p. 1 

# OAR Box 1865 Prepped by Charmelle Mathews



### Document

Number: 

# 103)IV-K-(A)- 1 Docket Number: 

# A-83-2 7

Printed 12/3/20089:15:33 AM

Sheet 103 of 105P. 2

o f f H _ y \ c a IV"K-(A)- 1



## ElMERGYAN

D ENVIRONMENTA

L ANALYSIS , INC . 165 5 NORT

H FORT MYE

RD R ARLINGTON , VIRGINI A 2220 9 ^P. 3



### PROJECTION S O F INDUSTRIAL FUE L OI L AND NATURAL GA S PRICE S

Prepare d for : U.S . ENVIRONMENTA L PROTECTIO NAGENC Y Offic e o f Ai r Qualit yPlannin g and Standard s Researc h Triangl e Park , Nort h Carolin a 2771 1

Prepare d by : ENERG Y AN D ENVIRONMENTA L ANALYSIS , INC . 165 5 Nort h For t Mye r Drive , Suit e 60 0 Arlington , Virgini a 2220 9

Octobe r 198 6P. 4



### Thi s repor t wa s furnishe dt o th e U.S . Environmenta l Protectio nAgenc y b y Energ y an dEnvironmenta l Analysis , Inc. , Arlington , Virginia , infulfillmen t o f Contrac t Numbe r 68-02-4202 . Th e content s o f thi s repor t ar e reproduce d herei na s receive dfro m th e contractor . Th e opinions , findings , an dconclusion s expresse dar e thos e o f th e autho r an

dno t necessaril y

thos e o f th e U.S . Environmenta l Protectio nAgency .



# Li 5 _

TABL E O F CONTENT S Pag e 1 . SCOP E AN D OBJECTIVE S 1- 1 2 . CRUD E OI L PRICE S 2- 1 2. 1 Overvie w

o f Methodolog y

Use dt o Develo pCrud e Oi l Price s 2- 1 2. 2 Projecte dCrud e Oi l Price s 2- 1 2. 3 Highlight s o f th e Analysi s o f Crud e Oi l Price s 2- 4 3 . FUE L OI L PRICE S T O TH E INDUSTRIA L SECTO R3- 1 3. 1 Determinant s o f Residua l Oi l Pricin g 3- 1 3. 2 Relationshi po f Hig hSulfu r Residua l Oi l wit hCrud e Oi l Price s 3- 1 3. 3 Difference s i nResidua l Oi l Price s b y Sulfu r Conten t 3- 3 3. 4 Regiona l Pric e Difference s 3- 3 3. 5 Distillat e Oi l Price s 3- 6 3. 6 Relationshi pBetwee nResidua l Oi l an dNatura l Ga s Price s 3- 6 4 . NATURA L GA S PRICE S 4- 1 4. 1 Th e Contex t - Evolutio no f th e Natura l Ga s Marke t inth e 1982-198 6 Perio d4- 1 4. 2 Focu s an

dMethodolog y

fo r thi s Study

4- 3 4. 3 Result s fo r th e Lo w Oi l Price/Flexibl e Ga s Pric e Scenari o 4- 6 4. 4 Comparison s o f Ga s Marke t Scenario s 4-1 0 APPENDI XA : REGIONA L INDUSTRIA L OI L AND GA S PRIC E FORECAST S FORTH E

LO W OI L PRIC E SCENARI O A- 1 APPENDI XB : REGIONA L INDUSTRIA L OI L AN D GA S PRIC E FORECAST S FORTH E

HIG H OI L PRIC E SCENARI O B- lP. 6

LIS T O F TABLE S

Pag e 1- 1 Oi l an

dNatura l Ga s Pric e Scenario s 1- 3 2- 1 Crud e Oi l Pric e Boundin g Case s 2- 3 2- 2 Projecte dEconomi c Growt hRates , 1984-199 5 2- 5 2- 3 Energ y

Intensit y

Trend s inth e Lo

w Cas e 2- 7 2- 4 U.S . Oi l Productio n2- 8 2- 5 U.S . Oi l Deman dOutloo k 2- 9 2- 6 Worl dTransportatio nOi l Us e inLo w Cas e 2-1 0 2- 7 Worl dOi l Supply/Deman dinLo w Cas e 2-1 1 2- 8 Marke t Factor s inth e Lo w Pric e Cas e 2-1 2 3- 1 Residua l Oi l Pric e Differential s b y Sulfu r Content : Lo w Oi l Pric e Scenari o 3- 4 4- 1 Oi l an

dNatura l Ga s Pric e Scenario s 4- 5 4- 2 Natura l Suppl y an dDemand : Lo

w Oi l wit hFlexibl e Ga s Marke t . . 4- 7 4- 3 Projection s o f Ga s Prices : Lo w Oi l wit hFlexibl e Marke t 4- 8 4- 4 Projecte dTrend s i nNatura l Ga s Consumptio n4-1 2 4- 5 Projecte dTrend s inGa s Suppl y an dWellhea dPrice s 4-1 4 4- 6 Projecte dTrend s inIndustria l Burnerti pPrice s inth e

Middl e Atlanti c Regio n4-1 6P. 7



### LIS T O F FIGURE S

Pag e 1 . Worl dOi l Pric e 2- 2 2 . Federa l Region s o f th e Unite dState s 4- 9P. 8

1 . SCOP E AN D OBJECTIVE S

Thi s repor t present s a se t o f oi l an dnatura l ga s pric e forecast s prepare d b y EE A durin g th e summe r o f 1986 . Th e focu s i s o nprojection s o f delivere d regiona l price s t o industria l secto r energ y users . Thi s repor t constitute s a n updat e o f fue l pric e forecast s prepare da s a ninpu t fo r th e impac t analysi s o f th e New Sourc e Performanc e Standard s fo r industria l boilers . Th e previou s se t o f pric e forecasts , prepare din1984 , ha s bee noutdate db y recen t trend s inoi l price s an

drapi dinstitutiona l change s inth e natura l ga s market . Specificall y

th e repor t provide s delivere dindustria l energ y pric e projection s b

y Federa l regio nthroug hth e yea r 200 5 fo r th e followin g alter nativ e energ y

sources : t Distillat e fue l oi l 0 Residua l fue l oi l • Natura l gas . Th e nee dt o updat e thes e pric e forecast s occur s ina perio do f unusuall y highuncertaint y

inoi l an

dnatura l ga s markets . Althoug hoi l an dga s market s hav e bee nnotoriousl y difficul t t o predic t i nth e las t 1 5 years , th e presen t environmen t i s unusuall y unstabl e du e to : t Th e shar pdro pincrud e oi l price s fro m $26-2 7 pe r barre l in 198 5 t o $12-1 5 inearl y 1986 . • Th e evolutio no f a mor e market-oriente dinstitutiona l environ men t innatura l ga s market s combine dwit hsharpl y declinin g price s durin g 1983-1986 . Thi s repor t addresse s thes e uncertaintie s b y generatin g alternativ e scenario s t o reflec t th e potentia l impac t o f thes e issue s o nth e rang e o f futur e oi l an

dga s prices . Wit hrespec t t o oi l price s th e scenario s reflect : • Hig han

dlo w scenario s fo r worl dcrud e oi l price s t Tha t n o attemp t wa s mad e t o prepar e a "bes t guess " scenari o du e t o curren t uncertaint y t Tha t anattemp t wa s mad e t o generat e "plausible " (bu t no t extreme ) scenario s wit hth e highan dlo w forecast s expecte dt o bracke t futur e outcomes . Wit hrespec t t o delivere dnatura l ga s price s t o th e industria l sector , 

### 1- 1P. 9

t,h e scenario s reflect : • Alternativ e outcome s o f th e institutiona l evolutio no f th e marke t • Withi na

n"institutional " scenario , pric e fo r ga s sol di n traditiona l market s an da differen t pric e reflectin g sale s i n th e ne w transpor t (o r carriage ) market . Tabl e 1- 1 summarize s th e descriptio no f th e scenario s reflecting : • Tw o fue l oi l pric e forecasts , reflectin g hig hversu s low crud e oi l trend s • Si xdistinc t forecas t pric e trajectorie s fo r natura l ga s t o repre sent :

- highan

dlo w oi l price s

- a flexibl e versu s rigi dinstitutiona l environmen t unde r th e lowe r crud e oi l price s

- traditiona l a s wel l a s transpor t marke t price s fo r eac ho f th e thre e scenario s o f natura l ga s price s Thi s repor t i s organize dint o thre e sections . Sectio n2 present s th e forecast s o f crud e oi l prices . Sectio n3 explain s th e developmen t o f fue l oi l price s inrelatio nt o th e crud e oi l prices . Sectio n4 contain s th e discussio n o f natura l ga s prices . Two appendice s contai nth e detaile dregiona l pric e projections . Appendi xA contain s projection s fo r al l fue l price s unde r th e lo w crud e oi l pric e scenario s whil e Appendi xB ha s al l projection s whic hwer e base donth e hig hcrud e oi l pric e scenario .



