The bulk of Alaska's oil production occurs on the North Slope. The 800-mile Trans-Alaska 

Pipeline System (TAPS) transports virtually all of this oil to Valdez, where it is loaded onto 

tankers and shipped to refineries. The construction of this pipeline required federal 

legislation, the Trans-Alaska Pipeline Authorization Act, which was signed into law in 

November 1973. The Act directed the Secretary of the Interior (and supporting agencies) to 

"take all necessary action to administer and enforce rights-of-way, permits, leases, and 

other authorizations that are necessary for or related to the construction, operation, and 

maintenance of the trans-Alaska oil pipeline system." ( 43 USC §1652(b )). 

See Appendix A for additional background information. 

The TAPS System (Source: BLM) 

2 
6 


Insert offset folio 4 here 21977.004

Kenai LNG 

The Kenai Liquefied Natural Gas (LNG) project has exported natural gas in liquefied form 

from Alaska's Cook Inlet since 1969, with only one brief interruption. Until this year, it was 

the only operating liquefaction terminal in North America. Over the course of its lifetime, 

the project has received numerous federal authorizations - initially from the Federal 

Power Commission 2 and later from the Department of Energy- to export natural gas. In 

part, this unique treatment is due to the plant's small operating capacity, the fact that 

Alaskan natural gas markets are geographically separated from Lower 48 natural gas 

markets, and the age of the facilities (i.e., they are "grand-fathered," according to FERC). 

See Appendix B for additional background information. 

The Arctic Sun Loading at Kenai LNG (Source: ConocoPhillips) 

2 The Federal Power Commission was the predecessor to the Federal Energy Regulatory Commission (FERC). 

3 
7 


Insert offset folio 5 here 21977.005

Alaska LNG 

Under new administrative procedures established in 2014, liquefaction projects in the 

Lower 48 will not generally receive "conditional authorizations" to export LNG to non-Free 

Trade Agreement countries. Instead, the Department of Energy will only consider issuing 

final authorizations to projects that have completed environmental review by other 

agencies. The Department noted in its new procedures, however, that Alaska may deserve 

special treatment: 

"The revised procedures will apply only to exports from the lower-48 states. In the 

Proposed Procedures Notice, DOE stated that no long-term applications to export 

LNG from Alaska were currently pending and, therefore, DOE could not say whether 

there may be unique features of Alaskan projects that would warrant exercise of 

the DOE's discretionary authority to issue conditional decisions."3 [emphasis added) 

Indeed, the proposal to build a gas pipeline from the North Slope to Nikiski, a gas treatment 

plant at Point Thomson, and a liquefaction facility in Nikiski- the "Alaska LNG" projectreceived a conditional authorization from the Department of Energy in May 2015. It is the 

only project to receive such an authorization since the new procedures were implemented. 

See Appendix C for additional background information. 

SAMQW 

. 

Pre liminal)' Facility Locations (Source: Alaska LNG) 

3 DOE, Procedures for Liquefied Natural Gas Export Decisions (August 15, 2014): 

http://energy.gov/sites/prod/files/2014/08/f18/FR%20Procedures%20LNG%20Exports%2008 15 14.pdf. 

4 
8 


Insert offset folio 6 here 21977.006

National Petroleum Reserve-Alaska 

The United States once maintained a network of Naval Petroleum Reserves- at Elk Hills 

and Buena Vista in California, Teapot Dome in Wyoming, and on the North Slope of 

Alaska. The reserve in Alaska was transferred to the Department of the Interior in 

1976 and renamed, while the other sites were transferred to the Department of Energy. 

The National Petroleum Reserve-Alaska (NPR-A) covers approximately 23 million acres, 

making it larger than any national park or wildlife refuge. It is the only remaining NPR 

site in the country and has always held, by far, the most potential for future discoveries. 

Scattered lease sales have been conducted in NPR-A, which the United States Geological 

Survey estimates may contain nearly 900 million barrels of oil and just under 53 trillion 

cubic feet of natural gas.4 

See Appendix D for additional background information. 

NPR-A and the N01th Slope Oil and Gas Activity (Source: BLM) 

4 http://pubs.usgs.gov/fs/2010/3102/pdf/FS10-3102.pdf. 

5 
9 


Insert offset folio 7 here 21977.007

Oil Exports from Cook Inlet 

In 1975, the United States effectively banned the export of domestic crude oil.5 This general 

prohibition on exportation included oil produced in Alaska. However, the President 

retained broad power to authorize exports on a selective basis in the national interest. In 

1985, the Commerce Department and an interagency group determined that exports of 

crude oil from Alaska's Cook Inlet would be in the national interest. The final rule stated: 

"Without further development of Cook Inlet resources, it is estimated that no more 

than 20,000 barrels per day may be available for export and most likely only 4,000 

to 5,000 barrels per day of state royalty oil may be exported. This quantity would 

require only a few vessel sailings a year and would have a minimal impact on the 

shipping industry." 

See Appendix E for additional background information. 

Oil and Gas Pipelines in Cook Inlet [Source: DO!/MMS) 

5 The general prohibitions were repealed in December 2015. 

6 
10 


Insert offset folio 8 here 21977.008

Oil Exports from TAPS 

In 1988, Canada and the United States signed a free trade agreement. Later that year, 

President Reagan determined that 50,000 barrels per day of Alaskan crude oil shipped 

through the Trans-Alaska Pipeline System could be exported to Canada. Further, following 

the passage of Public Law 104-58, President Clinton determined that unlimited exports of 

oil shipped through TAPS could be exported anywhere in the world. Until the general 

prohibitions were repealed in December 2015, Alaska remained the only state that could 

export crude oil beyond Canada. 

See Appendices F and G for additional background information. 

Tanker Routes for Exports to the Far East (Source: BLM) 

7 
11 


Insert offset folio 9 here 21977.009

Renewable Fuel Standard 

The Congressional Research Service writes: "The Renewable Fuel Standard (RFS)-

established by the Energy Policy Act of 2005 (P.L. 109-58; EPAct05) and expanded in 2007 

by the Energy Independence and Security Act (P.L. 110-140; EISA)-mandates that U.S. 

transportation fuel contain a minimum volume of biofuel. The statute exempts 

noncontiguous states and territories, but allows them to opt in." Hawaii elected to opt in, 

but Alaska did not. The rationale for the exemption was, and remains, that biofuel is not 

generally produced in Alaska and that it is logistically difficult to transport the volumes 

that would be needed from the Lower 48 to the State's small isolated network of refiners. 

See Appendix H for additional background information. 

Refineries in Alaska (Source: EIA)6 

6 A refinery at North Pole closed in 2014. 

8 
12 


Insert offset folio 10 here 21977.010

FERC Authority 

The Federal Energy Regulatory Commission regulates interstate electric transmission and 

wholesale sales. FERC does not have public utility-related authority in Hawaii and Alaska, 

due to the "electrical isolation" of those states.? The EIA explains: 

"The electricity infrastructure in Alaska differs from that in the Lower 48 states in 

that Alaskans are not linked to large, interconnected grids through transmission and 

distribution lines. Although an interconnected grid called the Railbelt exists in the 

more populated areas from Fairbanks to south of Anchorage, even that grid is 

isolated from the electric grids in Canada and the Lower 48 states. Most of the 

state's rural communities have no grid access and rely on consumer-owned electric 

cooperatives for their power, and many of those rural power providers use diesel 

electricity generators. This diesel use contributed to Alaska's ranking second only to 

Hawaii in the per capita generation of electric power from petroleum liquids."s 

See Appendix I for additional background information. 

Alaska"s Electricity System (Source: EIA) 

9 
13 


Insert offset folio 11 here 21977.011

Conclusion 

The federal government has implemented energy policies that treat Alaska in exceptional 

ways. Sometimes this has involved exempting the State from certain nationwide mandates, 

while in other cases Alaska has been conferred exclusive opportunities. As the North 

American energy renaissance prompts a broad modernization of U.S. energy policy, Alaska 

may continue to deserve such special status in other areas. 

Acknowledgments 

Staff wish to thank the Congressional Research Service for its assistance with this report. 

The cover image is of the Trans-Alaska Pipeline in the northern Brooks Range.9 

9 Dave Houseknecht (June 20, 2007): 

http://gallery.usgs.gov/photos/03 08 2010 bFViOMLyx6 03 08 2010 1611.Vwal83q aao .. 

10 
14 


Insert offset folio 12 here 21977.012

APPENDIX A: 

TAPS and North Slope Production 
15 


Insert offset folio 13 here 21977.013

Crude Oil Production 

,iliiS 
16 


Insert offset folio 14 here 21977.014

APPENDIXB: 

Kenai LNG 
17 


Insert offset folio 15 here 21977.015

MEMORANDUM 

To: 

From: 

Subject: 

Senate Energy and Natural Resources Committee 

Attention: Tristan Abbey 

Michael Ratner. Specialist in Energy Policy 

Kenai LNG export orders 

As you requested. below is a table in chronological order of export orders related to the Kenai LNG 

facility in Alaska. 

Table I. Department of Energy Export Orders Related to Kenai LNG 

Order 

Order granting blanket authorization to export liquefied natural gas by vessel 

from the Kenai LNG facility near Kenai, Alaska, and vacating prior export 

authorization 

Order granting blanket authorization to export liquefied natura! gas by vessel 

from the Kenai LNG facility near Kenai. Alaska to non~free trade agreement 

nations 

Order granting blanket authorization to export liquefied natural gas by vessel 

from the Kenai LNG facility to free trade agreement nations 

Order granting authorization to export liquefied natural gas from Alaska 

Order denying rehearing 

Order granting authorization to export liquefied natural gas from Alaska 

Order amending authority to export to reflect name change 

Order amending authorization to export liquefied natural gas from Alaska 

Order granting blanket authorization to export liquefied natural gas from 

Alaska 

Order extending authorization to export liquefied natural gas from Alaska 

Order dismissing complaint 

Order amending authorization to export liquefied natural gas 

Order granting blanket authorization to export liquefied natural gas 

Order amending authorization to export liquefied natural gas to Japan 

Order transferring authorization to export liquefied natura! gas 

Order# 

3784 

3418 

3392 

2860 

2500-A 

2500 

261-G. 

1473-A, 

1580-A 

261-F 

1580 

1473 

261-E 

261-D 

786 

261-C 

261-B 

Date 

February 8, 20 16 

April 14, 2014 

February 19,2014 

October 5, 20 I 0 

July 30, 2008 

June 3, 2008 

January 30, 2008 

June 20, 2000 

April I 0, 2000 

April2, 1999 

July 18, 1997 

March 2, 1995 

March 17, 1993 

July 15, 1992 

December !9, 1991 
18 


Insert offset folio 16 here 21977.016

Order 

Order amending authorization to export liquefied natural gas to Japan 

Order amending authorization to export liquefied natural gas to Japan 

Order amending authorization to export liquefied natura! gas 

Order transferring the LNG export authorization of Phillips Petroleum 

Company to Phillips 66 Natura! Gas Company 

Order amending authorization of Phillips Petroleum Company and Marathon 

Oil Company to export LNG from Alaska 

Order authorizing exportation of liquefied natural gas and dismissing application 

for permit 

Source: Department of Energy 

Order# 

261-A 

261 

206 

49-A 

49 

37 FPC 777 

Date 

June 18, 1991 

July 28, 1988 

November 16, 1987 

April 3, 1986 

December 14, 1982 

April 19, 1967 
19 


Insert offset folio 17 here 21977.017

APPENDIXC: 

Alaska LNG 
20 


Insert offset folio 18 here 21977.018

MEMORANDUM 

To: 

From: 

Subject: 

Senate Energy & Natural Resources Committee 

Attention: Tristan Abbey 

Michael Ratner, Specialist in Energy Policy 

Differentiating Alaska natural gas exports 

This memorandum responds to your request for infom1ation regarding liquefied natural gas (LNG) 

projects for export in the state of Alaska and how they arc treated differently by the Department of 

Energy's (DOE) Office of Fossil Energy (DOE!FE). If you have any questions or would like to discuss 

the details ofthis memorandum please do not hesitate to contact me. 

DOE's LNG Exports Determinations and Alaska 

DOE!FE has statutory responsibility, through Section 3 of the Natural Gas Act (NGA), to permit the 

export of natural gas from the United States. Exports to countries with which the United States has a free 

trade agreement (FTA) are deemed consistent with the public interest and authorization is granted without 

modification or delay. Exports to non-FTA countries require DOE/FE to make a public interest 

dctcnnination. IfDOE!FE finds that the exports are not consistent with the public interest, then 

authorization is denied. This detem1ination cmmot be waived. 

As part of its due diligence in response to the large number of applications to export U.S. produced 

natural gas it received, DOE!FE commissioned two studies regarding LNG exports from the lower-48 

states. The studies exan1incd the effects of LNG exports on domestic natural gas prices and the U.S. 

economy. Neither study included exports from Alaska, in part because no new projects to export natural 

gas from Alaska were proposed at the time, but also because Alaskan natural gas exports are viewed as 

unlikely to affect prices and the economy in the lower-48 states. Subsequent DOE!FE studies took the 

smnc approach to Alaskan LNG exports. Since those inirial studies, the Alaska LNG project (sec below 

··The Alaska LNG Project") has been proposed m1d treated separately from DOE!FE's analysis of the 

market implications of natural gas exports from the lowcr-48 states. The potential export volumes from 

the Alaska LNG projects are not included in the cumulative economic effects or other effects that DOE is 

evaluating for projects in the lower-48 states. 

The Kenai LNG Terminal: The Only Operating U.S. LNG Export Terminal 

Since 1969, Alaska has been the only U.S. state to export natural gas in liquefied form (LNG). 1 The Kenai 

LNG facility in Nikiski, AK operated continuously from 1969 to 2011, when production of natural gas in 
21 


Insert offset folio 19 here 21977.019

the Cook Inlet of Alaska declined too much to keep the facility operating. Subsequent discoveries 

prompted the owner and operator of the facility, ConocoPhillips, to reopen the tenninal in 2012. On 

March 31, 2013, the export license for the terminal expired. A new request to export was submitted by 

ConocoPhillips to DOE/FE for a short-term license (two-years), which was grautcd in April, 2014. The 

compauy subsequently applied again for an extension in September 2015, in advauce of the expiration of 

its previous permitinApril2016. The compauy received its authorization on February 8. 2016. The 

current DOE/FE authorization, Order No. 3784, grants ConocoPhillips a new license to export LNG from 

its Kenai facility beginning February 19, 2016 aud tenninating on February 18, 2018. 

The Alaska LNG Project: Bringing North Slope Natural Gas to Market 

The Alaska LNG project submitted its application to export natural gas to countries with which the United 

States does not have an FTA on July 18, 20142 In Order No. 3643, DOE/FE issued a conditional order 

grauting the project approval to export natural gas to non-FTA countrics 3 In the order DOE/FE makes 

multiple references to Alaskau natural gas exports being different thau those from the lowcr-48 states. In 

its conclusion, DOE/FE recognizes that ''export facilities located in Alaska may present different 

considerations. ''4 The Alaska LNG project includes an 800-mile pipeline to trausport natural gas from the 

North Slope to its proposed liquefaction facility in Nikiski (not the existing terminal). According to 

DOE/FE, because of this distance it views the natural gas intended for export as stranded and that it 

would not otherwise come to market. According to DOE/FE, the added cost of the pipeline to the project 

necessitated a conditional authorization for the Alaska LNG project, something it stopped issuing for 

projects in the lower-48 states. In examining domestic and regional supply, DOE/FE concluded that its 

·'focus in this proceeding is regional. "5 

In addition to the Natural Gas Act, natural gas exports from Alaska ·s North Slope, which is where the 

Alaska LNG project would source its natural gas, are subject to the Alaska Natural Gas Trausportation 

Act (ANGTA) of 1976 (P.L. 94-586). Section 12 of the law stipulates that ''before any Alaska natural gas 

in excess of 1.000 Mcf [thousand cubic feet) per day may be exported to any nation other than Cauada or 

Mexico, the President must make and publish an express finding that such exports will not diminish the 

total quantity or quality nor increase the total price of energy available to the United States." Both the 

NGA aud the ANGTA apply to North Slope natural gas exports. In 1988, President Reagan made a 

detennination that exports of Alaska natural gas from the original Kenai terminal would satisfy the 

ANGTA rcqnirement based in part on the price of natural gas at the time and the supply. Similar 

conditions would seem to apply now to the new Nikiski project. 

2 U.S. Department of Energy, OtTice of Fossil Energy, OrderConditional{v Granting J,ong-Term, i\Iulti-Conrract Authorization 

to Export Liquefied Natural Gas by Vesselfi"om the Proposed Alaska J)•v'G Terminal in Nikiski. Alaska, to Non-Free Trade 

Agreement }v'ations, FE Docket No. 14-96-LNG, \Vashington, DC, May 28.2015, p. 5, 

http://energy.gov/sites/prod/fi1es/20l5/07/f24/ord3643.pdf 

:t When DOE/FE changed its procedures for evaluating U.S. LNG exports and eliminated its conditional approvals for projects, it 

retained its right to issue conditional approvals fOr projects in Alaska, ru1d did issue a conditional approval (Or the Alaska LNG 

project See http://cncrgv.gov/sites/prodJ[ilcs/20 14/08/fl8/FR%20Proccdurcs%20l,NGo/o20Exports%2008 _15 _14.pdf lor the 

procedural changes. 

1 DOE/FE Docket No. 14-96-LNG, page 30. 

'DOE/FE Docket No. 14-96-LNG, page 33. 
22 


Insert offset folio 20 here 21977.020

Congressional Research Service 3 

Table I. Documents Distinguishing Alaskan Natural Gas Exports 

Newest to Oldest 

Description 

Order granting blanket authorization to 

export liquefied natural gas by vessel from 

the Kenai LNG facility near Kenai, Alaska, 

and vacating prior export authorization" 

Order conditionally granting !ong*term, 

mu!tiwcontract authorization to export 

liquefied natural gas by vessel from the 

proposed Alaska LNG terminal in Nikiski, 

Alaska, to nonwfree trade agreement 

nations~ 

Order 

3784 

3643 

Order granting long~term multiwcontract 3554 

authorization to export liquefied natural gas 

by vessel from the proposed Alaska LNG 

project in the Nikiski area of the Kenai 

Peninsula, Alaska, to free trade agreement 

nationsc 

Order conditionally granting long-term 3282 

multi-contract authorization to export 

liquefied natural gas by vessel from the 

Freeport LNG terminal on Quintana Island, 

Texas to non-free trade agreement nations 

Report: Effect of Increased Natural Gas 

Exports on Domestic Energy Markets by the 

U.S. Energy Information Administration 

Order granting authorization to export 

liquefied natural gas from Alaska"-

2860 

Date 

February 8, 

2016 

May 28,2015 

November 21. 

2014 

May 17,2013 

January 20 12 

OctoberS, 

2010 

Excerpt/Comment 

"In particular, we (DOE/FE) find that the 

proposed exports of natural gas are not 

needed to meet regional demand in the Cook 

Inlet, Alaska area during the two-year period of 

this authorization. For these and other reasons 

discussed below, we grant CPANGC's 

Application."b 

"No intervenor challenged this assertion [that 

the question of general domestic or national 

need was not relevant], and DOE/FE concurs in 

it."d 

"As to the 12-year period for the 

commencement of export operations, Alaska 

LNG notes that construction of the Project will 

take place in challenging Arctic conditions. 

Alaska LNG also highlights the complexity and 

expansive scope of the Project, which it 

anticipates will lengthen the environmental 

review and permitting timellnes under the 

National Environmental Policy Act (NEPA), 42 

U.S.C. § 4321 et seq."e DOE/FE granted the 12 

year period to begin operations. 

Because there is no natural gas pipeline 

interconnection between Alaska and the lower 

48 states, those LNG export markets generally 

are viewed as distinct.f 

EIA assumed that an Alaska pipeline, which 

would transport Alaskan produced natural gas 

into the !ower-48 United States, would not be 

built during the forecast period in any of the 

cases in order to isolate the lower-48 United 

States supply response. Due to this restriction, 

both the AEO [Annual Energy Outlook] 20 II 

High Economic Growth and Low Shale EUR 

[estimated ultimate recovery] cases were 

rerun, as those cases had the Alaska pipeline 

entering service during the projection period in 

the published AE020 11.8 

"The standard of review in Order No. 2500, as 

here. is whether the proposed export is 

inconsistent with the public interest and, in 

particular, whether there is a shortage of 

natural gas supplies in the local Southeastern 

Alaska market such that local needs for natural 

gas cannot be met ... "h 
23 


Insert offset folio 21 here 21977.021

Congressional Research Service 

Description 

Order granting authorization to export 

liquefied natural gas from Alaska a 

Order extending authorization to export 

liquefied natural gas from Alaska~ 

Order Date 

2500 june 3, 2008 

1473 April 2, 1999 

Excerpt/Comment 

"On balance, we [DOE/FE] find that local 

interests are well served by a grant of the 

requested authorization because the continued 

operation of the Applicant's liquefaction plant 

provides significant benefits to the local 

economy."' 

DOE/FE authorized the extension of exports 

from Alaska, it evaluated the impact of the 

exports on a regional basis and did not 

mention the effect on prices in the !ower-48 

statesJ 

Source: U.S. Department of Energy and U.S. Energy Information Administration. 

Notes: 

a. Refers to the existing Kenai LNG terminal. 

b. p. 2, http://www.energy.gov/sites/prod/files/2016/02/f29/ord3784.pdf. 

c. Refers to the proposed terminal in Nikiski. 

d. p. 5, http://energy.gov/sites/prodlfiles/20 15/07/f24/ord3643.pdf. 

e. p. 6, http:l/energy.gov/sites/prod/files/20 14111/fl9/ord3554%20fta.pdf. 

pp. 13-14, http://energy.gov/sites/prodlfiles/20 13/051101ord3282.pdf. 

g. p. 3. This study was commissioned by DOE's Office of Fossil Energy as part of their statutory requirements to 

determine if natural gas exports to non~FTA countries are in the public interest. 

h. p. 16, http://www.fossil.energy .gov/programs/gasregu!ation/authorizatfons/Orders _Issued_ 20 I O/ord2860.pdf. 

p. 57, http:l/ferc.gov/industries/gas/indus-actfangtp/doe2500.pdf. 

http://www.fossil.energy.gov/programs/gasregulation/authorizations/orders/ord 1473.pdf. 
24 


Insert offset folio 22 here 21977.022

APPENDIXD: 

National Petroleum Reserve-Alaska 
25 


Insert offset folio 23 here 21977.023

MEMORANDUM 

To: 

From: 

Subject: 

Senate Committee on Energy and Natnral Resources 

Attention: Tristan Abbey 

Marc Humphries, Specialist in Energy Policy 

Brief History and Status of the Former Naval Petroleum Reserves 

You requested a memorandum on a brief history and status of the fonner Naval Petroleum Reserves 

(NPR) beginning with the Naval Petroleum Reserves Production Act of 1976 (P.L. 94-258). 1l1e 1976 

Act placed the reserves within a production framework rather than for conservation, e.g., the 1976 Act 

authorized fi.dl commercial development of the reserves. The reserves were primarily transferred to and 

managed by the newly established Department of Energy (DOE) in 1977. There were seven reserves 

listed under the l976Act. No maps of the NPRs are included in this memo, because they were either nonauthoritative or inadequate, with the exception of the NPR-A map. 

Former NPR's: 

NPR-1 Elk Hills 

Elk Hills is located in Kern County, ncar Bakersfield, California, and was one of the largest oil fields in 

the United States. The DOE was directed to sell off the asset by the Defense Authorization Act of 1996 

(P.L. 104-1 06). NPR-1 was privatized in 1998. Occidental Petroleum Company (OXY) purchased it for 

$3.65 billion. The Elk Hills oil field had been in production since 1976. At its peak in 1981, Elk Hills 

produced 18 LOOO barrels per day. OXY continues to produce oil and gas at its Elk Hills operation. 

NPR-2 Buena Vista 

NPR-2 is also in Kern County, California, about 30 miles southwest of Bakersfield. The property was 

transferred from the Department of Defense (DOD) to DOE following the 1976 Act, then, under the 

Energy Policy Act of 2005, the property was transferred to the Department of the Interior (DOl). Some of 

the lands were conveyed to the city of Taft, California. The Bureau of Land Management (BLM) 1 held oil 

and gas lease sales beginning in 2006 --the first in about 80 years. The field is currently near exhaustion. 

1 'l11e BLM, an agency within the Dcpmtmcnt of the Interior, administers the oil and gas leasing program ontederallands, among 

other things. 
26 


Insert offset folio 24 here 21977.024

2 ---------

NPR-3 Teapot Dome 

NPR-3 is located about 25 miles north of Casper, Wyoming. After the 1976 Act, the DOE retained 

operation ofNPR-3 (Teapot Dome), operating a small stripper well and the Rocky Mountain Oilfield 

Testing Center (RMOTC) until its recent sale to Stranded Oil Resources Corporation on January 30, 2015. 

The DOE announced its intent to sell the NPR-3 in July 2013. The RMOTC used NPR-3 as a commercial 

testing ground for new technology and processes for petroleum production. 

NPR-4 Alaska 

The Naval Petroleum Reserve-Alaska, (NPR-A), located in northwest Alaska, was renamed the National 

Petroleum Reserve-Alaska and transferred to the DOl following the 1976 Act. 1l1e BLM held lease sales 

in the northeast planning area of the reserve in 1999, 2002, and 2010 and held lease sales in the northwest 

planning area in 2004 and 2006. In 2008 and 20 ll, tracts were offered in the northeast and northwest 

areas. On Feb mary 13, 2015, the BLM reached a Record of Decision on a development alternative that 

would allow the Greater Moose's Tooth One (GMT!) oil and gas project to move forward, potentially 

reaching production in the far eastern section of the reserve. The GMT I site would be the first producer in 

theNPR-A. 

In2012, the Secretary of the Interior (Ken Salazar) announced his decision, based on a multi-year 

planning process and the Final Integrated Activity Plan/Environmental Impact Statement, to limit oil and 

gas development to about 12 million acres (or 72% of the reserve's estimated recoverable oil and gas) of 

the 23 million acre reserve. 

Naval Oil Shale Reserve-1 Colorado (NOSR-1) (top of the Roan Plateau) and Naval 

Oil Shale Reserve-3 Colorado (NOSR-3) (base of the Roan Plateau) 

The NOSRs I and 3, located in western Colorado near the city of Rifle, were transferred from DOE to the 

DOl in 1997 under the National Defense Authorization Act of 1997 (P.L. 105-85). Properties were 

transferred for the purpose of developing their commercial potential within the multiple-use planning 

framework for federal land use. 1l1e Roan Plateau was included in the BLM Resource Management Plan 

(RMP) in 1984 and within the Roan Plateau Planning Area. Oil and gas lease sales were held beginning in 

2008, but currently there is no production in the former NOSR-1 (top of the Roan Plateau). Development 

was halted as a result of a court challenge. As part of the settlement, the BLM is required to complete a 

new Enviromnental Impact Statement which would analyze and possibly adopt the Roan Plateau 

Settlement. 

Several natural gas wells were developed by DOE in the fonner NOSR-3. Currently, there is significant 

oil and gas production in the fanner NOSR-3 (base of the Roan Plateau). The Anvil Points Oil Shale 

R&D facility which was established at NOSR-3 was decommissioned between 1985-1987. 

Naval Oil Shale Reserve-2 Utah (NOSR-2) 

111e DOE transferred NOSR-2 to the Northern Ute Indian Tribe in 2000. Plans for development are 

uncertain as a search did not uncover anything specific to the former NOSR site. 
27 


Insert offset folio 25 here 21977.025

APPENDIXE: 

Oil Exports from Cook Inlet 
28 


Insert offset folio 26 here 21977.026

MEMORANDUM 

To: 

From: 

Subject: 

Senate Committee on Energy and Natural Resources 

Attention: Tristan Abbey 

Paul Parfomak, Specialist in Energy Policy 

Cook Inlet Oil Exports 

This memorandum responds to your request for a brief historical overview of oil exports from Cook Inlet, 

Alaska. 1 Please let me know if you have additional questions. 

Oil Exports from Cook Inlet 

Prior to passage of the Consolidated Appropriations Act, 2016 (P.L. 114-113), which generally lifts 

restrictions on marketing and selling U.S. cmde oil to intemational buyers,' exports of Alaskan cmde oil 

other than those passing through the Trans Alaska Pipeline System (TAPS) were subject to restrictions 

under the Energy Policy and Conservation Act of 1975 (P.L. 94-163, EPCA). 1l1is act required the 

President to promulgate a rule prohibiting the expmt of domestic cmde oil, generally, but allowed 

exemptions for exports which the President determines to be consistent with the national interest and the 

purposes of the act ( § l 03(b)) as further detailed in the Appendix. Responsibility for implementing EPCA 

was delegated by the President to the Secretary of Commerce. Therefore, crude oil export licenses under 

EPCA were issued by the Bureau of Industry and Security (BIS) within the Department of Commerce. 

On November 6, 1985, the Secretary of Commerce detem1ined that the export of emde oil from Alaska's 

Cook Inlet was consistent with the national interest and the purposes ofEPCA. 1l1e exemption was 

granted in part due to the effmts of Alaska's congressional delegation and others to persuade the Reagan 

Administration that increased oil revenues vYould spur greater oil development in Alaska in the face of 

declining production3 Cmdc oil production from Cook Inlet state waters at that time was around 40,000 

barrels per day (bblld), but was declining approximately IS% per year due to a lack of new investment by 

incumbent oil producers (Figure I). 4 

U.5{ Exports of Crude Oil and 

3 Resource Development Cmmcil, Inc .. 'Cook Inlet Oil,'' Resource Review, newsletter, Anchorage, AK, November 1985. 

Admirtistrati<m, "'Exports of Crude Oil D<.,'lived ffom Alaska's Cook Inlet' 51 
29 


Insert offset folio 27 here 21977.027

200 

150 

100 

50 

0 

Figure I. Cook Inlet Crude Oil and NG L Production 

Thousand barrels per day (bbl/d) 

0'\ 

00 

0'\ 

,..; 

g 

0 

N 

Sources: Alaska Department of Natura! Resources, "Royalty Production," web page, April 6, 20 16, 

http://dog.dnr.alaska.gov/Royalty/Production.htm; Alaska Department of Revenue, Tax Division, "Alaska Oil Production," 

November 8, 2013, http://www.tax.alaska.gov/sourcesbook/AiaskaProduction.pdf. 

Note: NGL = natural gas liquids. NGL exports have not been subject to export restrictions. 

In his national interest detennination, the Secretary of Commerce addressed Cook Inlet em de oil 

development. 

The benefits that will ensue from these exports include increased incentives for investment in the 

e"1Jloration and development of domestic cmdc oil, transportation efficiencies, and material 

enhancements to the energy security of our allies. This initiative will also encourage other 

countries to remove trade barriers to U.S. goods and services. It does not affect our energy security 

as we retain the flexibility to react to changes in the world's m·ailablc oil supply-' 

BIS license policy for Cook Inlet cmde oil exports in the Code of Federal Regulations stated: 

ExJJOrts from Alasl<a's Cook Inlet. The liceusing policy is to approve applicatious for e"llorts of 

cmde oil that was derived from the state-owned submerged lands of Alaska's Cook Inlet and has 

not been, or will not be, trausported by a pipeline over a federal right-of-way subject to the 

[Mineral Leasing Act] or the Trans-Alaska Pipeline Authorization Act. 6 

The ]<ederal Register notice stated that BIS export licenses issued under these regulations will have a 

tenn no longer than one year and are subject to revocation '·if there is serious intermption to available 

U.S. oil supplies.''7 According to the BIS, the agency approved a total of six licenses for the export of 

Cook Inlet oil in fiscal years 1986, 1987 (2), 1989 (2), and 19908 

The state of Alaska receives royalties of approximately 12.5% of the oil and natural gas produced from its 

leases. These royalties may be taken as a share of the phvsical commodity-royalties "in-kind .. (RIK)-

or as a share of commodity value. According to the Alaska Department of Natural Resources, the state 

'Ibid. 

"15 C.F.R 754.2 (d). 

Department of Commerce, "Exports ofCmdc Oil Derived from Alaska's Cook Inlet," 50 Federal Register 52798, December 

26. 1985. 

