Page 1 of 7 UNITED STATES ENVIRONMENTAL PROTECTION AGENCY WASHINGTON, D.C. 20460

OFFICE OF
AIR AND RADIATION

Petroleum and Natural Gas Systems (Subpart W) of the Greenhouse Gas Reporting Rule Docket: EPA-HQ-OAR-2009-0923

Title: Subpart W’s Impact on the Greater Economy

Summary: This memo summarizes EPA's analysis of the potential impact of the petroleum and natural gas systems final rule Subpart W - Petroleum and Natural Gas Systems of the Greenhouse Gas Reporting Rule on the United States economy in general.Page 2 of 7 Subpart W’s Impact on the Greater Economy

Overview and Purpose

This memo summarizes EPA’s analysis of the potential impact of the petroleum and natural gas systems final rule Subpart W – Petroleum and Natural Gas Systems of the Greenhouse Gas Reporting Rule (hereafter, Subpart W) on the United States economy in general. EPA determined that if all of the Subpart W reporting costs were passed on to fuel consumers in the form of higher prices, the price of natural gas and petroleum could increase by less than 0.1 percent. Hence, EPA concluded that the impact of Subpart W on the greater economy is insignificant.

Background

EPA received several comments on its April 2010 Subpart W proposal raising concerns that the rule could affect the prices of fuels or disrupt fuel supply into the greater economy. EPA notes that the final Subpart W rule does not have any requirements that will in any way disrupt petroleum and natural gas production or supply either partially or completely, i.e. all monitoring required under the final rule can be conducted under business-as-usual conditions. However,EPA understands that the Subpart W monitoring and reporting costs could be passed on to endusers in other industries such as farmers, manufacturers, and individual consumers in the form of higher fuel prices. To evaluate this pot ential impact on fuel prices, EPA conducted an analysis to estimate the increase in fuel prices under the assumption that all of the costs from the rule would be passed on to end-users.

Analysis of Potential Cost Impact on Fuel Prices

EPA used the Subpart W monitoring and reporting costs from the Economic Impact Analysis (EPA-HQ-OAR-2009-0923) and the total throughput from reporting facilities by segment to estimate the impact on fuel prices. The impact is the ratio of the Subpart W cost borne by reporters to the total throughput of fuel (natural gas or petroleum) through their reporting facilities. The national throughput for each of the segments is defined as follows: a) Onshore production – petroleum and natural gas produced b) Offshore production – petroleum and natural gas produced c) Onshore natural gas processing – natural gas processed by the facility less extraction loss (extraction loss means the reduction in quantity of natural gas due to the extraction of natural gas liquids from the natural gas processed) d) Onshore transmission – all natural gas leaving the natural processing plant is assumed to go through transmission, i.e. the same volume as onshore natural gas processing in item (c) above e) Underground Storage – withdrawals of natura l gas from underground storage reservoirs f) LNG Storage – withdrawals of liquefi ed natural gas (LNG) from storagePage 3 of 7 g) LNG imports – total volume of natural gas imported as LNG (Note that exports of LNG with an increased fuel price do not impact U.S. domestic markets. Also, there is only one export LNG facility in the U.S. in Alaska; hence the impact from this one facility on the overall economy is insignificant.) h) LDCs – assumes 60 percent of all end-use natural gas consumption in the country goes through LDCs.1

EPA views this as a robust and conservative approach for several reasons. First, this approach accounts for throughput from reporting facilities only; petroleum and natural gas operators will not report from all of their facilities (e.g., some facilities will be below the reporting threshold). Therefore, the reporting cost will be apportioned to reporting throughput, which is less than the total fuel (oil and natural gas) going into commerce. Second, parent companies may pass on some of the costs to the owners instead of end-use consumers . Third, EPA used the first-year cost, which is notably higher than subsequent-year costs. In sum, the analysis provides an upper bound estimate of the impact.

The analysis was conducted in three steps, as follows:

A) Estimate the fuel throughput for reporters for each segment;

B) Determine the first year cost impact per volume of throughput for each segment; and

C) Calculate the ratio of reporting throughput to cost and compare to the average market fuel price from 2003 to 2008.