### 1- 2P.1 0



### TABL E 1-1 . OI L AN D NATURA L GA S PRIC E SCENARIO S

Lo w oi l • Fue l oi l produc t price s • Natura l ga s

- Present s price s fo r two marke t segment s

-- Carriag e

-- Non-carriag e o r loca l distributio ncompany (LDC ) sale s

- Tw o alternativ e scenario s o f natura l ga s price s dependin g on marke t evolutio n

-- Flexibl e marke t - maximize s abilit y t o retai nga s sale s

-- Mor e rigi dmarke t - institutiona l an dbehaviora l constraint s limi t abilit y

t o lowe r burnerti pnatura l ga s price s an dretai n natura l ga s sale s Hig hoi l • Fue l oi l produc t price s • Natura l ga s

- Present s price s fo r two marke t segment s

-- Carriag e

-- Non-carriag e o r LDC sale s

1- 3P.1 1

2 . CRUD E OI L PRICE S 2. 1 OVERVIE W

O F METHODOLOG YUSE D T O DEVELO P CRUD E OI L PRICE S EE A utilize d a mode l o f worl doi l market s a s th e framewor k t o develo pth e crud e oi l pric e scenarios . Thi s mode l (WOIL) , develope db y EE A an dDOE , i s th e framewor k use di nDOE' s Nationa l Energ y Polic y Pla n(NEPP ) projections . I nthi s model , deman dan dsuppl y balance s ar e represente dfo r fiv e countr y groups : th e Unite dStates , th e res t o f th e OEC D countries , th e developin g countries , Mexic o an

dth e produce r member s o f OPEC . I t i s a system s dynamic s framewor k wit hstructura l representation s o f deman dforce s (reflectin g effi cienc y gain s an

dfue l switching ) an dexplici t trackin g o f resourc e discovery , developmen t an

dproductio ni nth e suppl y sectors . Fo r eac hworl dregio nWOI L project s primar y

energ y supplie d interm s o f oil , gas , coal , nuclea r an d renewable s (includin g production , ne t trade , an dstoc k changes) . Energ y consumptio ni s estimate dbase do neconomi c activit y

an dequipmen t efficienc y assumption s an

di s projecte db

y fue l typ e (includin g electricity ) an db y secto r (residential , commercial , industrial , electri c utilit y an dtrans portation) . Energ y

price s ar e calculate dfro m supply/deman dbalance s fo r resourc e cost s (fo r example , minemout hcoal ) plu s taxes , deliver y charges , an

d othe r markup s t o determin e delivere d energ y prices . Th e WOI L mode l treat s th e OPE C countrie s a s th e margina l supplie r o f oi l inworl dmarkets , wit hsome degre e o f contro l o nexces s productio ncapacity . Price s ar e determine db y deman dan

dsuppl y forces , wit hOPE C exertin g marke t powe r i ntigh t markets . 2. 2 PROJECTE D CRUD E OI L PRICE S Figur e 1 show s th e Highan dLo w Pric e Scenario s generate dinthi s study . Th e Lo w Pric e Scenari o fall s t o $13-1 4 pe r barre l ($1985) , the nrise s t o abou t $1 5 in199 0 an

d$2 0 b y 1995 . Th e Hig hCas e reflect s a muc hmor e rapi drecover y t o $2 1 b y 198 8 an

dreturn s t o 1984-198 5 price s level s o f $26-2 7 pe r barre l i n 1995 . Tabl e 2- 1 present s th e year-by-yea r price s use di nFigur e 1 . Sinc e thes e two scenario s ar e intende dt o provid e plausibl e boundin g case s fo r futur e oi l pric e trends , th e "themes " o r underlyin g characteristic s o f th e two scenario s shoul dbe highlighted . Th e Lo w Oi l Pric e Cas e coul dbe 

### 2- 1P.1 2



### 1985$/BB L 3 0

2 0 -

1 0 - F1GUR E 1



# Worl d Oi l Pric

e

LO W PRIC E CAS E



### —T—•— r '84 '85 ~i—«—i—•— r

•8 6 '8 7 *8

8 T—•—r T 

### i —•—r •8 9 '9 0 '9 1 '9 2 *9 3 '9 4 '95 YEA R

2- 2P.1 3

TABL E 2-1 . CRUD E OI L PRIC E BOUNDIN GCASES * (198 5 $/bbl )

Lo w Cas e HighCas e

198 5 26.7 6 26.7 6 198 8 13.3 4 21.1 6 199 0 14.4 7 23.8 7 199 5 20.0 8 27.0 2 200 0 24.6 1 30.6 1 200 5 30.7 9 37.4 2 Averag e U.S . refine r acquisitio ncos t o f crud e oil .



### 2- 31 characterize das : T • Continue dhig hOPE C crud e oi l productio nresultin g fro m revenu e need s an dlac k o f agreemen t amon g key countrie s • Moderat e economi c growt hrat e reflectin g poore r performanc e tha n historica l experienc e • Minima l respons e o f oi l deman dan dsuppl y element s t o lowe r crud e oi l prices . Incontrast , th e Hig hOi l Pric e Scenari o coul d be characterize d by : • A stronge r economi c growt hrat e • A greate r respons e o f suppl y an ddeman dfo r oi l t o lowe r crud e price s • A retur nt o histori c OPE C behavio r pattern s 2. 3 HIGHLIGHT S O F TH E ANALYSI S O F CRUD E OI L PRICE S Th e developmen t o f projection s o f crud e oi l price s considere da wid e variet y o f factors . Fo r thi s study th e emphasi s wa s place donth e followin g issues : Assumption s regardin g economi c growt h Impac t o f worl dcrud e oi l pric e o noi l an dga s productio noutsid e OPEC , especiall y

U.S. , Nort hSe a an

d Canad a Degre e o f fue l switchin g inU.S . industria l an delectri c utilit y sector s Degre e o f energ y

deman drespons e t o lowe r fue l price s Potentia l utilizatio no f ga s an dcoa l inles s develope dcountrie s Efficienc y

gain s inth e transportatio nsecto r Outloo k fo r nuclea r powe r Th e discussio nwhic hfollow s present s som e o f th e assumption s an dinter mediat e result s fo r selecte darea s t o illustrat e th e natur e o f th e scenarios . Th e emphasi s inth e presentatio ni s o nth e Lo w Oi l Pric e Scenari o sinc e tha t cas e i s a significan t departur e fro m recen t trends . Tabl e 2- 2 present s th e economi c growt hrat e forecast s use d inth e analysi s fo r bot hth e Lo

w an dHig hScenarios . Fo r th e U.S. , th e 2.3-2. 8 percen t pe r yea r rang e reflect s uncertaint y ove r th e pac e o f economi c recovery . Inth e Lo w Case , th e growt hrate s fo r th e OEC D an dres t o f fre e worl d(the developin g countries ) ar e substantiall y below recen t experienc e reflectin g muc hpoore r 

### 2- 4P.1 5



### TABL E 2-2 . PROJECTE D ECONOMI C GROWT H RATE S

1984-199 5 ( % pe r yea r i

nrea l terms )

Lo w Cas e HighCas e
U.S . 2. 3 2. 8 Res t o f OEC D 1. 8 2. 3 OPE C 2. 5 3. 3 Res t o f fre e worl d2. 5 3. 3

2- 5performanc e b y Japa nan

da considerabl e moderatio no f growt hinles s develope d countries . Not e tha t th e lowe r economi c growt hrate s ar e use dinth e Lo w Oi l Cas e no t becaus e w e believ e lowe r oi l price s wil l slow economi c growt hbu t becaus e ou r Low

Cas e i s intende dt o reflec t a scenari o o f poore r fre e worl d economi c performanc e whic hcontribute s t o a weake r energ y deman d (an

d lowe r oi l prices) . Tabl e 2- 3 show s forecas t trend s inenerg y intensit y

fo r th e Lo

w Oi l Pric e Case . Thes e trend s continu e t o reflec t improve denerg y efficienc y

bu t a t a slowe r pac e tha ni nth e past . Th e U.S . tren di nefficienc y i s a 1 percent pe r yea r improvemen t inenerg y intensit y

pe r $ o f GN P ove r th e 1984-199 5 period . Tabl e 2- 4 show s th e U.S . oi l productio nlevel s associate dwit hbot h cases . Fo r th e Lo

w Oi l Pric e Case , th e estimate s show a rang e o f uncertaint y inth e impact s o f variou s component s o f U.S . production . Productio ninAlaska , fo r example , woul dno t be significantl y reduce dbecaus e o f hig hfixe dcost s an d th e relativel y

recen t developmen t o f productio ncapacity . Onth e othe r hand , EOR(enhance doi l recover y techniques ) productio ncoul dfal l of f very rapidly . Tabl e 2- 5 present s th e U.S . oi l deman dprojection s b y endus e secto r unde r th e Lo

w Oi l Pric e Scenario . Mos t o f th e increas e inindustria l oi l deman dcome s fro

m fue l switchin g fro

m natura l gas . Th e lowe r endo f th e rang e o f oi l deman dincrease s ove r th e perio d1984-199 5 implie s anincreas e o f slightl y belo w 1 percen t pe r annum . Th e fla t (o r declining ) oi l deman dfo r transportatio nuse s tend s t o outweig hincrease doi l us e i nth e industria l an d electri c utilit y

sectors . Tabl e 2- 6 show s worl doi l deman dfo r transportatio nuse s declinin g fro m 4 0 percen t t o 3 6 percen t o f worl d oi l deman d ove r th e 1984-199 5 period . Tabl e 2- 7 show s th e overal l oi l suppl y an ddeman dbalanc e inth e Lo w Oi l Pric e Case . Tabl e 2- 8 convert s thi s balanc e int o th e measure s mos t relevan t fo r pric e determination . OPE C productio ni s projecte dt o gro w fro m 4 1 percen t o f al l worl doi l suppl y in198 4 t o 5 6 percen t b y 1995 . Fro

m th e perspectiv e o f pric e determination , th e key measure s ar e OPE C capacit y utilizatio nan

d revenues . Fro

m 198 0 t o 1984 , th e capacit y utilizatio nrat e o f OPE C decline d sharpl y fro m 9 2 percent t o 5 8 percen t creatin g tremendou s pressure s fo r a collaps e inworl doi l prices . Usin g simpl e rule s o f thum bfro m historica l



### 2- 6P.1 7



### TABL E 2-3 . ENERGYINTENSIT YTREND S I N TH E LO W CAS E (barrel s pe r $1000 , inrea l terms , o f GNP )

U.S . Res t o f OEC D OPE C Res t o f fre e worl d 198 4

3.6 0 2.8 7 2.2 2 3.2 5 199 0

3.3 6 2.7 0 2.0 7 3.1 2 199 5

3.2 2 2.5 5 1.9 4 3.0 2



### 2- 7P.1 8



### TABL E 2-4 . U.S . OI L PRODUCTION

(MMB/D )