8 Bureau oflndustry and Security, personal conununicution, Sepkmbcr 8, 2014. 
30 


Insert offset folio 28 here 21977.028

began exporting its RIK oil from the Cook Inlet to Taiwan in 198 7. Exports to Taiwan continued through 

a series of one-year competitive auctions until 1991, when the last contracted deliveries were stopped 

underfarce majeure following the emption of the Mount Redoubt volcano, which dismpted oil operations 

in the Cook Inlet arca9 The total volume of RIK Cook Inlet cmdc oil exported to Taiwan between 1987 

and 1991 was 3,587,088 barrels. w 1l1ese exports never resumed. The exports by the state of Alaska 

correspond with the BIS licenses issued and appear to account for all oil exports from Cook Inlet. As 

Figure 1 shows, while Cook Inlet exports may have temporarily increased cmde production, they did 

little to reverse the long-term decline of cmde oil production in the region. Today, nearly all cmde oil 

produced in Cook Inlet is supplied to a refinery ncar the city of Kenai, AK, which produces most of 

Alaska's gasoline as well as other fucls. 11 

9 Alaska Department of Natural Resources, Division of Oil and Gas 2009 Annual Report, May 2010, p. 36, 

http://dog.dnr.alaska.gov/Publications/Docmnents/Annua1Reports/Section2_2009.pdf. 

10 Ibid., Table Il.S. 

" Alaska Oil and Gas Association, "AOGA Fact Sheet: Cook Inlet Oil & Gas Production," April20 !5, p. 3. 
31 


Insert offset folio 29 here 21977.029

Congress1onal Research Service 

Appendix: Prior Statutory Limits on Cook Inlet Exports 

Energy Policy and Conservation Act of 1975 (P.L. 94-163 §103) 

DOMESTIC USE OF ENERGY SUPPLIES AND RELATED MATERIALS AND EQUIPMENT 

SEC. 103. (a) The President may. by rule. under such terms aud conditions as he detennines to be 

appropriate and necessary to cmry out the purposes of this Act restrict exports of-

( I) coal, petroleum products. natural gas. or petrochetnical feedstocks. and 

(2) supplies of materials or equipment which he detennines to be necessary (A) to maintain or 

further exploratioiL production, refining, or transportation of energy supplies. or (B) for the 

constmction or maintenance of energy facilities within the United States. 

(b) (I) The President shall exercise the authority provided for in ExemptiotL subsection (a) to 

promulgate a rule prohibiting the expurt of cmde oil and natural gas produced in the United States. 

except that the President may, pursuant to paragraph (2), exempt from such prohibition such cmde 

oil or natural gas exports which he determines to be consistent with the national interest and the 

pmposes of this Act. 

(2) Exemptions from any mlc prolribiting cmde oil or natural gas e~-ports shall be included in such 

mlc or provided for in an amendment thereto and may be based on the purpose for export, class of 

seller or purchaser. country of destinatioiL or m1y other reasonable classification or basis as the 

President detennines to be appropriate and consistent with the national interest and the purposes of 

tlris Act. 

(c) In order to implement any rule promulgated under subsection (a) of this section, the President 

may request and, if so, the Secretary of Conunerce shall, pursuant to the procedures established by 

the Expurt Adnrinistrdtion Act of 1969 (but without regard to the plrmse "and to reduce the serious 

inflationary impact of foreign demand" iu section 3(2)(A) of such Act), impose such restrictions as 

specified in any mle under subsection (a) on expurts of coaL petroleum products, natural gas. or 

pctrochenrical feedstocks. and such supplies of materials and eqnipment. 

(d) Any finding by the President pursuant to subsection (a) or (b) and any action taken by the 

Secretary of Commerce pursuant thereto shall take into account the national interest as related to 

the need to leave unintemtpted or unimpaired-

(!) exchanges in similar quantity for converrience or increased efficiency of transportation 

with persons or the govermuent of a foreign state, 

(2) tempurary e>.-ports for convenience or increased efficiency of transpurtation across parts of 

an adjacent foreign state which exports reenter the United States, and 

0) the historical tmding relations of the United States with Canada and Mexico .. 
32 


Insert offset folio 30 here 21977.030

APPENDIXF: 

TAPS/Canada Oil Exports 
33 


Insert offset folio 31 here 21977.031

MEMORANDUM 

To: 

From: 

Senate Committee on Energy and Natural Resources 

Attention: Tristan Abbey 

Paul Parfomak, Specialist in Energy Policy 

Subject: Alaska Oil Exports to Canada Under Free Trade Agreements 

This memorandum responds to your request for a brief historical overYiew of oil exports from Alaska to 

Canada under free trade agreements.' Please let me know if you have additional questions. 

Alaska Oil Exports under USCFTA and NAFTA 

The United States-Canada Free-Trade Agreement Implementation Act of 1988 (USCFTA)2 authorized 

exports of up to 50,000 barrels per day (bbl/d)3 of Trans Alaska Pipeline System (TAPS) cmde oil to 

Canada-as provided for in the agrcemcnt"-subject to certain presidential findings and on condition that 

the oil be shipped on U.S.-flagged tankers from the lower 48 states and consumed in Canada5 It appears 

that access to TAPS oil was a Canadian request, based on the needs of Vancouver refineries. Canada 

sought this reciprocal access for its acquiescence to essentially guarantee a supply of oil and gas to the 

United States under the USCFTA energy chapter. It was noted that 50,000 bblld was only 2-3% of total 

Alaskan daily output in 1988.6 To implement this provision of the agreement, on December 31. 1988. 

President Reagan issued a finding that cmde oil exports under USCFTA were in the national intercst 7 

According to the Alaska Department of Natural Resources, however, there were no shipments of TAPS 

cmde to Canada under this authorization. 8 

U.S. Exports ofCrude Oil and 

related to the refinery 

(>'·Energy: "Hearings before the Subcommittee on Energy and Power_ Committee on Energy and 

Commerce, March 1, 100-179. p. 7 President Ronald Rcagzm, ·'Presidential Findings Regarding the Export of Alaskan Cmde Oil to Canada,' December 31. 1988. 

g Alaska l )epartnH..'n1 of Natural Resources. personal commLmication, September 18, 2014. 
34 


Insert offset folio 32 here 21977.032

The TAPS oil export provisions of the USCFTA were incorporated by reference in the North American 

Free Trade Agreement (NAFTA), which went into effect on January 1, 19949 However, the regulatory 

record raises the question of whether the 1996 determination allowing unlimited exports from TAPS was 

in conflict with the earlier 1988 determination with regard to Canada. It could be argued that-as the 

superseding language-the 1996 detennination did extend to Canada as the language is not country 

specific. Nonetheless, the 1988 determination capping the amount at 50,000 bbl/d was also still reflected 

in the B IS export regulations. Because Canada apparently never imported U.S. crude oil under the 

specific provisions related to TAPS it is unclear whether the two seemingly different allowances 

represented an oversight in regulatory codification or the licensing policy at the time. 

Lifting of U.S. Crude Oil Export Restrictions 

On December 18, 2015, Congress passed the Consolidated Appropriations Act, 2016 (H.R. 2029), which 

was signed by the President and became P.L 114-11310 Included in P.L 114-113 is a provision that 

repeals Section 103 of the Energy Policy and Conservation Act of 1975 (EPCA; P.L. 94-163), which 

directs the President to promulgate a rule prohibiting crude oil exports. P.L. 114-113 also includes a 

"savings clause" and a list of exceptions that maintain and provide the President with authority to restrict 

exports under certain circumstances. Enactment ofP.L 114-113 allows U.S. crude oil to be marketed and 

sold to international buyers and concludes a nearly two-year debate about the varied and multidimensional considerations associated with allowing the export of cmde oil produced in the United States. 

Passage of P. L 114-113 appears to have removed any U SCFTA or NAFTA restrictions on TAPS oil 

export from Alaska to Canada. However, CRS is not aware of any cmdc oil shipments from TAPS to 

Canada since the act was passed. 

'NAFTA Annex 608.2 

see CRS ReportR44403, Cmde Oil Export'iand Related Provisions in PL. 114-!13: In B1ief, by Philip 

Sherlcok. 
35 


Insert offset folio 33 here 21977.033

i\PPENDIX G: 

Dil Exports from TAPS 
36 


Insert offset folio 34 here 21977.034

MEMORANDUM 

To: 

From: 

Subject: 

Senate Committee on Energy and Natural Resources 

Attention: Tristan Abbey 

Paul Parfomak, Specialist in Energy Policy 

Alaska North Slope Oil Exports 

This memorandum responds to your request for a brief historical overview of oil exports from Alaska's 

North Slope.' Please let me know if you have additional questions. 

North Slope Oil Exports 

1l1e export of cmde oil from Alaska's North Slope (ANS) has been an issue for Congress since the 

authorization of the Trans Alaska Pipeline System (TAPS) in 1973. 1l1e Trans Alaska Pipeline 

Authorization Act' specified that oil shipped through the pipeline conld be exported intemationally, but 

only under restrictive conditions (detailed in the Appendix) including a finding by the President that such 

exports would be in the national interest. These conditions were reaffirmed in the Export Administration 

Act of 1979.3 In effect, the conditions amounted to a ban on TAPS oil exports. 

TAPS was completed in 1977: initial oil shipments were flowing by year-end. With continued oilfield 

development on the North Slope, production climbed steadily for I 0 years, peaking at nearly 2 million 

barrels per day (bbl/d) in 1988 (Figure 1). Much of the North Slope cmde was shipped to California for 

refining, which was the nation· s third-largest oil producer at the time. 

tvw.sKan encr!l' e;..q)orts is available in CRS Report R43753, L~S. Exports ofCrude Oil and 

Natural Gas: Jhe Case of Alaska, by Paul W. Fergusson 

2 !' L. 93-153,43 U.S.C. §§ 1651 et seq. 

3 P.L. 108-458 §7(d). 
37 


Insert offset folio 35 here 21977.035

Congressional Research Service 

Figure 1. Alaska North Slope Crude Oil Production 

Thousand barrels per day (bbl/d) 

Sources: Alaska Department of Natural Resources, ''Royalty Production," web page, Apri16, 2016, 

http://dog.dnr.alaska.gov/Roya!ty/Production.htm; Alaska Department of Revenue, Tax Division, "Alaska Oil Production," 

November 8, 2013, http://www.tax.alaska.gov/sourcesbook/AiaskaProduction.pdf .. 

The United States-Canada Free-Trade Agreement Implementation Act of 1988 (USCFTA)" authorized 

exports of up to 50,000 bbl/d5 of TAPS cmdc oil to Canada-as provided for in the agreement6

-subject 

to certain presidential findings and on condition that the oil be shipped on U.S.-flaggcd tankers from the 

lower 48 states and consumed in Canada7 It appears that access to TAPS oil was a Canadian request, 

based on the needs of Vancouver refineries. Lacking access to TAPS cmde, Canadian refiners on the west 

coast had to source their oil feedstock from more expensive Asian or Middle Eastem suppliers. Canada 

sought this reciprocal access for its acquiescence to essentially guarantee a supply of oil and gas to the 

United States under the USCFTA energy chapter. It was noted that 50,000 bbl/d was only 2-3% of total 

Alaskan daily output in 19888 To implement this provision of the agreement, on December 31, 1988, 

President Reagan issued a finding that cmde oil exports under USCFTA vvere in the national interest.9 

According to the Alaska Department of Natural Resources (ADNR), however, there were no shipments of 

TAPS cmde to Canada under this authorization. 10 

In the mid-1990s, high volumes of Alaskan oil could be shipped economically only to the four westem 

statcs. 11 This resulted in locally falling oil prices and constrained domestic production. As California 

prices fell below world prices, there were complaints from West Coast oil producers, industry analysts, 

4 P.L 100-449 §305(a). 

5 While an t>xplanation of the precise figure of 50,000 bhl/d may be lost to history, it appears to have been related to the rcfint'l)' 

capacity in Vancouver where it was prcsm11cd by Alaska officials the oil would be shipped. 

"USCFTA, Annex 902.5(3) 

7 P.L. IW-449 §305(a). 

8 "Energy: Free Trade \Vith Canada," Hearings before the Subcommittee on Energy and Power, Committee on Energ~y and 

Conunerce, March I, 1988, Serial No. !00-179. p. 4. 

9 President Ronald Reagan, "Presidential Findings Regarding the Export of Alaskan Cmde Oil to Canada," December 31, 1988. 

10 Alaska Department of Natural Resources, personal conummication, September 18, 2014. 

11 Very minor amounts also W(..'llt through the Panama Canal to U.S. refineries on the Gulf of Mexico. 

Sec, for example: Samuel A Van Vactor, "'Time to End the Alaskan Oil Export Ban,- Cato Policy Analysis No. 227, Cato 

Institute, Mav 18, 1995, http://www.cato.org/pubs/pas/pa-227 h1ml. 
38 


Insert offset folio 36 here 21977.036

Congressional Research Service 

and public officials about what they perceived to be artificially depressed prices. Some also pointed to the 

underutilization of tankers built to carry North Slope crude, and the resulting negative impacts on marine 

employment, shipbuilding and repair, and the availability of tankers for national defense. 13 

Early efforts to achieve remedial action failed until 1995, when low world oil prices and a supportive 

Department of Energy (DOE) coincided with renewed legislative efforts in both Houses of Congress. A 

June 1994 DOE study, Exporting Alaskan North Slope Crude Oil-Benefits and Costs, concluded that 

permitting the export of Alaska crude would be beneficial to the U.S. economy. 

First, lifting the ban would expand the markets in which ANS oil can be sold, thereby increasing 

its value. ANS oil producers, the States of Califomia and Alaska, and some of their local 

govemments all would beuefit from iucreased revenues. Permitting exports also would generate 

new economic activity and employment in Califomia and Alaska. The study concludes that these 

economic benefits would be achieved without increasing gasoline prices (either in Califomia or in 

the nation as a whole). 14 

Increased producer revenues would be the result of access to a broader market as well as transportation 

savings from avoiding the Panama Canal to reach U.S. ports in the Gulf of Mexico. In addition, DOE 

predicted that higher prices at the wellhead would result in I 00,000 bbl/d more output from Alaska and 

California than would be the case with continued export restriction. Higher North Slope production, in 

tum, would generate additional income to the federal government due to oil sales from federally owned 

reserves and royalties on federal leases. Royalty revenues to the state of Alaska would likewise increase. 

Original opposition to the export of em de oil from TAPS was driven in part by representatives of the U.S. 

maritime industry, who viewed Alaskan oil development as an opportunity to enlarge the U.S.-flagged 

coastal tanker fleet under the Merchant Marine Act of 1920 (the Jones Act). 15 The Jones Act requires 

shipments between U.S. ports to be carried on U.S.-flagged vessels. More recent opponents of exports 

from TAPS argued that such exports would increase U.S. dependence upon foreign oil supplies, raise 

gasoline prices, and lead to job losses at West Coast refineries no longer being supplied with Alaskan oil. 

Some opponents also expressed concerns about potential oil spills (in light of the Exxon Valdez spill) or 

linked TAPS oil exports to potential oil exploration in Alaska's Arctic National Wildlife Refuge, an 

environmentally sensitive area they wished to protect from development. 16 

Notwithstanding the arguments of opponents, and with substantial pr';lccted economic benefits (and little 

administrative cost), bills to repeal the effective export ban in the 104 Congress (H.R. 70 and S. 395) 

passed by large margins, 324-77 and 74-25 respcctivcly. 17 President Clinton signed the Trans-Alaska 

Pipeline Amendment Act (P.L. I 04-58) in November 1995. TI1e act provides that oil transported through 

TAPS may be exported tmless the President finds, after considering specified criteria, that exports are not 

in the national interest.'" 

13 U.S. Congress, I [ouse Conunittec on Resources, Exporls a/Alaskan Nm1h Slope Oil, To Accompany H.R. 70, 1 041

h Cong., 1st 

scss., Jtmc 15, 1995, H.Rept. 104-139 (Washington: GPO, 1995). 

1

"

1 Department ofFnerg)\ Bxpot1ing .A]askan Xmth Slope Crude Oil--Benefits and Costs, June 1994, p. l. 

1995. For further discussion sec CRS Report R43653, Shipping lJ.S. Crude Oil h.v rVater: 

John Frittelli. 16 "Alaska Oil Export Ban Lifted," CQ Almanac, 1995, 51'1 ed., pp. 5,2)-5,26, 1996. 

17 While the export b[Ul was tmdcr debate in 1995, the United States was already t!xporting nearly 900,000 bbVd of petroleum 

produGts-28% in the [onn of petroletun coke, which is used in making steel. Otht..'f exports \Yere cross-border exchanges of 

as some cntde, with Canada and Mexico. Trade in pctrolemn coke plus expmts to Canada and Mexico 

U.S. oil exports at the time. 

18 Trans-Alaska Pipeline Amendment Act of 1995, P.L. 104-58, 30 U.S. C. § l85(s). 
39 


Insert offset folio 37 here 21977.037

Congress;onal Research Service 

To address the economic and environmental issues associated with TAPS oil exports, the National 

Economic Council, the Council on Environmental Quality, and the Department of Commerce's Bureau of 

Export Administration coordinated an interagency review. The review-which included extensive public 

hearings, review of public comments, and analytical evaluation-concluded that TAPS exports would not 

likely pose a significant impact to the economy or the environment. 19 Subsequently, on April 28, 1996, 

President Clinton issued a national interest determination authorizing North Slope oil exports. The 

President's detennination stated that such exports 

will not diminish the total quantity or quality of petroleum available to the United States; and are 

not likely to cause sustained material oil supply shortages or sustained oil price increases 

significantly above world market levels that would cause sustained material adverse employment 

effects in the United States or that would cause substantial harm to consumers .... I have also . 

concluded that exports of such cmde oil will not pose significant risks to the environment if 

certain terms and conditions arc mct. 20 

The oil export authorization included several conditions related to tanker shipping routes. inspections, and 

ballast exchange intended to mitigate environmental risk. 

With the cmde oil export restrictions lifted, TAPS exports totaling 36,000 bbl/d began in 1996; they grew 

to 66,500 bbl/d in 1997, dipped to 52,900 bbl/d in 1998. and rose again to a high of 74,000 bbl/d in 

1999-about 7% of North Slope production that year. According to the Energy Information 

Administration (EIA), Alaskan cmde oil exports between 1996 and 2004 were shipped to South Korea 

(48%), Japan (26%), China (17%), and Taiwan (9%). 21 TAPS exports ceased temporarily in May 2000 as 

West Coast buyers had to pay more to compete with foreign buyers for Alaskan oil. An additional cargo 

was shipped to China in 2004 aboard a tanker reportedly en route to Asia for repairs. 22 TAPS exports 

resumed with two shipments of cmde oil in October 2014 and May 20 15 bound for a refinery in South 

Korea. 

Viewed relative to total domestic refinery input of 14.8 million bbl/d,24 TAPS cmde oil exports at their 

peak in 1999 amounted to the equivalent of half of one percent of U.S. refinery demand. In absolute 

terms, these export volumes were not viewed by market analysts as particularly significant. In a July 1999 

report, the General Accounting Office (GA0)2

' concluded that lifting the North Slope oil export effective 

ban raised the relative prices of North Slope and comparable California oils between $0.98 and $1.30 per 

barrel above what they would have been with the effective ban in place, but that the price increases did 

not have an observable effect on North Slope or California oil production. (It is possible that production 

could have been lower without the incremental demand for exports.) The GAO also concluded that lifting 

the export ban increased costs for some refiners but had limited effects on consumers and the oil-shipping 

industry on the West Coast26 

Slope Crude Oil; Establishment of 

License Exception TAPS, 20 President William J. Clinton, Memorandum to the Secretary of Commerce and the Secretary of Energy, April28, 1996. 

21 Energy Information Administration, "Hmv Much Oil Is Produced in Alaska and \"Vherc Does It Go?," \Veb page, June 26,2014. 

http://v.,'\V"\v.eia.gov/too1s/faqs/faq.cfm?id:::::J5&t=6 

Warren Comv-vall, "Where Would ANWR Oil GoT The Seattle Times, April 19,2005. 

23 Jacob Gronholt-Pedersen and Liz Hampton, '"Traders Eye Alaskan Oil Exports to Asia as Shipping Ban Ended,'' Reuters, 

Januarv 8, 2016. 2

"

1 Energy Infonnation Administration, '"U.S Refinery and Blender Net Input ofCmdc Oil,' web pagc, September 29,2014, 

http://w\\w.eia.gov/dnav/petlhist!Lea11!andkr.ashx'?n=PET&s=MCRRJUS1&i'=A. 

25 Now called the Govemmt..'nt Accountability Office. 

General Accmmting Office, Alaskan North Slope Oil: lJmited f;!Jects c{L[fting E.:rport Ban on Oil and Shipping Industries and 

Consumer~>, GAO/RCED-99-19 !, July 1999. 
40 


Insert offset folio 38 here 21977.038

Congressional Research Service 

Appendix: Statutory Limits on TAPS Oil Exports 

Trans Alaska Pipeline Authorization Act of 1973 (P.L. 93-153 §101) 

Limitations on E~']lort 

(u) Any domestically produced crude oil transported by pipeline over rights-of-way granted 

pursuant to section 28 of the Mineral Leasing Act of 1920, except such crude oil which is either 

exchanged in similar quantity for convenience or increased efficiency of transportation with 

persons or the government of an adjacent foreign state, or which is temporarily exported for 

convenience or increased efficiency of tmnsportation across parts of an adjacent foreign state and 

reenters the United States, shall be subject to all of the limitations and licensing requirements of 

the Export Administration Act of 1969 (Act of December 30, 1969: 83 Stat. 841) and, in addition, 

before any crude oil subject to tltis section may be exported under the limitations and licensing 

requirements and penalty and enforcement provisions of the Export Administmtion Act of 1969 

the President must make and publish an e'-']lress finding that such exports will not diminish the 

total quantity or quality of petroleum available to the United States, and are in the national interest 

and are in accord with the provisions of the Export Administration Act of 1969: Provided, That 

the President shall sub1nit reports to the Congress containing findings made under tltis section, and 

after the date of receipt of such report Congress shall have a period of sixty calendar days, thirty 

days of which Congress must have been in session, to consider whether exports under the terms of 

tlris section are in the national interest If the Congress within tltis time period passes a concurrent 

resolution of disapproval stating disagreement with the President's finding concerning the national 

interest further exports made pursuant to the aforementioned Presidential findings shall cease, 

(P,L, 93-153 § 101) 

Export Administration Act of 1979 (P.L. 108-458 §7(d)) 

(d) DOMESTICALLY PRODUCED CRUDE OIL-(1) Notwithstanding any other provision of 

this Act and notwithstanding subsection (u) of section 28 of the Mineral Leasing Act of 1920 (30 

U,S,C, 185), no domestically produced crude oil tmnsported by pipeline over right-of-way granted 

pursuant to section203 of the Tmns-Aiaska Pipeline Authorization Act (43 U,S,C 1652) (except 

any such crude oil which (A) is exported to an adjacent foreign country to be refined and 

consumed therein in exchange for the same quantity of crude oil being exported from tlmt country 

to the United States: such exchange must result through convenience or increased efficiency of 

transportation in lower prices for consumers of petroleum products in the United States as 

described in paragraph (2)(A)(ii) oftltis subsection, (B) is temporarily e~']lorted for convenience or 

increased efficiency of transportation across parts of an adjacent foreign country and reenters the 

United States, or (C) is transported to Canada, to be consumed thereiR in amounts not to exceed 

an annual average of 50,000 barrels per day, in addition to ex']lorts under subparagraphs (A) and 

(B), except that any ocean transportation of such oil shall be by vessels documented under section 

12106 of title 46, United States Code) may be exported from the United States, or any of its 

territories and possessions, subject to paragraph (2) of tltis subsection, 

(2) Crude oil subject to the proltibition contained in paragraph (I) may be exported only if-

(A) the President so recommends to the Congress after making and publishing express 

findings that eC\']lorts of such crude oil, including exclmnges-

(i) will not dintinish the total quantity or qmlity of petroleum refined witltin, stored 

within, or legally comntitted to be transported to and sold within the United States: 

(ii) wilt witltin 3 months following the initiation of such exports or exchanges, result in 

(I) acquisition costs to tl>e refiners which purchase the imported crude oil being lower 

tlmn the acquisition costs such refiners would lmve to pay for the domestically produced 

oil in the absence of such an export or exchange, and (II) not less than 75 percent of such 
41 


Insert offset folio 39 here 21977.039

Congressional Research Service 

savings in costs being reflected in wholesale and retail prices of products refined from 

such imported crude oil: 

(iii) will be made only pursuant to contracts which may be tcnuinatcd if the cmde oil 

suppliers of the United States are intemlpted. threatened, or diminished: 

(iv) are clearly necessary to protect the national interest and 

(v) arc in accordance with the provisions of this Act and 

(B) the President includes such findings in his reconunendation to the Congress and the 

Congress. within 60 days after receiving that recommendation. agrees to a joint resolution 

which approves such exports on the basis of those findings, and which is thereafter enacted 

into law. 

(3) Notwithsl1nding any other provision of tllis section or any other provision of law, including 

subsection (u) of section 28 of the Mineral Leasing Act of 1920. the President may export oil to 

any country pursuant to a bilateral intemational oil supply agreement entered into by the United 

States with such nation before June 25. 1979, or to any country pursuant to the lulernational 

Emergency Oil Sharing Plan of the lntemational Energy Agency. 

Trans-Alaska Pipeline Amendment Act of 1995 (P.L. 104-58 §202) 

(f) Exports of Alaskan North Slope Oil-

(!) Subject to paragraphs (2) through (6), of this subsection and notwithstanding any other 

provision of law (including any regulation), any oil transported by pipeline over right-of-way 

granted pursuant to this section may be exported after October 31, 1995 unless the President finds 

that C"'jlortation of this oil is not in the national interest. In evaluating whether the proposed 

exportation is in the national interest the President-

(A) shall deternline whether the proposed exportation would dinlinish the total quantity or 

quality ofpetroleumavailable to the United States; 

(B) shall conduct and complete an appropriate environmental review of the proposed 

e"l'ortation. including consideration of appropriate measures to Jnitigate any potential adverse 

effect on the environment, within four months after the date of enactment of this subsection: 

and 

(C) shall consider. after consultation with the Attomcy General and Secretary of Commerce, 

whether anticompetitive activity by a person e"'jlorting cmde oil under authority of tllis 

subsection is likely to cause sustained material cmde oil supply shortages or sustained cmde 

oil prices significantly above world market levels for independent refiners that would cause 

sustained material adverse employment effects in the United States. 

The President shall make his national interest deternrination within five months after the date of 

enactment of tllis subsection or 30 days after completion of the environmental review, whichever 

is earlier. The President may make !lis detennination subject to such terms and conditions (other 

than a volume limitation) as are necessary or appropriate to ensure that the exportation is 

consistent with the national interest. 

(2) Except in the case of oil exported to a country pursuant to a bilateral intemational oil supply 

a1,>reement entered into by the United States with the country before June 25. 1979, or to a country 

pursuant to the lntemational Emergency Oil Sharing Plan of the lntemational Energy Agency, any 

oil transported by pipeline over right-of-way granted pursuant to this section. shall, when 

exported. be transported by a vessel documented under the laws of the U nitcd States and owned by 

a citizen of the United States (as determined in accordance with section 2 of the Shipping Act. 

1916 (46 U.S.C. App. 802)). 

6 
42 


Insert offset folio 40 here 21977.040

(3) Nothing in this subsection shall restrict the authority of the President under the Constitution, 

the International Emergency Econonric Powers Act (50 U.S.C. 1701 et seq.), or the National 

Emergencies Act (50 U.S. C. 160 l et seq.) to prohibit exportation of the oil. 

(-l) The Secretary of Commerce shall issue any rules necessary for implementation, including any 

licensing requirements and conditions, of the President· s national interest detem1ination within 30 

days of the date of such detennination by the President. The Secretary of Conunerce shall consult 

with the Secretary of Energy in administering the provisions of this subsection. 

(5) If the Secretary of Commerce finds that anticompetitive activity by a person exporting crude 

oiltmdcr authority of this subsection has caused sustained material crude oil supply shortages or 

sustained crude oil prices significantly above world rnarket levels and further finds that these 

supply shortages or price increases have caused sustained rnaterial adverse employment effects in 

the United States, the Secretary of Commerce may recommend to the President who may take 

appropriate action against such person, which may include modification or revocation of the 

authorization to export crude oil. 

(6) Admirustrative action with respect to an authorization under tlris subsection is not subject to 

sections 551 and 553 through 559 of title 5, United States Code. 
43 


Insert offset folio 41 here 21977.041

APPENDIXH: 

Renewable Fuel Standard 
44 


Insert offset folio 42 here 21977.042

MEMORANDUM 

To: Senate Committee on Energy and Natural Resources 

Attention: Tristan Abbey 

From: Kelsi Bracmort, Specialist i:n Agricultural Conservation and Natural Resources Policy 

Subject: Tile Renewable Fuel Standard: Alaska's Exemption 

TI1is memorandmn responds 

More specifically, memo·rau,dmtn on 

arguments made at the time of enactmelll for and against this '·"""lP"'"'L 

For additional illtlltmatic•n 

(kbracrnmt@ers.loc.gov). 

Exemption from the Renewable Fuel Standard 

and Hawaii from ethanol requirements due 

from the RFS. 

exemption. and the 

opposed by some. illdudillg both Senators from Califomia. Then. ill the 1 09th Congress. dnting Senate 

1 Reference matexial fur till:. memorandum \Vas obtaiued by Laura Hanson. CRS Senior Research Librarian. 

2 For more info-nnation ou the RFS. "'ee CRS Report R43J25, The Renmvable Fuel Standard (RFS): In BriC!l 3 42USC7545 
45 


Insert offset folio 43 here 21977.043

consideration ofH.R. 6 (the enacted bill ofEPAct 2005) an amendment was added in the Senate with 

language exempting noncontiguous states and territories 6 That language \Yas then retained in conference. 

For EISA, the exemption language first appeared in H.R. 6 (liOth Congress: the enacted bill) during 

Senate considcration7 Following passage, subsequent versions of the bill retained the exemption. 

Argument For and Against the RFS Exemption Language 

Congress debated several aspects of the RFS before voting on it, including whether certain states should 

be exempt from the program. The impetus for this state exemption dialogue was that the majority of the 

renewable fiiCl considered to be eligible for the RFS (i.e., com ethanol)-past and fi1turc-is produced in 

the Midwest, away from major distribution and use centers along the east and west coasts (i.e., midwest 

state production versus coastal state consumption). Arguments stemmed primarily from economic and 

transportation conccms. For instance, some were concerned that fuel prices could spike if transport of the 

renewable fiJCl from its point of production to the point of consumption took too long. 8 Additionally, there 

were concerns about tbe high cost of transporting ethanoL Moreover, some argued that the RFS would 

increase gas prices in non-com growing states, essentially becoming a "hidden gas ta-x. "

9 The chemical 

composition of ethanol prevents it from being transported using existing gasoline pipeline infrastructure. 

Ethanol is mostly transported by rail car, followed by tmcks and barges. Others were concerned that the 

mandate could give an economic boost to ethanol producers in com-growing states without giving tbe 

same boost to non-com grmYing states. 1

n Various an1endments regarding state participation were 

( ... continued) 

my State ofCalifomia. My State also will face high shipping and tran~portation costs. Also, as noted in EPA's 1999 Blue Ribbon 

Panel Report on Oxygenates in Gasoline, Califomia docs not need ethanol to meet its Clean Air Act rt-'{}Uiremcnts. 

It has also bcl!n argued that the waiver is needed because Alaska and Hmvaii do not need as much ethanol as they \\-ill bl! required 

to usc. Again, the same argument can be made for other States. And \Vhen those States have raised this concem, the authors of the 

hill respond by pointing out that the bill gives States credits that they can sell to other States that may need them, thus generating 

revenue for their States. If this argument is good for some States, it should also he good for all States. 

If the costs of implementation and the need for ethanol in a State are to be factors in detem1ining whether the mandate should 

apply, they should be factors in making a similar dctennination for all States, not just two. Further, although Alaska and Ha\vaii 

\Vould no longer be required to usc renewable fuels tmder this provision, the amount of the national mandate has not decreased 

accordingly. The mandate in tl1is bill was designt..'d taking all States into account including Alaska and Hmvaii. Now that Alaska 

and IIawaii arc exempt from the mandate, other States will be forced to use greater mnounts of cthm1ol to meet the overall 

rt.'tlewable fuds requirl!ments. 