A. Estimate the Fuel Throughput by Reporters for each Segment

First, EPA estimated the fuel throughput for reporters in each segment using its threshold analysis (see Appendix C of the Technical Support Document). For some segments, the fuel throughput is not available. In such cases, EPA estimated the fuel throughput for reporters using analogous data such as fuel capacity. While it is possible to estimate emissions based on the capacity of individual facilities (which EPA had to do in the threshold analysis for all segments except onshore production), that approach is not a fair measure of actual throughput because often the capacity of facilities far ex ceeds the throughput. Therefore, for segments other than onshore production, EPA estimated the actual throughput of reporting facilities (“reporting throughput”) using Equation 1:

capacity national throughput national capacity reporting throughput reporting *

= Equation 1

1 EIA. (2008) Distribution of Natural Gas: The Final Step in the Transmission Process . U.S. Energy Information

Administration.Page 4 of 7 The national throughput for each of the segments in the petroleum and natural gas industry was determined using the following data sources:

1) Onshore production – EPA determined the total petroleum and natural gas production from reporting onshore production entities us ing the HPDI, LLC database2 which provides real oil and natural gas production rates reported to state governments. 2) Offshore production – EPA determined the total petroleum and natural gas production from reporting offshore production entities usi ng the total offshore production from the Energy Information Administration (EIA).3 3) Onshore processing – EPA determined the total volume of natural gas processed from reporting natural gas processing entities using the natural gas processed reported to the

EIA.4 4) Onshore transmission – EPA estimated the total transmission throughput for reporting natural gas transmission entities using the natural gas processed reported to the EIA. EPA assumed the national throughput for the tr ansmission sector was equivalent to the natural gas throughput less extraction losses. 5) Underground storage – EPA determined the total underground storage throughput for reporting underground storage entities using data from the Energy Information Administration (EIA)5. 6) LNG Storage – EPA estimated the total liquefied natural gas withdrawn for LNG storage reporters using data from the EIA.6 7) LNG Import – EPA estimated the total liquefied natural gas imported for LNG terminal reporters using data from the EIA.7 8) LDCs – EPA determined the total natural gas deliveries for natural gas distribution reporters using EIA data8.

Table 1 below shows the national capacity and reporting capacity from the Subpart W threshold analysis, and the national throughput and reporting throughput as determined from this analysis for each segment.

2 HPDI Database 3 EIA. (2010). Crude Oil Production. U.S. Energy Information Administ ration. Independent Statistics and Analysis. <www.eia.gov/dnav/pet/pet_crd_crpdn_adc_mbbl_m.htm> 4 EIA. (2010). Natural Gas Plant Processing. U.S. Energy Information Administ ration. Independent Statistics and Analysis. <www.eia.gov/dnav/ng/ng_prod_pp_dcu_nus_a.htm> 5 EIA. (2010) U.S. Underground Natural Gas Storage by Storage Type. U.S. Energy Information Administration. Independent Statistics and Analysis. <www.eia.gov/dnav/ng/ng_stor_type_s1_a.htm> 6 EIA. (2010) Liquefied Natural Gas Additions to and Withdrawals from Storage. U.S. Energy Information Administration. Independent Statistics and Anal ysis. <www.eia.gov/dnav/ng/ng_stor_lng_dcu_nus_a.htm>. 7 EIA. (2010) U.S. Natural Gas Imports by Country. U.S. Energy Information Administration. Independent Statistics and Analysis. <www.eia. gov/dnav/ng/ng_move_impc_s1_a.htm>. 8 EIA. (2010) Natural Gas Consumption by End Use.. U.S. Energy Information Administration. Independent Statistics and Analysis. <www.eia. gov/dnav/ng/ng_cons_sum_dcu_nus_a.htm>.Page 5 of 7 Table 1. Estimated Volume of Fuel Throughput for Re porters for each Segment in Petroleum and Natural Gas Systems (Subpart W), in billion cubic feet per year (Bcf/year)

Industry Segment National Capacity (Bcf/year) Reporting Capacity (Bcf/year) National Throughput

(Bcf/year) Reporting Throughput

(Bcf/year)

Onshore Production (Natural Gas) 17,540 16,125 17,540 16,125

Onshore Production (Petroleum) 2,864,006 1 2,277,845 1 2,864,006 1 2,277,845 1

Offshore Production (Natural Gas) 11,261 2 5,119 2 3,584 1,629

Offshore Production (Petroleum) 11,261 2 5,119 2 1,701,466 1 773,489 1

Processing 16,675 16,249 13,776 13,424

Transmission 516,338 492,315 13,776 13,135

Underground Storage 8,330 5,795 2,493 1,734

LNG Storage 79 73 34 31

LNG Terminals 3,918 1,947 584 290

Distribution 1,200 3 1,026 3 11,975 10,238

1 Units for petroleum production in U.S. Barrels per day.

2 These are national emissions in Mcf/year. Offshore Production re porting throughput was determined using the national emissions and the reported emissions, in Mcf/year, because natu ral gas capacity data was not available.

3 These are thousand miles of main pipelines in natural gas di stribution. Distribution reporting throughput was determined using miles of main pipeline, in thousands of miles, because distri bution natural gas capacity data was not available.