198 4 199 0 199 5

LOW CAS E Lowe r 4 8 Alask a 

### EO R Tota l HIGH CAS E 

### 8. 0

1. 7 0. 6 10. 3 5. 4 - 6. 1



### 1. 7 0. 4 - 0. 5 7. 5 - 8. 3 9. 2 -10. 1 4. 4 - 5. 0 1. 3 - 1. 5 0. 3 - 0. 5 6. 0 - 7. 0 8. 2 - 9. 6



### 2- 8P.1 9



### TABL E 2-5 . U.S . OI L DEMAN D OUTLOO K

198 4 199 0 Lo w Cas e 199 5 Industria l (Quads ) Electri c utilitie s (Quads ) R/ C (Quads ) Transportatio n(Quads ) Tota l (Quads ) (MMB/D ) 7. 9 1. 3 2. 6 19. 3 31. 1 14. 7 9. 5

1. 5 - 2. 0 2. 8 - 3. 1 18. 7 -18. 9 32. 3 -33. 5 15. 4 -15. 8 10. 3 - 1. 8 - 2. 9 - 19. 0 - 34. 0 - 16. 1 - 11. 6 2. 7 3. 2 19. 2 36. 7 17. 3



### 2- 9P.2 0

TABL E 2-6 . WORL D TRANSPORTATIO N OI L US E I

N LO W CAS E (MMB/D )

198 4 199 0 199 5

U.S . Res t o f OEC D LDC's * Tota l transportatio n 

### 9. 8 5. 2 3. 5 

### 18. 4 9. 5

5. 4 4. 0 

### 18. 9 9. 6

5. 2 4. 2 

### 19. 0

Percen t o f tota l oi l us e 

### 40 % 38 % 36% Les s develope d countries .

2-1 0 

# JP.2 1



### TABL E 2-7 . WORL D OI L SUPPLY/DEMAN D IN LO W CAS E (MMB/D )

198 4 199 0 199 5 DEMAN D U.S . Res t o f OEC D Res t o f fre e worl d Tota l fre e worl d 14. 7 19. 9 11. 2 45. 8 15. 4

22. 1 12. 6 50. 1 16. 1

22. 5 13. 4 52. 0



### SUPPL Y U.S . Res t o f OEC D Res t o f fre e worl d OPEC * Processin g gai n

* * 

### CP E export s Tota l fre e worl d 10. 3 

### 6. 1 8. 1 18. 5 

### 1. 0 

## LS 45. 8 

### 8. 3

5. 8 8. 4 24. 9 

### 1. 1 

## LS. 50. 1 

### 7. 0

5. 2 8. 5 29. 2 

### 1. 1 1. 0

— T 52. 0 

### Include s natura l ga s liquids . *Centrall y

planne deconomies .

2-1 1TABL E 2-8 . MARKE T FACTOR S I N TH E LO W PRIC E CAS E P.2 2

OVERAL L OI L BALANC E (MMB/D )

Fre e worl d deman d Fre e worl d suppl y Ne t deman d fo r OPE C 198 4 199 0 199 5 

### 45. 8 27. 3 18. 5 50. 1

25. 2 24. 9 52. 0

22. 8 29. 2

PRESSURE S O

N OPE C 198 0 198 4 198 8 199 0 199 5 Capacit y Utilizatio n(% ) Gros s oi l revenue s (billio n198 5 $ ) 

### 9 2 41 4 5 8 20 0 7 2 11 2 8 3 13 2 9 1 21 4

2-1 2P.2 3

experience : • Upwar dpricin g pressure s hav e occurre dwhe nOPE C capacit y util izatio nha s bee nabov e 8 0 percen t

- 9 3 percen t i n1973/197 4 durin g th e oi l embarg o

- 90-9 2 percen t i nth e 1978-198 0 perio do f anothe r shar ppric e increas e • Downwar dpressure s onpric e hav e occurre dwhe ncapacit y utili zatio nha s bee nbelow 7 0 percen t

- 65-7 0 percen t i n1982-198 3

- belo w 6 0 percen t i n1984 . Not e als o tha t gros s oi l revenue s o f th e OPE C nation s wer e already cu t in hal f i n198 4 (compare dt o 1980 ) primaril y du e t o decline s i nOPE C productio n rathe r tha nprice . In1985-198 6 revenue s hav e plummete d a s oi l price s decline d fro m $26.5 0 t o roughl y

$12-1 5 pe r barrel . Th e Lo w Oi l Pric e Scenari o show s a ver y gradua l recover y

o f OPE C a s a shar e o f worl doi l production . B y 1990 , OPE C capacit y

utilizatio nha s jus t exceede d8 0 percen t (causin g price s t o begi nt o increas e abov e $1 5 pe r barrel) . Eve nintha t year , oi l revenue s hav e stil l recovere donl y t o 198 4 levels , tendin g t o forc e highe r productio nlevels . I nthi s Lo

w Oi l Pric e Scenari o characterize db

y minima l response s inworl doi l suppl y an ddeman dt o a $1 5 oi l price , ther e i s ver y

littl e pressur e onOPE C oi l productio ncapacit y unti l th e earl y 1990's . Afte r 1990 , th e pric e ris e i s fairl y moderat e inth e Lo

w Cas e (fro m $1 5 t o $2 0 b

y 1995 ) du e t o th e behaviora l assumptio ntha t continue d disunit y an drevenu e pressure s o nth e OPE C nation s weake nthei r abilit y t o exercis e marke t powe r a s th e worl d oi l marke t tighten s up . I ncomparison , unde r th e HighPric e Scenario , crud e oi l price s hav e already rise nt o $23-2 4 b

y 199 0 du e t o stronge r decline s i nNon-OPE C productio n an dincrease denerg y

an doi l demands . Price s ris e t o $2 7 in199 5 (recove r t o 198 5 levels ) du e t o a tigh t marke t plu s th e exercis e o f OPE C marke t powe r accordin g t o historica l patterns .

2-1 3P.2 4

3 . FUE L OI L PRICE S T O TH E INDUSTRIA L SECTO R 3. 1 DETERMINANT S O F RESIDUA L OI L PRICING Th e mos t importan t competitiv e fue l oi l agains t natura l ga s an dcoa l i s residua l oil . Residua l oi l ha s traditionall y bee nconsidere da lo w value d by-produc t o f th e refinin g process . Thi s perceptio nlead s man y observer s t o not e tha t resi dprice s i ntime ar e se t a t "whateve r th e marke t wil l bear. " However , resi dprice s ar e determine db y a comple xse t o f underlyin g factor s including : th e pric e an dqualit y

o f crud e oil , deman dfo r resi dan dothe r refiner y products , refiner y

configuration s an

dcapacit y

utilization , cost s o f convertin g resi dt o lighte r petroleu m product s an

ddesulfurizatio ncosts . Thi s discussio no f residua l oi l price s i s organize db y th e followin g key analytica l elements : f Th e pric e o f residua l oi l relativ e t o crud e oi l • Pric e distinction s b y sulfu r conten t • Regiona l pric e difference s Ther e is , inreality , significan t interactio namon g thes e factors . Fo r example , th e determinant s o f price s b y sulfu r conten t diffe r regionally . Difference s i nregiona l produc t deman dan dexistin g refiner y

configuration s ar e als o important . However , fo r expositiona l purposes , eac ho f thes e key element s wil l be discusse dseparately . 3. 2 RELATIONSHI P O F HIG H SULFU RRESIDUA L OI L WIT H CRUD E OI L PRICE S I nperiod s wher e ther e i s a significan t exces s productio ncapacit y fo r hig hsulfu r resid , resi dprice s ca nfal l lo w enoug hrelativ e t o crud e oi l s o tha t i t become s economi c fo r refiner s t o substitut e residua l oi l fo r crud e a s a feedstoc k sinc e i t ca nbe upgrade dt o produc e lighter , highe r value d products . Thus , i neffect , refiner y upgradin g economic s se t a floo r pric e o n highsulfu r residua l oi l inrelatio nt o crud e oi l prices . Deman dfo r residua l oi l ha s decline dsharpl y inth e U.S . inrecen t year s fro m approximatel y

2. 8 millio nbarrel s pe r da y (MMB/D ) inth e 1976-197 9 perio d t o 1. 4 MMB/ D in1983 . Thi s dro pinresi dconsumptio nb y one-hal f ove r a fou r yea r perio dha s bee nmor e sever e tha nth e declin e inoveral l petroleum produc t consumption , whic hdroppe db y abou t 2 0 percen t ove r th e same period . Th e



