p.1 

OAR Box 1828 

Prepped by Ollie Stewart 

Document Number: 

138) ll-K- (B)-137 

Docket Number: 

A-83-27 

Printed 11/12/200811:12:53 AM Sheet 138 of 325 
P.2 

B 5 ~ 1«—I ENERGY AND ENVIRONMENTAL ANALYSIS, INC. A-83-27 

II-K-CBD-137 

April 6, 1984 

Mr. Robert Short 

Economic Analysis Branch 

Environmental Protection Agency 

MD-12 

Research Triangle Park, North Carolina 27711 

SUBJECT: Context of Current Fuel Price Forecasts Used in EPA's 

Industrial Boiler NSPS Analysis, EPA Contract 68-02-3564, 

Task #14 

Dear Robert: 

Enclosed please find a draft of the explanation of the two fuel price 

forecasts used in the Industrial Boiler NSPS Project. This brief 

document, is in response to a request from EAB for the major assumptions 

behind the oil and gas prices input to IFCAM as part of the energy 

scenarios developed in the summer, 1983. 

If you have any questions, please give me a call. 

Sincerely, •gj.Tt* 

Karl F. Held 

Project Manager 

KFH:sm 

Enclosure 

cc: Al Wehe 

Economic s / Engineerin g 
P.3 

CONTEXT OF THE 

CURRENT FUEL PRICE FORECASTS 

USED IN EPA'S INDUSTRIAL BOILER NSPS ANALYSIS 

Crude Oil Prices 

World crude oil prices are assumed to increase to $31.90 per barrel in 

1990 ($1982) and $57.40 per barrel by the year 2000.* Compared to the 

recent range defined by "conventional wisdom", this price is in the 

mid-range of forecasts from 1985-90, then rises very rapidly at a rate 

faster than current "high oil price" forecasts. 

Three main conditions must exist, and are implied in the scenario, that 

could lead to the six percent/year crude oil price increase between 1990 

and 2000: 

• Economic growth for the U.S., Japan and Western Europe (at 2.4 

percent/year in real terms) and strong growth for OPEC and 

other non-OPEC nations (at 3.5 to 4.8 percent/year), coupled 

with modest end-use efficiency gains, leads to an increase in 

total liquids demand by about three MMB/D by 2000. 

-• A decline in U.S. and Western Europe total liquids production 

(excluding coal liquids) by about 1.0 MMB/D absorbs most of 

the projected 1.5 MMB/D increase in production from other 

non-OPEC sources. 

• These two trends lead to an increase in demand for crude faced 

by OPEC of about 2.5 MMB/D between 1990 and 2000. This 

represents over 75 percent of OPEC's excess available capacity 

in 1990 and puts strong upward pressures on world crude oil 

prices throughout the remainder of the decade. 

*Mid-range set of projections (Scenario B - Reference Case) from the 

National Energy Policy Plan (NEPP-1983), Energy Projections to Year 

2010, U.S. Department of Energy, DOE/PE-0029/2, October, 1983. 

-1-
P.4 

The key question about these conditions are whether the assumed economic 

growth projections can be sustained at such high oil prices, and whether 

conservation gains could be made in developing countries to keep their 

oil demand from growing at the projected 2.5 to 4.6 percent/year rates. 

An oil supply disruption case would tend to produce a sharp spike in oil 

prices, which is not very consistent with this scenario. 

Resid Prices Relative to Crude 

In these scenarios, the burnertip industrial resid price for relatively 

low sulfur resid (about 0.8 percent) is consistently equal to the world 

oil price. This implies a significant "tightening up" of residual oil 

markets compared to today's situation. This would tend to occur if 

current trends in refinery upgrading (converting residual oil outputs to 

a lighter product slate) continue in the future. 

Natural Gas Prices 

Two natural gas price scenarios are being used, referred to as Low and 

High. These scenarios basically differ in their assumptions regarding 

gas price trends from 1983-1990. The NSPS regulatory context focusing 

on new boilers implies that only prices starting in the late 1980's 

would be relevant. Thus, we have focused on the real world context 

behind the two price forecasts in 1990. Both forecasts imply the same 

annual rate of escalation of prices from 1990 to 2000. Consequently, 

the discussion of 1990-2000 gas price trends has common implications for 

both Low and High gas price scenarios. 

