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# OAR Box 

# 1828 Prepped by Ollie Stewart



## Document

Number: 

# 138 ) ll-K - (B)-13 7 Docket Number: 

# A-83-2 7

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

# B 5 ~ 1«— I ENERG

YAN D ENVIRONMENTA L ANALYSIS , INC . 

# A-83-2 7

II-K-CBD-13 7 Apri l 6 , 198 4

Mr . Rober t Shor t Economi c Analysi s Branc h Environmenta l Protectio n Agenc y MD-1 2 Researc h Triangl e Park , Nort h Carolina 2771 1 SUBJECT : Contex t o f Curren t Fue l Pric e Forecast s Use d i n EPA' s

Industria l Boile r NSP S Analysis , EP AContrac t 68-02-3564 , Tas k #1 4 Dea r Robert : Enclose d pleas e fin d a draf t o f the explanatio n o f the tw o fue l pric e forecast s use d in the Industria l Boile r NSP S Project . Thi s brie f document , i s i n respons e t o a reques t fromEA B fo r the majo r assumption s behin d the oi l an

d ga s price s inpu t t o IFCA M a s par t o f the energ y scenario s develope d i n the summer , 1983 . I f yo u hav e an

yquestions , pleas e giv e m e a call . Sincerely , 

# •gj.Tt*

Kar l F . Hel d Projec t Manage r KFH:s m Enclosur e cc : A l Weh e

Economic s / Engineerin gP. 3

CONTEXT O F TH E CURREN T FUE L PRIC E FORECAST S USE D INEPA' S INDUSTRIA L BOILE R NSP S ANALYSI S

Crud e Oi l Price s Worl d crud e oi l price s ar e assume d t o increas e t o $31.9 0 pe r barre l in 199 0 ($1982 ) an

d $57.4 0 pe r barre l b ythe yea r 2000. * Compare d t o the recen t rang e define d b y"conventiona l wisdom" , thi s pric e i s i n the mid-rang e o f forecast s fro m1985-90 , then rise s ver yrapidl ya t a rat e faste r tha

n curren t "hig

h oi l price " forecasts . Thre e mai n condition s mus t exist , an d ar e implie d i

n the scenario , tha t coul d lead t o the si x percent/yea r crud e oi l pric e increas e betwee n 199 0 an d 2000 :

• Economi c growt h fo r the U.S. , Japan an d Wester n Europ e (at 2. 4 percent/yea r i n rea l terms ) an d strong growt h fo r OPE C an d othe r non-OPE C nation s (a t 3. 5 t o 4. 8 percent/year) , couple d wit h modes t end-us e efficiencygains , lead s t o a n increas e in tota l liquid s deman d b yabou t thre e MMB/ D b y2000 .

- • Adeclin e i n U.S . an d Wester n Europ e tota l liquid s productio n (excludin

g coa l liquids ) b

yabou t 1. 0 MMB/ D absorb s mos t o f the projecte d 1. 5 MMB/ D increas e i n productio n fro mothe r non-OPE C sources . • Thes e two trend s lea d t o a n increas e i n deman d fo r crud e face d b yOPE C o f abou t 2. 5 MMB/ D betwee n 199 0 an d 2000 . Thi s represent s ove r 7 5 percen t o f OPEC' s exces s availabl e capacit y i n 199 0 an

d put s stron

g upward pressure s o n worl d crud e oi l price s throughou t the remainde r o f the decade . *Mid-rang e se t o f projection s (Scenari o B - Referenc e Case ) fro mthe Nationa l Energ

yPolicyPlan (NEPP-1983) , Energ yProjection s t o Yea r 2010 , U.S . Departmen t o f Energy , DOE/PE-0029/2 , October , 1983 .



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Th e keyquestio n abou t thes e condition s ar e whethe r the assume d economi c growt h projection s ca n b e sustaine d a t such high oi l prices , an d whethe r conservatio n gain s coul d b e mad e i n developing countrie s t o keep thei r oi l deman

d fro mgrowing a t the projecte d 2. 5 t o 4. 6 percent/yea r rates . A n oi l suppl ydisruptio n cas e woul d ten d t o produc e a shar p spik e i n oi l prices , whic h i s no t ver yconsisten t wit h thi s scenario . Resi d Price s Relativ e t o Crud e In thes e scenarios , the burnerti p industria l resi d pric e fo r relativel y lowsulfur resi d (abou t 0. 8 percent ) i s consistentl yequa l t o the worl d oi l price . Thi s implie s a significan t "tightening up " o f residua l oi l market s compare d t o today' s situation . Thi s woul d ten d t o occu r i f curren t trend s i n refiner yupgrading (convertin g residua l oi l output s t o a lighte r produc t slate ) continu e in the future . Natura l Ga s Price s Tw o natura l ga s pric e scenario s ar e being used , referre d t o a s Lo wan d High . Thes e scenario s basicall ydiffe r i n thei r assumption s regarding ga s pric e trend s fro m1983-1990 . Th e NSP S regulator ycontex t focusing o n ne wboiler s implie s tha t onl yprice s starting in the lat e 1980' s woul d b e relevant . Thus , w e hav e focuse d o n the rea l worl d contex t behin d the tw

o pric e forecast s in 1990 . Bot h forecast s impl ythe sam e annua l rat e o f escalatio n o f price s fro m199 0 t o 2000 . Consequently , the discussio n o f 1990-200 0 ga s pric e trend s ha s common implication s fo r bot h Lo wan

d High ga s pric e scenarios . Projecte d 199 0 Industria l Natura l Ga s Prices : Lo wForecas t . I n 1990 , the projecte d industria l natura l ga s pric e i s lowe r tha n mediu m sulfur resi d i n region s such a s the southwes t an d wes t coast ; comparabl e t o a 1 t o 2 percen t sulfur residua l fue l oi l i n the sout h atlanti c an d