### 3- 1P.2 5

declin e i nresi ddeman daffecte dimporte dsupplie s mor e severel y tha noutpu t fro m U.S . refineries . I nth e lat e 70's , resi dimport s accounte dfo r nearl y two-third s o f domesti c suppl y bu t b y 198 2 import s haddroppe d t o 40-4 5 percen t o f resi dsuppl y

t o U.S . markets . Thi s le dt o pric e decline s fo r residua l oi l whic hfel l belo w

th e trigge r leve l causin g refiner s t o instal l facilitie s (particularl y

cokin g units ) t o upgrad e residua l oi l int o lighte r products , reducin g th e degre e o f exces s resi dsuppl y inth e marke t place . Th e key issue s inforecastin g th e relationshi po f hig hsulfu r resi dt o crud e oi l are : • Wha t constitute s a parit y relationshi p o r differentia l betwee nhigh sulfu r resi dan

dcrud e i nth e future ? • How sensitiv e i s thi s differentia l t o lowe r crud e oi l prices ? Th e latte r poin t relate s t o whethe r highsulfu r resi dprice s wil l mov e propor tionatel y

wit hth e declin e i ncrud e oi l price s o r les s tha nproportionately . Fo r example , i f al l o f th e cost s o f upgradin g resi dt o ligh t product s wer e dependen t o

nth e cos t o f crud e oil , the non e woul dexpec t th e floo r pric e fo r highsulfu r resi dt o dro pa t th e sam e percentag e rat e a s th e crud e oi l price . I nfact , al l o f th e fixe dcos t o f resi dupgradin g an da portio no f th e variabl e cost s ar e no t dependen t o ncrud e oil . Hence , fro m th e perspectiv e o f refiner y economics , a s th e pric e o f crud e oi l declines , w e woul dexpec t hig hsulfu r resi dt o declin e bu t les s rapidly . Thes e factor s woul dtendt o mak e hig h sulfu r resi dprice s converg e (i nabsolut e dollar s pe r barrel ) wit hcrud e oi l price s unde r ou r two crud e oi l pric e scenarios . Onth e othe r hand , th e valu e o f th e ligh t product slat e ma y b e droppin g relativ e t o crud e oi l du e t o th e wea k forecas t deman dfo r gasolin e inth e future . T o th e exten t tha t th e averag e pric e o f th e ligh t product slat e drop s relativ e t o crud e oil , thi s wil l ten dt o increas e th e differentia l o f highsulfu r resi dbelow crud e becaus e th e valu e o f product s converte dfro m resi dwoul db e lowe r relativ e t o crud e oil . Whe nthes e concept s ar e incorporate dint o th e forecas t framework , th e pric e differentia l betwee ncrud e oi l an dhighsulfu r residua l fue l oi l drop s fro m $3.5 4 pe r barre l in198 5 t o $2.46 pe r barre l in198 8 a s a resul t o f th e dro pincrud e pric e fro m $26.7 6 t o $13.3 4 pe r barre l ove r th e same period . Thi s dro pindifferentia l continue s th e historica l tren d o f shrinkin g differen tial s durin g period s o f fallin g prices . A s projecte dcrud e oi l price s increas e


### 3- 2P.2 6

afte r 1988 , th e differentia l betwee ncrud e an dresi dwil l star t t o increas e again , althoug hno t a s rapidl y a s th e projecte d increas e incrud e oi l prices . 3. 3 DIFFERENCE S IN

RESIDUA L OI L PRICE S B YSULFU RCONTEN T Sulfu r conten t an

dviscosit y

ar e tw o majo r qualit y

distinction s whic h resul t inpric e differences . Fo r th e purpose s o f thi s study , sulfu r distinc tion s ar e th e relevan t issue . Th e forecas t o f residua l oi l price s b y sulfu r conten t i s intende dt o matc hth e fou r classe s use dinth e impac t analysi s o f th e Ne w Sourc e Performanc e Standard : 3% , 1.6% , 0.8 % an d0.3 % sulfu r b

y weight . Th e long runpric e differentia l betwee nhighan dlow sulfu r residua l oi l wil l b e determine db y th e cost s o f desulfurization . A critica l issue , onc e again , i s th e exten t t o whic hdesulfurizatio ncost s ar e dependen t upo ncrud e oi l a s a ninput . T o th e exten t tha t crud e oi l account s fo r a shar e o f desul furizatio ncosts , th e differentia l betwee nhighan dlo w sulfu r residua l oi l wil l decreas e i nou r oi l pric e scenario . EEA' s analysi s o f desulfurizatio n cost s indicate dtha t a t $2 7 pe r barre l crude , crud e oi l relate dcost s (indirectly , hydroge nproductio nan dproces s utilit y

costs ) accounte dfo r roughl y two-third s o f desulfurizatio ncosts . Cost s independen t o f crud e oi l price s (retur no ncapital , catalys t replacement , chemical s an d othe r operatin g expenses ) accounte dfo r th e balanc e o f costs . Tabl e 3- 1 reflect s th e incorporatio no f thes e concept s i nth e forecas t sulfu r conten t pric e differentia l inth e Lo w Oi l Pric e Scenario . Fro m 1985 - 1988 , whil e th e crud e oi l pric e fall s b y one-half , th e residua l oi l sulfu r conten t differentia l narrow s sharpl y bu t no t to ' th e same extent . 3. 4 REGIONA L PRIC E DIFFERENCE S Residua l oi l price s als o diffe r b y regio nwithi nth e U.S . Fo r th e purpose s o f thes e forecasts , thre e majo r regiona l group s ca nb e distinguished: * • Eas t andGul f coast s • Midwes t • Wes t coas t
*0the r distinction s coul dad dth e inlan

dwaterwa y

system an dth e mountai n states . However , thes e area s ar e les s importan t interm s o f th e volum e o f oi l an dnatura l ga s consumptio ninthes e areas . 

### 3- 3P.2 7



### TABL E 3-1 . RESIDUAL OI L PRIC E DIFFERENTIAL S B YSULFURCONTENT : LO W OI L PRIC E SCENARI O (198 5 $ )

Residua l Oi l : 

### u r Differen t ($/bbl ) ($/MMBtu ) ($/MMBtu ) Crud e Oil * Sulfu r Differential* *

198 5 26.7 6 4.6 1 0.8 0 198 8 13.3 4 2.3 0 0.5 2 199 0 14.4 7 2.4 9 0.5 4 199 5 20.0 8 3.4 6 0.6 3 200 0 24.6 1 4.2 4 0.6 9 200 5 30.7 9 5.3 1 0.7 9 *Averag e U.S . refine r acquisitio ncos t o f crud e oi l 0. 3 t o 3.0 % sulfur .

3- 4Th e larg e eas t coas t market s fo r residua l oi l ar e supplie dprimaril y b y th e Caribbea nrefiners , loca l refinerie s an dsmal l shipment s from Gul f coas t refineries . Th e key

determinan t o f resi dprice s onth e eas t coas t i s th e Gul f coas t pric e plu s tanke r cost s t o reac hterminal s alon g th e easter nseaboard . Thi s i s becaus e th e mor e comple xrefinerie s alon g th e Gul f coas t ar e th e lowes t cos t source s o f residua l oil . Th e refinerie s locate do nth e eas t cos t ar e les s efficien t an dtendt o generat e resi dyield s o f 12-1 4 percen t (percen t o f produc t output ) compare dt o lowe r yield s inth e Gul f coast . Th e Caribbea n refiner s ar e basicall y pric e takers , eve nthoug himport s from th e Caribbea n historicall y

provide dth e bul k o f resi dsupplie s onth e eas t coast . Pric e difference s alon g th e Atlanti c seaboar dar e fairl y small , reflectin g difference s i ntransportatio ncosts . Resi dmarket s i nth e midwes t hav e undergon e majo r shift s du e t o th e declin e o f resi dconsumption . Resi dconsumptio ni s now heavil y

concentrate d inlarg e en

dusers , suc ha s th e stee l plants . Amoco , on e o f th e majo r resi d supplier s inthi s region , ha s withdrawnfro m thi s market . Th e ceilin g on midwester nresi dprice s i s presentl y se t b y Gul f coas t product s barge du pth e rive r system . Midwester nrefinerie s ar e relativel y efficien t producer s o f low sulfu r resi ddu e t o a hig hshar e o f cokin g capacit y an da lowe r sulfu r mi xo f crud e oi l tha ni nth e Gul f coast . Hence , i f resi ddeman dwer e strong , thes e refinerie s coul dmak e lo w an dmediu m sulfu r resi da t relativel y lowe r cos t tha n Gul f coas t refiners . I na stron g market , productio no f thes e resi dgrade s ca n b e a profitabl e business . Resi dprice s ca nswin g ove r a relativel y wid e rang e inth e midwes t dependin g onth e siz e o f th e resi dmarket . Thi s analysi s assume s continuatio no f a relativel y wea k marke t fo r resid , henc e resi dprice s inth e midwes t ar e se t a t $0.19/MMBt u($1985 ) abov e Gul f coas t prices . Wes t coas t market s ar e essentiall y isolate dfro

m othe r resi dmarkets . Th e crud e oi l mi xi s heavie r tha no nth e Gul f coast , du e t o th e qualit y o f California nan

dAlaska ncrudes . Du e t o a declinin g resi dmarke t an da heavie r crud e mix , refinerie s inthi s regio nhav e already installe dupgradin g capacit y t o conver t resi dt o lighte r products . Hence , resi dtend s t o b e a highe r value d produc t relativ e t o crud e cost s o nth e wes t coas t du e t o it s valu e a s a feedstock . Lo

w sulfu r Indonesia ncrud e oi l price s woul dse t a ceilin g o n


### 3- 5P.2 9

resi d price s onth e wes t coas t lo w sulfu r resi ddu e t o th e relativel y high shar e o f stringen t sulfu r regulation s inthi s area . Ineffect , compare dt o th e Gul f coast , resi dpric e i s relate dt o th e lowe r pric e o f wes t coas t crudes , offse t partiall y

b y a highe r resi dt o crud e pric e ratio . We hav e assume dresi d price s onth e wes t coas t ar e slightl y below Gul f coas t price s ina relativel y wea k resi dmarke t du e t o th e lowe r averag e crud e oi l cost s onth e wes t coast . 3. 5 DISTILLAT E OI L PRICE S Thes e price s hav e bee nprojecte dbase donhistorica l relationship s wit h crud e oi l prices . 3. 6 RELATIONSHI P BETWEE N RESIDUA L OI L AN D NATURAL GA S PRICE S Sinc e competitio nbetwee nresidua l oi l an dnatura l ga s i s takin g plac e in 1986 , ther e ha s bee na grea t dea l o f discussio nregardin g th e interactio no f th e price s o f thes e competitiv e fuels . Natura l ga s prices , a t leas t inth e shor t run , ar e clearl y affecte db

y residua l oi l price s a s ga s marketer s tr y t o compet e wit hfue l oil . On e popula r vie w i s tha t residua l oi l price s wil l tend t o increase , relativ e t o crud e oi l prices , a s a consequenc e o f competitio n wit hnatura l gas . Thi s vie w implicitl y

assume s tha t residua l oi l wil l wi n substantia l market s fro m natura l ga s an

dth e increase d deman d fo r resi dwil l rais e it s price . No adjustment s hav e bee nmad e inresidua l oi l price s t o accoun t fo r marke t interactio nwit hnatura l ga s sinc e th e methodolog y fo r projectin g natura l ga s price s depend s o nassumption s regardin g residua l oi l price s t o determin e whethe r natura l ga s wil l b e abl e t o maintai nmarke t shar e agains t residua l oil .