Projected 1990 Industrial Natural Gas Prices: Low Forecast . 

In 1990, the projected industrial natural gas price is lower than medium 

sulfur resid in regions such as the southwest and west coast; comparable 

to a 1 to 2 percent sulfur residual fuel oil in the south atlantic and 

-2-
P.5 

midwest regions; and not competitive with resid in the northeast, where 

higher transmission and distribution costs make natural gas higher than 

even low sulfur resid. This scenario in 1990 implies a combination of 

the following factors driving gas prices: 

• Renegotiation of many of the problem pricing provisions in old 

contracts plus the fact that production under these contracts 

(primarily signed in 1978-81) is a fairly small share of total 

gas supplies in 1990. 

• Fairly significant increases in wellhead gas prices as the 

current gas surplus is worked off by 1990. 

• Gas import prices drop (in real terms) to become competitively 

priced with domestic gas supplies. 

Projected 1990 Industrial Natural Gas Prices: High Forecast 

The "high" gas price forecast is based on a published DOE projection, 

the Energy Information Administration's 1982 Annual Energy Outlook 

(DOE/EIA-0383(82), April 1983) Middle World Oil Price (Case A) forecast. 

EIA projects that average natural gas wellhead prices increase substantially in 1985, 1986 and 1987 due to current deregulation provisions of 

the Natural Gas Policy Act. "Old" natural gas supplies (under relatively low-cost long-term contracts) are replaced over time (as contracts 

expire) by very expensive new supplies. EIA projects that industrial 

natural gas prices in the 1985-1990 time frame will be between the 

projected industrial low sulfur residual fuel oil and distillate fuel 

oil prices (even if the world oil price is a little lower or higher than 

the forecast discussed above). According to EIA, industrial natural gas 

demand will drop slightly in 1985 but will increase in 1988, 1989 and 

1990 (when the projected burnertip price stabilizes) to about 1982 

levels. 

This scenario in 1990 implies a combination of the following factors 

driving gas prices: 

-3-
• Pipeline contracts for expensive new gas supplies signed since 

1978 will not be renegotiated or relaxed and there will be no 

market outs of expensive existing contracts. All take-or-pay 

and most-favored nation clauses are strictly enforced. 

• Gas producers set new wellhead prices at higher levels such 

that industrial burnertip gas prices compete with projected 

very low sulfur residual fuel oil prices. 

Industrial Natural Gas Prices After 1990 

Beyond 1990, these scenarios assume a highly elastic supply curve for 

natural gas (domestic plus imported) with wellhead gas prices increasing 

by one to two percent per annum in real terms. This implies high 

estimates of undiscovered gas reserves and a relatively slow increase in 

costs as smaller fields are found over time. 

Another possible factor contributing to this scenario is the continuation of a dual-priced gas market (such as under the current Industrial 

Sales Program) where industrial users are charged a lower price than 

residential/commercial users. 

Note that in these scenarios, gas prices begin to fall below projected 

residual oil prices (at the burnertip). In the Low Gas Price scenario, 

burnertip gas prices by the year 2000 are substantially below high 

sulfur residual oil prices. In the High Gas Price scenario, gas is also 

priced below high sulfur resid in most regions, at medium sulfur resid 

in the southeast (which is nonsensical compared to the other regional 

gas prices), but above low sulfur resid in the northeast. 

Both of these scenarios in the 1990's imply dominance of natural gas 

over resid in fuel combustion markets. Essentially, relative to the 

elastic supply curve for natural gas, the rise in crude oil price is 

sufficient to lead oil refiners to upgrade their crude capacity, rather 

than lower resid prices further to compete against cheaper natural gas. 

-4-
P.7 

It further assumes a sufficient degree of competition among gas producers that they are unable, as a group, to support a price level above the 

resource cost of finding new gas supplies which, after adding transmission/distribution costs, is generally below resid prices at the 

burnertip. 

-5-