B. Determine the first year cost impact per volume of throughput for each segment

EPA divided the first year costs estimated in the Economic Impact Analysis (EPA-HQ-OAR2009-0923) for each segment by the reporting throughput for each segment. This analysis is different for onshore and offshore production b ecause both natural gas and petroleum are produced and will share the reporting cost.

Cost Impact Analysis for Onshore and Offshore Production

Since onshore and offshore production reporters produce both petroleum and natural gas, EPA converted the reporter production of petroleum and natural gas volumes to energy content in British thermal units (Btu). EPA then divided the total first year cost for production by the total energy content produced. The resulting average cost burden per Btu was then multiplied by the higher heating value9 of produced natural gas and crude oil to give the cost per thousand cubic feet of natural gas and barrels of oil respectiv ely. Equation 2 below shows how this was done for natural gas and, Equation 3 , below, shows how this was done for petroleum.

Pt Pt Ng Ng Total Ng Ng HHV G HHV G B HHV B

× + × × = Equation 2

9 2009 API Compendium Table 3-7, pg. 3-20Page 6 of 7 Pt Pt Ng Ng Total

Pt Pt HHV G HHV G B HHV B

× + × × = Equation 3

where,

B Ng = Burden to report natural gas from the onshore/ offshore production segment per thousand cubic feet of natural gas ($2006/Mcf)

B Pt = Burden to report petroleum from the onshore/ offshore production segment per barrel of petroleum ($2006/bbl)

G

Ng = Total estimated natural gas reporting throughput in the onshore/ offshore production segment in thousand cubic feet of natural gas per year (Mcf)

HHV Ng = Higher heating value of natural gas (Btu/Mcf)

G

Pt = Total estimated petroleum reporting throughput in the onshore/ offshore production segment in U.S. barrels (bbl)

HHV Pt = Higher heating value of petroleum (Btu/bbl)

B Total = Total burden for the onshore/ offshore production segment ($2006) per burden analysis to the rule

Table 2, below, shows the total first year cost (process and combustion emissions) per volume of reporting throughput and per MMBtu.

Table 2. Total First Year Process and Combustion Cost per Fuel Energy Cont ent and per Fuel Volume.

Sector First Year Cost per MMBtu ($/MMBtu) First Cost per
Volume

Onshore Production (Natural Gas) $ 0.00057 0.0007 $/Mcf Onshore Production (Petroleum) $ 0.00057 0.0033 $/bbl Offshore Production (Natural Gas) $ 0.00016 0.0002 $/Mcf Offshore Production (Petroleum) $ 0.00016 0.0009 $/bbl Processing $ 0.00050 0.0006 $/Mcf
Transmission $ 0.00129 0.0013 $/Mcf Underground Storage $ 0.00142 0.0015 $/Mcf LNG Storage $ 0.02122 0.0218 $/Mcf
LNG Terminals $ 0.00024 0.0002 $/Mcf
Local Distribution $ 0.00019 0.0002 $/Mcf
Weighted Natural Gas Impact † $ 0.00070 0.0008 $/Mcf
Weighted Oil Impact $ 0.00224 0.0130 $/bbl
† The total first year process and combustion cost per volume does not include the cost from Onshore Production (Petroleum) or

Offshore Production (Petroleum).

C. Compare the resulting metric with the average market fuel price from 2003 to 2008

The total weighted first year burden for Subpart W per Mcf of natural gas and per barrel of oilPage 7 of 7 throughput for reporters, $0.0008 per Mcf for natural gas and $0.0130/bbl for petroleum, is less than 0.1 percent of the average cost of wellhead produced natural gas over the past five years. The Energy Information Administration reports the average cost of wellhead produced natural gas from 2004 to 2008 as $6.62 per Mcf10 and the average cost of domestic crude oil as $59.08 per U.S. barrel11. Given that Subpart W’s burden per volume of natural gas and petroleum throughput for reporters is an insignificant fracti on of national fuel prices, EPA concludes that Subpart W’s impact to petroleum and natural gas prices will be negligible. Furthermore, summing the individual burdens per volume of natural gas sold for each segment to determine the national burden per volume of natural gas sold overestimates the real impact on downstream U.S. natural gas prices. In conclusion, Subpart W will have little impact on other industries (e.g., farming and manufacturing) and commercial and residential consumers.

10 EIA (2008) Monthly Energy Review . Table 6-7, pg. 199. Retrieved online 27 Aug. 2010 at < http://www.eia.doe.gov/aer/pdf/pages/sec6_17.pdf> 11 EIA (2008) Annual Energy Review . Table 5.18, pg. 169. Retrieved online 08 Oct. 2010 at < http://www.eia.gov/emeu/aer/pdf/pages/sec5_45.pdf>