### 3- 6P.3 0

4 . NATURA L GA S PRICE S

• J 4. 1 TH E CONTEX T - EVOLUTIO N O F TH E NATURA L GA S MARKE T I N TH E 1982-198 6 PERIO D Th e perio dbetwee n198 2 an d198 6 reflecte da fast-pace dtransitio no f th e natura l ga s marke t fro m a regulatedindustr y t o on e whic hi s increasingl y responsiv e t o marke t pressures , wit hth e institution s tryin g t o adap t t o marke t conditions . Th e dominan t marke t forc e inthi s perio dwa s th e substantia l surplu s o f natura l ga s availabl e i nU.S . markets . Thi s surplu s le dt o a rapi ddeclin e i n ga s price s ove r th e 1982-198 5 perio dprio r t o th e shar pdeclin e i noi l prices . Ga s deman dcontinue dit s lon g rundownwar dtrend , aggravate db y th e recessio n o f 198 2 an

dth e failur e o f th e industria l secto r t o reboun dstrongl y i n 1983-1984 . Ga s producer s continue dt o believ e tha t th e endt o th e ga s surplu s (o r "bubble" ) wa s jus t aroun dth e corner , henc e drillin g t o fin dne w reserve s continue da t a fairl y hig hlevel , tendin g t o maintai nth e surplus . Th e institutiona l structur e o f th e marke t becam e mor e responsiv e t o marke t pressure s a s follows : • Fo r th e mos t part , producer s wer e willin g t o compromis e o ntake-or pa y payment s arisin g fro m thei r pipelin e contract s whic hwoul dhav e create dman y

billion s o f dollar s infinancia l cost s t o th e pipelines . • T o a lesse r extent , pipeline s wer e abl e t o ge t ou t o f contrac t pricin g provision s wher e price s wer e abov e competitiv e levels , althoug hofte nonly

b y temporar y

waiver s o r special , shor t term arrangements . • A spo t marke t emerge dinth e interstat e ga s market , fe db y release d ga s fro m hig hprice dcontract s movin g unde r Specia l Marketin g Program s (SMP's ) in1983-198 4 an db y sale s o f ga s fro

m ne w reserve s prove nin1981-198 3 bu t no t committe dt o lon g term contract s wit h th e pipelines . • Pipeline s compete dwit heac hothe r fo r marke t share , chiefl y a t th e expens e o f producers , b y lowerin g wellhea dga s prices . Th e Federa l Energ y

Regulator y

Commissio n(FERC ) attempte dt o institu tionaliz e thi s mor e marke t responsiv e climat e whic hha dbee nevolvin g i nth e 1982-198 4 perio dthroug hOrde r #436 , issue dinth e fal l o f 198 5 (an dstil l bein g negotiated) . Ke y aspect s o f thi s rulin g were :



### 4- 1P.3 1

9 A nattemp t t o plac e th e pipelines ' rol e a s a transporte r o f ga s o n a nequa l footin g wit hth e traditiona l pipelin e merchant * rol e • Establishe da system o f regulatin g transmissio ncost s fo r bot h conventiona l merchan t sale s and carriag e (o r transport ) ga s whic h allowe d fo r downwar dflexibilit y incarriag e rate s withou t FERC' s norma l case-by-cas e approva l proces s • Placin g th e pipeline s a t ris k t o recove r ful l "regulator y approve d costs " i nth e carriage/transpor t marke t t Requir e th e pipeline s t o becom e ope nacces s transporter s fo r al l legitimat e producer/marketers . Th e inten t o f thi s orde r wa s t o legitimiz e th e institution s tha t ha dbee n evolvin g unde r marke t pressure s s o a s to : • Forc e al l participant s t o accep t o r shar e some degre e o f marke t ris k • Mak e th e pipeline s pla y a rol e a s commo ncarrier s • Permi t response s t o marke t pressure s withi ngeneric , rathe r tha n case-by-case , FER C rules . Fro m th e perspectiv e o f th e marketplace , th e mos t importan t ramification s o f thes e institutiona l change s were : t I t allowe dth e marke t t o respon dt o th e ga s surplu s • I t provide da basi s fo r marke t discriminatio ni nburnerti pprice s t o en duser s o f natura l ga s Thi s las t poin t i s particularl y importan t i nligh t o f th e precipitou s declin e i noi l price s whic hoccurre di nlat e 1985-earl y 1986 . Th e FER C actions , accompanie db y paralle l action s b

y some o f th e stat e Publi c Servic e Commissions , basicall y allow fo r a lowe r burnerti pnatura l ga s pric e t o be charge dt o enduser s wh o ar e likel y t o shif t t o alternativ e fuel s tha nothe r customers . Previously , natura l ga s wellhea dan d pipelin e transmissio nrate s wer e average dina t th e city-gat e (loca l distributio ncompany o r LD C purchas e point) . Onl y

th e LD C coul dcharg e differentia l rate s t o end users . Unde r th e new system , on e industria l plan t coul dpotentiall y pay a lowe r natura l ga s wellhea dprice , transpor t cos t an d distributo r marku ptha nanothe r industria l use r i nth e sam e LD C marke t area . Inconcept , thi s ne w structur e permit s

*Th e merchan t rol e include dsignin g contract s wit hproducers , takin g titl e t o th e gas , an

dsignin g contract s wit hlcoa l distributio ncompanie s t o sel l th e gas . 

### 4- 2P.3 2

natura l ga s pric e discriminatio namon g en duser s withi nth e same broa dendus e categories . Sinc e th e shar pdeclin e i noi l price s b y earl y 1986 , producer s hav e essentiall y

cease do r a t leas t ver y sharpl y curtaile dne w

drillin g activities . Spo t marke t price s fo r ga s a t th e wellhea dhav e decline dfro m jus t below

$2.0 0 i nlat e 198 5 t o roughl y $1.3 0 pe r millio nBtu's . 4. 2 FOCU S AN D METHODOLOG YFORTHI S STUD Y I ndevelopin g projection s o f natura l ga s price s t o industria l en duser s t o matc hth e tw o oi l pric e scenario s describe dearlier , w e hav e structure d sensitivit y

case s t o reflec t th e uncertaint y o f how ga s market s wil l respon d t o a marke t environmen t o f lowe r oi l prices . On e suc hissu e i s how flexibl y

th e institution s an dparticipant s wil l respon dt o marke t pressures . I ndescribin g th e evolutio no f institution s th e greate r flexibilit y o f pricin g potentiall y give s th e natura l ga s marke t a muc hbette r opportunit y t o retai nga s sale s t o industrial/electri c utilit y customer s wh o coul dswitc ht o fue l oil . However , thi s flexibilit y doe s no t guarante e tha t ga s wil l b e mor e competitiv e tha nfue l oi l i nth e future . A t some point , fo r example , producer s wil l hav e t o recove r findin g cost s plu s a reasonabl e rat e o f retur nt o justif y drillin g activitie s require dt o develo p new ga s supplies . Anothe r typ e o f marke t rigidit y relate s t o how

fa r pipeline s woul d discoun t rate s i nth e carriag e market . FER C rule s permi t pipeline s t o se t transmissio nrate s fo r carriag e sale s betwee nvariabl e an dful l regulatory approve dcosts . Thi s implie s a rang e o f $0.0 6 t o 0.7 0 pe r millio nBt ufo r man y interstat e pipelines . Rate s wil l be determine dwithi nthi s enormou s rang e b y competitiv e pressures . However , a key facto r i s how

lo w thi s carriag e rat e coul dfal l t o maintai nga s level s agains t oi l competition . Sever e discountin g o f carriag e rate s t o a larg e volum e marke t coul dlea dt o significan t revenu e losses . Thi s provide s a nincentiv e fo r pipeline s t o resis t sever e transmissio n rat e discount s o

ncarriag e ga s sales . Fo r thes e reasons , two set s o f industria l natura l ga s pric e projection s wer e develope dfo r th e Low Oi l Pric e Scenari o (wher e competitio nfro m fue l oi l wil l b e mos t severe) : 

### 4- 3P.3 3

jt On e reflectin g downwar dflexibilit y i ntransmissio nan

ddistributio n rate s towar dvariabl e cost s • Anothe r mor e "rigid " cas e wher e transmissio nan ddistributio ncost s d o no t fal l a s fa r inattemptin g t o mee t oi l competition . Kee pinmin dtha t becaus e o f th e abilit y t o pric e discriminat e withi n industria l markets , eac hga s scenari o generate s two burnerti pprice s t o th e industria l sector : • A carriage/transpor t pric e • Anothe r pric e fo r purchase s throug htraditiona l loca l distributio n companie s sales . Th e carriag e pric e wil l tendt o b e th e lowe r delivere d pric e inal l interstat e markets . Th e resultan t scenario s ar e show ninTabl e 4-1 . Wit hrespec t t o natura l ga s prices , • Unde r th e Lo

w Oi l Pric e Scenario , fou r set s o f delivere dprice s ar e generate dreflectin g

- Two subscenario s (flexibl e versu s rigi dmarket )