·n1is is an lll1fair m1cl rumecessary exemption tOr 1:\:v-o States, and 1 oppose iCU.S. Congress, Senate Conunittee on Enviromnent and Public \Vorks, Reliable Fuels Act, Report l 08-57. I 08th Cong., l st sess., 

Jtme 3, 2003, p. 41; 

''I Sl.'t1ator Feinstein] In the Envirmunent fmd Public Works Conunittee, Senator Murkowski om~red an amendment to the ethanol 

mandate to exempt Alaska and Hawaii fi-om the requirement because, first, Alaska and Hawaii arc a great distance ffom the 

Ivlidwcst, where 99 percent of the ethanol is produced in the United States~ secondly, !3milies and businesses in Alaska and 

Ha\vaii \vould lmve to pay exorbitant costs lOr ethanol to be shipped to these States and blended into their gasoline. 

l have the same concerns about increased fuel costs to 13.mi1ies and businesses in CalitOmia ifthe ethanol mandate becomes law. 

I m11 sure other Senators up and dovmthe east and \Yest coasts have the same concems 1 do." 

149 Cong Rcc S7200. ScnateAmdts. 843 and 844 to SA 539- Energy Policy Act of2003, June 3, 2003, p. S7205. 

6 1 09th Congress, IIR 6 - Senate Engrossed Amendment, Jwe 28, 2005, p. 143. 

7 1101

h Congress, HR. 6- Senate Engrossed Amendment, Jtme21, 2007, p. 12. 

8 "Ethanol imports from other regions arc vital. However, m1y potential price spike could be exacerbated if it takes too long for 

supplies from out-of-St:'1te (primarily the Midwest, \Vhere virhmlly all of the production capacity is located).,_ Senator Feinstein: 

149 Cong Rec S7200. Senate Amdts. 843 m1d 844 to SA 539- Energy Policy Act of2003. 9 "Senate Postpones Votes on Ethanol Mandate in Energy Blll, Today, May 8, 2003; "'East, West Coast Lawmakers to Fight 

Ethanol Amendment to Energy Measure," CQ Today, May 10 This led to the adoption of an runendment by' Senator Boxer that provided a higher incentive to ethanol produced from non-

( continued ... ) 
46 


Insert offset folio 44 here 21977.044

introduced but not adopted, including an amendment that would require only the midwestern states to 

participate.'' 

( ... continued) 

com feedstock. ''Senate Unable to Take Significant Stt.-'P v.ith Bill," Platts Inside Energy, June 9, 2003. 

11 S.Amdt. 844 (lOS"' Congress); S.Arndt. 851 (1 08°' Congress): S.Amdt. 853 (1 OS'h Congress). 
47 


Insert offset folio 45 here 21977.045

APPENDIX I: 

FERC Authority 
48 


Insert offset folio 46 here 21977.046

MEMORANDUM 

To: 

From: 

Subject: 

Senate Energy and Natural Resources Committee 

Attention: Tristan Abbey 

Adam Vann, Legislative Attorney 

Federal Energy Regulatory Commission (FERC) Jurisdiction over Electricity 

Transmission and Retail Sales in Alaska 

You have asked us for an explanation as to why FERC does not regulate electricity transmission 

and wholesale sales in the State of Alaska. This memorandum explains that the Federal Power 

Act (FPA), the law from which FERC derives its jurisdiction over electricity transmission and 

wholesale sales, covers such transmission and sale only to the extent that it is "in interstate 

commerce," and that transmission and sales in the State of Alaska have been deemed not to be in 

interstate commerce. 

Part II of the FPA governs the regulation of electric utility companies engaged in interstate 

commerce, and is the source ofFERC's electricity jurisdiction. Section 20l(b)(l) provides that 

Part II applies "to the transmission of electric energy in interstate commerce and to the sale of 

electric energy at wholesale in interstate commerce, but ... shall not apply to any other sale of 

electric energy ... " 2 This limitation on the reach of the FPA, and thus the federal role in regulation 

of the electric energy industry, is a product of the longstanding division of roles in the regulation 

of utilities between the federal and state governments, as well as the understanding of the reach 

of Congress pursuant to Article I Section 8 of the U.S. Constitution at the time of the enactment 

of the FPA 

The reach of the FPA, and thus ofFERC, under Section 20l(b)(l) extends beyond transmission 

of electric energy across state lines or wholesale sales of electric energy between parties in 

different states to include transactions where the facilities employed are "interconnected and 

capable of transmitting [electric) energy across the State boundary, even though the contracting 

parties and the electrical pathway between them are within one State." 3 However this jurisdiction 

does not extend to transmission and retail sales tbat take place entirely within a single state, 

:>Florida Power& Light Company. 29 FERC -::61,140 at 61,291-92 (1984). 
49 


Insert offset folio 47 here 21977.047

using facilities that do not interconnect with those of another state. This situation is the case with 

Alaska and Hawaii. Because these states do not share a border with any other states, their 

electricity transmission facilities are not interconnected with those found in other states or 

capable of transmitting electric energy across state boundaries. As a result, FERC does not have 

jurisdiction over electricity transmission and retail sales in Alaska. FERC has confirmed this lack 

of jurisdiction. 4 

4 See Promoting Wholesale Competition TI1rough Opt-'ll-Access Non-Discriminatory Tnmsmission St-'TYices by Public Utilities 

nnd Transmitting Utilities, Order No. 888, FERC Stats. & Regs. atn 541 (1996) ('"Section 201(bX l) spccit!cally 

exempts tfom Commission jrrrisdictlon in intra~iatc cmm11crcc and transmission of electric energy 

consumed wholly by the transmitter. \\heeling that occurs in Alaska, Hawaii and 

the Ekcttic Reliability Council (ERCOT) portion ofTexns 
50 

What we have done in this white paper, and it is not very long 

so I would commend it to you all, but it details the various special 

exceptions that have been made for the State of Alaska, not because we are so special, other than the fact that we believe that 

we are pretty special, but we are special because of our resources. 

We have seen exceptions made over the years on LNG, on the renewable fuel standards, crude oil, FERC and then our signature 

achievement which is the Trans-Alaska pipeline. 

So as I lay out more of these I will be sure to give you all a heads 

up. But as we think about the role that a state like Alaska can 

play or really any of our energy producing states, I think we recognize that there is a time that is required to put infrastructure in 

place to allow for exploration and production to move forward. 

While some are panicked at the notion that we are sitting at low 

oil prices and have been for some period of time and are suggesting 

that we should not be looking to make longer-term investment, I 

am looking at it and taking the exact opposite view. I will be interested in hearing from our panelists this morning in terms of your 

thoughts and your comments in this vein. 

With that, I am going to turn to Senator Heinrich, who is standing in this morning for the Ranking Member, Senator Cantwell. 

Senator Heinrich, I appreciate your leadership on this panel at 

all times, but I also want to particularly thank you for your help 

with the Energy Policy Modernization Act and the Sportsmen’s provisions that we were able to include in that. So thank you. 

We look forward to your comments this morning. 

STATEMENT OF HON. MARTIN HEINRICH, U.S. SENATOR FROM 

NEW MEXICO 

Senator HEINRICH. Thank you, Madam Chairman. 

I think it is a testament, a testimony, to your leadership and to 

Ranking Member Cantwell’s leadership that this particular Committee has been so productive at a time where we will find that to 

be the exception rather than the rule around here. 

I want to thank you for scheduling this hearing to examine challenges and opportunities for oil and gas developments in different 

price environments. Senator Cantwell was not able to attend and 

asked me to fill in for her, and I want to thank our witnesses for 

joining us today. 

Energy markets have been changing pretty rapidly in the last 

couple of years, particularly in the oil and gas sector. At the end 

of 2015 there were several policy changes that affect energy markets including removing the restrictions on exports of crude oil. 

Just last week, obviously, we passed the Energy Policy and Modernization Act of 2016 on a big, bipartisan vote, 85 to 12. 

It is the first broad, comprehensive bill that the Senate has 

passed since 2007 when my predecessor was on this Committee, 

Senator Bingaman. 

It is important to understand that the recent developments in expectations for the market, such as oil and natural gas, as we consider any new policy changes. Earlier this year, in January and 

February, the global and domestic crude oil prices fell to $26 a barrel, prices we have not seen in over a decade, and just last month 

51 

natural gas prices fell below $1.60 per million BTUs. Those are 

prices we have not seen since the 1990s. 

This current low price environment for oil and natural gas presents both challenges and opportunities, the topic of today’s hearing. For oil and natural gas producers in New Mexico and elsewhere the low prices are reducing investments and causing significant job losses, even bankruptcies, for some companies. 

The economies in the major producing parts of my state, San 

Juan County and the San Juan Basin, the Permian Basin in Southeast New Mexico, are struggling. 

Though the recent growth in production is starting to slow, unfortunately, price volatility is not a new phenomenon. The long history of the oil and gas industry has been one of boom and bust cycles. 

While oil and gas companies are looking for ways to cut costs in 

a current low price environment, we must remain vigilant about 

ensuring both safety and protecting our land and water. 

For example, last week was the sixth anniversary of the BP 

Deepwater Horizon explosion and oil spill which was a human, economic and ecological disaster of epic proportions. Eleven members 

of the crew were killed in the explosion, and 17 others were injured. Oil spewed into the ocean unmitigated for nearly three 

months, a mile below the surface. 

I remember having conversations with the Director of Sandia National Labs at that time who was one of the experts who was 

pulled in to help plug that well. 

It is clear now that this disaster could have been avoided. Multiple blue ribbon panels all have concluded that the immediate 

cause of the Macondo blow out can be traced to a series of systematic failures in risk management and a broken safety culture. 

The final version of the Offshore Drilling Safety regulations was 

published a couple of weeks ago. The final regulations tightened 

standards for blowout preventers and address the other primary 

causes of the Deepwater Horizon disaster, inadequate risk management and safety oversight, by codifying the advances made by industry experts and regulators over the last five years. 

Today’s low oil and natural gas prices also present an opportunity for consumers in the larger economy. Recent low oil and natural gas prices have provided real savings for consumers. 

For example, AAA estimates that Americans saved more than 

$115 billion on gasoline in 2015 compared to 2014, which was an 

average of more than $550 per driver, real money. 

In its monthly, short-term energy outlook, the U.S. Energy Information Administration predicts that this year’s April to September 

driving season will feature the lowest gasoline prices in 12 years, 

averaging $2.40 a gallon this summer, down from $2.63 last summer. 

EIA data on natural gas also paints a picture friendly to consumers. The agency forecasts low natural gas prices will push 

down average residential electricity prices this year for the first 

time since 2002; however, these fossil fuel commodities are still 

susceptible to price swings. Less than two years ago, oil prices were 

over $100 a barrel and natural gas prices were spiking to levels 

52 

four times those today, but experts agree that we are in a new era 

of natural gas abundance and low prices. 

Most experts also agree that oil prices will go up again. It is just 

a matter of when and how much. The low natural gas prices and 

increasing supplies of natural gas have helped with diversification 

of the electric power sector both here and abroad, but the same is 

not true related to low oil prices. Over 70 percent of the petroleum 

consumption in the U.S. is for the transportation sector, and 91 

percent of the transportation sector is fueled by petroleum. 

We need to embrace policies that encourage efficiency and diversification of the transportation sector so that it is not dependent on 

one volatilely-priced commodity. These policies can provide additional savings for consumers. The CAFE ́ standards put in place in 

2007 are estimated to save consumers $140 billion by 2030. 

Once again, I want to thank the Chair for holding this hearing, 

and I am looking forward to the testimony of all of our witnesses. 

The CHAIRMAN. Thank you, Senator Heinrich. 

Before I introduce the witnesses and ask you to provide us with 

your statements, I will remind colleagues we have three votes set 

for 11 o’clock this morning. It is my intention to keep the Committee moving throughout those votes, so I would advise you to 

keep plugged into your electronic devices so you do not miss the 

vote. We will continue on, and we will just pass the gavel back and 

forth here. 

To our witnesses, we apologize for bumping you last week and 

now we apologize for being jumping jacks here at the Committee, 

but this is the U.S. Senate and we are doing business. We have 

work to do today and certainly not the least of which is to hear 

your comments and your contributions. 

We are joined this morning by Mr. Jason Bordoff, the Founding 

Director for the Center on Global Energy Policy, and Professor of 

Professional Practice in International and Public Affairs at Columbia University. Welcome. 

Mr. Oren Cass is a Senior Fellow at the Manhattan Institute. We 

welcome you this morning. 

Ms. Suzanne Minter is the Manager of Oil and Gas Consulting 

Services for Platts Analytics. Thank you. 

Ms. Leslie Palti-Guzman, I hope I am pronouncing that right, is 

the Director of Global Gas for the Rapidan Group. Welcome. 

Rounding out the panel we have Mr. Michael Ratner, who is a 

specialist in Energy Policy at the Congressional Research Service. 

So we welcome you all. 

We ask that you try to keep your comments to five minutes. Your 

full statements will be included as part of the record. Once you 

have concluded, we will all begin our questions. 

Thank you. Mr. Bordoff, would you please proceed? 

53 

STATEMENT OF JASON BORDOFF, FOUNDING DIRECTOR, CENTER ON GLOBAL ENERGY POLICY, AND PROFESSOR OF PROFESSIONAL PRACTICE IN INTERNATIONAL AND PUBLIC AFFAIRS, COLUMBIA UNIVERSITY SCHOOL OF INTERNATIONAL 

AND PUBLIC AFFAIRS 

Mr. BORDOFF. Thank you, Chairman Murkowski. Thank you, 

Senator Heinrich, members of the Committee. Thanks for the invitation to be here today. 

I will just briefly summarize the three points that I make and 

elaborate in my written testimony. 

First, on the impacts of the oil price collapse. The oil price collapse has hurt workers, families, communities. U.S. oil production 

is now falling rapidly, although on net, lower prices are still a boost 

to the U.S. economy, albeit a smaller one than has been the case 

in the past. 

In the face of the oil price collapse, U.S. oil production has been 

much more resilient than many people expected it to be. U.S. oil 

production peaked in April 2015, has since fallen and will continue 

to fall, certainly, over the next year. Oil and gas companies have 

slashed capital investment and jobs causing hardship for communities, especially in oil-producing states like Alaska and many others. At the same time, the U.S. oil sector has lowered costs, has improved technology and productivity and efficiency to cope with the 

pressure of the low oil price and in many ways will be in a stronger 

position to weather the next inevitable future downturn in oil 

prices. 

On net the U.S. is still the world’s largest consumer and a very 

large importer of oil. And so, a decline in the oil price offers a 

macro economic boost. But as I said, this positive impact is smaller 

than many had anticipated. And that’s because consumers are 

spending less of the savings from lower fuel prices. The big employment gains from the shale boom are being thrown into reverse. And 

as a smaller importer, more of the consumer benefit of low prices 

is coming at the expense of domestic producer revenue. 

My second point in the testimony is that while oil prices are low 

today it goes without saying that it’s very far from clear that they 

will remain low and in fact, may be more volatile going forward. 

Currently the oil market is over-supplied, but low oil prices are 

starting to do what low oil prices do and take their toll on supply, 

not only in the U.S. but in other countries too, like China and Mexico and Colombia and others. 

Roughly $400 billion in global capital investment has been cut 

back, meaning less supply is coming online in the years to come. 

And low oil prices are stimulating more global oil demand including here in the U.S. 

Iran is ramping up production after the lifting of sanctions, although running into some difficulty in doing that. OPEC may yet 

try to reinsert itself. We’ll see. That doesn’t seem all that likely 

right now, but it’s certainly a possibility. And geopolitical risks 

abound in major oil producing states. 

Recent supply disruptions and pipeline sabotage in Iraq and Nigeria, the looming economic and social collapse in Venezuela, the 

recent worker strike in Kuwait, the ongoing civil strife in Libya, all 

of these, I think, are reminders of the risk to supply from conflict, 

54 

from poor governance, from political dynamics, from economic turmoil. And moreover, with OPEC’s spare capacity at historic lows 

any disruption that does occur to global oil supply can have an outsized impact in the market because there’s little buffer in the event 

of a supply disruption. 

U.S. shale is a short cycle source of supply. It can respond more 

quickly to changes in price, but that doesn’t happen overnight the 

way spare capacity can be brought to the market in a matter of 

weeks. And it takes, certainly shorter than conventional oil, but 

still can take, we don’t fully know for sure, we’re kind of learning 

as we go with shale oil, but can take maybe up to a year to respond 

to changes in price. And the result of that without adequate inventories which we do have plump inventories now, may mean more 

price volatility looking forward. 

My final point is that regardless of price, government must ensure oil and gas is produced safely and responsibly. It must correct 

market failures like pollution. It must assess risks and benefits in 

determining whether to allow drilling on Federal lands. It must 

consider permit applications for energy infrastructure to ensure environmental impacts are understood and that they’re mitigated. 

And those fundamental roles for government don’t change in different oil price environments. In all cases government needs to design smart, cost effective, narrowly tailored regulations. But it 

would be short sighted to weaken, in my view, well designed, necessary regulations because of short term oil price fluctuations. 

I think methane leakage is a good example of that where a lot 

of good work has shown that that can be reduced at fairly low cost 

in the market. 

So in short, just to close, I think today’s oil market is in the 

midst of profound transformation creating new challenges, opportunities for workers and communities for the oil industry, for climate 

policy and for the economy, overall. Predicting oil prices is fraught 

with pitfalls but whatever they are, government’s regulatory responsibility that remains to protect air and water or other resources and do it as smart and cost effective a manner as possible. 

Thank you for the opportunity to testify today. 

[The prepared statement of Mr. Bordoff follows:] 

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Center on Global Energy Policy 

April 26, 2016 

Congressional Testimony if 

Jason E. Bordoff 

Founding Director, Center on Global Energy Policy, and Professor if Professional Practice in International and 

Public Affairs, Columbia University School if International and Public Ajfairs 

Before the 

Committee on Energy and Natural Resources 

United S fates Sen ate 

2nd Session, 114'" Congress 

Chairman Murkowski, Ranking Member Cantwell and Members of the Committee, thank you for 

inviting me here today to discuss challenges and opportunities for oil and gas development in 

different price environments. 

In my testimony today, I would like to make three main points: 

First, the oil price collapse has hurt many workers, families and commurtities by causing job 

losses in oil-producing states, with U.S. oil production now falling sharply after a lag. While 

low oil prices, on net, are a boost to the U.S. economy, that benefit has been more muted 

than many expected based on past experiences. 

Second, while oil prices are low today, it is far from clear they will remain low. The oil 

industry has long known cycles of boom and bust, and there are many factors today that may 

combine to cause a price spike more quickly than anticipated. Moreover, oil prices moving 

forward may be more volatile than in the past. 

Third, as the committee knows, the federal government has a diverse set of responsibilities 

regarding energy production, including to protect air and water quality, regulate oil and gas 

production on public lands, correct market failures, and more. These roles are necessary, and 

government should design smart and cost-effective regulations regardless of oil prices, 

particularly as this commodity's future supply, demand, trade, and price trends are 

notoriously difficult to forecast. 

Current Market Conditions and Economic Impacts 

We are in the midst of one of the steepest oil price collapses in history. In June 2014, oil markets 

tipped into the current down cycle that has sent prices from over $115 a barrel to lows in the $20s in 

early 2016, before rebounding to their current level of around $40-45 per barrel. Many factors 

contributed to this collapse, but perhaps the most sigrtificant was the unprecedented rise in U.S. oil 

production driven by the shale revolution. From 2010 to 2015, the U.S. experienced the largest fiveyear ramp-up in oil production of any country in history (Figure 1), rising to a peak of9.7 million 

barrels per day (b/d) in April2015. From 2005 to 2015, U.S. natural gas production increased more 

than SO percent (Figure 2). Both of these production booms were made possible by technological 

advancements combirting horizontal drilling and hydraulic fracturing that allowed oil and gas to be 

extracted economically from shale and other tight geologic formations. 

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Center on Global 

Figure 1: Largest Build-Outs in Oil Production over a Five-Year Period 

(Thousands of barrels per day) 

USApr2010-Apr2015 

Saudi Arabia 1969-1974 

Russia'1999-2004 f-------------~ 

lran1968-1973 f-----------~··­

SovietUni<ln 1972-1977 1------·~---~~~·-· 

l!bya1965-1970 f--------- lraq'1994-1999 f--------- NorthSea1991-1996 f--------~ 

lliiiCrudeOil NGls 

Kuwai!' 1991 "

1996 1~~--"------ •Restoration ofproduc!ion, not organic production growth 

MextC01977 1982 !::::======='----------------- 1.000 2,000 

Source: BP Statistical Review of World Enert,')' 2015, EI.A 

Figure 2: US Dry Natural Gas Production 

(Billion cubic feet per day) 

Source: EIA Short-Tt:rm Energy Outlook 

3,000 4,000 5,000 6,000 

As prices started to slide in the summer of 2014, OPEC found itself confronted by surging high-cost 

supply, including from the U.S., and an inability to forge at,>reement among OPEC and certain nonOPEC countries to curb production, particularly with Iran's looming return to the oil market postsanctions. Consequently, OPEC took no action at its November 2014 meeting, and oil prices fell off 

a cliff. Indeed, in 2015, OPEC countries sharply increased production, with Iraq and Saudi Arabia 

together rising 1.2 million b/d from 2014 to 2015. 

Many expected that US production would fall sharply as a result, as U.S. shale oil output was 

perceived to be high-cost supply that was not economic at lower prices. Analysts believed that tight 

oil supply required an average break-even price of around $60 to $70 per barrel range to be 

2 
57 


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economically Yiable.' In reality, C.S. 

expected. There were factors 

productivity; service costs 

(aka "ht:gh~gradmg< 

Fi1,111re 3: US Crude Oil Production and Oil-Directed Rig Count 

10 U.S. crude 011 Productlon and 011-!limcted Rig Count 

Million barrels per day rotary rigs anlling 

Source El/\.; Baker Hughes 

EwntuallY, the of tight oil supply 

production has steeper decline rates comTntional oil wdls. 

can fall as much as 70 in the first year.~ That means that in order to 

more and more \vells. But that is no 

million b/ d in April 20 l S to 9 million in 

1.800 

1.600 

1.400 

1.200 

1.000 

800 

600 

400 

200 

by EIA to fall a further 1 million b/d by the middle of next year, before beginning 

to 

ln one \vay, the oil price collapse may come to he seen in retrospect as an opportunlty for the l .S. 

oil sector to make and more resilient. Eventually, \vill recover, and U.S. output 

'-',-ill start to rise again. And "\vill at lower prices believed 

because the intense economic pressure current do\·vnturn has companies to ti.nd 

ne\v and innovative ways to impnn-c their efficiency, productivity, and cost-effectiveness. The C .S. 
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may be a short-cycle supplier, but it is most certainly not the high cost supplier (as some previously 

described it), and that may allow it to better weather future downturns. 

The oil patch has been hit hard by the price collapse. The U.S. oil and gas sector has lost nearly 

100,000 jobs since January 2015.4 Total employment impacts are larger than that because employees 

who lose their jobs in the oil and gas sector may reduce spending on other goods and services, such 

as restaurants, which can lead to reductions in local service sector employment. Economists at the 

Federal Reserve Bank of Dallas, for example, estimate that a 50 percent sustained drop in oil prices 

would reduce Texas employment by 1.2 percent, or 140,000 jobs.5 The economic impact would be 

even more severe in percentage terms in states in which oil and gas is a larger share of the economy, 

like Wyoming, Oklahoma, North Dakota, Alaska.' U.S. oil companies are planning to cut back 

investments by 50 percent on average this year following a 40 percent average cut in capital 

expenditures last year, and nearly 60 American oil and gas companies filed for bankruptcy between 

January 2015 and April2016. 7 

On net, however, the U.S. is still the world's largest oil consumer and a very large oil importer (even 

with the recent decline in imports), and thus a fall in oil prices offers a macroeconomic boost by 

reducing consumer spending on fuel. Americans today are spending $180 billion less each year on 

energy goods and services than we were in July of 2014, which corresponds to about 1 percent of 

GDP8 A year and a half ago, energy expenses constituted 5.4 percent of total consumer spending. 

Today that share is down to 3.7 percent.'' 

Yet the oil price fall is providing less of a macroeconomic boost than many had anticipated. The 

reason requires further study, but there appear to be several potential factors at work. First, while 

there was some boost to consumer spending from the lower gasoline price, it was much lower than 

would have been expected based on the historical relation between spending and energy prices."' 

Second, the net benefit to the U.S. is smaller because the U.S. is such a larger producer, and the big 

employment gains from the shale boom are now being thrown into reverse.' 1 Third, as the White 

House Council of Economic Advisers recently explained, because the U.S. is a much smaller net oil 

4 Devashree Saba and Mark Muro, "Rigged: Declining U.S. oil and gas rigs forecast job pain," Brookings Institution, 16 

March 2016, http://www.brookings.edu/blogs/ the-avenue/ posts/2016/ 03/16-declining-us-oil-gas-rigs-saha-muro. 

s Mine Yucel, "Plunging Crude Prices: Impact on U.S. and State Economies," August 7, 2015, 

https:/ /www.dallasfcd.org/ assets/ documents/ research/ events/2015 / 15vistas_yucel.pdf. 

6 Stephen P.A. Brown and Mine K Yucel, "The Shale Gas and Tight Oil Boom: U.S. States' Economic Gains and 

Vulnerabilities," Council on Foreign Relations, October 2013, http:/ /www.cfr.org/united-states/shale-gas-tight-oilboom-us-states-economic-gains-'ltulnerabilities/ p31568. 

7 Haynes and Boone, LLP Oil Patch Bankruptcy Monitor, 4 April 2016, 

http:/ /urww.haynesboone.com/-/ media/ ftles/ attorney0

;020publications/2016 I energy_haokruptcy _monitor/ oil_patch_ 

bankruptcy _20160 I 06.ashx. 

8 James Hamilton, "Why no economic boost from lower oil prices?," Econbrowser Blog, April10, 2016, 

http:// econhrowser.com/ archives/2016/ 04 /why-no-economic-boost-from-lower-oil-prices. 

9 Ibid. 

10 Ibid. 

11 See, e.g., James Feyrer, Erin T. Mansur, Bruce Sacerdote, "Geographic Dispersion of Economic Shocks: Evidence 

from the Fracking Revolution," NBER Working Paper No. 21624, October 2015, http:/ /www.nber.org/papers/w21624 

(finding that the shale boom caused the number of Americans working to be 750,000 higher and the unemployment rate 

to be 0.5 percent lower during the Great Recession than it othenvise would have been). 

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importer than it was before, when the price falls, more of the consumer benefit comes at the 

expense of domestic producer revenue, thus providing less of a macroeconomic boost.12 

So far, I have discussed the supply impacts of the oil price collapse, but the demand impacts also 

represent a challenge. Consumers have responded to the lower prices. In the U.S., SUV sales were 

up 16 percent" and plug-in electric vehicle sales were down by 17 percent in 2015.14 U.S. gasoline 

demand, which many thought had peaked in 2007, has been rising and is projected by EIA to equal 

2007 levels again in 2016 and 2017. Overall, U.S. oil demand increased 1.5 percent in 2015 and is 

projected to increase further by 0.6 percent and 1 .0 percent in 2016 and 2017, respectively. With 

falling domestic production and rising demand, U.S. net oil imports in January 2016 were up 650,000 

barrels per day from a year earlier. 

Increased petroleum dependence reduces our energy security. Despite today's low price, as I noted, 

the U.S. is still a significant consumer and importer of oil. Thus we increase our energy security if we 

reduce oil consumption and concomitantly the exposure of the U.S. economy to inevitable oil price 

fluctuations in the future-not to mention the climate and environmental imperative to reduce oil 

consumption. Policies to reduce oil demand and investments in alternative transportation fuel R&D 

not only increase our energy security, but also reduce greenhouse gas emissions that lead to 

potentially severe climate change impacts. 

While I have focused on oil supply and demand, let me briefly say a word about natural gas. 

Domestic natural gas producers have also been impacted by the oil price drop. Natural gas prices in 

the U.S. have been very low for some time. Available evidence suggests that the U.S. has a large 

supply of inexpensive natural gas. Despite the loss of so-called "associated gas" production--gas 

produced as a byproduct of producing oil--even as oil output falls, U.S. gas output has continued to 

rise, and the EIA expects continuing increase in 2016-2017. U.S. marketed natural gas production 

reached a record high level of 79 billion cubic feet per day (Bcf/ d) in 2015, an increase of 5% from 

the previous year, even as natural gas prices remained relatively low (Figure 4). U.S. natural gas 

consumption was weak as a result of the warm winter, but still rose 2.1 Bcf/ d to 75.3 Bcf/ din 2015. 

Perhaps the primary implication of the fall in oil prices has been the sharp drop in natural gas prices 

elsewhere in the world, especially Asia, where gas prices are often linked to the price of oil. This 

changed market outlook has raised questions about the global market for liquefied natural gas 

(LNG) exports, including from the U.S. In late February, a historic milestone was reached when the 

first ever large-scale shipment of LNG from the lower 48 states set sail for export, a development 

that I believe may have significant geopolitical implications. 15 

12 Council of Economic Advisers, "The AII~Of~The-Above Energy Strategy as a Path to Sustainable Economic 

Growth," 2014, p.3, 

https:// www.whitehouse.gov /sites/ default/ files/ docs/ aota_report_updated_july _2014.pdf. 

13 James B. Stewart, ''The SUV Arms Race Goes Upscale," New York Times, April14, 2016, 

http:/ /www.nyt.imes.com/2016/04/15/business/the-suv-arms-race-goes-upscale.html. 

H Dana Hull, "Plug-In Electrlc Autos Left Behind in Record U.S. Year," Bloombe~January 6, 2016, 

http://www.bloombergxom/ news/ artides/2016-01-06/ plug-in-electric-vehicles-left-behind-in-u-s-autos-record-year. 

15 Jason Bordoff and Akos Losz, 10The United States Turns On the Gas: The Benign Energy Superpower?," Foreign 

Affairs, 4 March 2016, https:/ /www.foreignaffairs.com/articles/2016-03-04/united-states-tums-gas. 

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Figure 4: U.S. Natural Gas Production Growth 

(2006-15) Annual natural growth in 

selected states 

bilhon cub1c feet 

80 Pennsylvania 

70 

60 1 4 

50 

40 

30 

20 

10 

0 

2006 2009 2012 2015 

Source: Energy Information Administration 

Lower for Longer? 

\Xlith the sustained drop in oil prices, "lo\ver for longer" is the ne\v mantra. The futures market, 

admittedly a poor predictor of future prices, is pricing oil below $50 per barrel through 2019. That 

may prove to be true, but we should remember that the oil industry historically has been marked by 

boom and bust," starting with the discovery of oil in Pennsylvania in 1859, which helped crash the 

price of oil from $16 per barrel in 1859 to 50 cents in 1861, before the onset of the Civil War 

brought a surge back to $8 per barrel by 1864. 17 

Currently the global market is oversupplied and inventories are at a very high level, "\Vhich w:ill weigh 

on prices for some time to come. 1\t the same time, the best cure for lo\v prices, the saying goes, is 

low prices. U.S. production is falling sharply now. Further production declines are expected this year 

from China, Mexico, and Colombia. And roughly $400 billion in global capital investment cuts 

means that less supply will be available in the years to come. 1

s ~1eanwhile, consumers are responding 

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to low prices: global oil demand, which gtew only 0.9 million b/ din 2014, grew 1.8 million b/ d last 

year, and is projected to rise another 1.2 million b/ d this year. 

Beyond market fundamentals, there are other factors that may cause prices to swing back up. Iran is 

ramping up production after the lifting of sanctions, but recent indicators suggest this will be neither 

as easy nor as quick as Tehran's lofty claims would suggest. Despite OPEC's failed effort to freeze 

production in Doha, it may yet try to reassert itself by curtailing output. 

And geopolitical and economic risk to oil supply abounds. The conflicts that erupted in the 

aftermath of the Arab Spring across the oil-rich Middle East and North Africa region show little 

sign of abating. Libya remains mired in a protracted civil war. Recent supply disruptions and pipeline 

sabotage in Iraq and Nigeria remind of the supply risks ftom conflict, political dynamics and poor 

governance. Nigeria has seen rising militancy in the Niger Delta and gtowing risks highlighted by 

President Buhari's decision to redeploy troops from the North to the oil-rich South. Ongoing 

tensions and disagteements between Turkey, the Kurdistan Regional Government, and Iraq remain 

a continued threat to oil supply in Northern Iraq. Venezuela-the largest oil producer in Larin 

America and sixth largest within OPEC--is close to economic and social collapse. The country 

enters the third straight year of deep recession, the inflation rate is projected to exceed 200 percent 

in 2016, and the risk of sovereign default remains very high. A worker strike in Kuwait that slashed 

oil output by more than halflast week was short-lived, but reminds of the potential for new and 

unexpected supply risks. In short, there are no lack of global problems that could impact supply and 

prices in the oil market. 