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midwes t regions ; an d no t competitiv e wit h resi d in the northeast , wher e highe r transmissio n an d distributio n cost s mak e natura l ga s highe r tha n even lowsulfur resid . Thi s scenari o i n 199 0 implie s a combinatio n o f the following factor s driving ga s prices :

• Renegotiatio n o f man yo f the problempricing provision s in ol d contract s plu s the fac t tha t productio n unde r thes e contract s (primaril ysigne d i n 1978-81 ) i s a fairl ysmal l shar e o f tota l ga s supplie s i n 1990 . • Fairl ysignifican t increase s in wellhea d ga s price s a s the curren t ga s surplu s i s worke d of f b y1990 . • Ga s impor t price s drop (in rea l terms ) t o become competitivel y price d wit h domesti c ga s supplies . Projecte d 199 0 Industria l Natura l Ga s Prices : High Forecas t Th e "high " ga s pric e forecas t i s base d o n a publishe d DO E projection , the Energ

yInformatio n Administration' s 198 2 Annua l Energ yOutloo k (DOE/EIA-0383(82) , Apri l 1983 ) Middl e Worl d Oi l Pric e (Cas e A ) forecast . EI Aproject s tha t averag e natura l ga s wellhea d price s increas e substan
tiall yin 1985 , 198 6 an d 198 7 du e t o curren t deregulatio n provision s o f the Natura l Ga s Polic yAct . "Old " natura l ga s supplie s (unde r relative
l ylow-cos t long-ter mcontracts ) ar e replace d ove r time (a s contract s expire ) b

yveryexpensiv e ne wsupplies . EI Aproject s tha t industria l natura l ga s price s in the 1985-199 0 time fram e wil l b e betwee n the projecte d industria l lowsulfu r residua l fue l oi l an d distillat e fue l oi l price s (eve

n i f the worl d oi l pric e i s a littl e lowe r o r highe r tha n the forecas t discusse d above) . According t o EIA , industria l natura l ga s deman d wil l drop slightl yin 198 5 bu t wil l increas e i n 1988 , 198 9 an d 199 0 (when th e projecte d burnerti p pric e stabilizes ) t o abou t 198 2 levels . Thi s scenari o i n 199 0 implie s a combinatio n o f the following factor s driving ga s prices :



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-• Pipelin e contract s fo r expensiv e ne wga s supplie s signe d sinc e 197 8 wil l no t b e renegotiate d o r relaxe d an d ther e wil l b e n o marke t out s o f expensiv e existing contracts . Al l take-or-pa y an d most-favore d natio n clause s ar e strictl yenforced . • Ga s producer s se t ne wwellhea d price s a t highe r level s suc h tha t industria l burnerti p ga s price s compet e wit h projecte d verylowsulfur residua l fue l oi l prices . Industria l Natura l Ga s Price s Afte r 199 0 Beyon d 1990 , thes e scenario s assume a highl yelasti c suppl ycurv e fo r natura l ga s (domesti c plu s imported ) wit h wellhea d ga s price s increasing b yon e t o tw

o percen t pe r annu

mi n rea l terms . Thi s implie s high estimate s o f undiscovere d ga s reserve s an d a relativel yslowincreas e i n cost s a s smalle r field s ar e foun d ove r time . Anothe r possibl e facto r contributing t o thi s scenari o i s the continua
tion o f a dual-price d ga s marke t (such a s unde r the curren t Industria l Sale s Program ) wher e industria l user s ar e charge d a lowe r pric e tha n residential/commercia l users . Not e tha t i n thes e scenarios , ga s price s begi n t o fal l belo wprojecte d residua l oi l price s (a t the burnertip) . In the Lo wGa s Pric e scenario , burnerti p ga s price s b ythe yea r 200 0 ar e substantiall ybelo whig h sulfur residua l oi l prices . In the High Ga s Pric e scenario , ga s i s als o price d belo whigh sulfur resi d in mos t regions , a t mediu msulfur resi d in the southeas t (which i s nonsensica l compare d t o the othe r regiona l ga s prices) , bu t abov e lowsulfur resi d in the northeast . Bot h o f thes e scenario s in the 1990' s impl ydominanc e o f natura l ga s ove r resi d i n fue l combustio n markets . Essentially , relativ e t o the elasti c suppl ycurv e fo r natura l gas , the ris e in crud e oi l pric e i s sufficien t t o lea

d oi l refiner s t o upgrad e thei r crud e capacity , rathe r tha n lowe r resi d price s furthe r t o compet e agains t cheape r natura l gas .



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I t furthe r assume s a sufficien t degre e o f competitio namong ga s produc er s tha t they

ar e unable , a s a group , t o suppor t a pric e leve l abov e the resourc e cos t o f findin g ne w ga s supplie s which , afte r addin g trans mission/distributio ncosts , i s generall y below resi dprice s at the burnertip .



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