- Tw o price s fo r eac hsubscenari o (carriag e an dconventiona l sale s burnerti pprices ) • Unde r th e Hig hOi l Pric e Scenario , two set s o f ga s price s ar e projecte d(reflectin g carriag e an dconventiona l sale s prices ) Anothe r facto r whic hvarie s betwee nga s pric e scenario s i s th e volum e o f natura l ga s imports . Unde r th e flexibl e ga s market/Lo w Oi l Case , ga s import s ar e assume dt o gro w

rapidly . Thi s wil l tendt o lowe r th e U.S . wellhea dpric e o f ga s b y placin g les s pressur e o ndomesti c resource s t o satisf y some leve l o f ga s demand . Thi s matche s th e inten t o f th e flexibl e cas e unde r Lo w Oi l Prices , i.e. , wher e natura l ga s consumptio ni s mos t likel y t o be maintaine din a climat e o f very

lo w oi l prices . I

nth e marke t rigidity case , ga s import s ar e assume dt o fac e mor e obstacles , henc e a lowe r leve l o f ga s import s wil l tend t o lea dt o highe r U.S . natura l ga s wellhea dprice s - makin g ga s les s competitiv e unde r th e climat e o f lowe r oi l prices . Th e methodolog y

employe dt o develo pth e projecte dnatura l ga s price s relie s onsevera l model s o f th e natura l ga s marke t develope db y EEA . Th e ga s suppl y sid e o f th e analysi s i s base do nth e Hydrocarbo nSuppl y Mode l develope d b y EE A fo r th e Strategi c Analysi s an dEnergy Forecastin g Divisio no f th e Ga s


### 4- 4P.3 4It

TABL E 4-1 . OI L AN D NATURA L GA S PRIC E SCENARIO S

Lo w oi l t Fue l oi l produc t price s • Natura l ga s

- Present s price s fo r two marke t segment s --Carriag e --Non-carriag e o r loca l distributio ncompany (LDC ) sale s

- Two alternativ e scenario s o f natura l ga s price s dependin g o nmarke t evolutio n --Flexibl e marke t - maximize s abilit y t o retai nga s sale s --Mor e rigi dmarke t - institutiona l an dbehaviora l constraint s limi t abilit y

t o lowe r burnerti pnatura l ga s price s an dretai n natura l ga s sale s Hig hoi l • Fue l oi l produc t price s A Natura l ga s

- Present s price s fo r two marke t segment s --Carriag e --Non-carriag e o r LD C sale s



### 4- 5P.3 5

t Researc hInstitute. * EE A als o use dit s proprietar y Energ y Overvie w

Mode l whic hintegrate s deman dan dsuppl y factor s t o develo pburnerti ppric e projec tion s b y region . Thi s mode l link s productio nflow s fro m twelv e ga s suppl y region s throug hmode l pipelin e system s (12 ) t o ga s distributio nservic e area s (10) , wit heac hmajo r en dus e secto r differentiate dwithi neac hdistributio n company servic e area . 4. 3 RESULT S FO RTH E LO W OI L PRICE/FLEXIBL E GA S PRIC E SCENARI O Inorde r t o provid e a concis e descriptio no f th e result s o f thi s ga s pric e projection , thi s sectio ncover s th e Lo w Oil/Flexibl e Ga s Pric e Scenari o insome detail . Sectio n4. 4 the nbriefl y compare s th e difference s inga s price s betwee nscenarios . Tabl e 4- 2 present s th e ga s deman dan dsuppl y balanc e unde r th e Low Oil/Flexibl e Ga s Pric e Case . Th e result s impl y that : t Ga s deman dhold s u pthroug hth e 1980's , the nbegin s t o declin e i n th e earl y

1990' s - losin g 2 quad s o f consumptio nove r th e 1984-199 5 period . • Mos t o f th e loa dlosse s ar e i nboile r market s (industria l an d electri c utility ) • Th e growt hi nga s import s lead s t o a declin e o f Lower-4 8 natura l ga s productio no f 3 quad s (or 1 7 percent ) ove r th e 1984-199 5 period . Th e pric e projection s inTabl e 4- 3 hel p t o explai nth e abov e trends . Ga s i s abl e t o maintai nit s loa dthroug hth e 1980' s du e to : • Th e continuatio no f th e surplus , whic hkeep s th e margina l wellhea d cos t (henc e marke t pric e o f gas ) dow n • Heavy

discountin g o f transmissio nan ddistributio nrate s i ncarriag e markets . Thes e two factor s kee pth e industria l natura l ga s burnerti pprice s inth e carriag e marke t wel l below competitiv e oi l price s throug h199 0 - - a s show nb y th e exampl e result s fo r th e Mid-Atlanti c regio n(se e Figur e 2) . Eve ninth e 1980's , th e conventiona l LD C (loca l distributio ncompany ) sale s pric e t o industria l user s i s substantiall y abov e oi l prices .

*Se e Ga s Researc hInsight s (Ma y 1983 ) distribute db y th e Ga s Researc hInstitut e fo r a descriptio no f thi s model . 

### 4- 6P.3 6



### TABL E 4-2 . NATURAL GA S SUPPL YAND DEMAND : LO W OI L WIT H FLEXIBL E GA S MARKE T (Quadrillio nBtu's )

1984 a 

### 198 8 199 0 199 5 DEMAND Boiler s - - 5. 5 5. 0 4. 5 Othe r Industrial 0 

### ^ 3. 6 3. 7 3. 7 Subtota l Industrial/Utilit y 9. 4 9. 1 8. 7 8. 2 Residential/Commercia l 7. 2 7. 1 7. 0 6. 8 Plan t & Lease/Pipelin e Fue l 1. 6 1. 5 1. 4 1. 2 Tota l Consumptio n18. 2 17. 7 17. 1 16. 2 SUPPL Y Lower-4 8 Productio n17. 4 16. 9 16. 1 14. 5 Imports/Supplementa l s LJ D L_3 US

2^ 2 Tota l Suppl y

18. 4 18. 2 17. 6 16. 7 les s unaccounte dfo r 0. 2 0. 5 0. 5 0. 5 Tota l Dispositio n18. 2 17. 7 17. 1 16. 2

a 

### Fro m Natura l Ga s Annua l 1984 ; EI A (December , 1985 ) adjuste dt o Continenta l U.S . coverage . D

### Proces s hea t an

dfeedstoc k uses .

4-

7TABL E 4-3 . PROJECTION S O F GA S PRICES : LO W OI L WIT H FLEXIBL E MARKE T ($198 5 pe r MMBtu )

198 6 198 8 199 0 199 5 GA S SUPPL YPRICE S Margina l ga s cos t 1.3 0 1.4 1 1.9 5 3.0 3 Avg . wellhea d pric e 1.8 8 1.7 2 1.9 5 2.9 5

INDUSTRIAL SECTO RFUE L PRICE S Middl e Atlanti c Natura l ga s (Carriage ) 2.4 5 2.3 4 2.5 4 3.6 2 Natura l ga s (LD

C sales ) 3.5 6 3.0 4 3.3 2 4.4 7 Residua l oi l (0.8 % S ) 3.3 3 2.4 9 2.7 0 3.7 1 Southwes t Natura l gas a 2.1 8 2.1 5 2.3 4 3.3 4 Residua l oi l (1.6 % S ) 3.2 2 2.2 3 2.4 2 3.3 4

a Industria l an

d electri c utilit y

sector s predominantl y serve d b

y direc t sale s o f ga s i

nintrastat e carriag e market .



### 4- 8FIGUR E 2 

# Federa l Region s o

f th e Unite d State s

REGIO N NAME S 1 . Ne wEnglan d 2 . Ne wYork/Ne wJersey 3 . Middl e Atlanti c 4 . Sout h Atlanti c 5 . Midwes t 6 . Southwes t 7 . Centra l 8 . Nort h Centra l 9 . Wes t 10 . NorthwestP.3 9

Inth e 1990-199 5 period , th e ga s marke t tighten s u pan dth e surplu s ha s ended . Wellhea dprice s inth e carriag e marke t begi nt o closel y trac k natura l ga s wellhea dprice s i ntraditiona l sale s markets . Inthi s environment , th e wellhea dprice o f ga s rise s t o provid e sufficien t incentiv e fo r producer s t o findan ddevelo pnew

reserves . Import s fro m Canad a ar e increasin g inth e earl y 1990' s and , becaus e the y ar e price dcompetitivel y wit hU.S . suppliers , th e import s hel pkee pdow nth e marke t pric e o f gas . However , th e marke t pric e o f ga s (i.e. , margina l ga s cost ) i s projecte dt o nearl y doubl e inth e 1988-199 5 perio di norde r t o elici t sufficien t new supplie s o f ga s t o satisf y demand . Althoug hth e transmissio nan ddistributio ncost s i nth e carriag e marke t ar e squeeze dfro

m $1.30-1.5 0 pe r MMBt u(traditiona l margin s i ninterstat e markets ) t o $0.45-0.6 0 pe r MMBtu , thi s i s no t enoug ht o avoi dsignifican t natura l ga s loa dlosse s du e t o risin g natura l ga s wellhea dprice s an dth e lo

w oi l prices . B

y th e mid-90's , th e traditiona l sale s marke t fo r industria l user s i s limite dt o essentiall y highvalue duse s o f natura l gas . Inthi s scenario , th e industria l natura l ga s burnerti pprice s inth e carriag e marke t ris e graduall y u pt o matc ha moderatel y low sulfu r oi l pric e i

n th e Mid - Atlanti c whil e th e traditiona l sale s price start s nea r ver y low sulfu r residua l oi l the nrise s substantiall y abov e th e residua l oi l pric e structur e i n th e 1990's . 4. 4 COMPARISON S O F GA S MARKE T SCENARIO S Inal l o f th e scenario s examine dinthi s study , th e natura l ga s marke t i s generall y

abl e t o maintai na competitivel y price dpositio nthroug hth e 1980' s inrelatio nt o residua l fue l oi l price s inth e industria l sector . A s show n fo r th e Lo

w Oil/Flexibl e Marke t Case , natura l ga s price s remai ndepresse da t th e wellhea dint o th e lat e 1980' s whil e th e curren t conditio no f exces s ga s suppl y persists . B

y 1990 , th e ga s marke t i s poise dfo r th e transitio nt o a balanc e o f suppl y

an ddeman dwit hga s price s risin g a t th e wellhea dt o stimu lat e th e exploratio nan ddevelopmen t o f new supplies . Inth e earl y