If a significant supply disruption were to occur, there is also less of a cushion in the global oil market 

to handle it, with OPEC spare capacity--oil that can be quickly brought onto the market to 

compensate for production losses elsewhere........at historic lows. OPEC's effective spare capacity, 

most of which is held by Saudi Arabia, is currently estimated by the lEA to be 2.7 million b/ d,19 

although many believe it is actually much lower. Even the higher number represents less than three 

percent of global demand. By contrast, for most of the 1990s, OPEC spare capacity averaged closer 

to five percent of global demand. 

In a world with very narrow spare capacity, any disruption to global supply can have an outsized 

impact on price because there is little buffer in the event of supply disruptions. 

Once the market comes back into balance, likely later this year or next, and inventories begin to 

draw down, prices could rise more quickly than expected given all these factors. A key question then 

is whether the U.S. can act as a new sort of "swing supplier" to quickly ramp up production and 

stem the price rise. Because the decline rates are steep and upfront costs low, shale oil production, in 

theory, can rise quickly once companies start drilling again. In truth, we do not know how quickly 

U.S. production can start rising again or at what oil price that happens. Shale oil is a new 

phenomenon. Yet we know it will not happen overnight. It takes rime for capital markets to open 

up, for companies to get the rigs and equipment, and for laid-off workers to return. Even if prices 

rise back to $55 or $60 per barrel, around the level at which many expect U.S. supply could begin 

rising again, it may take 9 to 12 months for domestic production to follow that market signal. 

t9 International Energy Agency, Oil Market Report, April14, 2016, p. 17. 

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Historically, dominant producers have tried, with varying degrees of success, to curb boom and bust 

cycles by managing supply-from John Rockefeller and Standard Oil to the Texas Railroad 

Commission to OPEC. Today, the oil market is functioning more like a free market, as OPEC's 

hold is loosened and it is letting low prices bring the market back into balance. If OPEC, particularly 

Saudi Arabia, continues to abstain from any effort to manage the market by hiking or cutting supply, 

and the U.S. has a notable lag in its ability to respond, the impact may be more price volatility ahead. 

Policy Implications of a Low-Price Environment 

The low oil price may have certain near-term implications for energy policy. For example, a lack of 

public concern with current low gasoline prices may have made it easier for Congress to repeal the 

ban on U.S. crude oil exports. Higher projected gasoline use creates a bit more headroom for 

biofuels to enter the fuel system before the so-called "blend wall" is reached. Reduced sales of fuel 

efficient cars will increase pressure by some to curtail fuel economy standards in the 2018 midterm 

review, even as it causes others to argue the standards should be ratcheted up to offset increased 

consumer preference for less fuel efficient cars. And potential geopolitical instability in key oil 

producing regions is a national security concern to which policymakers should be carefully artuned. 

As a general matter, however, energy and environment policy should be formulated without excess 

consideration given to short-term fluctuations in oil prices. As noted above, prices will go up and 

down, often rapidly. Regardless of the price, government has a responsibility to ensure oil and gas 

production is done in a safe and responsible manner that protects precious air and water resources. 

Government has a role to correct market failures, like policies to reduce carbon emissions that 

contribute to climate change, a social cost that is not internalized in the price we pay for energy. 

Government has a role to determine which federal lands to open to energy exportation, based on a 

careful assessment of potential environmental risks and impacts, as well as the potential benefits that 

come from increased domestic energy supply and reduced import dependence. Government has a 

role to play in evaluating permit applications for new energy infrastructure projects, from pipelines 

to transmission lines and more, to ensure potential environmental impacts are understood and 

mitigated. 

These fundamental roles for government do not change in different oil price environments. \Vhen 

oil prices are low, and industry is under acute economic pressure, there can be pressure to weaken 

environmental regulations, yet that would be short-sighted. Whether prices are high or low, 

government regulators must protect our air and water, and should do so with carefully crafted, smart 

regulations that achieve their environmental goals at the lowest cost to companies and consumers. 

Consider the case of methane emissions from oil and gas production. Methane is a potent 

greenhouse gas. Yet excellent work from the Environmental Defense Fund and others has shown 

that methane leaks can be greatly reduced at very low cost. As a result, well-designed methane 

regulations are a cost-effective way to reduce greenhouse gas emissions when compared to the social 

cost of such emissions, and thus should be pursued even when oil prices are low and the industry is 

hurting. 

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Similarly, low gasoline prices have reduced demand for fuel-efficient vehicles, leading io arguments 

that the Obama Administration's ambitious fuel economy standards should be weakened when they 

come up for a midterm review in 2018. Yet the entire point of a government regulation to increase 

fuel efficiency-thus reducing oil imports and pollution-is to push the automotive market to 

achieve a level of fuel efficiency that it would not on its own. A policy that induces car makers to 

produce and price vehicles differently to alter the mix of the fleet is more, not less, important when 

prices fall, precisely because the market would not achieve this result on its own. Even at today's 

lower oil prices, increasing fuel economy standards still delivers net benefits to society and helps to 

protect consumers against future oil price volatility.20 

Nor should decisions about whether to open or not open particular areas to exploration, or approve 

certain pieces of infrastructure, be determined based on today's outlook for production, demand, 

trade, and prices. As discussed above, today's market conditions can and will change-it is only a 

question of when-and often those changes occur far more rapidly than many expect. Moreover, 

our ability to anticipate those changes is limited. Consider that a decade ago, in 2005, the EIA 

projected that the U.S. in 2015 would be a net importer of 19 billion cubic feet per day of natural 

gas. Instead, we just exported the first-ever large-scale LNG cargo from the lower-48 and will soon 

be a net exporter. 

CONCLUSION 

Today's oil market is in the midst of a profound transformation, driven by new technologies, global 

efforts to transition to cleaner energy sources, a shale revolution in the U.S., a historic shift in 

OPEC's market role, changing geopolitical and trade relationships, and many other factors. 

Predicting what the oil market, and certainly oil prices, "'ill look like over the next several years is 

fraught with pitfalls. The oil price collapse of the last 18 months has brought hardship to companies, 

workers and communities in many oil-producing states, and is starting to cause U.S. oil production 

to decline. It has also brought many geopolitical and economic challenges to oil-producing countries 

globally, and undermined the push for alternative transportation fuels. At the same time, it has 

brought opportunities-providing a boost to U.S. consumers and GDP, making the U.S. oil industty 

far more efficient and lowering its costs, and enabling countries to remove economically and 

environmentally wasteful fuel subsidies. 

Despite these near-term challenges and opportunities, the basic responsibility of the federal 

government to protect air and water quality, regulate oil and gas production on public lands, evaluate 

permit applications for energy infrastructure, correct market failures, and more, do not 

fundamentally change with oil prices. Whether oil prices are high or low, government should take 

care to design smart regulations as cost effectively as possible, and not let short-term fluctuations in 

oil prices unduly influence the formulation of energy and environment policy. 

2D Varun Sivaram and Michael Levi, "Automobile Fuel Economy Standards in a Lower-Oil-Price World," Council on 

Foreign Relations Discussion Paper, November 2015, http:/ /~.cfr.org/energy-policy/automobile-fuel-economystandards-lower-oil-price-world/ p37190?cid=::otr-marketing_usc-cafestandards. 

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The CHAIRMAN. Thank you, Mr. Bordoff. 

Mr. Cass. 

STATEMENT OF OREN CASS, SENIOR FELLOW, MANHATTAN 

INSTITUTE FOR POLICY RESEARCH 

Mr. CASS. Thank you for inviting me to participate in today’s 

hearing. 

In my view, natural resource policy should disregard the energy 

price environment for three reasons. First, because policy decisions 

take decades to play out. Second, because market prices and predictions say little about what future prices will actually be. And 

third, because innovation and exploration change the scale and economics of resources constantly. Therefore, the appropriate Federal 

role is to establish a clear, stable framework within which the private sector can make long-term investments. This approach is likely to maximize output and minimize the cost of that output. 

Of course, those who oppose development of American energy 

will therefore oppose it across price environments, and they do. But 

when energy prices are high, they argue the timelines are too long 

to justify investment. And when prices are low, they ask what’s the 

rush? This is disingenuous. The debate over domestic production 

should proceed on the merits not with reference to yesterday’s closing price. 

And if anyone ever doubted the true value of American energy, 

the boom of the past ten years should have settled it. The benefits 

are broad and large, including reduced energy costs, increased employment, reduced dependence on imports and increased 

geostrategic power for the United States. 

I’d like to offer a few examples that underscore the inappropriateness of reacting to the price environment and then turn to policy 

reforms. 

First, it took Gulf of Mexico production 50 years to mature. Production began in the 1940’s but it was not until the 1990’s that advancements drove production costs down by 60 percent in a single 

decade and output first exceeded a million barrels per day. 

The shale revolution was entirely unexpected, even after decades 

of research and experimentation. As recently at 2003 the USGS 

downgraded the estimate for our discovered, technically recoverable 

resources in the Eagle Ford Basin in Texas from 270 million barrels to 33 million barrels, total. In 2015 alone, the formation produced more than 500 million barrels. 

And as recently as 2010 the EIA forecasted no foreseeable rise 

in U.S. oil production. Five years later it was reporting a 66 percent increase. Today some analysts believe the shale boom is over. 

Others say it is just beginning. 

So with no credible forecast of how energy markets will evolve, 

but with the opportunity for enormous production under our feet, 

the best course for the nation is to let markets work. Private industry is best positioned and incentivized to put its own capital behind 

its own judgments about when and where to invest. It will place 

bets efficiently as long as it can trust the regulatory environment 

in which it must act. 

And government must, in turn, make clear that it is open for 

business, that it supports efforts to expand production and that it 

65 

is committed to not whiplashing policy back and forth on the basis 

of the price environment. 

Here are five examples of those types of policy reforms: First, 

clear legislatively binding road maps should dictate the opening of 

new areas both offshore and onshore; second, states should hold 

permitting authority over Federal lands within their borders; third, 

irresponsible calls to limit or ban fracking should be actively refuted with unambiguous legislation; fourth, looking downstream 

pipelines and export terminals for both oil and natural gas should 

be deemed in the national interest, and energy products should be 

placed on the same legal footing as other commodities for export; 

and fifth, new and expanded drilling sites, power plants, refineries 

and manufacturing facilities should face no heightened new source 

requirements. 

I agree with Mr. Bordoff that environmental protection remains 

important regardless of the price environment, but that doesn’t 

mean that it needs to stand in the way of production. 

In closing, I would urge you not to underestimate the long-term 

potential of resources under Federal control. In fact, they hold the 

opportunity to repeat or even exceed the shale boom underway. 

ANWR alone is estimated to have greater reserves than the entire Bakken formation in North Dakota and Montana. Estimates 

for other off limits areas offshore are expected to be four times 

larger still, and those estimates are often decades old and made 

without benefits of exploration and development. Actual production 

in the Gulf of Mexico led to a fivefold increase in the estimates of 

resources there. 

If the question is what resources will America and the world 

need in future decades, the answer is that no one knows. But if the 

question is what course to pursue, we do know. Innovation and exploration have always benefited us and in hindsight, we are always 

glad they occurred. 

The moment when new supply seems less critical is no less a moment when future investment should be encouraged. 

Thank you again for the opportunity, and I look forward to answering your questions. 

[The prepared statement of Mr. Cass follows:] 

66 


Insert offset folio 57 here 21977.057

Testimony of Oren M. Cass 

before the Senate Committee 

on Energy and Natural Resources 

April19, 2016 

Good morning Chairman Murkowski, Ranking Member Cantwell, and Members of the 

Committee. Thank you for inviting me to participate in today' shearing. 

My name is Oren Cass. I am a senior fellow at the Manhattan Institute for Policy 

Research where my work addresses both energy and environmental policy.l 

My testimony today focuses on the implications of the energy price environment for 

federal energy policy, and my primary message to the committee is this: Congress 

should design energy development policy independent of prevailing market prices, for 

three reasons: 

• First, the primary impact of policy decisions will not be felt for years or even 

decades; 

• Second, market prices and predictions say little about what future prices will 

actually be; and 

• Third, innovation and exploration will dramatically and unpredictably change 

both the scale and economics of various resource bases. 

Therefore, the appropriate federal role is to establish a clear, stable framework within 

which the private sector can make long-term investments wherever it chooses. The 

same policies that make sense in a low-price environment make sense in a high-price 

environment. 

This approach is most likely to produce the most efficient allocation of resources and 

maximize domestic production of energy while minimizing its cost. As the boom of the 

past ten years illustrates, the resulting benefits are broad: reduced energy costs for 

households and businesses, increased employment, reduced dependence on imports 

and exposure to price volatility, and increased geostrategic power for the United States 

at the direct expense of many of the worst actors on the global stage. 

of the points contained in tllis testimony. sec Oren Cass. "Step on the 

Am•am.fwe" Manhattan Institute for Policy Research, July 2015. 
67 


Insert offset folio 58 here 21977.058

Energy Policy Time Horizons 

The exploration and extraction of natural resources occurs on decades-long timelines. 

Out-of-sight-of-land wells were first drilled in the Gulf of Mexico in the 1940s, but it 

was in the 1990s that technological advancements drove production costs down by 60 

percent in a single decade2 and output first exceeded 1 million barrels per day (bbl/ d).3 

Even in the current price environment, the U.S. Energy Information Administration 

(EIA) forecasts a 10 percent increase next year, to more than 1.8 million bbl/ d.4 

Similarly, the revolution in shale production that has upended global markets over the 

past eight years began with research in the 1970s and required decades of small-scale 

advancements.5 As recently as 2003, the U.S. Geological Survey (USGS) downgraded its 

estimate of undiscovered, technically recoverable resources (UTRR) in Texas's Eagle 

Ford shale formation from 270 million bbl to 33 million bbl.6 In 2015 alone, the 

formation produced more than 500 million bbl? 

Even well-understood and easily accessible resources take years to come online. As 

then-Senator Obama observed in a 2008 campaign speech, "George Bush's own Energy 

Department has said that if we opened up new areas to drilling today, we wouldn't see 

a single drop of oil for seven years. Seven years. And Senator McCain knows that, 

which is why he admitted that his plan would only provide 'psychological' relief to 

consumers."S The seven years were up last year, in the midst of an oil glut. 

When energy prices are high, opponents of expanding domestic production argue the 

timelines are too long to justify the approach. When energy prices are low, they ask 

"what's the rush ?" 9 But when anticipating resources that might come online a decade or 

more hence, the market price today is simply not relevant. 

2 "The Offshore Petroleum Industry in !he Gulf of Mexico: A Continuum of Activities,'' Bureau of Ocean Energy 

Management, 2008. hllp://w>vw.bocm.gO\·IO!Tshorc-Petro!cum-!ndustrv-Organizatioiml-Schenrc/. 

3 "Federal Offshore-Gulf of Mexico Field Production of Crude Oil." 

9 See. 

Out!." 

15, 2016). 

Carol Browner and Michael Conathan, "What the BP Oil Disaster Tells Us About Arctic 

April20, 2015.J!l1!®illlL!l&'-lti'!E'.QJ!.s;Jlli'L\l:llitl::!?JQ::QJl:ill~m::J£llidl?::i!!2\lllbill11!£.:!!1!ill.[llg: 

2 
68 


Insert offset folio 59 here 21977.059

Long-Term Price Forecasts 

If policymakers had any capacity to accurately predict long-term energy price trends, 

they might use those forecasts to craft today' s energy policy in anticipation of future 

price levels. They have no such ability. Indeed, policymakers of the early 2000s had no 

conception that oil prices might rise more than five-fold that decade, just as 

policymakers of the early 2010s had no conception prices might plunge back down. 

To quote a recent paper in the Journal of Economic Perspectives by Christiane Baumeister 

and Lutz Kilian, "oil prices keep surprising economists, policymakers, consumers and 

financial market participants."JO Even financial market futures, they find, offer no 

meaningful guidance. 

This should not be surprising. The determinants of long-term demand include not just 

economic growth and thus total energy demand, but also the evolution of energy 

consumption technologies that might change efficiency levels or the relative 

attractiveness of various forms of energy. Even if one could presume some reasonable 

level of global economic growth and energy efficiency improvement in the coming 

years, what share of new cars on the road will consume gasoline at all? 

Supply projections are even less reliable. The scale and location of recoverable resources 

changes constantly, as does the cost of lifting those resources. As recently as 2010, the 

EIA forecast no upward trajectory in domestic oil production for the next five years. By 

2015, its estimate for the year had increased 66 percent over its 2010 forecasf.ll 

The picture looking forward is no clearer. Some analysts believe the U.S. shale boom is 

over. My Manhattan Institute colleague, Mark Mills, believes it is only just beginning 

and estimates that production costs will continue to decline until on par with those of 

Saudi Arabia. 12 None of which even considers the possibility that other countries with 

shale reserves-China chief among them-might succeed in development of their 

~rrt:Q'!lbillill (""But for the American people who, after all, own any oil that might be locked beneath the Arctic 

no rush. Domestic oil and gas production is already at record levels. and according to even oil and 

gas industry projections, continued technological innovation means that economic growth no longer requires an 

equivalent gr0\;1h in fossil fuel consumption."). 

1

° Christiane Baumeister and Lutz Kilian. "Forty Years of Oil Price Fluctuations: Why the Price of Oil May Still 

Surprise Winter 2016, J.ill!LUwwwll£!:§12llliL'ill!ll£IL.\6!.\.!t:::!JS.l.!!lillJiQIS!UlliU2W2ill: see also Brad Plumer_ "Why Cmde Oil Prices 

11 "Annual Energy Outlook 2010:• EIA. April 2010, lillllliil-'IJUili.u!lliL!Q[!:±;lH!;fill:!;)JbcsiJ!."&illiiild£1Ll[lfm.JJ21lli![ 

(table All); "Aruma! Energy Outlook 2015." EIA. 

(table All). 

Mark P. Mills. "Shale 2.0: Teclrnology and 1l1e 

Manhattan Institute for Policy Research, May 2015, llil!W.:tl.ll.lh!lli!L!!ill!.lli!!c:!lfllilldlbll.!.l:l.illl~£...1.'2C!!.lli· 

3 
69 


Insert offset folio 60 here 21977.060

own,B or that the next "revolution" in oil sands or oil shale could be just around the 

corner. Finally, geopolitical events could at any moment cause substantial shocks in 

both short- and longer-term supplies. 

If we do not know what will happen, we must plan accordingly. 

The Federal Opportunity 

While domestic oil and gas production outside of federal control exploded from 2010-

2013, increasing respectively by 52 percent and 29 percent, it fell during the same period 

on federal lands and waters, decreasing respectively by 16 and 24 percent.14 One reason 

for this discrepancy is the disproportionate concentration of shale resources outside of 

federal control. But had those resources been under federal control and subject to the 

associated regulatory restrictions, permitting requirements, and political in-fighting, the 

development may never have happened at all. Looking beyond the shale boom and 

excluding North Dakota entirely, those states where the federal government controls 

less than 10 percent of land saw proved reserves increase 104 percent from 2008-2013, 

while those states where the federal government controls more than 50 percent of land 

saw reserves decliue by 7 percent.15 

Yet, the off-limits federal resources may be far richer than those driving the shale boom. 

Off-limits areas of the Outer Continental Shelf (OCS) are estimated to contain more than 

40 billion bbl of technically recoverable resources. The Arctic National Wildlife Refuge 

(ANWR) contains another 10 billion. By contrast, the entire Bakken Formation in North 

Dakota is estimated to contain less than 10 billion bbl and that estimate was less than 1 

billion bbl until the formation was well into development (see figure).16 

Further exploration could reveal some of these federal resources to be smaller in scale 

than the preliminary estimates indicate, however the more common experience has 

been for exploration and development to beget ever-larger discoveries over time. For 

instance, from 1996-2011, the U.S. government's resource estimate for off-limits areas of 

the OCS changed little. But the Gulf of Mexico, under active development, saw its 

14 "Sales of Fossil Fuels Produced from Federal and Indian Lands. FY 2003 through FY 2013." EIA. June 19. 2014. 

h!1p://;nn;.cia.go;/anal>sis/rcguesrs/fcdcmllands (table !.g). 

15 Ross W. Gorte ct al.. "Federal Land Ownership: OYerYiew and Data."' CRS. February 8, 2012. 

ll!!ll£!/fas.prg/sgp/crsil!]iscZR_-!Ll-l6ll!if (table I. federal ownership of state land): "Crude Oil Proved Reserves, 

Reserves Changes, and Production," EIA, December 4. 2014. 

h1tp:l/www.cia.go;-/dnm·/pc!/pc! crd pres a cpcO tO l mmbbl a. h!m (reserves growth by stale). 

16 Supra note 1 (figme 7). 

4 
70 


Insert offset folio 61 here 21977.061

estimate increase five-fold- from a less-than-5 percent chance of finding 'I 0 billion bbl 

to a best guess of nearly 50 billion bblY 

Access to well-understood federal areas in the OCS and ANWR, as well as an 

opportnnity to explore and invest in other onshore areas, has the potential for similar 

upside. 

26.6 

U.S. Geologtcal Survey 

Stable, Pro-Production Policy 

With no credible forecast of how energy markets will evolve, but with the opportnnity 

for enormous production under its feet, the best course for the nation is to let markets 

work. Private industry is best positioned and incentivized to put its own capital behind 

its own judgments about what investments at what scale make sense where. It will 

place bets efficiently as long as it can trust the regulatory environment in which it must 

act. Government must make clear that it is "open for business," supportive of efforts to 

expand production, and committed to notwhiplashing policy back and forth in 

response to changing market conditions. 

The objective should not be simply to open as much land as quickly as possible. 

Industry lacks capacity to invest everywhere at once and government lacks capacity to 

provide the requisite oversight. Rather, reforms should focus on the establishment of a 

clear and legally-binding (i.e., legislated) roadmap for the opening of new on- and 

1

' ,. Assessment of Undiscovered Technically Recoverable Oil and Gas Resources of the Nation's Outer Continental 

Shelf, 20 11," Bureau Management (BOEM). November 201 L 

5 
71 


Insert offset folio 62 here 21977.062

offshore areas over the coming five- and ten-year periods, including ANWR and offlimits OCS areas. USGS should regularly update inventories of federal lands and waters 

and EIA should forecast development timelines and peak output levels that can form a 

baseline against which to measure achieved production increases. States should be 

granted permitting authority over lands within their borders and clear procedures and 

timelines should be established for permitting processes that remain at the federal level. 

In addition, downstream timelines must be shortened. Not only does it take years or 

decades for new resources to come online, but it can take just as long to construct the 

infrastructure needed to transport and use the resulting fuel. Pipelines and export 

terminals for both oil and natural gas should be deemed in the national interest and 

subject to a straightforward approval process with a clear timeline. Energy products 

should be placed on the same legal footing as other commodities for export. And 

environmental laws should be amended to eliminate the heightened "new source" 

burdens that new and expanded power plants, refineries, and manufacturing facilities 

face as compared to existing ones. 

If the question is what resources will America and the world need ten, twenty, or thirty 

years from now, the answer is that no one knows. But if the question is what course to 

pursue, we do know: innovation and exploration have always benefited the nation and 

in hindsight we are always glad they occurred. The moment when new supply seems 

least critical is no tess a moment when future investment should be invited. 

The energy revolution unleashed by new oil and gas production on private lands has 

brought enormous benefits to the America's economy, its geopolitical power, and its 

household budgets. This nation has the resources under federal lands and waters to 

repeat that experience. But the necessary long-term planning and investment will only 

occur if the federal government replicates the stable and supportive framework that 

private industry has encountered on private and state-controlled land. 

Thank you again for the opportunity to appear before the Committee. I hope my 

testimony will be helpful to you as you consider appropriate federal energy policy in 

the context of fluctuating energy prices. 

6 
72 

The CHAIRMAN. Thank you, Mr. Cass. 

Ms. Minter, welcome. 

STATEMENT OF SUZANNE MINTER, MANAGER, OIL AND GAS 

CONSULTING, PLATTS ANALYTICS 

Ms. MINTER. Good morning and thank you for inviting me to 

share the views of Platts Analytics, the forecasting and analytics 

unit of Platts division of McGraw Hill Financial. As a Manager in 

oil and gas consulting, my primary work pertains to global crude 

oil and liquids dynamics with a focus on global upstream investment, trade flow dynamics and supply trends. I have over 30 years 

of experience in the energy industry across multiple commodities 

including natural gas, power and crude oil. 

As we sit in the second quarter of 2016, the U.S. energy producer 

continues to navigate his way through a volatile and overall low 

price environment. After reaching the most current peak of $107 in 

the summer of 2014, crude prices fell swiftly and steeply into the 

end and of 2014, and with a brief exception during 2015, have remained well below $50, ultimately reaching $26 this last February. 

This price environment has dramatically affected producer and 

service company balance sheets as well as spending and producing 

behavior. It is believed that in 2015 the average producer recognized capital expenditure cuts of 35 percent at an incremental 40 

percent in 2016. In hindsight it is obvious to all involved that the 

current price environment is indicative of an extremely oversupplied global energy market. 

The shale revolution, which began with natural gas, allowed the 

U.S. producer to increase nat gas production by 25 percent in just 

five years between 2010 and 2015. As this technology that drove 

natural gas production found its way into the oil fields it allowed 

an even more staggering 57 percent increase in oil production in 

just three years between 2012 and 2015. When one combines oil, 

liquids and natural gas production, the U.S. has introduced 8.3 million barrels of oil equivalent into the global market since 2010. 

Despite the fact that prices have fallen over 75 percent, global 

energy production has continued to grow. Since January 2014 the 

International Energy Agency estimates that global oil and liquids 

production grew by 5.8 million barrels a day with the U.S. contributing 2.1 million barrels of that growth. The remaining volumes 

have come primarily from Saudi Arabia and Iraq for a combined 

1.9 million barrels and the other 2.1 come from other countries in 

aggregate. 

This is where it becomes very important to consider that, while 

the U.S. producer is primarily motivated by his own balance sheet, 

for the most part our global competition produces primarily for revenues. When one considers the contribution of GDP of energy production to OPEC nations in other countries with national oil companies it is apparent that the economic decisions that drive production in these regions are not the same as those of the U.S. independent producer. 

Given the fact that they are currently receiving less than half of 

the revenues per barrel of oil produced as they were as recently of 

June 2014, basic math says that these countries need to create and 

73 

sell more volumes at current low price levels in order to keep their 

economies viable. 

Since the collapse of U.S. prices, the U.S. producer has developed 

more technical prowness than anyone could have imagined in such 

a short period of time. We have seen the rate count fall over 80 

percent from all-time highs to all-time lows, yet the production response to date has been quite muted. 

The remaining rig fleet sits atop the best known acreage and resultantly over the past 20 months in many basins initial production 

rates have increased by 50 percent while drill times have decreased 

25 percent. These two factors are among the major determinants 

of how much production a producer can get from his acreage with 

the rigs available to him. 

The other key item to consider, aside from rig count, is the rate 

at which producers are completing wells they are drilling. In order 

to manage the reduced CAPEX budgets many producers are drilling but not completing all of the wells they drill. We believe that 

producers are completing enough wells to hold production flat during 2016 and intentionally creating an inventory of drilled but 

uncompleted wells, known as DUC, that they will carry into 2017 

in hopes of completing them in a future higher price environment. 

This growing DUC inventory holds reserves that can be brought 

online in a short period of time which in turn, defines the concept 

of spare capacity. 

The global energy market, as broad as it is, is a closed physical 

environment where ultimately supply and demand must balance 

for the market to function properly. The current price environment 

is sending a signal to producers as witnessed by the balance sheets 

here in the U.S. and to revenues globally that production must 

slow and allow demand to catch up with the glut of energy that has 

been introduced into the market in such a short period of time. 

Platts expects there to be an even flow in the recovery, both price 

wise and volumetrically. Until we find balance and a way to manage supply growth with demand growth, the recovery for all will be 

tenuous. 

However, due to spare capacity and the unique economic environment which drives producer activity, it is believed that the U.S. 

producer may be best positioned to lead the recovery and bolster 

economic growth. 

I’m happy to provide any more information on any of these issues 

discussed here today or any other questions offered during this session. 

Thank you. 

[The prepared statement of Ms. Minter follows:] 

74 


Insert offset folio 63 here 21977.063

Testimony of 

Suzanne Minter 

Manager, Oil and Gas Consulting 

Platts Analytics 

before the 

U.S. Senate Energy and Natural Resources Committee 

Hearing to examine challenges and opportunities for oil and gas development in different price 

environments 

April19,2016 

Chairman Murkowski, Ranking Member Cantwell, and members of the Committee, good 

morning and thank you for inviting me to present the analysis of Platts Analytics regarding oil 

and gas development in the current low-price environment 

My name is Suzanne Minter, and I am Manager of Oil & Gas Consulting at Platts Analytics, a 

division of McGraw Hill Financial. In this role I manage projects pertaining to global crude oil 

and liquids dynamics, with a focus on global upstream investments, trade flow dynamics, and 

supply trends. I have over 30 years of experience in the energy industry including marketing and 

trading natural gas, power and crude oil. 

Platts Analytics provides analytics and forecasting and is a unit of Platts, the leading independent 

provider of information and benchmark prices for the commodities and energy markets. 

Customers in over 150 countries look to Platts' expertise in news, pricing and ana1ytics to deliver 

greater transparency and efficiency to markets and help them make better informed trading and 

business decisions. 

The face of US energy production has changed dramatically over the last decade with the so 

called "Shale Revolution". Since 2010 the US has grown natural gas production 25% from an 

annual average of 58 BCF/d (billion cubic feet) to an annual average of72 BCF/d in 2015. 

In 2012 the technology that drove natural gas growth found its way onto the oil space. Since 

January 2012 US oil production grew by 57% from 6.1 MMB/d (million barrels per day) to reach 

a peak of 9.7 MMB/d in April of 2015. As I will reference during this testimony, all energy 

production, be it natural gas, natural gas liquids or oil is entwined. For purposes of this 

testimony I will focus primarily on crude oil. 

After reaching a recent peak in June, 2014 of $107.73, North American crude prices, generally 

benchmarked as West Texas Intermediate (WTI), fell 76% to reach a low of $26.05 in February 

2016. The first leg of this overall move lower was a precipitous drop in pricing from $107.73 to 

$42.03 that occurred from June, 2014 to March, 2015. In a mere 250 days, prices fell 55% from 

a multiyear average of $96.93 (Average prices assessed by Platts from January 2012 to June 

2014). As we look at the current global energy market, it is clear that this price collapse is 

indicative of global over supply. However, the rapidity and steepness of this price action caught 
75 


Insert offset folio 64 here 21977.064

many in the producing and investment community off guard and caused dramatic changes in 

producer behavior and balance sheets. 

As a result of this price movement, producers have been forced to cut Capital Expenditure 

(CAPEX) plans dramatically. 2015 saw average CAPEX cuts by producers of 35% as they 

reduced their drilling plans and slashed the rig fleet. As of April2016, the US rig count stands at 

443, an all-time recorded low, down 80% from the all-time peak of 2,144 achieved in October, 

2014. After a 14-month persistently low-priced environment, producers entered 2016 with 

further estimated CAPEX cuts of 40%. Clearly it is not just the producer that suffers in this 

environment but all associated services that are impacted by the rig count. The most amazing 

piece of this entire story though, is that despite the annihilation of the rig count, US crude 

production has yet to show dramatic declines. The U.S. Energy Information Administration 

(EIA) estimates that US production peaked in April of 2015 at 9.7 million barrels per day 

(MMB/d) and currently is estimated to be at 9.2 million b/d a decline of 500,000 b/d or 5%. 

This phenomenon was made possible by the fact that as they cut CAPEX, producers were able to 

capture huge cost savings from the services sector (Platts Analytics estimates there was an 

average cost savings of 35% across US producing basins in 2015). At the same time, they 

recognized impressive gains in technology. A quantifiable explanation of"technology gains" can 

be described as follows: 

I will use the Eagle Ford Basin of Texas as an example. Currently the Eagle Ford accounts for 

13% of US crude production. In October, 2014 the rig count in the Eagle Ford peaked at 209 

rigs. At that time, the average initial production (IP) rate for a well in the Eagle Ford was 436 

barrels of crude per day and the average time it took to drill a well was 15 days. At that time, 

those 209 rigs, should they have remained in the basin, and continued to drill at that rate of one 

well every 15 days, would have ultimately produced 3.3 MMB/d of crude in the Eagle Ford by 

2020. 

2 
76 


Insert offset folio 65 here 21977.065

Eagle Ford Projections By Rig Count ( Q4 2014) 

3.5 

3.0 

't> 2.5 

to 

:iE 2.0 

:iE 1.5 

1.0 

0.5 

0.0 

Ill History Declining 50 Rigs ~' 75 Rigs 111100 Rigs 125 Rigs 150 Rigs ~' 175 Rigs 200 Rigs 225 

Source: Platts Analytics 

In 2015 as producers cut their rig fleets, the rigs remaining now sit on the best known acreage. 

Resultantly, the average IP rate in the Eagle Ford increased by 50% to 662 barrels of crude per 

day and average drill times have fallen by 25% to ll days. As a result, the current rig count of 

49 in the Eagle Ford could theoretically hold production flat at the current estimated level of I 

MMb/d, so long as those 49 rigs stay in the basin through 2020 and continue to drill one well 

each every ll days with an IP rate of 662 barrels each. This also means, that when recovery 

occurs, the Eagle Ford would only require 125 rigs to create the 3.3 MMB/d previously projected 

by 2020 that had once required 209 rigs to produce. 

8.0 

6.0 ., 

:;:, 

2 4.0 

2 

2.0 

0.0 

Eagle Ford Production Projections by Rig Count (2015) 

Ill History Declining 50 Rigs 

111100 Rigs 

175 Rigs 

1!1125 Rigs 

0200 Rigs 

11175 Rigs 

150 Rigs 

225 Rigs 

Source: Platts Analytics 

3 
77 


Insert offset folio 66 here 21977.066

The contingency on these types of production scenarios is that all wells drilled are completed and 

brought on line in a linear fashion. Data analyzed by Platts Analytics from Rig Data shows that 

not all wells being drilled are producing oil immediately. In this new reduced CAPEX 

environment, producer behavior has changed dramatically, even beyond the slashing of the rig 

fleet. 

From review of the quarterly and annual reports of publically traded companies, it is estimated 

that 40% of the cost of a multimillion dollar well goes into the actual drilling of the well and 

60% of the cost goes into the completion of that well, the process of piping and hydraulic 

fracturing, or "fracking," that allows for production to actually begin. Platts Analytics estimates 

that since 2015, a decreasing amount of wells drilled have been completed, and that in between 

50-75% ofwells are being completed. Producer presentations and quarterly reports ofpublically 

traded companies are stating that those producers with still-intact and relatively healthy balance 

sheets are completing enough wells to hold production flat during 2016 and are intentionally 

creating an inventory of drilled but uncompleted (DUC) wells that they will carry into 2017 in 

hopes of completing them in a higher price environment thereby recognizing greater revenues in 

the future. This DUC inventory will have significant implications for production and the price 

recovery in the near to midterm. 

Platts Analytics estimates there are currently in excess of 6,500 DUC wells in inventory as of 

December 2015. (Due to lag in reporting of state level data, this is the most recent estimate we 

are able to compile.) As mentioned, there is reason to believe that this DUC inventory has 

increased dramatically in the last six months and will continue to do so over the next six months. 

Approximately 2,500 DUC wells reside in Texas alone and those are presumed to be oil wells in 

the Eagle Ford and Permian basins. Assuming an average IP rate of only 500 barrels per day, it 

can be deduced that if producers made the decision to complete all of those wells at one time, 

Texas alone could introduce 1.25 MMB/d of oil into the global market. This oil, sitting in the 

ground, with the potential to hit the market in a short pe1iod of time (an estimate of current 

completion time is an average of 30 days) is known as "spare capacity." Platts Analytics 

believes that in the current global energy producing community, the US has the greatest amount 

of spare capacity. 

It is very important to consider that the US energy story is 1) not only a crude story, and 2) not 

only a US story. In the last decade, the US has introduced 8.3 MMBoe/d (million barrels of 

energy equivalent per day) into the global market when one considers production of crude, 

natural gas and natural gas liquids. Even in the current environment of dramatically slowed 

producer activity and low prices, Platts Analytics believes the US producer is on target to 

introduce an incremental 2.7 MMBoe/d into the global markets by 2020. For reference, we 

estimate that the global market is approximately 145 MMBoe/d, so while introduction of these 

barrels was not extraordinarily large from a percentage basis, the time and the rate in which this 

energy entered the market appears to have stressed the system in ways unimagined. 

4 
78 


Insert offset folio 67 here 21977.067

14.0 84 

12.0 72 

10.0 60 

"C 

..... 8.0 "' 0 

.0 

:E 6.0 

48~ 

36 C1l 

:E 

4.0 24 

2.0 12 

0.0 

~~ ,_# ,,yl>l<o ~~ ,_<0)..,<0) ~..,.., ~~ ~¢ ~~ ~~ ~..,ro ~-¢> ~..,<o ,_<;)~ ,_<0)"-<0) 

~~Gas NGL Crude 

Source: Platts Analytics NG Market Call Long Tenn. NGL Market CalL and Cmde Oil Market Call 

While production numbers are the "headline number" and what drive producer profits and 

revenues, it is important to realize that barrels of crude produced are merely feedstock that will 

be refined and turned into product to be consumed both here in the US and abroad. While the 

lifting of the export ban in December 2015 is only a recent event, the US has been an exporter of 

crude via refined products created for decades and became a net exporter of cmde via refined 

products in 20 12. 

As startling as the collapse of crude prices has been, what is even more telling of the global 

oversupply of energy is the accompanying collapse of refined product prices recognized by 

refiners. On an annual average in 2015, refiners at the US srulf coast, which represents 

approximately 75% of US refining capacity, recognized average margins of $9.35 for each barrel 

of crude refined. This represents an increase of 8% over 2014 averages of $8.64. However, 

feedstock costs, (as proxy to WTI) fell over 60% during that same time period. This price 

phenomenon, coupled with swelling refined product inventories, (per the EIA, refined product 

inventory currently sits at 827 million barrels, near an all-time high and 85 million barrels higher 

than this period last year and 132 million barrels or 20% higher than the 5 year average) clearly 

illustrates that even though prices for products fell significantly during this period, global 

markets did not appear willing or able to absorb what was being created. This trend in collapsing 

refined product margin appears to be accelerating, as witnessed by the fact that 2016 year-to-date 

margins at the US gulf coast, have averaged a mere $3.11 per barrel versus $10 69 for the same 

period in 2015. 

Since January 2014, the International Energy Agency (IEA) estimates that global crude and 

liquids supply has grown by 5.8 MMB/d with US production accounting for 2.1 MMb/d of the 

total. Saudi Arabia is estimated to have contributed .7MMB/d, Iraq 1.2 MMB/d and other 

nations in aggregate 2.1 MMB/d. At first consideration, this inverse relationship between low 

5 
79 


Insert offset folio 68 here 21977.068

prices and higher production may appear illogical, but upon further consideration of the 

economic decisions that drive production here in the US versus the rest of the globe, it may not 

be as illogical as it appears and actually defines the brunt of the problem for the US producer 

who is attempting to survive in an oversupplied global environment. 

6.0 

5.0 98 

97 

96 

'C 95 ..... 

~ 94 

:!!: 93 

92 

91 

90 

Global Oil Production v Brent Prices 

$120 

$100 

$80 

$60 

$40 

$20 

$0 

Here in the US, there are an estimated 9,000 individual entities that are producing energy. These 

parties behave in their own best interest. As oil prices fell, producers kept producing, and will 

continue to do so as long as it makes economic sense for their balance sheet. As previously 

mentioned, efficiencies like cost savings from the service sector, coupled with potential 

financial hedges that may have been put in place, have allowed the US producer to keep 

producing at prices lower than anyone would have assumed possible. Now that we have existed 

in this low-price environment for an extended period oftime, the US producer is starting to show 

strain to its balance sheet and accordingly, production is beginning to decline and is expected to 

continue to do so in the near term. The independent US producer is unique in the global energy 

market in that it is driven solely by individual profit. At the same time it contributes a minority 

share of production, approximately 13% of total global liquids supply. Also notable is that 

energy only contributes a small portion of overall GDP in the US. 

As a general rule, National Oil Companies (NOC) on the other hand, produce for revenue, not 

profit. When one considers the GDP profile/impact of energy production of OPEC nations it 

should become apparent that the economic decisions that drive production in these regions are 

not the same as those of the independent US producer. 

Despite the fact that the US producer has illustrated that its technological prowess has allowed it 

to remain profitable from a balance sheet stand point, the reality is, the US producer still has to 

purchase or lease the land it drills. This is in direct contrast to an NOC who not only owns the 

6 
80 


Insert offset folio 69 here 21977.069

land and therefore the production that is extracted from it, but also often owns a refining 

complex that creates refined barrels that US refined barrels compete with in the global market 

place. Aside from this difference though, the revenues that are raised from energy production and 

sales are what funds the majority of these countries' national economies. Given the fact that they 

are currently receiving 25% of the revenues per barrel of oil produced as they were as recently as 

June 2014, basic math says these counties need to create and sell more volumes at current low 

prices in order to keep their economies viable. 

As previously alluded to, the recent surge in global energy growth appears to have overwhelmed 

recent demand growth. While it is apparent we are currently sitting in a globally oversupplied 

world from an energy perspective, one has to believe that the energy markets will balance, more 

than likely in the near tem1 as a supply-side response. Once iliat balance appears in the 

marketplace, going forward, natural demand growth will require that additional production be 

introduced back into the marketplace to meet demand. 

In the near/mid-term, it will be the US producer that is the marginal supplier and price setter into 

the global market. Given the fact that it is believed that the US holds the largest spare capacity to 

produce incremental oil in the form of the growing DUC inventory which holds reserves that can 

be brought on line in a short period of time, it is the US producer, and their financial 

determination of what price point is adequate for their balance sheet, that will dictate the time 

and price iliat US production v.~ll be reintroduced in to the market. Clearly current prices have 

slowed production activity and we believe that many US producers are operating near cash costs. 

As explained previously, for the US producer who is ultimately driven by profit, not revenue, 

this type of behavior is unmaintainable for an indefinite amount of time. Resultantly, Platts 

Analytics oil price forecast expects a price recovery in the back years to incentivize production 

to come back on line. 

$120 

$100 

$80 

~ $60 "' "' Break Even ..... 

<I> 

$40 

$20 

$0 

Jul-14 Jan-15 Jul-15 Jan-16 

Source: Platts/Plalts Analytics 

7 
81 


Insert offset folio 70 here 21977.070

~ $80 

"' "' ..... $60 "' 

$40 1-

I 

$20 I 

$0 + 

~ ~~ ~ ~~ ~(o 

~ ~ ~ \,. \.s \,. \.s \,. 

/!' ~-$ ~-$ ~ .. <:> \.s \,. \.s \,. 

-WTI Brent - •WTI Forecast Brent Forecast 

Source: Platts/Platts Analytics Oil Market Call April, 2016 

Despite the fact that energy production is an expensive undertaking, we currently estimate that 

the prices needed by the US producer to complete their DUC inventory may be much lower than 

our global competitors believe or would like it to be. As previously mentioned, the DUC 

inventory is a result of wells that have been drilled, which results in "sunk" costs of 40% of 

drilling costs. Therefore, a producer may decide to complete his well at lower prices than 

previously required or expected in order to 1) recapture that "sunk" cost and 2) generate cash 

flows and revenue. While each producer will behave differently than the next, it seems realistic 

to assume that when producers are able to recognize WTI pricing in the mid $40-$50 range they 

will bring incremental volumes back in to the market place. 

Platts Analytics expects there to be an ebb and flow in the recovery, both pricewise and 

volumetrically. If too much production hits the market all at once, we will quickly find ourselves 

in an oversupply situation once again. If the US producer is the one to introduce too many 

incremental barrels into the market place, we may see a surge in global barrels at the same time 

as all parties involved compete for market share. Until we find balance and a way to manage 

supply growth with global demand growth, the recovery for all will be tenuous. However, due to 

spare capacity and the unique economic environment which drives producer activity, it may very 

well be that the US producer is best positioned to lead the recovery and bolster economic growth. 

8 
82 

The CHAIRMAN. Thank you, Ms. Minter, I appreciate it. 

Ms. Palti-Guzman? 

STATEMENT OF LESLIE PALTI-GUZMAN, DIRECTOR, GLOBAL 

GAS, THE RAPIDAN GROUP LLC 

Ms. PALTI-GUZMAN. Chairman Murkowski, Ranking Member 

Cantwell, Senator Heinrich and members of the Committee, my 

name is Leslie Palti-Guzman and I’m the Director of Global Gas at 

the Rapidan Group, an independent energy market, policy and geopolitical consulting firm based in Bethesda with a representation in 

New York, where I’m based. I’m very honored to speak with you 

today. 

As a European gas analyst, who is familiar with EU energy security and as a U.S. resident for the past ten years who has witnessed the transformative U.S. energy boom and what it means for 

the rest of the world, I will focus my remarks on the new global 

gas order that has emerged and what it means for U.S. LNG exports, global gas trade and the geopolitics of gas. 

Three main drivers have ushered the new global gas order since 

the second half of 2014. One, low oil index gas prices as a result 

of large oil prices decline. Two, rock bottom European and Asian 

spot gas prices as a result of the evidence of new LNG supply. 

Three, all of this is happening at a time when demand has been 

disappointing notably in traditional Asian markets. 

As a result, we see LNG buyers’ market with greater flexibility, 

a growing competition between exporters, the entry of more diverse 

LNG players, a convergence of European and Asian gas prices 

below $5 per million BTU, and the wait and see approach when it 

comes to new investments for new infrastructure. What does it 

mean for U.S. LNG? In retrospect permitting, contracting and financing U.S. shale to LNG facilities was the easy part. Now U.S. 

LNG needs to sell. 

The current market environment could make the U.S. shale to 

LNG market less attractive along with its unique Henry Hub pricing. U.S. LNG is all about flexibility which has made U.S. LNG 

very attractive to purchasers, but at the same time it creates unpredictability for market players, governments and market forecasters in two regards. First, the amount of future exports. Second, 

their destination. 

Regarding the volume uncertainty how much of U.S. LNG will 

eventually be exported? Due to flexible contract agreements there 

is no guarantee that the customers of U.S. LNG facilities will export the gas if the economics do not work. If there is high global 

demand for LNG, U.S. LNG will run at a high utilization rate. If 

there is low demand, U.S. LNG exports will be cut. 

Second, uncertainty is the destination. Current narrowing regional spreads makes Asia a less popular destination for U.S. LNG 

which will benefit to other consumer centers around the world. 

What about the next wave of U.S. LNG investments? I believe 

that the most critical element to watch in determining whether the 

world needs additional U.S. LNG is demand for LNG. 

In many countries natural gas must compete for market share 

with cheaper coal and zero emission renewables which makes the 

future LNG demand uncertain. Post Cop 21 has raised the profile 

83 

of gas as the best partner to a greener economy but prices matter. 

Gas and LNG have to remain competitive. 

True, more affordable gas creates renewed or new appetite in 

several countries. It makes also the environmental argument of favoring gas over coal or fuel oil more compelling. Opportunistic demand for spot LNG is on the rise in new niche markets or even 

higher risk markets due to cheaper and wider availability of nonlong term LNG supply as well as extended use of new technologies 

such as floating storage and regasification units. However, demand 

for those new importers could be fickle if prices rebound and some 

alternative gas supplies or displaced natural gas with competing 

fuels. 

That said, I believe the U.S. LNG plays will continue to be attractive for new investment decision given their low costs, unique 

pricing and stable source of supply; however, it is important to 

keep in mind that Asian and European buyers like to diversify 

their sources and pricing exposure which implies that they don’t 

solely want U.S. LNG only in their portfolio. 

When it comes to the geopolitics of gas current structural overcapacity mitigates the risk of any isolated geopolitical event that 

could disrupt the LNG flow. In addition, the rise of more geopolitical stable suppliers such as Australia and the U.S. reduce the 

exposure of global gas market to geopolitical disruptions. 

The more liquid, competitive and transparent the market is, the 

more consumers will accept this new notion of energy security that 

LNG brings that is not related to a land pipeline or additional storage capacity. 

Also, the more liquid the market is, the more steady suppliers 

such as Qatar and Russia will continue to adapt their pricing 

downward and offer more flexible terms which in turn, will improve the odds of the golden age of gas beyond the U.S. 

Thank you. 

[The prepared statement of Ms. Palti-Guzman follows:] 

84 


Insert offset folio 71 here 21977.071

United States Senate Committee on Energy and Natural Resources 

Hearing entitled "Challenges and Opportunities for Oil and Gas development in Different Price 

Environments" 

Written Testimony of Leslie Palti-Guzman 

Director, Global Gas, The Rapidan Group LLC 

Aprill9, 2016 

Chairman Murkowski, Ranking Member Cantwell, and Members of the Committee, my name is 

Leslie Palti-Guzman and I am the Director of Global Gas at The Rapidan Group, an independent 

energy market, policy, and geopolitical consulting firm based in Bethesda, Maryland, with a 

representation in New York where I am based. It is an honor to speak with you today about the 

changing price environments and what it means for natural gas and LNG developments. 

As a European gas analyst, who is familiar with EU energy security, and as a US resident for the 

past ten years who has witnessed the transformative US energy boom and what it means for the rest 

of the world, I will focus my remarks on the new global gas order that has emerged since the second 

half of2014 and what it means for US LNG exports, global gas trade and the geopolitics of gas. 

A New Global Gas Order 

Large oil price declines reflected in oil-indexed gas prices (notably in Asia), abundance of new LNG 

supply and European and Asian rock bottom spot prices at a time when traditional Asian demand is 

muted, have ushered in a new order for LNG markets. 

The 2016 global gas market features a buyer's market with greater flexibility, growing competition 

between exporters, entry of more diverse LNG players, a convergence of European and Asian spot 

prices below $5/mmbtu, and a wait-and see approach on LNG infrastructure investments. 

US LNG Needs to Sell 

Permitting, contracting and building US shale-to-LNG facilities was in retrospect the easy part, now 

the US LNG needs to sell. Flexible purchasing agreements, eroding international prices and 

weakened demand in top LNG consumer country could make the US shale-to-LNG market less 

attractive than it was a few months ago. 

There is no guarantee that the customers of the US's first shale-to-LNG export facility, Sabine Pass, 

in Louisiana will not leave the fuel at its port when commercial operations start next month. Roughly 

58 million tons of US LNG have been sold under long-term contracts out of the five facilities 

currently under construction (sufficient to supply the combined LNG markets of Europe and South 

America), however there is no guarantee that the customers which have contracted the volumes will 

actually use their option to export the gas if the economics do not work. US LNG is all about 

flexibility, which has made US LNG appealing to purchasers, but it also means that buyers are free 

to walk away from previously agreed purchases by giving notice. 

Furthermore, buyers are free to send their LNG without a fixed destination attached-meaning that 

there is no predetermined dedicated market for US exports. The destination of US Gulf Coast LNG, 

with first commercial cargoes starting in coming weeks, will be determined by regional price 

spreads. Current narrowing regional spreads make US LNG to Asia unlikely. Whereas about half of 

all cargoes from new LNG export projects were initially expected to go to Asia, as it stands today, it 

Testimony of Leslie Palti-Guzman I Senate Committee on Energy I April 19, 2016 p. 1 
85 


Insert offset folio 72 here 21977.072

seems that 1/3 of US LNG will go to Asia, while possibly 1/3 will be sent to Europe and 1/3 to the 

rest of the world, notably South America. 

Along with its unique Henry-Hub pricing, the newly found flexibility is highly attractive for 

purchasers, but it also creates unpredictability for market players, governments, and market 

forecasters regarding the amount of future exports and their destinations. 

Next Wave of US LNG Investments 

Given the medium-term glut, the market takes a wait-and-see approach when it comes to making 

major final investment decisions (FIDs). Oil price levels, project cost mitigation, competition 

between supply sources, and natural gas demand will shape the flow of incremental US supply in the 

coming years. 

FIDs that do go ahead in the next four years will feature either major cost reductions, competitive 

technologies (such as FLNG), capacity downsizing, or access to a large-scale resource and/or 

strategic market that makes the project a winner in the long run despite the current, unfavorable 

market conditions. 

US LNG plays will continue to be attractive for new investment decisions (including Greenfield) 

given their low cost, unique pricing and stable source of supply. 

However, it is important to keep in mind that Asian and European buyers like to diversify their 

sources of supply and pricing exposure, which implies that they don't want solely US LNG in their 

portfolio. Some in Europe, do not want to replace a Russian dependence by a US dependence. In 

Asia they want a portfolio as diversified as possible (supply from Russia, Qatar, Australia and 

others). Delays in other plays (Mozambique, Western Canada) will be a boon for new investments in 

US LNG. But the most important competition to additional US LNG capacity will be unsold 

volumes from operational export plants. 

Medium-term and long-term demand for LNG will be one of the most critical elements to watch in 

determining whether the world needs additional US LNG. In many countries, natural gas must 

compete for market share with cheaper coal and zero-emission renewables, which makes future 

demand uncertain. In Europe, there is no obviousness in the role of gas and gas cannot compete with 

coal without a carbon price. Post Cop-21 has raised the profile of gas has the best partner to a 

greener economy, but prices matter. Gas and LNG have to remain competitive. 

More affordable and accessible LNG creates renewed or new appetite in several countries, making 

also the environmental argument of favoring gas over coal or fuel oil more compelling. As the Asian 

premium for LNG prices evaporate, large Asian importers such as Japan and South Korea will save 

billions of dollars on their LNG bills. Cheaper natural gas imports can accelerate switching from 

coal, a top Chinese priority to address urban pollution. 

Moreover opportunistic demand for spot LNG is on the rise. LNG is gaining traction in new niche 

markets that see it as a stop-gap solution or as a security of supply necessity. New countries have 

entered the LNG importer club past 2 years (Jordan, Egypt, Pakistan) due to cheaper and wider 

availability of "non-long-term" LNG supply as well as expanded use of floating storage and 

regasification units (FSRU) that cut lead time to get in place a LNG import infrastructure (less than 2 

years). However, demand from these new, opportunistic importers could be fickle if prices rebound, 

and some may increase domestic production, secure alternative import supplies, or displace natural 

gas with competing fuels. 

Testimony of Leslie Palti-Guzmanl Senate Committee on Energy I April 19, 2016 p. 2 
86 


Insert offset folio 73 here 21977.073

Trends in Global LNG Trade and Pricing 

The surge of flexible supply available to the spot market will be a defining feature of medium-term 

global LNG markets. It will have a transformative impact on the market, which will become freer 

and more transparent by the end of the decade. While this flexible supply is a boon for buyers, it is a 

challenge for suppliers in an oversupplied market and will drive intense competition, downward 

pressure on pricing and doubts regarding the sanctity of long-term contracts. 

In addition, oil price gyrations will make oil-gas pricing less predictable, speeding LNG buyers' push 

away from oil-indexation. At a time when lower pricing and cost inflation put at risk projects and 

companies are tempted to defer investment, a reform of financing for LNG projects might be needed. 

Once Hubs will be liquid enough, especially in Asia, investments will increasingly rely on market 

forces and reliable price signals. 

Geopolitics of Gas 

The rise of more politically stable suppliers, such as Australia and the US, reduces the exposure of 

global gas markets to geopolitical disruptions, which means enhanced energy security for 

consumers. 

Current structural overcapacity mitigates the risk that any isolated geopolitical event that disrupts 

LNG flows would significantly impact pricing near term. A simultaneous cutoff of gas to Europe 

from Algeria and Libya is our highest probability event for this year, but odds are low. Longer term, 

Russia's continual threats to long-term gas diversification and the evolution of Qatar-Iran relations 

pose risks in Europe, the Caspian, and across the Middle East, but near-term disruptions are unlikely. 

The more liquid, competitive and transparent the market is, the more established suppliers such as 

Qatar and Russia will continue to adapt their pricing downward and offer more flexible terms, which 

in tum will improve the odds of the golden age of gas. 

Testimony of Leslie Palti-Guzmanl Senate Committee on Energy I April 19,2016 p. 3 
87 

The CHAIRMAN. Thank you. 

Mr. Ratner, welcome. 

STATEMENT OF MICHAEL RATNER, SPECIALIST IN ENERGY 

POLICY, CONGRESSIONAL RESEARCH SERVICE 

Mr. RATNER. Thank you. 

Chairman Murkowski, Ranking Member Cantwell, Senator Heinrich, members of the Committee, my name is Michael Ratner. I’m 

a specialist in Energy Policy at the Congressional Research Service. 

CRS appreciates the opportunity to testify on the important issue 

of oil and natural gas development in different price environments. 

In accordance with our statutes CRS takes no position on policy 

or legislation. 

Why prices for oil and gas have declined so drastically in recent 

years is directly related to the advent of U.S. shale gas production 

and the application of related techniques to the oil sector. 

The drop in oil prices since mid–2014 has attracted a lot of attention and has prompted producers to improve their production methods. This has contributed to the resiliency of U.S. output. U.S. 

crude oil production in January 2016, the latest data available, remained over nine million barrels per day. Although it was the 

fourth month of decline, oil prices remained low. 

Natural gas is different. U.S. natural gas production continues to 

rise despite sustained low prices. In January 2016 U.S. natural gas 

production hit a new monthly high, and in March the United 

States started exporting liquefied natural gas from the lower 48. 

In the United States, oil and natural gas prices are no longer 

linked. Outside of the United States, contract natural gas prices 

tend to be indexed oil but that is changing. Prices for both commodities are currently low compared to just five years ago. 

Regardless of the price level, some analysts contend that an external cost, such as national security and the environment, are not 

fully incorporated into the price, although analysts disagree about 

the magnitude of externalities. 

Oil is in the $40 per barrel range, up recently, but still relatively 

low. And U.S. natural gas is under $2 per million British Thermal 

Units (BTU). One does not have to think back, far back, to when 

prices for both commodities were much higher. In 2011 oil was 

close to $100 per barrel, and natural gas was about $4 per 

MMBTU. Also, keep in mind that ten years ago shale gas and tight 

oil were almost unknown. 

Any price assumptions in my testimony are not forecasts, and 

CRS has not evaluated the likelihood of any scenario. 

In a low price environment both oil and natural gas producers, 

as well as service companies, face financial challenges. Companies 

have cut capital expenditures, laid off workers, filed for bankruptcy 

protection, gone into bankruptcy, sold assets or been downgraded 

by credit agencies. Cutting capital expenditures, in particular, will 

have effects on production beyond a five-year timeframe, especially 

in more challenging areas. 

However, the responsiveness of shale production could potentially smooth any related price events. The longer prices stay low, 

the harder it will be for companies to survive. Nevertheless, some 

companies will remain financially solid and will weather the low 

88 

prices better. As prices rise, companies will reassess their strategies. 

On the other hand, consumers of all types should benefit from 

the low prices. Individuals and companies have seen their oil and 

natural gas related expenses decline. How consumers view the future of oil and natural gas, especially prices, influences their decision on purchasing new equipment that uses oil or natural gas. 

This will have an impact on future production needs and prices. 

As an example, prior to the fall in oil prices there was a lot of 

discussion on sectors where natural gas could replace oil products, 

mainly long haul trucking, rail and marine. Now there is less talk 

of substitution in trucking or rail, although marine remains an 

area of interest which appears to be driven more by regulation 

than by prices. 

Similarly on electricity, there’s been a shift to natural gas by 

generation verses coal. While this has mostly been an increase in 

utilization, new construction tends to focus on natural gas or renewables in part because of the regulatory issues and financial incentives. 

Oil remains the dominant fuel for transportation and different 

price levels may affect the fuel efficiency of a car one buys but it 

is not as likely to significantly influence the fuel type consumed. 

There are a variety of other areas that will be affected by high 

or low prices including related sectors like infrastructure, trade, 

the environment and geopolitics, among other topics. 

As I mentioned, the United States began exporting liquefied natural gas earlier this year. With the lifting of restrictions at the end 

of last year exporting crude oil from the United States has become 

easier. 

Regarding the environment, they’ll be positive and negative consequences that are outside my expertise. For geopolitics, countries 

that rely on oil and natural gas revenues for their budget have 

been hurt by low prices. This includes both U.S. allies and adversaries. 

Finally, oil and natural gas prices are big economic factors; however, the U.S. economy is well diversified and not reliant on statecontrolled energy companies. Nevertheless, some local economies 

will benefit while others do not, depending upon the scenario. 

Thank you for the opportunity to appear before the Committee. 

I’ll be happy to elaborate on my opening remarks and address any 

questions you may have. 

Thank you. 

[The prepared statement of Mr. Ratner follows:] 

89 


Insert offset folio 74 here 21977.074

Statement of 

Michael Ratner 

Specialist in Energy Policy 

Before 

Committee on Energy and Natural Resources 

U.S. Senate 

Hearing on 

"Challenges and Opportunities for Oil and 

Gas Development in Different Price 

Environments" 

April26, 2016 

Congressional Research Service 

7-5700 

www.ns.gov 
90 


Insert offset folio 75 here 21977.075

Congressional Resear_c-'-h-'S-'-erv_c_cicc_e _______________________________ _ 

Chairman Murkowski, Ranking Member Cantwell, Members of the Committee, my name is Michael 

Ratner. I am a Specialist in Energy Policy at the Congressional Research Service. CRS appreciates the 

opportunity to testifY on the important issue of oil and natural gas development in different price 

environments. In accordance with our enabling statutes, CRS takes no position on policy or legislation. 

Introduction 

Why prices for oil and natural gas have declined so drastically in recent years is directly related to the 

advent of U.S. shale gas production and the application of related techniques to the oil sector. TI1e drop in 

oil prices since mid-20 14 has attracted a lot of attention, and has prompted producers to improve their 

production methods. This has contributed to the resiliency of U.S. output. U.S. crude oil production in 

January 2016, the latest data available, remained over 9 million barrels per day, althongh it was the fourtl1 

month of decline, while prices remained low. Natural gas is different. U.S. natural gas production 

continues to rise, despite sustained low prices. In January 2016, U.S. natural gas production hit a new 

monthly high and in March the United States started exporting liquefied natural gas from the lower-48. 

Prices 

In the United States, oil and natural gas prices are no longer linked. Outside of the United States, contract 

natural gas prices tend to be indexed to oiL but that is changing. Prices for both commodities are currently 

low, compared to just five years ago. Oil is in the $40 per barrel range, up recently but still relatively low, 

and U.S. natural gas is under $2 per million British thermal units (mmBtu). One docs not have to think far 

back to when prices for both were much higher. In 2011, oil was close to $100 per barrel and natural gas 

was about $4 per mmBtu. Also, keep in mind that ten years ago shale gas and tight oil were almost 

unknown. Any price assumptions in my testimony are not forecasts, and CRS has not evaluated the 

likelihood of any scenario. 

Producers 

In a low price environment, both oil and natural gas producers as well as service companies face financial 

challenges. Companies have cut capital expenditures, laid off workers, filed for bankmptcy protection, 

sold assets, or been downgraded by credit agencies. Cutting capital expenditures, in particular, will have 

effects on production beyond the five-year time frame, especially in more challenging areas. However, tl1e 

responsiveness of shale production could potentially smooth any related price effects. The longer prices 

stay low the harder it will be for companies to survive. Nevertheless, some companies will remain 

financially solid and will weather low prices better. As prices rise companies will reassess their strategies. 

Consumers 

On the otl1er hand, consumers of all types-should benefit from low prices. Individuals and companies 

have seen their oil and natural gas related expenses decline. How consumers view the future of oil and 

natural gas, especially prices, influences their decision on purchasing new equipment that uses oil or 

natural gas. This will have an impact on future production needs and prices. As an example, prior to the 

fall in oil prices there was a lot of discussion on sectors where natural gas could replace oil products, 

mainly long-haul tmcking, rail, and marine. Now, there is less talk of substitution in trucking or rail, 

although marine remains an area of interest, which appears to be driven more by regulations than by 

prices. Similarly on electricity, there has been a shift to natural gas-fired generation versus coal. While 

this has mostly been an increase in utilization, new construction tends to focus on natural gas or 

renewables, in part because of regulatory issues and tlnancial incentives. Oil remains the dominant fuel 

for transportation and different price levels may affect the fuel efficiency of a car one buys, but it is not as 

likely to significantly influence tl1e fuel type consumed. 