1990's , th e evolutio no f th e natura l ga s marke t begin s t o follow differen t track s unde r th e condition s o f th e thre e cases : § I nth e Lo w Oil/Flexibl e Case , th e industr y i s largel y

abl e t o retai nexistin g boile r markets . Ga s pipeline s an ddistributor s cu t margin s t o th e bon e t o maintai ncompetitivenes s wit hmedium an d 4-1 0P.4 0

' low sulfu r residua l fue l oi l i na ner a o f risin g ga s prices . Rapidl y increasin g import s o f ga s fro m Canad a hel p t o tempe r th e increas e i nU.S . wellhea dprice s an dprovid e th e suppl y fo r th e ga s market . • Inth e Lo

w Oil/Rigi dCase , ga s suffer s a shar plos s o f boile r deman di nth e industrial/utilit y sectors , wit hdelivere d ga s price s i nth e carriag e marke t risin g t o th e leve l o f low-sulfu r resid , a s pipeline s an

ddistributor s ar e les s willin g t o discoun t thei r margins . Wit ha slowe r increas e i nCanadia nimports , U.S . produc tio nlevel s andwellhea dprice s fo r ga s ar e comparabl e t o th e Low Oil/Flexibl e Case , bu t overal l ga s suppl y i s reduce dleadin g t o a smalle r market . • Inth e Hig hOil/Rigi dCase , natura l ga s experience s significantl y les s marke t pressur e from alternativ e fuel s an d ca ncontinu e t o b e competitivel y

price dt o th e industria l secto r throug h1995 . Incentive s fo r domesti c exploratio nrecove r mor e quickl y i npac e wit hth e oi l pric e recovery , an dth e U.S . resourc e bas e i s abl e t o sustai nessentiall y

th e curren t marke t throug hth e mid-1990' s withou t significan t increase s i nimport s o r pric e discountin g b y ga s pipeline s an

ddistributors . Ke y mode l result s i nth e marke t trend s fo r ga s consumption , wellhea d prices , andburnerti ppric e competitio nar e highlighte dbelow . Ga s Consumptio n Tabl e 4- 4 summarize s th e majo r trend s inga s consumptio nthroug h199 5 fo r th e thre e cases . Overal l consumptio no f natura l ga s (henc e th e siz e o f th e ga s market ) i s primaril y th e resul t o f ga s versu s oi l competitio ni nth e industria l an

delectri c utilit y

sectors . Residentia l an d commercia l ga s us e i s projecte dt o remai nnea r curren t levels . Unde r bot hLo

w Oi l cases , industria l an delectri c utilit y

ga s consumptio n decline s durin g th e lat e 1980' s t o a leve l o f approximatel y 8. 7 quad s compare d t o 9. 4 quad s in198 4 an d9.0-9. 2 quad s in1985. * Thi s declin e i s consisten t wit htw o trends : • Ga s losin g smal l portion s o f th e existin g boile r marke t t o hig h sulfu r residua l fue l oil ; an d • Ga s losin g potentia l market s i nnew boile r constructio nt o residua l fue l oi l an

dlong-term

electri c utilit y

decision s favorin g coa l an d nuclea r energy . *Estimate dbase donpreliminar y 198 5 EI A

dat a publishe di nth e Natura l Ga s Monthly .
4-1 1TABL E 4-4 . PROJECTE D TREND S I N NATURAL GA S CONSUMPTION (Quadrillio nBtu's ) P.4 1

198 4 199 0 199 5 Lo w oi l wit hflexibl e marke t Residential/commercia l Industrial/utilit y Other* * Tota l consumptio n Lo w oi l wit hmarke t rig i Residential/commercia l Industrial/utilit y Other* * Tota l consumptio n Highoi l wit hmarke t ri g Residential/commercia l Industrial/utilit y Other* * Tota l consumptio n dit y

idit v 

### 7. 2

9. 4 

## LS 18. 2



### 7. 2 9. 4 

## LS 18. 2



### 7. 2 9. 4 1. 6 18. 2 

### 7. 0

8. 7 1. 4 17. 1



### 7. 0 8. 6 1. 4 17. 0



### 7. 1 9. 5 1. 5 18. 1 

### 6. 8

8. 2 1. 2 16. 2



### 6. 8 7. 4 1. 2 15. 4



### 6. 9 9. 1 1. 4 17. 4 Natura l Ga s Annua l 1984 , EI A (Decembe r 1985 ) adjuste d t o Continenta l U.S . coverage . * * Include s pipelin e fue l an d plant/leas e uses .

4-1 2P.4 2

, Beyon d1990 , th e ga s marke t outloo k differ s significantl y betwee nth e Lo

w Oi l cases :

• Wit hmarke t flexibility , ga s experience s a loa dlos s o f onl y 0. 5 quad s durin g 1990-199 5 consisten t wit hcontinuatio no f th e same long-term

trend s t Unde r th e assumption s o f th e marke t rigidit y case , ga s lose s 1. 2 quad s inth e industrial/utilit y sectors , wit hth e incrementa l loa d los s occurrin g primaril y i nmarket s wher e ga s mus t compet e agains t higho r mediu

m sulfu r residua l fue l oil . I nth e Hig hOi l case , natura l ga s i s a low-price dfue l throug h199 0 relativ e t o residua l fue l oi l an dcompete s wel l bot hinexistin g an dnew boile r markets . Throug h1995 , ga s consumptio ninth e industrial/utilit y secto r remain s below

curren t levels . Ga s Suppl y

an dWellhea dPrice s Th e key trend s fo r ga s suppl y an d wellhea dprice s ar e summarize dinTabl e 4-5 . Unde r th e Lo

w Oi l cases , domesti c U.S . (Lower-48 ) natura l ga s productio n capacit y fall s significantl y durin g th e lat e 1980' s unde r th e outloo k fo r continue dlow

wellhea dprice s an

dcontractio no f exploratio nan ddevelopmen t activity . Two trend s ar e importan t inth e 1985-199 0 perio dfo r th e Lo w Oi l cases : • Canadia nimport s increas e t o approac hth e expor t level s (1. 6 tcf ) currentl y

authorize db

y Canada' s Nationa l Energy Boar d • Ga s price s recove r fro m th e curren t distres s level s o f $1.30/MMBt u t o th e rang e o f $1.90-1.95 . Th e tw o Lo w Oi l case s the ndiverg e inth e 1990-199 5 time frame . Th e Lo w Oil/Flexibl e Marke t cas e assume s continue dexpansio ninCanadia nimport s t o reac hlevel s o f 2. 2 quad s b y 1995 , substantiall y

beyondcurren t expor t author i zations . B

y 1995 , ga s price s hav e rise nsharpl y a t th e wellhea dt o th e $3.00/MMBt uleve l t o stimulat e th e domesti c exploratio nan ddevelopmen t activit y neede dt o sustai nLower-4 8 productio no f 14. 5 quads . However , th e mov e b y Canadia nproducer s t o expand U.S . sale s ease s pressure s onth e declin in g U.S . resourc e bas e whic hwoul doccu r inmaintainin g a tota l ga s suppl y t o 16.5-17. 0 quads . Th e othe r two case s follow ver y differen t track s beyond1990 :

4-1 3P.4 3

TABL E 4-5 . PROJECTE D TREND S I N GA S SUPPL YAN D WELLHEAD PRICE S

198 4 199 0 199 5 Lo w oi l wit hflexibl e marke t Ga s suppl y

(quads ) Lower-4 8 productio n Imports/supplemental s Tota l suppl y Margina l ga s cos t (198 5 $/MMBtu ) Lo w oi l wit hmarke t rigidit y Ga s suppl y

(quads ) Lower-4 8 productio n Imports/supplementa l s Tota l suppl y Margina l ga s cos t (198 5 $/MMBtu ) Highoi l wit hmarke t rigidit y Ga s suppl y

(quads ) Lower-4 8 productio n Imports/supp l ementa l s Tota l suppl y Margina l ga s cos t (198 5 $/MMBtu ) 17. 4 1.0 18. 4 2.8 0 16. 1

1. 5 17. 6 1.9 5 14. 5

2. 2 16. 7 3.0 3

17. 4 1. 0 18. 4 2.8 0 16. 0

1. 5 17. 5 1.9 0 14. 2

1. 7 15. 9 2.9 5

17. 4 1. 0 18. 4 2.8 0 17. 1

1. 5 18. 6 2.7 5 15. 9

1. 9 17. 8 4.0 3 Natura l Ga s Annua l 1984 , EI A (Decembe r 1985 ) adjuste d t o Continenta l U.S . coverage .
4-1 4P.4 4