Prepared for Congress----------------------------------
91 


Insert offset folio 76 here 21977.076

Congressional Research Ser1iice 2 

Other Issues 

There are a variety of other areas that will be affected by high or low prices, including related sectors like 

infrastructure, trade, tl1e environment, and geopolitics, among other topics. As I mentioned, the United 

States began exporting LNG earlier this year. With the lifting of restrictions at the end oflast year, the 

United States has also started exporting cmde oil. Regarding the environment, there will be positives and 

negatives consequences that are outside my expertise. For geopolitics, countries that rely on oil and 

natural gas revenues for their budget have been hurt by low prices. This includes both U.S. allies and 

adversaries. Finally, oil aud natural gas prices are big economic factors; however, the U.S. economy is 

well diversified aud not reliant on state-controlled energy companies. Nevertheless, some local economies 

will benefit, while others do not depending upon the scenario. 

Thauk you for the opportunity to appear before the committee. I will be happy to elaborate on my opening 

remarks and address auy questions you may have. 

Prepared for CongresS---------------------------------
92 

The CHAIRMAN. Thank you, Mr. Ratner. Your final remarks there 

about certain areas benefiting and others not, when the comment 

was made earlier that the anticipated average price of fuel here in 

the country is going to be $2.04 a gallon, I am reminded that in 

about 80 percent of my communities that are not attached by road 

and their fuel is either flown in or barged in, they are going to still 

be looking at $5, $5.50 a gallon. So we do not all enjoy the same 

benefits. 

I want to talk about LNG just for a moment. I mentioned the Energy 20/20 white paper that we put out in 2013. At that time I had 

said that there was this narrowing window of opportunity for LNG 

exports because of all the things that many of you have said here 

today, and a recognition that for Alaska with the LNG that we 

have historically exported. For 40 years we exported limited 

amounts to Japan, and I mentioned that we have exceptions to 

some of what we are able to produce in Alaska for a host of different reasons. 

I have always said that our LNG opportunities are also subject 

to narrow window. We are pushing very hard to try to get our natural gas to market, but we have some logistical challenges that we 

are dealing with. 

In the meantime, the politics, the geopolitics, of LNG are playing 

out. The issues that you have mentioned, Ms. Palti-Guzman, are 

ones that I am particularly paying attention to and recognize that 

how we are viewed, we, being Alaska, may be different than the 

resource that comes from the lower 48 in terms of the markets that 

we might be attractive to. And you indicate that Asia looks to be 

a less popular U.S. destination. 

I am curious, and I would direct this question both to you and 

to Mr. Ratner, in terms of Alaska’s LNG opportunities, do you view 

that through a different lens than LNG, other domestic sources of 

LNG, or is it all in the same pot? Either one? Ms. Palti-Guzman? 

Ms. PALTI-GUZMAN. Thank you for your question. 

I think if you look globally at all supply of LNG port and shale 

supply of LNG, there will be stranded assets because there is too 

much of it. Now the projects that are going to go ahead are the 

ones that will manage to make cost mitigations, that will have customers already on board. 

When I look at Alaska we need to think about Asia, and Asia is 

not one block. The traditional buyers in Asia, Japan, South Korea, 

have declining demand or stagnating demand. But there are also 

a lot of uncertainties, and Japan’s may be related to the restarts 

of nuclear reactors and they are undergoing their regulation in 

their own markets. India and China, the two emerging economies, 

have huge upside for LNG demand, and then there is Southeast 

Asia that is a growing niche market. So when we look at Asia we 

need to distinguish between those different markets. And I still 

think that they are the growth motor for LNG demand globally. 

But we’ve seen in 2015 that their share in the global gas trade declined from 75 percent to 72 percent and maybe was related to 

slowdown in demand in China because of the slowdown of the economy but also less demand in South Korea and Japan. 

The CHAIRMAN. Let me ask Mr. Ratner. 

Mr. RATNER. Sure. Thank you for the question. 

93 

I mean, when it comes to Alaska, as you indicated, it is viewed 

as different for a gas, and DOE has said that in their permitting 

process when they granted permits for Alaskan projects. 

And I think that the, as far as, Asia is definitely the most logical 

market given the proximity of Alaskan gas. And I think, one of the 

things looking forward, is also that any new project in Alaska is 

not going to be entering the market in the next two years. It’s 

going to be entering further out. 

And so, we need to see how the current low prices will affect demand globally, particularly in Asia. But that those are going to be 

factors of what type of market is—will the Alaskan gas, if it gets 

built, will it be entering at that time. 

And so, I would expect that any new project in Alaska is going 

to take a good number of years to build the pipeline, build a facility, go through the permitting, etcetera, before it hits the market. 

And I think, going forward, if you look at the current low prices, 

that’s going to have a big impact on countries that may view, that 

currently don’t import LNG, but may view it as an alternative fuel 

in the future that may benefit potential exports from Alaska. 

The CHAIRMAN. This is just part of the struggle we have. People 

look at the prices today and say, well this is a lousy time to make 

such an investment. And as I have mentioned, whether you are 

talking oil and the potential within ANWR or eight to 12 years to 

build a pipeline that we are talking about for LNG, is again, about 

an eight to ten-year prospect for a $50 billion project. 

So how you marry this up, get people away from the imperative 

of now and the concern over prices now and focused on where we 

are going to be a decade from now in terms of our need and our 

demand is a big challenge for us. 

Let me go to my colleague, Senator Heinrich. 

Senator HEINRICH. Thank you, Chairman. 

Ms. Palti-Guzman, the four corners region in my state is heavily 

invested in the natural gas industry. Because of the oversupply 

that you mentioned, gas prices have now been very low for some 

time. The region is going through some difficult economic times, as 

you can imagine. With gas prices continuing to hover around $2 

per million BTU, something like a fourth of the existing wells in 

San Juan County are losing money today. You can imagine people 

working in that industry in my state are hurting. 

What are the prospects and the opportunities for places like San 

Juan County that gas prices will soon return to more profitable levels? In particular, do you expect the increase in the use of combined cycle combustion turbines for electric power generation or the 

increases in natural gas exports to impact those prices? 

Ms. PALTI-GUZMAN. I definitely think that exports, you know, 

natural gas producers are looking for new outlets and more outlets. 

There is so much gas around. 

And so, U.S. LNG exports there have already started, that was 

yesterday at the ceremony for the opening of Sabine Pass, they 

have already sent seven cargos and then commercial operation will 

start. But we need to wait for another two years before the second 

liquefaction plans start. 

In the next two years there will be the ramp up of the Sabine 

Pass liquefaction plant, but the big increase in U.S. LNG exports 

94 

will happen beyond 2017. And then there is, at the same time, 

more pipeline exports to Mexico. 

So those are two areas where exports for U.S. natural gas producers that will have an impact on U.S. natural gas production. 

Senator HEINRICH. Thank you. 

Mr. Bordoff, you mentioned in your testimony recent methane 

waste regulations, and you stated that methane leaks can be greatly reduced at very low cost. We all know that unburned methane 

is a powerful climate disruption, pollutant. 

Have you had a chance to look at some of the particular rules, 

in particular, I point you to the Bureau of Land Management’s rule 

on methane waste? And would you expect those to conform to that 

pattern? 

Mr. BORDOFF. I think the regulations that have been proposed do 

a good job of trying to find the lowest cost opportunities to reduce 

methane emissions. We know that methane emissions, when the 

right steps are taken, can be reduced for just pennies on the dollar. 

Really good work by the Environmental Defense Fund, many 

universities and others have found opportunities to find different 

leaks in the pipeline system, different areas of production and take, 

you know, take targeted steps that are quite cost effective, again, 

considering the cost of methane emissions as a fairly potent climate 

forcer. So I think those are steps that are quite sensible to take 

where the, you know, benefits exceed the costs. 

Senator HEINRICH. Thank you. 

Ms. Minter, what do you see as some of the near-term impacts 

that you would expect on crude prices and refined products as well 

now that restrictions on exports of crude oil have been removed? 

Ms. MINTER. I think it’s really important to realize that for all 

practical purposes the U.S. has been exporting oil as a net export 

via refined products since 2012. 

Senator HEINRICH. Refined products. 

Ms. MINTER. So what we’re seeing now is refining margins across 

the board for the U.S. refiner are collapsing as we have this oversupply of refined product. 

So allowing exports for crude out the door will probably be helpful to some producers of a particular grade. However, we’ve really 

got to resolve the overall glut of refined products that we’re finding 

in inventories and they’re also being reflected in low prices before 

we can recover. 

Senator HEINRICH. Madam Chair, in the interest of letting a few 

more folks get to questions before we go to the floor, I am going 

to go ahead and give my time back. 

The CHAIRMAN. Senator Cassidy? 

Senator CASSIDY. Ms. Minter and maybe Mr. Bordoff, I am 

struck by the fact that it is easy to look at the capital expenditures 

and all the infrastructure in the DUCs. I would have said ducks, 

so thank you for making it clear. 

But the one thing I have heard consistently and see articles pertaining to is that we are also losing a work force. That folks who 

have gone to North Dakota to work in the Bakken may decide they 

don’t wish to stay there. Because the prices have fallen now, they 

have moved back. They marry, whatever. 

95 

Do you have any comments upon the age of our current work 

force and the difficulty in replacing well-trained workers with those 

who have previously not be trained? 

Ms. Minter first. 

Ms. MINTER. There is definitely some concern in how quickly 

we’re able to respond when the price signal comes. As producers 

and service companies sit in this low price environment for a 

longer and longer period of time, producers may not have adequate 

cash to address the price signal when it comes to bring production 

back on. And resultingly, we may not have adequate, you may not 

have the ability to bring qualified crews back in, in a quick period 

of time. 

If that’s the case where we go longer and longer in between the 

cycle of, you know, ramping production up and keeping it and dropping it back down, you could potentially see more extreme price 

spikes as producers have to throw money, really, out into the work 

force to bring back qualified workers. 

Senator CASSIDY. So even the presence of these drill but not completed or uncompleted, we would still be susceptible to that because 

those are only on the cusp of production but nonetheless without 

an adequate work force even those might not be quickly? 

Ms. MINTER. Right. 

And I think, like I said, what I was trying to say, is I think it’s 

going to be a function of the amount of time that we sit in this low 

price environment. There’s real potential that the commodity cycles 

can become very shortened. You know, given the recent price rise 

we’ve seen lately to this low 40s price area, it would not surprise 

me to see some producers actually have production coming back on 

right now from these docks which in turn will force us to slow back 

down. However, if we sit in a sub 40 price environment for a year 

or 18 months then you’re absolutely right, there could be a risk of 

losing. 

Senator CASSIDY. So there is one theory that the Saudis are 

doing this on purpose to drive out, not just our shale production, 

but also to make non-profitable our offshore work. The offshore 

work, of course, continues to produce no matter, and that is the 

bigger threat to the Saudis, so some say. 

In a sense, if that is true, just imagine that it is, the Saudis sort 

of predatory pricing is actually not only hurting those 750,000 people who are employed but it is actually subjecting our economy to 

greater risk for price spikes going forward. Fair statement? 

Ms. MINTER. I think it’s a fair statement to say that we are in 

a very competitive global market and right now producer behavior 

across the globe is one of everybody trying to get their market 

share any way they can. 

On those offshore projects that you referenced, they do produce 

and they will produce. In the long run they are much more capital 

intensive projects and they are longer-term projects. 

Senator CASSIDY. So in a sense, those are a better hedge against 

future price spikes because they are going to produce no matter 

what. 

Ms. MINTER. Possibly, yeah. 

Senator CASSIDY. Yes. Again, that would probably be the reason 

for us to think about that. 

96 

Mr. Bordoff, similarly, you said that we should not allow current 

pricing to dictate that. Would you agree that we should remain interested in those outer continental shelf projects with such tremendous capital expenditures to develop that are going to produce? 

Mr. BORDOFF. Well I mean, I would leave it to the companies 

that are investing billions of dollars in capital to, you know, make 

a decision about whether they’re interested in these—— 

Senator CASSIDY. The only reason I say that, by the way, is that 

it is also Federal policy. Mr. Cass references that, but Secretary 

Jewell recently said now is not the time to begin producing oil off 

the Atlantic Coast. 

I think it is, kind of, among other things, ignoring the time frame 

it calls to develop such things. I’m sorry, continue. 

Mr. BORDOFF. Yes, no, no. 

I think the point, I mean, the first thing I would say is I think 

the honest answer is we don’t totally know because we’ve never 

been through an extreme boom/bust cycle in the area of tight oil 

production before. And it’s a really—— 

Senator CASSIDY. Boom/bust? 

Mr. BORDOFF. Shale oil, right? So the question of how quickly at 

what price does it take for U.S. tight oil production to start growing again, on average. The Basin is very different, and how long 

does that take to restart is an open question. 

But I think it can take a little bit longer than some people think, 

maybe nine months, maybe 12 months because you have to get the 

capital markets to open back up again. You need the workers to 

come back and people have moved off to do other things. You need 

the rigs to come back. 

It is true that the drill but uncompleted wells can help. That’s 

probably a slug of a couple hundred thousand barrels a day. So the 

question is how much do you need shale to—— 

Senator CASSIDY. Let me stop you on that because I was struck 

that even though we have this incredible decline in rig count we 

still have not nearly the same amount of decline in production. 

Mr. BORDOFF. Right. 

Senator CASSIDY. And so it seems as if those DUCs have a potential, because I am assuming they are doing those in the upgraded 

or the high graded sites. Ms. Minter, would you agree with that? 

Ms. MINTER. Yes, actually we estimate that the DUC inventory, 

that the spare capacity, could potentially be close to one and a half 

million barrels a day if all of that production were brought online 

at one time. 

Senator CASSIDY. One and a half million a day? 

Ms. MINTER. Barrels, yes. 

Senator CASSIDY. Yes. 

I’m sorry. Mr. Bordoff, I am over my time, but if you can quickly 

answer? 

Mr. BORDOFF. No, so I think that there are, obviously, different 

estimates out there about exactly what the total volume of drill but 

uncompleted volume could be brought online quickly. 

So the point I was trying to make was in response to some supply disruption in the world the way, four or five years ago we have 

a million and a half barrels’ loss of Libyan supply with very narrow 

97 

margin of spare capacity being held by OPEC, mostly Saudi Arabia 

now. 

Are we in for more price volatility moving forward? And the 

question is to what extent drilled but uncompleted wells can very 

quickly come back or high levels of inventory can quickly provide 

some support. But if you need to wait for the U.S. to respond and 

that takes six, nine, 12 months, that may mean, as you said, prices 

sort of over and under shoot which means more volatility moving 

forward, potentially. 

Senator CASSIDY. I yield back. Thank you. 

The CHAIRMAN. Thank you, Senator Cassidy. 

Just for the information of members, the first vote has started. 

Again, we will keep the Committee moving through these votes. 

Senator Franken? 

Senator FRANKEN. Thank you, Madam Chair. 

Mr. Bordoff, you write in your testimony about the benefits from 

widespread use of hydraulic fracturing technology or fracking in 

the oil and gas sector. These benefits include lower oil and natural 

gas prices for consumers, of course. 

For natural gas the Department of Energy also states that when 

used in modern, efficient power plants it emits half as much carbon 

dioxide emissions as coal. 

However, we hear a lot about possible downsides of fracking. 

Many argue that the climate benefits of natural gas electricity generation verses coal is entirely dependent on how much methane 

leaks, something Senator Heinrich brought up about its potency as 

a greenhouse gas. Some states and localities have even banned 

fracking because of concerns about the impacts on the water table 

and water resources. 

What I would like you to do is talk about the tradeoffs of hydraulic fracking as you see it because this is an argument that we are 

having right now. 

Mr. BORDOFF. Yes, and it’s a really important one. Thank you for 

the question, Senator Franken. 

It—we’ve seen over the last five, six, seven years U.S. oil production almost double before it started to recently tail off. We’ve seen 

a very large increase in natural gas production. You know, just ten 

years ago in 2005 the Energy Information Administration projected 

that this year or last year, in 2015, we’d be importing about 18 or 

19 billion cubic feet a day of LNG imports. 

And now we just had our first export of LNG, and we’ll soon be 

a net exporter. That has added jobs. It has added a boost to the 

domestic economy. 

I think Ms. Palti-Guzman talked about the potential geopolitical 

implications that increased, that U.S. LNG exports could have and 

increased global trade could have in providing more diversity, 

optionality, sources of supply whether you’re in Europe dependent 

on Russian pipeline gas or in Asia paying very high prices for LNG 

a couple of years ago. 

So there are a host of economic and geopolitical benefits and in 

some cases we have seen cheap gas as one of the drivers, not the 

only driver, of displacement of coal which is high pollution, including but not limited to, carbon benefits here in the U.S. 

98 

There are really important and very valid concerns that have 

been raised about the environmental impacts of shale production. 

They need to be understood, better than they are today. They need 

to be properly regulated. 

We need different states and localities to reach different judgments about the level of risk that they’re going to decide to accept 

and different places have different risk associated with them. 

And whether it’s the risk of moving a lot of oil by rail or the risk 

of seismic activity, if you’re doing underground injection of waste 

water, other things. These are real important issues that shouldn’t 

be dismissed with the right set of regulations, with better understanding and with really good, local, State and Federal, there is a 

Federal role to play, in regulating this activity to make sure it’s 

done safely and responsibly. Hopefully we can find that right tradeoff between the risks and the benefits. 

Senator FRANKEN. Sure. 

One of the other tradeoffs, I mean, it is replacing coal in many 

coal-fired plants. Is an over reliance on cheap natural gas going to 

inhibit the deployment of renewable energy generation? 

I want to ask Ms. Minter a question. I am interested in your research to break even prices of production or the necessary global 

market price for companies to make a profit in different geological 

formations. I noticed in your testimony that the average, breakeven price for oil companies drilling in the U.S. shale formations 

is about $45 to $55 per barrel of oil. Is that correct? 

Ms. MINTER. What we have heard from producers in conversations with them is that yes, they tell us the break-even prices are 

between $45 to $55 per barrel. 

This varies broadly, though, across the U.S. depending upon play 

and the infrastructure available as well as the quality of oil. Not 

all oil is the same oil, and lighter oils are actually discounted significantly in the marketplace so those producers will probably need 

a higher price point to come back on. 

Senator FRANKEN. Okay. I see I am out of time, and I know we 

have votes so I will submit a couple questions for the record. 

Ms. MINTER. Thank you. 

Senator FRANKEN. If that is okay, Mr. Chairman. 

Senator BARRASSO. Absolutely. 

Senator FRANKEN. Thank you. 

Senator BARRASSO [presiding]. Mr. Bordoff, I want to discuss the 

effects of the low oil prices nationwide. In your testimony you stated the oil price fall is providing less of a macro economic boost and 

it may have been anticipated. You explained that while there was 

some boost to consumer spending from the lower gasoline price, it 

was much lower than would have been expected. And in the magazine, The Economist, it said exactly the same thing that you said. 

You also said that the net benefit to the U.S. is smaller because 

the U.S. is such a large producer and that the big employment 

gains from the shale boom are now being thrown into reverse. Finally, you stated that because the U.S. is a much smaller net oil 

importer than it was before, when the price falls more of the consumer benefit comes at the expense of domestic producing/producer 

revenue. 

99 

So the question is would you please expand a little bit upon your 

comments and explain how lower oil prices are providing far fewer 

economic benefits than in years past? 

Mr. BORDOFF. Yeah, thank you for the question, Senator Barrasso. 

If you, I think the White House Council of Economic Advisors in 

a report, recent report, looked at the domestic economic benefit of 

an oil price drop and there’s, sort of, been a rule of thumb that a 

$10 move in the price of oil might boost GDP somewhere between 

1.1 and 2.0 percentage points. We’ve seen about a $50 on average, 

and it’s been larger than that at certain points drop. And they estimated that in 2015, relative to ’14, the positive GDP in fact was 

0.2 percentage points. So that’s small. 

And what they broke it down and as the consumer benefit was 

about 0.5 percentage points which is the low end, but roughly what 

you’d expect based on the historic rule of thumb. But you—they 

subtracted from that 0.3 percentage points because of decline in 

drilling and mining investment. And so partly because consumers 

coming out of the great recession are saving more of the money 

they’ve saved with lower gasoline prices, paying down debt and 

other things. That’s reduced the positive impacts on what, partly 

because we are a much larger producer and industry is a much 

larger, is a larger part of the economy. And that’s taken a hit. 

And then the third part is that because we’re a smaller importer 

when we spend less on gasoline that has a distributional impact 

between either benefiting or hurting producers or consumers but 

more of that savings or increased spending on gasoline is circulating within the U.S. economy rather than flowing overseas. So 

the result of that is that when we have lower gasoline prices consumers save and producers lose. 

The flip side is when prices are inevitably going to spike again 

we’re also a little bit more resilient from a macroeconomic perspective because when consumers spend more and more of that increased spending circulates within the U.S. economy. 

Senator BARRASSO. Now thinking about your article that you 

wrote last month for Foreign Affairs, it was titled, ‘‘The United 

States turns on the Gas, the Benign Energy Superpower.’’ In the 

article you discuss how exports of LNG from the United States will 

pose serious challenges for Russia. You make a point that over the 

last several years Russia has placed its bets on vast strategic gas 

pipeline projects such as the very controversial, the Nord Stream 

Two, that would connect Russia to Germany bypassing Ukraine. 

You go on to say that Russia will try to retain its market share 

by lowering prices and using its spare production capacity to crowd 

out U.S. imports from the European market. Many European leaders remain concerned about projects like Nord Stream Two, the gas 

pipeline. It is only going to increase Russia’s share of Europe’s gas 

market, I believe, and reduce Europe’s energy security. 

You served as Special Assistant to President Obama and Senior 

Director of Energy and Climate Change at the National Security 

Council. Do you believe the Obama Administration is actually 

doing enough to discourage Germany from going forward with this 

Nord Stream Two gas pipeline? 

100 

Mr. BORDOFF. I don’t—it’s been a long time since I’ve had a clear 

sense of exactly what steps the Administration is taking, so I don’t 

have a strong view on that. 

Obviously, I know the Administration’s position is a lot of the 

similar concerns that you have over the Nord Stream Two pipeline. 

And a lot of steps, a lot of positive steps, I think, have been taken 

by the U.S. Government, by the Obama Administration, by the Energy Department and the State Department to help encourage Europe and work with European countries to increase diversity of 

flow and optionality of gas supply. 

So I think what makes Europe more secure in the face of heavy 

dependence on Russian gas is not to get off Russian gas. That’s 

probably not economically viable and it’s a fairly low cost source of 

gas. 

What makes them more secure is when they have increased pipeline interconnections, increased reverse flow capabilities. So that 

reduces the leverage that Russia might have to try to threaten to 

turn off the taps of gas supply because you can look elsewhere. You 

can bring in supply from LNG or from other sources. 

I think a lot of progress has been made in working with countries, and this is a big part of the European Union’s Energy Union 

Package proposal to try to work with countries to make the European market more connected. 

Senator BARRASSO. Well I was just curious. It just seems to me 

that top ranking officials within the Administration are not really 

publicly speaking out against Nord Stream Two. Do you agree with 

that? We just have not heard much from the Administration on it. 

Mr. BORDOFF. I feel like I can’t—I feel like I have heard about 

it. I can’t go back and say—— 

Senator BARRASSO. That is fine. 

Mr. BORDOFF. Particular things here. But I do think the Administration has expressed concerns about what Nord Stream Two 

might do to European energy security. 

Senator BARRASSO. Thank you. 

Senator Gardner? 

Senator GARDNER. Thank you, Mr. Chairman. Thank you for the 

opportunity for questions. Thanks to the panelists for your time 

and testimony today. 

Mr. Bordoff, in your opening statement you talked about geopolitical risk and political dynamics. There are those who wish to 

ban hydraulic fracturing in Colorado and at the Federal level as 

well. But we have seen, as you have just had an exchange about, 

in terms of natural gas we have seen an increase in natural gas 

as a foreign policy tool thanks to the development of energy 

through hydraulic fracturing. 

Should this hydraulic fracturing ban effort take hold, do you believe that that presents a political dynamic, a geopolitical risk, to 

foreign policy as well as energy stability in this country? 

Mr. BORDOFF. So, as I said in response to the questions from 

Senator Franken, I think that, obviously, you need states and localities to feel comfortable moving forward with this form of energy 

production. And when they do you need the right form of regulation 

in place to make sure that natural gas, however it’s produced, 

whether shale or otherwise, is produced safely and responsibly. 

101 

And then if that moves forward that increased domestic energy 

production and supply into the global market, I think as I wrote 

in Foreign Affairs, can have significant geopolitical benefits because the U.S. is indexed to Henry Hub prices. We have total destination flexibility and diversity of supply and our gas. 

Senator GARDNER. I understand what you are saying but I think 

there are some who, regardless of the regulatory system put in 

place, structure put in place, would ban hydraulic fracturing. They 

have said as much on national television, regardless of the regulatory environment. 

So do you believe that a ban, for instance, if you were to ban hydraulic fracturing on public lands and other areas of this country, 

do you believe that that would create a political dynamic that 

would put at risk our ability to use energy as a foreign policy tool? 

Mr. BORDOFF. I think that there, as I said, there are a lot of benefits to increasing domestic energy production. One of those is geopolitical. So that would be reduced if we had less domestic energy 

production. 

And in terms of the risks and the tradeoffs that people make between the risks and benefits, you know, that’s for Federal, State 

and local regulators to decide. 

Senator GARDNER. But how would a ban on hydraulic fracturing 

affect domestic oil and gas production? 

Mr. BORDOFF. Well, I mean, we’ve seen an increase of U.S. oil 

production from 5.0 to 9.7, at its peak, million barrels per day. And 

that—— 

Senator GARDNER. So it would decrease. It would decrease domestic oil and gas production, correct? 

Mr. BORDOFF. Yes. 

Senator GARDNER. And it would decrease our ability to use that 

as a foreign policy tool, correct? 

Mr. BORDOFF. It would—— 

Senator GARDNER. Like you just said, I believe you just said that 

through your answer. And if I misunderstood you, please correct it. 

Mr. BORDOFF. Well I think the question is whether we use it as 

a foreign policy tool in the way some other major oil producing 

countries do or whether we allow markets to decide where to invest 

and where to have oil and gas flow into the global market because 

now we have allowed oil exports because the Department of Energy 

is allowing LNG exports. And then those have impacts in the 

world. 

Senator GARDNER. But if you do not have enough to export that 

would affect our ability to use it as a foreign policy tool, correct? 

Mr. BORDOFF. If we, as a government, were to decide we wanted 

to use it as a foreign policy tool, I think it’s having geopolitical impacts that are important. 

Senator GARDNER. Right. So a decline in production would affect 

that ability. I think that is true. 

What would a ban on hydraulic fracturing do to a price of oil or 

gas? 

Mr. BORDOFF. You would see prices go up because you’d have reduced supply. 

Senator GARDNER. Ms. Minter, if you could respond to the same 

set of questions, what would happen to affect domestic oil and gas 

102 

production if these ideas were to be implemented to ban hydraulic 

fracturing? What would it do to price or to the balance of trade and 

our ability to use it as a foreign policy tool? 

Ms. MINTER. Thank you. 

Clearly much of the boom that we’ve seen in energy production 

has been driven by increased technology, driven primarily by fracturing. So one would assume that should we deny producers the 

ability to frack that our production costs would go up rather dramatically and ultimately we’ll, we will, no longer enjoy the ability 

to be a low cost provider into the global markets. 

Senator GARDNER. And it would have, certainly, negative economic impact on communities around the country, correct? 

Ms. MINTER. As far as energy production? Absolutely. 

Senator GARDNER. And the amount of jobs that would be lost 

would certainly be significant. Is that correct? 

Ms. MINTER. I cannot quantify that but one would assume there 

would be an impact to producer behavior. 

Senator GARDNER. One of the challenges we have, I think, in Colorado, of course, is Rocky Mountain-produced gas. Colorado can be 

a little bit of—the Rocky Mountain gas can be a little bit isolated, 

some people would believe it is isolated due to market access. 

And so, a question for Ms. Palti-Guzman. The Rocky Mountain 

oil and gas production may be seen as a disadvantage to geography 

to infrastructure and ports. It is why the Jordan Cove LNG export 

facility is so critically important to Coos Bay, Oregon and would be 

such a beneficial project to producers in the Western Slope of Colorado, Wyoming and beyond. So further Federal land restrictions on 

the Western Slope, like some who wish to ban hydraulic fracturing, 

present a significant challenge to our producers. 

In today’s price environment, higher fees, royalties on our Federal lands, I do not believe those are the answers, higher royalties 

on our Federal lands. How should the Federal Government be proceeding during this low price environment besides lowering higher 

fees and royalties on our producers and besides approaching things 

like hydraulic fracturing bans to encourage producers to have more 

ability to develop their resources on public lands? 

Ms. PALTI-GUZMAN. To your previous question on what would be 

the impact of the ban on hydro fracking I think first of all it would 

be a psychological impact for buyers all around the world that the 

U.S. is not open for business and that there would be potentially 

less for exports. 

And that could fit into our earlier discussion on Nord Stream 

Two, for instance, what Russia is doing in Europe is creating frack 

underground. So they are ready to build an expansion of the pipeline even without new long-term contracts. So without even knowing if demand will be there, necessarily. But the infrastructure will 

be there in place. 

Same for U.S. LNG exports and the Jordan Cove potentially. 

There is uncertainty about long-term projections on demand that 

investments are being decided now for the future. 

I think same for Alaska and the western coast of the U.S. for 

new LNG and price structure. You know, there is so much competition globally between different LNG projects that delay, some delay 

103 

in Western Canada or some delay in Mozambique could be a boon 

for Alaska or the western coast of the U.S. 

So you need to look at the global LNG market evolves how this 

project can remain competitive. And I think how this LNG would 

be priced is one of the most important questions because there is 

a lot of discussion now with buyers, between buyers and suppliers 

of what will be the right price for LNG and what will be the right 

indexation. So U.S. LNG from the Gulf Coast is Henry Hub index. 

Most of the LNG in Asia is still oil indexed. 

But there is a lot of push to create a hub in Asia. And in Europe 

there are already some hub index gas prices. So in the future the 

pricing of LNG will be much more diverse with different source of 

indexation. And if a project like in Jordan Cove or in Alaska are 

offering a more innovative pricing, that could be an attractive component for buyers. 

Senator GARDNER. Thank you. 

Thank you, Madam Chair. 

The CHAIRMAN [presiding]. Thank you, Senator Gardner. 

The whole discussion of geopolitics and how this all knits together is, of course, very, very interesting for us here in this country because we have gone from a nation where we thought we were 

going to hit peak oil. We thought we were building LNG import terminals rather than trying to figure out ways to export. All of a sudden, we are in the game when it comes to the geopolitics of our resources. 

I was reminded of an article I read a few months back. It was 

about a community in Lithuania, I believe, that celebrated the arrival of an LNG tanker into the community with a parade and fireworks. The final line in that article from one of the community 

leaders was LNG means freedom to them. Pretty simple, summing 

it up. 

Rather than take my five minutes, I am going to turn to Senator 

Warren because she has not had an opportunity to question. Go 

ahead, please. 

Senator WARREN. Thank you very much, Madam Chair. 

Mr. Cass, you said in your written testimony that, and I am 

quoting here, ‘‘Congress should not design energy development policy independent of—Congress should design energy development 

policy independent of prevailing market prices.’’ 

This was all through your work and, I think, in your testimony 

just now. You argue that oil prices are fundamentally unpredictable and that we should not make long-term policy decisions based 

on short-term fluctuations, so it makes a lot of sense to me. I just 

want to understand what that means in practice. 

The Obama Administration last month released a proposed plan 

for oil and gas leasing through 2022. As I understand it, your position is that the current price of oil and gas should not play a role 

in the Administration’s plan. Is that correct? 

Mr. CASS. Yeah. 

Senator WARREN. Good. 

The Obama Administration recently finalized a well safety rule 

for offshore drilling. I am guessing you and I might disagree on 

whether that is a good idea, but if I understand you correctly we 

104 

should not decide whether to enforce this new offshore development 

rule based on whether energy prices are high or low. Is that fair? 

Mr. CASS. I think we probably agree we need offshore well safety 

regulation, but I would also say that enforcing it should not be 

based on the market price. 

Senator WARREN. Okay, ‘‘shouldn’t’’ be based on the market price 

of oil. 

Now next year we are scheduled to reevaluate fuel economy 

standards for cars from the years 2022 through 2025. So just one 

more time, even if you do not like these standards, we should not 

change our policy based on the current price of oil. Is that right? 

Mr. CASS. I would put efficiency standards in a completely different category from production decisions and so we could—— 

Senator WARREN. Why is that? 

Mr. CASS. Well, the decisions that we make about production-related policy have implication for investments that are going to play 

out decades into the future. 

When we talk about efficiency policy I think, unfortunately, the 

problem with a lot of the efficiency policy analysis that we do is it 

only makes economic sense if we believe that government is better 

positioned than consumers to, for instance, decide what kind of car 

they should drive. 

Senator WARREN. Hold on just a sec here. 

I am not debating with you whether or not we believe in more 

efficiency standards, right, what the CAF ́ E standards should be, 

who you think is the best decision maker of the role of the government here. I am just asking that single question. Whether or not 

the current price of oil should affect long-term planning like the efficiency standards? And you have told me in other areas, no, the 

current fluctuations in price should not matter. I just want to know 

why you think they should matter then on CAF ́ E standards? 

Mr. CASS. I think you might be misunderstanding me. I think 

that efficiency standards also should be set independent of shortterm prices, but I also think that that means that the cost benefit 

analyses conducted to justify those efficiency standards need to recognize that the prevailing price, at some point in time, may not be 

the long-term price. 

Senator WARREN. Well, fair enough then. 

So, I just want to make sure then, it sounds like we are coming 

to the same place. And that is right now, as we are trying to decide 

what the appropriate standards are for 2022 through 2025, the current price of oil just simply should not bear on that. 

Mr. CASS. I think that’s correct. 

Senator WARREN. Good. 

Mr. CASS. But I would also say that EPA’s cost benefit analysis, 

assuming a $4 per gallon price of gasoline in setting those efficiency standards was probably not well researched. 

Senator WARREN. Well, but the question is should we make a 

change now because we have seen a change in oil prices. I think 

what you are saying, you said pretty consistently, I will quote you, 

‘‘The same policies that make sense in a low price environment, 

make sense in a high price environment.’’ 

You know, I think the relevance of this is that the auto industry 

agreed to these fuel economy standards back in 2012 and now they 

105 

are arguing that we should weaken these standards because oil 

prices are low. I am glad to know that even conservative policy experts might not like the fuel economy standards or the process by 

which they’re done, but that low oil prices today are not sufficient 

reason to change them. 

So let me ask Mr. Bordoff another question. Do you think that 

today’s low energy prices are a good reason to roll back the policies 

that protect the environment and consumers? 

Mr. BORDOFF. I do not, as I said in my testimony. I think government’s role is to protect air and water, to correct market failures 

like pollution, to look at permit decisions on energy infrastructure 

and do that smartly, cost effectively, weigh cost and benefits, but 

do that largely independently of short-term fluctuations in the energy price. 

I would say regulations do/can impose, potentially, a cost on consumers and on the industry, but the lack of regulation can as well. 

From Flint to the Aliso Canyon in California we can see the cost 

to the communities and to the environment when something goes 

wrong. 

Senator WARREN. Well, thank you very much. 

You know, we hear over and over how low energy prices mean 

that we need to go easy on oil and gas companies and that auto 

makers, despite their track record of success, cannot possibly be expected to meet fuel economy goals. But if we really want policies 

that are going to work for the long-term, policies that protect consumers and protect the environment, policies that encourage innovation and that create predictability, we cannot reverse course 

every time prices shift. 

I think that means upholding tough, achievable fuel economy 

standards and it also means not backing down just because the industry does not like it. 

Thank you, Madam Chair. 

The CHAIRMAN. Thank you. 

This is probably directed to you, Mr. Cass and Mr. Bordoff. This 

is regarding the position that some of my colleagues have suggested that this country needs to embark on and that is a policy 

that has been dubbed the keep it in the ground movement. That 

basically these resources that we are talking about here this morning, oil and gas, should be best kept in the ground, apparently, for 

some future point in time or from an environmental perspective. 

I am assuming that I know what your answer is and Senator 

Gardner alluded to it when he was speaking about a ban on 

fracking, but this is broader than just a ban on fracking. Do you 

think that this is wise Federal policy to basically prohibit production of fossil fuels on our Federal lands? What do you think of the 

policy or the proposed policy? 

Mr. CASS. No, I don’t think it’s sensible for two reasons. One is 

that, even if one’s primary focus is combating climate change, the 

keep it in the ground policy will do almost nothing to address that 

goal. And the second problem is that we continue to, for instance, 

sell millions of cars onto our roads in America and build all of the 

infrastructure that’s going to require the consumption of oil and 

natural gas. So the only question is whether we’re going to produce 

that energy ourselves or import it. And as long as our economy is 

106 

going to consume that energy, we’re certainly best served to be producing it here as well. 

The CHAIRMAN. Mr. Bordoff, if you can speak to that, but also 

speak to the energy security and the national security implications. 

I think Senator Cassidy also alluded to the jobs perspective. But 

when we talk about a policy that would take us in a direction that 

says we are just going to keep these valuable resources in the 

ground. Your comments and thoughts, Mr. Bordoff? 

Mr. BORDOFF. Yep. Thank you for the question, Chairman Murkowski. 

I think that on the supply side what is important, as I said earlier, is having the right government regulations to make sure that 

oil production, gas production, hydrocarbon production is done safely and responsibly, protects air and water resources. 

I think what we need to do is we need to take—put in place policies that address problems like climate change that internalize social costs. And over time that will reduce demand, potentially, for 

hydrocarbon resources and that will have an effect over the long 

term of reducing the supply that is produced. 

I think that is the more effective way of achieving the goals of 

reducing carbon emissions by focusing on policies that reduce demand. And if all one did were to ban domestic production in a certain place, demand would still be there and it’s going to be produced somewhere in the world. 

And secondly, as you said, there are economic and geopolitical 

benefits that need to be considered that would be lost and that 

need to be considered and weighed against, you know, potential environmental risks and make sure that we manage those with the 

right regulations. 

The CHAIRMAN. Thank you. 

Mr. Ratner, I mentioned in my opening comments and it has 

been suggested here that the lag time between the decision to move 

on a lease, whether it is oil, natural gas and actual production, is 

oftentimes a decade plus, and my example was ANWR. We have 

a chart that shows that year zero when legislation could be enacted, producing oil still requires eight to 12 years of work. 

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You have an EIS that would take two to three years. Drilling a 

single exploration well, another two to three years. BLM approving 

a production plan, one to two years. Then constructing the pipelines, the fabrication, the treatment plants, drilling pads, well complications, you know, another three to four years. This all assumes 

that there are no legal challenges and that the exploration is successful and on and on and on. 

The question to you is whether it stands to reason that the oil 

that we are consuming today, that we are seeing here in this country, was made possible by regulations and commercial decisions 

that were made eight, ten, 15 years prior to that time. Is that a 

rational, reasonable assumption to make? 

Mr. RATNER. Yes, I believe that’s correct. 

I mean the industry, as you know, plans out when they’re looking forward to how they evaluate the market as things have been 

said, going out to five, ten, 15 years based on the existing regulations at the time and where they think the regulations may be 

going as well. 

The CHAIRMAN. When we are thinking about the direction that 

we take, recognizing the importance of some certainty and stability 

and transparency, when it comes to our regulatory process, not 

only for today, but for what it means for future development, I 

think is key. 

Senator Cassidy? 

Senator CASSIDY. Ms. Palti-Guzman, you mentioned in your testimony that one of the contingencies as to whether or not there 

would be a market for our liquefied natural gas is whether there 

is a price on carbon. 

Europe does have a price on carbon, correct? I mean, a significant price on carbon. Obviously BTU per carbon is much more favorable for natural gas than coal. So I just pose that question because it seems as if you were putting that as a variable, but it does 

not seem a variable at all because it seems already in place. 

Ms. PALTI-GUZMAN. I think the current price on carbon is maybe 

not the right one, and what we’ve seen in most European countries 

is that natural gas has not been competitive with coal over the 

past. 

Senator CASSIDY. Excuse me? 

So even if that price has fallen as it appears to be, and it does 

seem a matter of time before it is disassociated from the price of 

oil, if nothing else, there is Azerbaijani, there are the Israelis. 

There are all these other pipelines bringing gas. 

So I am asking, I do not know this at all. Do you imagine that 

that price will come up with a hub, as you referred to, and at that 

point will become competitive with the price of coal? 

Ms. PALTI-GUZMAN. So what we’re seeing right now in Europe is 

a price war. And we see the established producers, Russia and Norway, bringing the prices down at record bottom prices, around $4 

per million BTU to price out other competitors, notably LNG suppliers. 

So the price of natural gas right now in Europe is really low, and 

it could potentially be triggering more coal to gas switching in 

power generation. And last year, in 2015, for the first time we saw 

a little recovery in natural gas demand in Europe. That was, you 

109 

know, I think it was since, for the past four or five years we saw 

a decline in natural gas demand in Europe. 

So there is no obviousness of the role of gas in Europe if gas 

doesn’t remain competitive, and there is really a fight for market 

shares between all the different suppliers because—— 

Senator CASSIDY. Now I get that, but just in the interest of time, 

as we drive that price down there could be, if you will, more of an 

uptake in use. I say that because, obviously, it would be for those 

concerned about carbon emissions, it would be a way to fuel your 

economy, literally, with significantly less carbon emissions. 

Ms. Minter, I read a very interesting book, The Accidental Superpower, and it suggested that fracking is really not something that 

will go worldwide because it takes a certain geologic formation. It 

takes certain capital markets. It takes a certain risk and willingness to tolerate risk that the U.S. is fairly kind of unique in. Would 

you agree with that? 

Ms. MINTER. Absolutely, thank you. 

It is really important, when we think about what’s happened 

here in North America as far as the American energy story, to realize that this is the only place on the globe where we have this 

unique set of investment, of land ownership—— 

Senator CASSIDY. So let me ask then. What about the Chinese, 

who do not have our same sort of property rights, but that in itself, 

they can basically say you have now volunteered your land, I gather? Would they be able to reproduce because that has been mentioned as a possibility? 

Mr. MINTER. It’s clearly a function of geology. 

It is believed that the U.S. only holds 30 percent of the global 

shale reserves. That being said, we also have 60 to 100 years of infrastructure in the ground that allowed us to bring this production 

to bear on the market so quickly. 

So given the fact that private equity has been willing to invest 

in the U.S. and U.S. infrastructure, it allowed us to develop this 

rather rapidly. It will take a while for other countries to be able 

to bring this type of production story into the global—— 

Senator CASSIDY. Even countries which are somewhat authoritarian and can override local considerations? 

Ms. MINTER. I think the lack of infrastructure is really going to 

be their whole—— 

Senator CASSIDY. So green field is more difficult? 

Ms. MINTER. Yes, absolutely. 

Senator CASSIDY. Good. 

Mr. Cass, I am really struck, man. Typically, around here if you 

say states are going to take over permitting on anything, whether 

it is driver’s licenses on up, people say oh, we cannot do that. You 

are saying why don’t we turn over permitting on Federal lands to 

the states involved? Could you please elaborate on that? Again, 

fear mongers will say, we cannot trust the states, whatever our 

founding fathers said about federalism we must absorb that power. 

Will you comment? 

Mr. CASS. Sure. 

You know, the reality is that states already operate fairly comprehensive regulatory and permitting regimes because of all the 

work they do on private lands and state held lands. And so, with 

110 

respect to the fracking related boom, in particular, almost all of 

that development has occurred outside of Federal control, probably 

not entirely by coincidence. And as a result it’s really the states 

that are the centers of expertise in a lot of this type of activity, and 

frankly have demonstrated they can do it far more quickly than 

Washington can and every bit as effectively. 

Senator CASSIDY. So if there is a learning curve, the states have 

done better with the learning curve, only because they have been 

in the curve, as opposed to the Federal Government which has excused itself, for whatever reason, and therefore would not have 

that expertise. 

Mr. CASS. That’s definitely true there further down the curve. 

And I also think that the political dynamics tend to be different. 

You know, there are going to be places, like New York State, where 

allowing the state to control things might lead to really bizarre—— 

Senator CASSIDY. Stagnation. 

Mr. CASS. And counterproductive policies. 

But the flip side is that states that are focused on economic development and value their energy resources, are going to be a lot 

more focused on developing them well and frankly care a lot more 

about their local environment than you would expect from a Washington bureaucracy. 

Senator CASSIDY. I accept that totally. I am sure others would 

not, but it makes total sense to me. 

Do you mind if I ask one more question, Senator Heinrich? 

Senator HEINRICH [presiding]. Sure, go right ahead. 

Senator CASSIDY. Also the new source requirement that they expanded, can you elaborate on that? 

Mr. CASS. Yeah, you know, I think it’s important to understand 

that under the regulatory environment, controlled by the EPA with 

the Clean Air Act, the Clean Water Act, we have two very different 

sets of environmental rules. One for facilities that already exist, 

and a much tighter one for new facilities that want to be built or 

expanded. 

And especially at a time like this when we’re seeing such a revolution in our energy market, different sources, different price 

points. It’s really unfortunate that you’re telling somebody, an existing coal plant, for instance, gets to play by different rules than 

a new natural gas plant would or new pipelines have to face tighter 

restrictions than existing ones would. 

And so I think, as Mr. Bordoff has emphasized, we certainly 

don’t want to ban an environmental regulation in this context. Environmental regulation is every bit as important as it ever was. 

But looking at the regulations that already control the infrastructure that’s out there, we should really be happy to keep building 

under those rules rather than tell anybody new that they need to 

hit a higher standard. 

Senator CASSIDY. I will bring this back to both something Senator Murkowski said and Ms. Palti-Guzman mentioned, the degree 

to which we continue to bruise natural gas at a low cost is the degree to which coal will be replaced worldwide with natural gas, if 

only because that initiates the price war, is the degree to which 

there is less carbon emissions. So if you cutoff the carbon here you 

are penny wise and a pound foolish if carbon is your concern. 

111 

Mr. CASS. That’s exactly right. 

And I think it’s important to understand that the United States 

has been a leader in seeing reductions in its carbon dioxide emissions over the past decade. That’s almost entirely the result of our 

increased use of natural gas. Natural gas has reduced our emissions about 13 times faster than solar power has. 

Senator CASSIDY. Yes. 

I have really enjoyed the panel. Thank you all for your expertise. 

I yield back. 

Senator HEINRICH. Thank you, Senator Cassidy. 

Mr. Bordoff, I want to actually look a little bit at that assumption which is that because the carbon dioxide emissions from natural gas are approximately 50 percent over those of coal, that the 

net impact for climate is twice as effective is a 50 percent reduction. Now assumed in that is that you actually capture that natural 

gas and that you are not putting methane, which is a very powerful 

driver, directly into the atmosphere unburned. What role do you 

think, if that assumption is to be correct, what does that mean for 

our policies with regard to making sure that we do not waste methane? 

Mr. BORDOFF. As I said earlier, that I think it means some really 

good research and studies have been done showing that at fairly 

low cost for just cents on the dollar, you can put smart policies in 

place that require people, gradually over time, building the necessary infrastructure to capture methane and make sure that it’s 

not leaked or vented. And if we do that and I think it’s a solvable 

problem. I mean I think natural gas—— 

Senator HEINRICH. Right. 

Mr. BORDOFF. Has had enormous geopolitical and economic benefits, as we talked about, the shale boom. 

Senator HEINRICH. We have talked a lot about the economics of 

that. 

Mr. BORDOFF. Yeah. 

Senator HEINRICH. But also within the climate piece of that. 

Mr. BORDOFF. Right. 

Senator HEINRICH. All assumptions for those improvements only 

hold if we actually use the methane for the purposes that use the 

natural gas, burn it and then release carbon dioxide as opposed to 

unburned methane into the atmosphere. Is that correct? 

Mr. BORDOFF. Yeah. So I mean, I think the way I would put it 

is I think cheap gas helps lower the cost of implementing climate 

policy. It has been one of the key drivers that has led to a substitution away from coal and help drive a reduction over the last decade in U.S. carbon emissions. Cheap gas alone does not solve the 

climate problem. 

Senator HEINRICH. Sure. 

Mr. BORDOFF. Or get to the kinds of reductions that we need. 

I’d also underline, as Senator Franken said, renewables or nuclear. But with climate policy, strong climate policy in place, that’s 

done well, that’s cost effective, having lower priced rather than 

higher priced natural gas can help achieve the carbon reduction 

targets we have at a lower overall cost to the economy. 

Senator HEINRICH. Well said. 

112 

These policies also can provide additional savings for consumers 

if they are well crafted. If you look back at the CAFE ́ standards 

that were put in place in 2007, they are estimated to save consumers $140 billion by 2030, a very substantive amount. 

Do you have thoughts for the impact of low prices on policies like 

that and whether or not we will continue to have the right incentives to utilize these resources conservatively and efficiently in the 

face of low prices and how you deal with that swing in commodity 

prices because it sends different market signals at different times? 

Mr. BORDOFF. Well consumers definitely respond to prices. I 

think in 2014 oil demand rose 800,000 barrels a day. Last year it 

was 1.8 million barrels a day. So the people are using more. U.S. 

vehicle miles traveled last year, I think, was up almost four percent, the highest increase in almost 30 years. 

If you look at the payback period of a Ford Fusion hybrid versus gasoline, and you assume $2 versus $4 that payback period is going 

to be 8.6 years rather than 4.3 years. So you know, that matters 

to consumers, who are cash constrained, who value, as most of us 

do, a dollar today more than a dollar in the future. 

So, it undermines the—and we’ve seen that in the sales of SUVs 

and the hybrid and electric vehicles in the U.S. today. We’ve seen 

increase in SUVs, reduction in hybrids. So, consumers are responding to that. 

I think that is why it’s more important, not less important, that 

we move forward with smart policies that over time help to reduce 

oil use. Not only because I think that’s important for environmental and carbon reasons, but also because I think ultimately 

when we think about U.S. energy security oil prices are going to 

go up and down. 

They’re going to spike and then they’re going to fall. That leads 

to the kind of volatility that, I think, can harm the economy. And 

so I think we’re more secure when our economy is less, when the 

oil intensity of it goes down. 

Senator HEINRICH. Thank you very much. 

I was going to say running counter to that trend is the electric 

car driving the Senator to my right, Senator King. 

Senator KING. Mr. Bordoff, you talked about the rise and falls in 

prices of oil, historically until the last four/five years oil and natural gas prices moved in box step. That seems to have broken. 

Do you think that that dis-relationship between those two commodities is permanent or is that a temporary phenomenon? 

Mr. BORDOFF. I think it’s going to continue to break in many respects. I mean the trends we’re seeing, and Ms. Palti-Guzman 

talked about this earlier, is where, in places around the world 

where the price of natural gas has historically been linked to the 

price of oil, that relationship is being broken. We’re seeing increased price for natural gas being set based on supply and demand for that commodity and based on gas to gas competition. 

You’ve seen an increase in the European market in spot gas sales 

and in gas sales based on gas to gas competition. It’s going to take 

some time for that to happen in the Asian market, but we’re seeing 

this really historic transformation, I think, in the global gas market driven in part by the fact that we have a surge of liquidity in 

the market from increased trade in LNG. And the U.S. along with 

113 

Australia is the primary driver of that for the next five or ten years 

at least. 

That is going to, that sort of liquidity in the global gas market, 

diversity of supply, increased competition of the kind of conditions 

that you need to allow price discovery and to allow a price for gas 

that reflects supply and demand for that commodity rather than 

supply and demand for another commodity. 

Senator KING. One of the differences is that oil is a worldwide 

commodity. Gas is not, at least at this point. 

I am from a region of the country that is becoming very dependent on natural gas. We used to be the most oil dependent region 

in New England. Now we are one of the most. Fifty-five to sixty 

percent of our electricity comes from natural gas. A lot of people’s 

homes are now heated with natural gas. 

My concern, to put a fine point on it, is unlimited LNG exports 

and their effect on domestic prices. We have had a lot of discussion 

here. I would like your view on that, on is there a point, I mean, 

we have been given very warm reassurances. Don’t worry. Don’t 

worry, it is going to be fine. The prices are not going to change. 

Yet, the experience in Australia was not that, as you know. At 

what point should we start to be concerned, because the low price 

of natural gas in the U.S. is a significant competitive advantage 

not to mention an advantage to consumers everywhere, the competitive advantage of manufacturing. Is there a point at which 

LNG exports can significantly affect domestic natural gas prices? 

Mr. BORDOFF. Yeah, no, it’s a really good question. And I would 

say I think, first of all an increased use of natural gas, increased 

global gas trade, the emergence of gas as a fuel, not just in the U.S. 

but globally, has several potential benefits, economic, geopolitical—— 

Senator KING. Big environmental benefits. 

Mr. BORDOFF. But it also may present new risks. 

I think if you look at the new—I was just, within a week or two 

ago, with the International Energy Agency in Paris. And one of the 

three mandates, the charges, that the new Executive Director, 

Fatih Birol, has from the members of the IEA, is security of gas 

supply because the world of gas is changing in really significant 

ways. And that, again, presents a lot of potential benefits, but potentially raises new risks. 

I think we need to think about what those are and what sorts 

of steps/policy measures might be taken to make communities that 

will be increasingly reliant on natural gas, secure in the event of 

unforeseen sorts of—— 

Senator KING. So far you have not answered my question. Do you 

think—— 

Mr. BORDOFF. So as—— 

Senator KING. LNG exports will affect domestic price? 

Mr. BORDOFF. So as regards the export of natural gas, anything 

that increases demand for natural gas and an export market will 

on the margin slightly push up the price of natural gas. The Department of Energy has estimated that. It’s a pretty small impact. 

I think the supply curve we think exists for shale gas is pretty 

flat. We’ve got a lot of gas in the $2, $3, $4 range, and so I think 

114 

there are a lot of factors that may affect gas prices domestically. 

The potential for LNG is just one of them. 

And I wouldn’t say that that concern would support banning 

trade in natural gas. And actually if U.S. gas prices were to rise 

too much, then the arbitrage window would close and the global 

market wouldn’t be there for U.S. LNG anymore. So it just 

wouldn’t make economic sense to do it. 

Senator KING. But the difference is pretty big right now. 

Mr. BORDOFF. Well, it’s—— 

Senator KING. Between $2 or $3. 

Mr. BORDOFF. Well, it’s narrowed a bit. 

Senator KING. It narrowed a bit. 

Mr. BORDOFF. I mean, it narrowed a bit, but yeah. 

Senator KING. But it is still a multiple of like two or three. 

Ms. Minter, your views on the relationship between LNG exports 

and domestic natural gas prices? 

Ms. MINTER. One of the big things to realize about the U.S. energy story is that it’s very much driven by the Northeastern U.S. 

which is a gas play. So, you know, we drill. There are two windows 

of production in the Northeast. One is a conventional wet window, 

and one is a dry window, I’m sorry, a wet window and one is a dry 

window. And the U.S. is the only place in the globe, really, that we 

drill in that wet window to create liquids. And with that comes associated natural gas. 

Unfortunately, and it’s almost ironic, in our five-year outlook for 

production in order to grow the way we would like to grow natural 

gas, we are looking for exports to make up almost 50 percent of our 

demand. So without that demand outlook we will not be allowed to 

grow natural gas as much as we would like to which would basically benefit all of us as consumers of low cost natural gas and also 

the producing environment. 

Senator KING. Okay. You did not answer my question either. You 

talked about a 50 percent increase in exports. Will that affect domestic natural gas prices? 

Ms. MINTER. It will. It will. However, it will, in our price forecast we come to about $4.50 in 2020. That being said, the current low 

price environment for natural gas that we’re in is not adequate to 

sustain the production growth that we’re currently experiencing. 

Regardless of LNG exports—— 

Senator KING. So $4.50 is about a doubling of current prices. 

Ms. MINTER. It’s also about 60 percent lower than where we have 

been historically. The reality is the current price environment will 

not allow us to continue this sort of production growth. 

March of this year—— 

Senator KING. I understand that $2.50 is unsustainable from a 

production point of view on the long run. My concern is going, 

heading more toward $10 or $12 which is the price in Asia. 

Ms. MINTER. We do not see that happening. We feel that there 

is adequate production response that will be profitable in that $3 

to $4 range that will invite producers to come back in and keep 

producing. 

The technology story has really changed the outlook for pricing. 

Producers are showing us that they will bring on production at volumes, at prices, much lower than anybody ever expected. 

115 

Senator KING. Good. 

Thank you, Madam Chairman. 

The CHAIRMAN [presiding]. Thank you, Senator King. 

Mr. Bordoff, let me ask you a question because you have been before this Committee when we had a hearing on our Strategic Petroleum Reserve (SPR). There has been a little bit of discussion here 

about cushion and some availability of supply that allows us to 

have some degree of control here. 

We have not really talked about the Strategic Petroleum Reserve. I, as you know, have long been one of those proponents that 

says, look, this is a reserve, and it is important that we preserve 

this reserve. If we were to see any kind of a prolonged disruption, 

how important is it that we continue a decent level of domestic oil 

production just from a national security perspective, an energy perspective? 

As you know, we have moved forward with some sale from the 

SPR, some drawdowns. Unfortunately I think we have people that 

have looked at the Strategic Petroleum Reserve as an avenue or an 

opportunity for access to cash. I call it a cash machine which is not 

what it was intended to be. 

Can you just speak a little bit to the significance of the Strategic 

Petroleum Reserve and why it is important that we keep up a level 

of domestic production? 

Mr. BORDOFF. Yeah, thank you for the question, Chairman Murkowski. 

And so I think at the time I talked about the ways in which the 

global oil market has changed over the last 40 years and the extent 

to which long term contracts and supply on particular destinations 

had given way to a very liquid, very fungible global market, potentially creating new risks. 

So whether we’re a large producer or not, whether we’re a large 

importer or not, if there’s a supply outage somewhere in the world, 

if something were to happen in the Strait of Hormuz or somewhere 

else, prices would go up globally for everyone. 

The Strategic Petroleum Reserve can play an important role in 

mitigating that. But it is a global market. So I mean, when you 

sort of think about the limitations of any stockpile that we would 

have, but I think the SPR has been a really important national security resource for 40 years. I think it is appropriate. 

And I think the Department of Energy is doing this, sort of taking a careful look at how the market has changed and does that 

make, should we as a result of that, think about changing SPR policy whether it’s the mix of crude verses refined products, whether 

we should be using it more often or less often, whether we should 

be increasing or decreasing the size, I wouldn’t do that just to raise 

revenue. 

In terms of increasing domestic supply, the impact of that in the 

global, I mean, more supply in the global market on the margin 

helps with supply with supply security, helps lower price of U.S. 

shale boom of almost five million barrels a day of supply over the 

last six years or so I think has been a, or the primary driver of the 

oil price decline that we’re seeing now. 

As I talked about earlier, I think the macroeconomic vulnerability we have to price shocks is lower when we’re less of a net 

116 

importer. So there are benefits both economic and geopolitical to increasing domestic supply. 

The CHAIRMAN. My last question is going to be hopefully a bit 

of a lightning round here. 

What I have heard from each of you is that look, oil prices go 

up, they go down. I have not heard any one of you suggest that oil 

prices are not going to rise at some point in time. It is just a question of when and how much. 

So the question to you is how do we prepare for that next increase and do we start preparing now? Can you give me a couple 

steps as to what we need to do to prepare for higher oil prices? If 

I have misread your comments and you do not think that we are 

going to see higher oil prices, you can tell me that too. But recognizing that it is more likely than not that it will come, how do we 

best prepare for that? 

We will start with you, Mr. Bordoff, and go straight down the 

line. I do not want a long answer, but maybe there are no short 

answers. 

Senator KING. Can I answer? [Laughter.] 

The CHAIRMAN. Yes, you can answer too. You are after Mr. 

Ratner. 

Mr. BORDOFF. I think it is true we’re going to see boom and bust 

cycles. We’ve seen them before when, I think after Edwin Drake 

discovered oil in 1859, the price went from $16 to $0.50 back to $8 

during the Civil War. 

So prices move around a lot, and they’re going to again. And 

that’s why I think we need to make sure we have really good policies in place, good environmental protections, all the rest, to make 

sure we have strong domestic supply. But also, as I said before, reducing the oil intensity of our economy reducing our vulnerability 

to those sharp swings in price. 

So things we can do that have economic, national security and 

environmental benefits that over time reduce how dependent our 

economy is on oil, I think that is what will make us more energy 

secure. 

The CHAIRMAN. Okay, so good policies and reduce our reliance. 

Mr. Cass? 

Mr. CASS. Well I should say I have no idea whether oil prices will 

go up significantly again or not. It seems like they might. Forty 

dollars might be the highest they ever go. 

I think the important thing is that the government play the role 

of maintaining a market and let private investors place their bets 

where they will. And so I think maintaining a good market for future investment means asking the question what kind of production do we want to be capable of in 2025 or 2030? 

What we’ve learned from the shale boom is essentially the more 

the better that to the extent that private companies would like to 

invest in developing additional resources, the better off America 

will be. And so that means creating as much certainty as possible 

in the market to encourage the investment and then providing access to the resources with all of the regulatory controls that Mr. 

Bordoff described, but providing access and providing certainty that 

if people want to make the investments they can pursue the production. 

117 

The CHAIRMAN. So the certainty there. 

It is an interesting suggestion though that we need to determine 

what level of production we actually want a decade or so from now. 

Of course, we do not know where our technologies will take us, but 

okay, I appreciate that. 

Ms. Minter? 

Ms. MINTER. Thank you. 

This will, sort of, feed off of Mr. Cass’ comments. 

Really what’s wrong with the pricing scenario right now is we 

clearly just have too much energy, right? Supply and demand and 

infrastructure all need to align themselves in order for the market 

to work. And when we’re oversupplied on one end of the equation 

without adequate demand, prices respond. 

I do agree with you that prices come up over time, and that will 

be a result of the fact that demand growth has matched, has, demand growth has kicked in. So allowing for supply and demand to 

drive the market and also allowing for policy to continue, that we 

continue to build out adequate infrastructure to allow these two 

pieces to meet, when they occur, will allow for less volatility in the 

price markets going forward. They will be higher, but they will 

probably become less volatile and you can get your product to your 

market and you have a market to get it to. 

The CHAIRMAN. Perhaps even accepting a little bit higher price 

with less volatility is not a bad thing for your economy. 

Ms. Palti-Guzman, would you agree? 

Ms. PALTI-GUZMAN. Yes, ma’am. 

So next, when we see the next increase in oil prices potentially beyond 2017 that sub-$100 anyway, I think, there will be a direct 

impact on the call for U.S. LNG as the oil index suppliers to Asia, 

for instance, will lose competitiveness again. 

But I wouldn’t take this for granted. And the U.S. needs to remain a reliable and stable supplier. And for this, maybe, alleviate 

some anxiety from buyers that one day some export license could 

be revoked or there will be a policy change. 

So for that, I think, that all the trade partnerships that are being 

discussed now are definitely encouraging more buyers to look into 

U.S. LNG and even more in the future. I think there is also an institutional role from governments in the U.S. and all around the 

world to push for more liquidity and transparency in the global energy markets. 

The CHAIRMAN. Very good. Thank you. 

Mr. Ratner? 

Mr. RATNER. Well as I said in my opening statement CRS doesn’t 

recommend policy. But I will comment on a couple observations 

that I’ve seen in my career. I think shale gas and tight oil offer a 

good example of things that came up when nobody else was looking 

at those. 

If you think back to the mid–2000’s and early 2000’s when we 

were building the LNG import terminals, there was, I mean, and 

I’ve looked back. There are no articles about shale gas and what 

it could mean. And then all of a sudden it showed up on the scene 

and changed the way that we do business. So I think things that 

encourage market efficiency both on the supply and the demand 

side are the most important things. 

118 

The CHAIRMAN. I appreciate that. 

Senator King, what do you think? 

Senator KING. Well first, I agree. I think it was Robert Gates 

who said we have a 100 percent record of predicting the future, we 

are always wrong. 

The CHAIRMAN. Yes. 

Senator KING. But some thoughts about this and particularly to 

the question of how do we keep ourselves from dependency. 

One is electric cars powered by natural gas and renewables. The 

fact that Elan Musk sold 400,000 cars in two days, I being one of 

them, is a remarkable sort of watershed. Now whether they will be 

able to deliver those cars and how much they are actually going to 

cost and all of those kinds of things. But that is an enormous potential change and natural gas supplying the electricity along with 

renewables. 

The other major development, it seems to me that could change 

all the calculus, is the development of storage capacity because 

once there is a development of grid scale storage capacity then 

things like wind and solar become much more feasible as baseload 

power sources than they are today, obviously they are not today. 

The other thing that is affecting, I think, dramatically the future 

is the decline in price of solar panels. 

But shale gas and the decline in price of solar panels, I think, 

are the two major energy developments of the last decade. When 

solar panels have gone from $70 a watt to $1.80, that is a huge 

deal. Storage is going to be an important part of that. 

I really think that over the next ten years it is quite conceivable 

that all of our speculation about oil and oil prices could change. 

I have a Nissan Leaf. The little thing, you know, on the upper 

left hand corner that tells you when your maintenance is. On the 

Nissan Leaf the little sign says at 16,000 miles, rotate tires. 

[Laughter.] 

That is it. There is no oil, there is no gas, there is no transmission. That is it. It is a direct drive electric motor. 

I do have a question, however. When does the price of gas intersect with renewable feasibility? In other words, right now at $2 

nothing can compete with gas. When do solar and wind, what is 

the line? I remember in the wind business ten years ago it was 

about $6 or $7. My sense is that it is now lower than that. Does 

anybody have any thoughts on that? 

Do you see what I am asking? In other words, right now gas is 

killing everything because the price is so low. Nothing can really 

compete. But at what point, when gas gets to $4.50, is that the 

number that will make solar and wind more competitive or coal or 

other technologies? Any thoughts? 

Ms. PALTI-GUZMAN. I don’t really see them as competitors. Actually I think that natural gas is a very flexible source of supply that 

can be the best partner to renewables, especially as long as 

they’re—they need another, kind of, base load power. 

Senator KING. Right. 

Ms. PALTI-GUZMAN. Or back up power while the—— 

Senator KING. I tend to agree with that as long as the fracking 

is done in an environmentally sound way. I think that is probably 

accurate. 

119 

Ms. PALTI-GUZMAN. And if I may add to one of your previous 

questions. 

I think that we definitely see a growing convergence of gas prices 

around the world and the U.S. will slowly, gas prices in the U.S. 

will slowly, marginally increase. But U.S. gas pricing will and the 

consumption of natural gas in the U.S. will remain very low compared to other consumers of natural gas because they are the producers while the other one needs to import. So they add the transportation costs—— 

Senator KING. Right. 

Ms. PALTI-GUZMAN. And the production costs and so on and so 

on. So even if we see—— 

Senator KING. That is about $7, isn’t it? $6? 

Ms. PALTI-GUZMAN. So right now in Asia the average for long- term and spot prices, I think, is below $8, but on the spot it’s even 

lower. It’s $5 per million BTU. And in Europe it went very low 

since the beginning of 2016 and hub index gas prices now are 

around $4 per million BTU. 

Senator KING. But LNG could not compete in a $4 market in Europe, could it? Doesn’t it cost more than that to condense it and 

ship it? 

Ms. PALTI-GUZMAN. So if you look at only the short run of U.S. LNG that can compete and land LNG cargoes at $4 per million 

BTU, but it means that the exporters have made the conscious 

choice of looking at liquefaction fees, for instance, as a sum cost 

and other variable costs that may not be recovered. 

Senator KING. Okay. You know, everything works if you do not 

have to recover your costs. 

Thank you, Madam Chairman. 

The CHAIRMAN. Thank you, Senator King. 

Thank you for very good discussion this morning on, clearly, an 

issue that is of great interest, not only to those of us in the Congress here, but the consuming public interested in knowing what 

happens to the prices that impact them whether it is the production of their power or how they fuel their vehicles, but also the 

broader perspective of the geopolitical impact that we are seeing 

because of the low prices. 

Again, the ability to predict the future here is something that I 

have not been able to perfect. I think what we try to do, as best 

we are able, is to put in place those policies that are more balanced, if you will, more evergreen, if you will, and allowing a playing field that works for a market to flourish. 

I thank you for what you have provided us today. We have yet 

one more vote, Senator King. We apologize for jumping up and 

down, but thank you again for the flexibility in your schedule. 

We stand adjourned. 

[Whereupon, at 12:14 p.m. the hearing was adjourned.] 

(120) 

APPENDIX MATERIAL SUBMITTED 

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April 26, 2016 Hearing: Challenges and Opportunities 

for Oil and Gas Development in Different Price Environments 

Questions for the Record Submitted to Mr. Jason Bordoff 

Questions from Senator John Barrasso 

Question 1: In a February 15, 2016 Wall Street Journal op-ed titled, "Germany and 

Putin's Pipe Dream," John Vinocur wrote: "you can't find a top-drawer Obama 

administration voice fighting Nord Stream 2." Mr. Vinocur went on to say that: 

"Appearing at the Munich Security Conference over the weekend, just after 

denunciations of the [Nord Stream 2] pact at the same podium by the chiefs of state of 

Ukraine and Poland, Secretary of State John Kerry left the matter out of his speech." 

During the hearing, I asked you whether the Obama Administration is doing enough to 

discourage Germany from going forward with the Nord Stream 2 gas pipeline. I also 

asked you whether you agreed with me that top-ranking officials within the Obama 

Administration do not seem to be publicly speaking out against Nord Stream 2. You said: 

"I feel like I have heard about it- I can't go back and say particular things here but I do 

think the Administration has expressed concerns about what Nord Stream 2 might do to 

European energy security." 

To your knowledge, who is the highest ranking official within the Obama Administration 

to speak out publicly against Nord Stream 2? (If possible, please provide either a news 

report about the official's statement or a copy of (or website link to) the statement.) 

RESPONSE 

There have been many comments expressing concern about Nord Stream 2 from 

Secretary of State Kerry, Assistant Secretary of State Nul and, Special Envoy Amos 

Hochstein, and others. I have provided the relevant website links and quotes to articles I 

found below: 

Secretary Kerry: 

"And we're also going to discuss one other specific issue of deep concern to me 

and to everybody here, and I think that's the Nord Stream 2 pipeline. This project 

has provoked a very heated debate on both sides of the Atlantic, and we are 

convinced would absolutely have an adverse impact on Ukraine, on Slovakia, and 

Eastern Europe. And we cannot lose sight of that." 

http :1 /www. state.gov /secretary/remarks/20 16/05/256882.htm 

Assistant Secretary Nuland: 

"Any effort to drag Europe back into single source energy dependence undercuts 

our strength and our sovereignty. From Nord Stream to Turk Stream, the risks are 

the same." http://www. state.gov/p/eur/rls/rm/20 15/nov/249587.htm 
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Questions for the Record Submitted to Mr. Jason Bordoff 

Special Envoy Hochstein: 

"Our commitment to energy security in Europe is directly linked to our concern 

for national security," Amos Hochstein, U.S. special envoy and coordinator for 

international affairs, told journalists in a conference call. 

"The U.S. is deeply concerned about a pipeline that would endanger the economic 

viability of Ukraine," he said, adding it would "deepen the rift between East and 

West." 

http :1 /www.reuters. com/ article/us-eu-gazprom-us-i dUSKCN OXX l YG 

"This is a project that will serve the Russian narrative completely from all aspects 

. and it creates just the chasm [the Russians] want in the middle of Europe," said 

Amos Hochstein, the U.S. State Department's special envoy for international 

energy affairs. 

"It revives the Cold War line as an economic one rather than a military-political 

one, with countries that have no choice but to be dependent on one side of the line 

with no option for diversity of their supplies," he told POLITICO in Washington. 

Nord Stream 2 would damage Ukraine's economy and put an "economic boot" on 

the necks of governments in Eastern Europe and Balkans, said Hochstein. 

"Nobody spends money building pipelines in a low-oil environment when you 

already have a pipeline that works just fine. That's not a commercial deal. That's 

a political deal -and a bad one." 

http://www.politico.eu/article/the-great-northern-gas-war-nordstream-pipelinegazprom-putin-ukraine-russia/ 

"All I see is an overarching political agenda to get rid of Ukraine as a transit 

country at all cost, no matter what the financial cost is," Amos Hochstein, the 

U.S. special envoy for international energy affairs, said in an interview. 

"For a country that is facing a Russian aggression militarily in the east, I would be 

very concerned that this is an attempt to undermine the economic stability of the 

country in nonmilitary means," he said. Ukraine, which had to restructure its 

debts earlier this year and has been depending on a bailout from the International 

Monetary Fund and the EU, gets around $2 billion a year in transit fees from 

Gazprom. 

http :I !www .wsj. com/articles/nord-stream-2-pi pel ine-spat -to-test -eu-commitment1450298291 

Question 2 On April 18, 2016, the Wall Street Journal ran an article titled, "EU Energy 

Chief Sees Significant Role for Iranian LNG in Europe: EU is seeking to expand 

commercial and political ties with Tehran following nuclear deal." The article discusses 

the recent visit by the European Union's Energy Commissioner, Miguel Arias Cafi.ete, to 

Iran. Mr. Cafiete believes that Iran will be able to start exporting liquefied natural gas 

2 
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Questions for the Record Submitted to Mr. Jason Bordoff 

(LNG) to Europe within three or four years. The article explains that: "Iranian authorities 

are looking to complete three LNG plants that were in the works before sanctions were 

tightened early in the decade." The article quotes Mr. Cafiete as saying that Iranian LNG: 

"fits with the security and supply strategy of the European Union." 

A. Do you have concerns with the European Union developing a dependence on 

Iranian LNG? 

RESPONSE: Yes, I have concerns with the EU developing a dependency on Iran 

or any single source of natural gas. There are any manner of disruptions that 

could take place that could threaten Europe's energy security, from natural 

disasters to security problems to the imposition of sanctions. As a critical part of 

the U.S. alliance structure and the home of our closest allies, Europe should not 

be dependent on any single source. 

B. Wouldn't it be more difficult to re-impose international sanctions on Iran if 

Europe develops a dependence on Iranian LNG? 

REPONSE: It would not be more difficult if Europe maintains a wide range of 

energy sources. Iran can be part of Europe's energy mix so long as neither Iran 

nor any other source dominates that market. In fact, the dependence could work 

the other way: Iran could become dependent on Europe as a customer of natural 

gas. In 2012, Europe ended its purchase ofiranian oil, cutting offlranian sales of 

nearly 700,000 barrels per day (and, at the prevailing prices, the equivalent of $70 

million per day). This had a tremendous impact on Iran's economy. So long as 

the context supports imposition of sanctions (such as Iran cheating on its nuclear 

deal in some significant way), Europe would have a strong interest in supporting 

our sanctions efforts and -- in fact -- its trade with Iran would be a crucial element 

of any sanctions campaign. 

Questions from Senator AI Franken 

Question I In July 2014, oil prices were over $100 per barrel. Today, oil prices are 

around $40 per barrel. While these low prices benefit consumers, oil prices often 

fluctuate and will likely rebound in due time. What are some of the effects-both on 

industry and consumers-of rapid fluctuation in oil and gas prices? How do fluctuating 

prices impact long term decisions made by businesses and families? 

REPONSE: Oil price spikes harm consumers and the macro economy. They erode 

spending power and reduce consumption, worsen the current account balance and weaken 

currencies, and, at times, contribute to rising inflation and trigger tighter monetary 

policies, which temper growth and investment. Studies analyzing long-term historical 

3 
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Questions for the Record Submitted to Mr. Jason Bordoff 

data found that a 10% per barrel oil price increase would predict 0. 7% slower economic 

growth in the U.S. four quarters after the price rise. 1 James Hamilton also noted in a 2011 

study that "all but one of the 11 post-war recessions were associated with an increase in 

the price of oil" and all but one of the 12 post-war oil price shocks "were accompanied by 

U.S. recessions, the single exception being the 2003 oil price increase associated with the 

Venezuelan unrest and second Persian GulfWar."2 The adverse impacts of price shocks 

seem lower today than in the past, for the reasons I discussed in my testimony. 

Beyond the economic impacts of oil price shocks, oil price volatility is itself harmful to 

the economy and to consumers. Oil price uncertainty can hurt the real economy through 

several channels. Companies tend to delay fixed asset investments and consumers often 

postpone durable goods purchases-particularly vehicle purchases-in the face of 

uncertain oil prices3 Volatility can also erode consumer demand more broadly, as 

uncertainty about future income and employment may undermine consumer confidence 

and induce consumers to increase precautionary savings 4 A recent academic paper found 

strong evidence that greater oil price volatility-irrespective of actual oil price levelsreduces industrial production not only in the United States but also globally 5 Volatile oil 

prices also increase unemployment as industrial production and overall output decline6 

In periods of excessive oil price volatility, "an increase in the rate of unemployment 

occurs because the industrial workforce is more likely to wait in anticipation [of] 

production level restoration ... than to retrain for jobs that require alternative skill sets."7 

To the extent oil price volatility also boosts inflation-because of a premium industrial 

producers attach to the price of their goods in the face of production cost uncertaintyhigher inflation may offset the negative impact on employment, as suggested by the 

inverse relationship between the two in the Phillips Curve 8 The academic literature has 

also documented that oil price volatility exacerbates the negative economic impact of oil 

price increases and reduces the economic benefits that are normally associated with oil 

price declines 9 

Question 2: The federal government has conducted several studies on the effect of 

increased Liquefied Natural Gas (LNG) exports on domestic prices. In these studies, 

1James D. Hamilton (2005). "Oil and the Macroeconomy," University of California, San Diego, p.8, 

http:// econweb.ucsd.edu/ -jhamilto/JDH_palgrave_oil.pdf. 

2 James D. Hamilton (2011), "Historical Oil Shocks," University of California, San Diego, 

http:// econweb.ucsd.edu/ -jhamilton/ oil_history.pdf. 3 John Elder and Apostolos Serle tis (20 lO), ''Oil Price Uncertainty," ]ou111al of }vfoney, Credit and B:mking, 

Vol. 42, No.6, 1137-59, p.l139. 

4 Zoheir Ebrahin1, Oliver R. Inclerwildi and David A. King (20 14), '"f\.facroeconmnic impacts of oil price 

volatility: mitigation and resilience," Frontiers in Energy, Vol. 8(1), 9-24, p.l4-15. 

5 Soojin Jo (2014), "The Effects of Oil Price Cncertainty on Global Real Economic Acti,~ty," journal o[ 

Money, Credit and Banking, Yo!. 46, No.6, 1113-1135, p.ll30-1131. 

6 Ebrahim, lnderwildi and I<.ing (2014), p. 17. 

'lbid.,p. 17. 

s Ibid., p.!S-16. 

9 Ibid. p.14 

4 
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Questions for the Record Submitted to Mr. Jason Bordoff 

prices typically increase 14-34%, with one scenario even projecting price spikes up to 

54%. While producers support increasing exports to capture more market share, higher 

gas prices would hurt American consumers. This is especially true for low-income 

households, who spend a larger fraction of their income on energy bills. Further, higher 

natural gas prices would burden domestic industries, such as the taconite industry in 

northern Minnesota. Are you aware of any scenarios where increasing LNG exports does 

not lead to American consumers paying higher prices for domestic natural gas and 

electricity? 

RESPONSE: Unless the supply curve for a good is perfectly flat, increasing demand (in 

this case via demand from outside the U.S.) for a product will cause some upward impact 

on price. Several DOE-commissioned studies have found that increasing LNG exports 

leads to slightly higher domestic natural gas prices. Importantly, DOE studies have also 

found that the macroeconomic impacts of LNG exports are positive and rise as the 

volume of LNG exports rises. 

It is important to note that the US natural gas production landscape has changed quite 

substantially since the publication of the DOE report referenced in the question. The 

report and its findings are based on the EIA's 2011 Annual Energy Outlook (AEO). To 

see how outdated those underlying assumptions are, it is enough to look at the reference 

projections in that forecast for 2016. The AEO 2011 reference case projected nominal 

Henry Hub gas prices to average $5.27 per MMBtu in 2016. The EIA's latest projection 

(in the Short-Term Energy Outlook) now expects Henry Hub prices to average only $2.25 

in 2016 (and the US has already started exporting LNG). The EIA's 2011 AEO expected 

US dry gas production to average 61.56 Bcf/d (22.47 Tcf) in 2016 in the reference case. 

The latest Short-Term Outlook of the same EIA expects US dry gas production to 

average 74.8 Bcf/d. The US shale gas potential turned out to be much more favorable 

than it seemed when the DOE completed its analysis, and prices are now much lower 

than anticipated back in 2012. 

The magnitude of the impact on domestic prices will be detennined by a number of 

factors, including the ultimate size of the domestic resource base and the amount of LNG 

that is ultimately exported. While DOE has studied a variety of scenarios, some are far 

less plausible than others. 

The original analyses that DOE commissioned found peak price impacts from 14 to 36 

percent depending on how quickly gas exports were ramped up and to what level. The 

DOE analysis showed that the wellhead price impact could be as high as 54 percent, if 

production from shale wells proved highly disappointing. The current market outlook is 

most similar to the scenario that found the smallest domestic price impacts, whereby 

price impacts peak at 14 percent in 2022 before easing to 10 percent by 2026. Under this 

scenario, exports gradually grew to 6 bcfper day by 2020. In its 2015 AEO, EIA projects 

US LNG exports rising to 5.7 bcf/day by 2020 and then 7.4 bcf/day by 2025. Under this 

5 
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U.S. Senate Committee on Energy and Natural Resources 

April 26, 2016 Hearing: Challenges and Opportunities 

for Oil and Gas Development in Different Price Environments 

Questions for the Record Submitted to Mr. Jason Bordoff 

projection, domestic natural gas prices will average $5.40 per mmbtu. A recent EIA 

analysis found that if we exported 12 bcf/day on average through 2040, prices would rise 

to $5.70. If we exported 16 bcf/day, prices would rise to $5.80. These are already very 

aggressive levels of assumed exports. For comparison, Qatar, the world's largest LNG 

exporter, currently exports 10 bcf/day. 

In October 2014, DOE assessed the impact of US LNG exports, and found smaller 

projected price impacts than in its January 2012 study. Current market expectations (i.e., 

the Henry Hub futures strip) indicate that we are the closest to the High Oil and Gas 

Resource case of the 2014 DOE report in terms of gas prices. In that scenario, the gas 

price impact of even substantial volumes of exports is very small. 

Question 3: While technological advances such as hydraulic fracturing and horizontal 

drilling have certainly increased domestic oil production, the U.S. still imports more than 

7 million barrels of crude oil every day. OPEC countries as a whole remain the largest 

source of these imports, and it is no secret that many do not share the same geopolitical 

interests as the United States. Now that we have lifted the ban on crude exports, are we 

going to have to make up the difference by importing more oil from OPEC countries? 

RESPONSE: U.S. crude oil exports have been falling recently, from a peak of 586,000 

barrels per day in April 2015 to 374,000 barrels per day in February 2016. Moving 

forward, as U.S. production begins to rise again with a recovery in oil prices, exports will 

likely rise as well. Given the capability of the U.S. refining sector, it is likely that 

increasing volumes of domestically produced light, tight oil will be exported, while 

greater volumes of heavier oil will be imported than would be the case if US oil exports 

were prohibited. Those increased gross imports will come from various sources, 

including OPEC countries like Venezuela that produce heavier crudes. 

Because U.S. production will likely be slightly higher if U.S. producers can fetch global 

prices, U.S. net oil import dependence will be likely lower because the export ban has 

been removed. This is true even though gross imports increase as more light oil is 

exported and more heavy oil imported than would be the case were the export restriction 

to remain in place. 

Less net import dependence reduces the macroeconomic vulnerability of the U.S. to oil 

price shocks. In a recent report, the White House Council of Economic Advisers (CEA) 

found the "resilience of the economy to international supply shocks-macroeconomic 

energy security-is enhanced by reducing spending on net petroleum imports and by 

reducing oil dependence." This is due both to the smaller terms of trade penalty from an 

oil price shock, and the fact that more of the increase in oil producer revenue stays within 

the United States. 

6 
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U.S. Senate Committee on Energy and Natural Resources 

April 26, 2016 Hearing: Challenges and Opportunities 

for Oil and Gas Development in Different Price Environments 

Questions for the Record Submitted to Mr. Jason Bordoff 

Questions from Senator Mazie K. Hirono 

Question 1: Continued volatility in oil and gas prices 

It is perhaps easy to forget that oil prices were over $100 less than two years ago. In 

Hawaii, we have enjoyed lower prices at the pump and on our electricity bills since we 

still get the majority of our electricity from oil. But it is the most expensive power in the 

country, about three times the national average. Mr. Bordoff, can you elaborate on the 

potential for continued volatility in oil prices over the next few years? Should consumers 

expect low oil and gas prices to last? 

RESPONSE: Predicting oil prices is fraught with peril, but consumers should not expect 

today's low prices to last forever. The history of the oil industry is filled with rapid 

swings from boom to bust. While today's oil market is oversupplied, recent global supply 

outages and geopolitical disruptions-from Nigeria to Kuwait to Canada to Venezuelaremind us that the oil market balance can change very rapidly. Already, the oil price has 

increased from below $30 per barrel in January to nearly $50 today. 

If a significant supply disruption were to occur, there is also less of a cushion in the 

global oil market to handle it. OPEC spare capacity, which can be quickly brought onto 

the market to compensate for production losses elsewhere is at historic lows. OPEC's 

effective spare capacity, most of which is held by Saudi Arabia, is currently estimated by 

the lEA to be 2. 7 million b/d, 10 although many believe it is actually much lower. Even the 

higher number represents less than three percent of global demand. By contrast, for most 

of the 1990s, OPEC spare capacity averaged closer to five percent of global demand. 

Historically, dominant producers have tried, with varying degrees of success, to curb 

boom and bust cycles by managing supply-from John Rockefeller and Standard Oil to 

the Texas Railroad Commission to OPEC. Today, the oil market is functioning more like 

a free market, as OPEC's hold is loosened and it is letting low prices bring the market 

back into balance. If OPEC, particularly Saudi Arabia, continues to abstain from any 

effort to manage the market, as the recent OPEC meeting in Doha suggests may be the 

case, and the U.S. has a notable lag in its ability to respond, the impact may be more price 

volatility ahead. 

Question 2: Development oflong-tenn energy policy 

Over 80% of Hawaii's energy comes from petroleum, making it the most petroleumdependent state in the nation. The long-term cost of dependence on imported oil is the 

reason that Hawaii has set a long-term goal to get 100 percent of its power from 

10 International Energy Agency, Oil Market Report, April 14, 2016, p. 17. 

7 
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U.S. Senate Committee on Energy and Natural Resources 

April 26, 2016 Hearing: Challenges and Opportunities 

for Oil and Gas Development in Different Price Environments 

Questions for the Record Submitted to Mr. Jason Bordoff 

renewable sources by 2045. How much should the current lower prices for oil and gas 

affect Congress's long-term policy plans? And do you think it is advisable for states and 

the U.S. as a whole to set long-term targets for renewable energy production, carbon 

emissions, and vehicle fuel economy then allow industry the flexibility to reach those 

targets? 

RESPONSE: Policies that use market-based mechanisms to set environmental targets, but 

then allow consumers and businesses flexibility in how they achieve those targets, can 

allow us to meet environmental goals at the lowest possible cost. At the same time, it 

would be unwise for policymakers to overreact to short-term fluctuations in price. 

Whether prices are high or low, government still must protect air and water, and do so 

with carefully created, smart policies aimed at achieving their environmental goals at the 

lowest cost. Not only can today's market conditions change rapidly, but our ability to 

anticipate those changes is quite limited, as evidenced by the failure of most analysts to 

predict the current oil price collapse. 

Reducing dependence on one fossil fuel source for power generation is not only 

important from an environmental standpoint, but from an economic and security 

standpoint as well. A state like Hawaii improves its resilience through energy resource 

diversification. When oil prices spike or shortages emerge, the ability to switch to other 

fuel sources reduces energy security vulnerabilities-just as Japan was able to shift to 

other fuel sources after the Fukushima nuclear disaster. 

8 
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U.S. Senate Committee on Energy and Natural Resources 

April 26, 2016 Hearing: Challenges and Opportunities 

for Oil and Gas Development in Different Price Environments 

Questions for the Record Submitted to Ms. Suzanne Minter 

Question from Senator AI Franken 

Question: I would like to continue our discussion on breakeven prices that we started in 

the hearing on April 26, 2016. In a Bloomberg article last year, Shell estimated that its 

previous plans to drill in the Arctic would be competitive at $70 per barrel. Is this similar 

to the breakeven prices you have seen for drilling in the Atlantic or Arctic Oceans, and 

how long do you think it will be before the price of oil returns to those levels? 

Platts Analytics is in general agreement that prices needed to incentive new drilling for 

offshore production is in the $70 per barrel range, and that for projects currently 

producing, break even costs are estimated in the low $40 (WTI) per barrel range. As 

volatile as prices have been, and as much attention as the "front month" or currently 

traded prices is given from the media, it is probably more important to consider the price 

of the 12 month forward curve, the price on any given day that WTI is valued at for the 

upcoming 12 months. Looking at the image below once can see that with a 2 month 

exception, on the 1st of each month since January 2014, that 12 month strip price has 

remained above $40 per barrel. 

$120 

$100 

$80 

$60 

$40 

$20 

$0 

-WTI Front Month -WTI 12 Month Strip 

This difference in pncmg is important to realize when one considers that offshore 

platforms generally produce for 16-20 years without the steep decline curves recognized 

by onshore shale wells. Investment/production from offshore platforms are considered to 
130 


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U.S. Senate Committee on Energy and Natural Resources 

April 26,2016 Hearing: Challenges and Opportunities 

for Oil and Gas Development in Different Price Environments 

Questions for the Record Submitted to Ms. Suzanne Minter 

be long term investments, and therefore production decisions around volumes currently 

flowing, may not be impacted by (relatively) short term price movements. 

As stated though, when we look forward, higher prices are anticipated in order to 

incentivize new drilling projects both on and off shore. The sub-$40 price environment in 

which we find ourselves today may be short lived as current spare capacity becomes 

utilized to offset natural declines we expect to see globally. From a global perspective, 

the longer we remain in the current low price environment, the more risk there becomes 

to global production (particularly from nations with less stable economies), as low prices 

being recognized by many producers may be inadequate to provide even maintenance 

CAPEX, let alone new exploration. 

$120 

$100 

~ $80 ... 

10 

£e. $60 '(II. 

$40 

$20 

$0 

While many view higher prices as a negative, I believe it may be construed as a positive 

economic indicator. We sit in today's low price environment, simply put, because supply 

has outstripped demand and demand growth is happening at a pace inadequate to absorb 

what we are creating. Prices will rise when demand occurs that will require additional 

production to come online. This demand growth may be considered a sign of growing 

economies rather than weakening. 
131 


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U.S. Senate Committee on Energy and Natural Resources 

April 26, 2016 Hearing: Challenges and Opportunities 

for Oil and Gas Development in Different Price Environments 

Questions for the Record Submitted to Ms. Suzanne Minter 

Question from Senator Mazie K. Hirono 

Question: Low oil price impacts on refinery market 

Ms. Minter, both of Hawaii's oil refineries have been put up for sale in the last three 

years. In your testimony, you state that the decline of prices for refined products like 

gasoline and diesel is accelerating and that the decline is squeezing the profit margins of 

refineries. Can you expand on what the decline in refined product margin means for the 

refinery market what further impacts could happen if oil prices remain low globally? 

Declining refined product margins are not a result of low oil prices, but have developed 

in spite of low oil prices. The decline in refining margins is indicative of the global 

oversupply of energy that began with the recent surge in oil production. At the end of the 

day, it is not the barrel of oil that we all consume, but the refined products created from 

those barrels. Given the order of magnitude that supply growth has outstripped demand 

growth, as our global refineries have been running at high utilization rates, it is not 

surprising to see this oversupply phenomena move "downstream" to the refined product 

markets. 

As the global oil markets inevitably rebalance themselves, through a combination of 

slowing supply growth and increasing demand, the refined product markets also should 

come back into balance. It is also notable that refineries that serve local, indigenous 

demand that are naturally "short" product such as Hawaii tend to enjoy significantly 

higher margins than refineries in regions that are net exporters, such as the US Gulf 

Coast. 

Looking at Hawaii in particular, the two refineries in the state have operational capacity 

of just over 150,000 barrels per day, (per EIA) which while clearly is very significant to 

Hawaii, makes up less than 1% of US refining capacity. Looking at the recent 

transactions, l do not think they should be considered alarming, but more than likely, for 

a company such as Chevron, who recently announced the sale of its Hawaiian refinery to 

One Rock Capital Partners, merely reflect a decision to focus their resources on their 

larger portfolio of assets. Also, it would seem that in the case of a market as unique as 

Hawaii, an island which is completely dependent on product that it either needs to create 

or import, while production/ refining cost are higher in an island setting rather than the 

US Gulf Coast, that there is a measure of supply security that will be maintained only by 

continuing to operate refineries within the state. 
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Question from Senator Mazie K. Hirono 

Question: US LNG Export Capacity 

In February a company began exporting LNG from a facility in Louisiana. Ms. Palti-Guzman, your 

testimony highlights the effects of decreased global demand for LNG over the last year. 

Meanwhile, there are other export facilities currently under construction and in line for permits 

to construct. Are U.S. companies in danger of locking in to too much export capacity by 

beginning the construction on export facilities that are unlikely to run at full capacity? 

Response by Leslie Palti-Guzman 

The combination of 1) unique US LNG business model (HH index, no destination clause, no takeor-pay) and 2) challenging market environment means that US LNG exports facilities are 

unlikely to be utilized at full capacity. 

US LNG is all about flexibility. Buyers are free to walk away from previously agreed purchases by 

giving notice and US LNG is not bound to any specific market and can be easily swapped or sold 

on the spot market, which will create more liquidity and efficiency in the global gas market, but 

also more uncertainties for US LNG offtakers. In stark contrast, most of the Asian LNG contracts 

remain trapped into take-or-pay contracts and earmarked to a specific market, creating more 

security of demand, but less room for swaps and trading operations. 

US will likely assume the role of swing supplier within a few years, which will stabilize global gas 

markets in period of supply or demand shock. But it means also that US LNG facilities will adjust 

their production overtime according to global LNG demand: US LNG will export when the world 

needs US LNG, and will not export or export less when demand is more muted. As such, the US 

is set to become one of the world's primary go-to supplier in times of crisis, which will be 

particularly helpful for European or Asian buyers. After Fukushima, Qatar supplied Japan with 

some extra 10 mt of LNG that were readily available as spare capacity-meaning divertible 

flexible supply that was not attached to any long-term contract or destination. 

Eroding international prices and weakened demand in top LNG consumer countries make the 

US shale-to-LNG market less attractive than when investment decisions were taken. Current 

uncertainties surrounding long-term natural gas demand means that the companies developing 

new and additional facilities in the US are taking leaps of faith. Medium-term and long-term 

demand for LNG will be one of the most critical elements to watch in determining whether the 

world needs US LNG and how much. US LNG will have to remain competitive because natural 

gas has to compete for market share with cheaper coal and zero-emission renewables. There 

are some reasons to be optimistic. More affordable and accessible LNG creates renewed or new 

appetite in several countries, making also the environmental argument of favoring gas over coal 
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or fuel oil more compelling. However, demand from these new, opportunistic importers could 

be fickle if prices rebound, and some may increase domestic production, secure alternative 

import supplies, or displace natural gas with competing fuels. 

2016-2020: US LNG capacity utilization is likely to be around 85% 

The vast majority of US LNG volumes will be lifted despite reduced appetite and smaller profit 

margins, as US LNG offtakers will be eager to quickly recover their fixed costs (e.g. liquefaction 

fees). However, competition from other suppliers and weaker demand will likely keep 

utilization rates below 100%. The global liquefaction utilization rate averaged 84% in 2015. I 

believe that US LNG liquefaction facilities will run at this rate or below and with important 

seasonal and yearly variations. 

As US LNG takes off, it will trigger a competitive response from rival suppliers, especially in 

Europe. Russia's Gazprom is prepared to sell its gas at marginal cost to European consumers for 

an extended period to drive European prices lower to the point where it is no longer profitable 

to import US LNG (though steep discounts are likely not sustainable, and I believe Europe will 

be one ofthe leading market for US LNG exports). 

Post-2020, the aggregated average liquefaction utilization for US LNG could evolve depending 

on future energy policies, commercial decisions, and geopolitics. The jury is still out, as many 

political and commercial decisions that will impact US LNG exports in Europe and elsewhere are 

still in the making. A higher US LNG output in the longer-term would require a strong, 

unequivocal signal for the use of natural gas as a transition fuel post COP21. 

US LNG facilities are likely to adjust their production over time according to global LNG 

demand, US domestic gas demand, competitiveness of oil-linked LNG, energy policies, and the 

price war to keep US supply out of the market.