> • Inth e Lo

w Oil/Rigi dcase , import s d o no t expan dsignificantl y durin g 1990-1995 . Lower-4 8 productio nan dprice s ar e comparabl e t o th e flexibl e low

case , bu t provid e fo r a tota l ga s suppl y below 16. 0 quads . • I nth e Hig hOi l case , Lower-4 8 productio nlevel s ar e highe r through ou t th e 1985-199 5 perio dleadin g t o a mor e rapi drecover y o f ga s price s an

dth e abilit y

t o sustai ndomesti c productio no f 1 6 quad s o r mor e int o th e mid-1990's . Burnerti pGa s Price s Th e majo r trend s i nindustria l burnerti pprice s betwee noi l an dga s ar e illustrate di nTabl e 4- 6 usin g th e Middl e Atlanti c a s a nexampl e o f a regiona l market . Inth e Lo

w Oi l cases , 0. 8 percen t sulfu r residua l fue l oi l i s price dt o industria l customer s a t $2.70/MMBt uin199 0 an d $3.71/MMBt ui n1995 . A s shown , natura l ga s price s inth e carriag e marke t are : • Competitiv e wit hresidua l fue l oi l inth e Flexibl e Marke t cas e throug h199 5 • A t parit y

wit hresi di n199 0 i nth e Rigi dMarke t cas e andprice d abov e resi din1995 . Ga s distributio ncompany sale s rate s t o industria l customer s ar e signifi cantl y highe r tha n0. 8 percen t sulfu r residua l fue l oi l price s i nbot hcases . Sinc e ga s wellhea dprice s durin g th e perio d1990-199 5 wer e no t signifi cantl y differen t betwee nth e Flexibl e an dRigi dcases , thes e difference s i n burnerti p(delivered ) price s ar e a resul t o f underlyin g assumption s o ndis countin g o f transmissio nan ddistributio n(T&D ) costs : • I nth e Flexibl e case , pipeline s woul dheavil y discoun t carriag e marke t transpor t margin s i f necessar y t o compet e wit hoil . Fo r 1995 , th e Mid-Atlanti c carriag e pric e i s essentiall y a $3.00/MMBt u wellhea dpric e plu s a $0.6 0 tota l T& D margin . Th e transmissio n componen t account s fo r approximatel y $0.3 5 wit hdistributio n(an d sale s taxes ) th e remainin g $0.25 . • I nth e Rigi dcase , pipeline s ar e assume dno t t o full y discoun t inthi s manner . Th e $3.81/MMBt udelivere dcarriag e pric e i s thu s compose do f roughl y

$3.0 0 fo r wellhea dga s cost s plu s $0.5 5 fo r transmissio nan

d$0.2 5 fo r distributio nan dtaxes . Industria l sale s price s offere db y loca l ga s distributio ncompanie s (LDC's ) reflec t th e continuatio no f th e traditiona l utilit y rat e structure s in th e ga s industr y

prio r t o FER C Orde r 436 . Burnerti pga s price s t o industria l

4-1 5P.4 5



### TABL E 4-6 . PROJECTE D TREND S I N INDUSTRIA L BURNERTI P PRICES I N TH E MIDDL E ATLANTI C REGIO N (198 5 $/MMBtu )

199 0 199 5

2.7 0 2.5 4 3.3 2 3.7 1

3.6 2 4.4 7 Lo w oi l wit hflexibl e marke t 0.8 % S residua l oi l Carriag e marke t ga s pric e LD C sale s pric e
Lo w oi l wit hmarke t rigidit y 0.8 % S residua l oi l 2.7 0 3.7 1 Carriag e marke t ga s pric e 2.7 3 3.8 1 LD C sale s pric e 3.3 0 4.5 3 Hig hoi l wit hmarke t rigidit y 0.8 % S residua l oi l Carriag e marke t ga s pric e LD C sale s pric e 4.3 9 4.1 8 4.6 1 4.9 6

4.7 4 5.9 1

4-1 6

### customer s o f LDC' s ar e muc hhighe r tha ninth e carriag e marke t du e t o th e

highe r T& D margin s -- e.g. , a $0.70-$1.1 0 transmissio nmargi nan d$0.40-$0.8 0 distributio nmargin . Thes e highe r margins : • Full y

recove r th e cost s o f th e transmissio ncost s authorize din FER C rate-settin g procedures . • Ar e applicabl e onl y t o segment s o f th e industria l secto r (primaril y hig hvalue duse s an

dapplication s no t switchabl e t o oil ) whic hd o no t gai nacces s t o carriage . Thus , th e degre e o f pipelin e willingnes s t o discoun t transmissio nmargin s o n carriag e transaction s become s a crucia l facto r inga s versu s oi l competitio n unde r low

oi l prices . Th e Hig hOil/Rigi dscenari o reflect s a competitiv e outcom e fo r ga s whic h i s ver y simila r t o th e Lo

w Oil/Flexibl e case , althoug hth e overal l pric e level s fo r ga s an

doi l ar e significantl y higher . Ga s ca nb e delivere dt o th e industria l secto r a t competitiv e price s withou t ful l flexibilit y incarriag e discountin g because : • Highe r deman dlevel s decreas e th e uni t cost s o f operatin g pipelin e anddistributio nsystems , an d • Highe r oi l price s decreas e th e alternat e fue l netbac k pressure s o n ga s wellhea dcosts , providin g mor e "room " fo r recover y o f T& D margins .

4-1 7P.4 7



### APPENDI XA REGIONA L INDUSTRIAL OI L AN D GA S PRIC E FORECAST S FORTH E LO W OI L PRIC E SCENARI O (SUMMER1986 )P.4 8



### LIS T O F TABLE S TABL E NO . TITL E A- 1 CRUD E OI L PRIC E FORECAS T A- 2 INDUSTRIAL 3.0 % SULFURRESIDUAL FUE L OI L PRIC E PROJECTION S A- 3 INDUSTRIAL 1.6 % SULFURRESIDUAL FUE L OI L PRIC E PROJECTION S A- 4 INDUSTRIA L 0.8 % SULFURRESIDUAL FUE L OI L PRIC E PROJECTION S A- 5 INDUSTRIAL 0.3 % SULFURRESIDUAL FUE L OI L PRIC E PROJECTION S A- 6 INDUSTRIAL DISTILLAT E FUE L OI L PRIC E PROJECTION S A- 7 INDUSTRIAL NATURAL GA S PRIC E PROJECTIONS : CARRIAG E MARKE T

ESTIMATE S ASSUMINGFLEXIBL E CARRIAG E MARKE T A- 8 INDUSTRIAL NATURAL GA S PRIC E PROJECTIONS : NON-CARRIAG E

MARKE T ESTIMATE S ASSUMINGFLEXIBL E CARRIAG E MARKE T A- 9 INDUSTRIAL NATURAL GA S PRIC E PROJECTIONS : CARRIAG E MARKE T

ESTIMATE S ASSUMINGMARKE T RIGIDIT Y A-1 0 INDUSTRIAL NATURAL GA S PRIC E PROJECTIONS : NON-CARRIAG E

MARKE T ESTIMATE S ASSUMINGMARKE T RIGIDIT YP.4 9

TABL E A-1 . CRUD E OI L PRIC E FORECAST *

Averag e Refine r Acquisitio n Cos t o f Crud e Oi l Yea r (198 5 $/bbl , 198 5 (actual ) 26.7 6 198 8 13.3 4 199 0 14.4 7 199 5 20.0 8 200 0 24.6 1 200 5 30.7 9 Energ y an d Environmenta l Analysis , Inc .



### A- 1TABL E A-2 . INDUSTRIAL 3.0 % SULFURRESIDUAL FUE L OI L PRIC E PROJECTIONS *

(198 5 $/MMBta ) P.5 0

Federa l regio n 1985* * 198 8 199 0 199 5 200 0 200 5

1 . New England 4.2 5 2.1 5 2.3 4 3.2 9 4.0 6 5.1 0 2 . New York/Ne w

Jerse y 4.1 8 2.0 9 2.2 8 3.2 3 4.0 0 5.0 4 3 . Middl e Atlanti c 4.1 8 2.0 9 2.2 8 3.2 3 4.0 0 5.0 4 4 . Sout hAtlanti c 4.1 6 2.0 7 2.2 6 3.2 1 3.9 7 5.0 2 5 . Midwes t 4.3 3 2.2 4 2.4 3 3.3 8 4.1 4 5.1 9 6 . Southwes t 4.1 4 2.0 5 2.2 4 3.1 9 3.9 5 5.0 0 7 . Centra l 4.3 0 2.2 1 2.4 0 3.3 4 4.1 1 5.1 5 8 . Nort hCentra l 4.2 4 2.1 6 2.3 5 3.3 1 4.0 8 5.1 4 9 . Wes t 4.0 6 2.0 5 2.2 4 3.1 6 3.9 1 4.9 4 10 . Northwes t 4.0 1 2.0 1 2.1 9 3.1 2 3.8 7 4.8 9 *Energ y an d Environmenta l Analysis , Inc . **Estimate , no t actual .



### A- 2TABL E A-3 . INDUSTRIAL 1.6 % SULFURRESIDUAL FUE L OI L PRIC E PROJECTIONS *

(198 5 $/MMBtu ) P.5 1

Federa l regio n 1985* * 198 8 199 0 199 5 200 0 200 5

1 . New England 2 . New York/Ne w

Jerse y 3 . Middl e Atlanti c 4 . Sout hAtlanti c 4.4 6 2.3 3 2.5 2 3.4 8 4.2 6 5.3 2 4.4 0 2.2 7 2.4 6 3.4 3 4.2 1 5.2 6 4.4 0 2.2 7 2.4 6 3.4 3 4.2 1 5.2 6 4.3 7 2.2 5 2.4 4 3.4 1 4.1 8 5.2 4 5 . Midwes t 6 . Southwes t 7 . Centra l 8 . Nort hCentra l 4.5 4 2.4 2 2.6 1 3.5 7 4.3 5 5.4 1 4.3 5 2.2 3 2.4 2 3.3 8 4.1 6 5.2 2 4.5 1 2.3 9 2.5 7 3.5 3 4.3 2 5.3 7 4.4 6 2.3 3 2.5 2 3.4 9 4.2 8 5.3 5 9 . Wes t 4.2 8 2.2 2 2.4 1 3.3 4 4.1 1 5.1 5 10 . Northwes t 4.2 4 2.1 8 2.3 7 3.3 0 4.0 7 5.1 1 *Energ y an d Environmenta l Analysis , Inc . **Estimate , no t actual .



### A-3TABL E A-4 . INDUSTRIAL 0.8 % SULFURRESIDUAL FUE L OI L PRIC E PROJECTIONS *

(198 5 $/MMBtu ) P.5 2

Federa l regio n 1985* * 198 8 199 0 199 5 200 0 200 5 1 . New England 4.8 0 2.5 6 2.7 6 3.7 7 4.5 9 5.7 0 2 . Ne w York/Ne w

Jerse y 4.7 4 2.4 9 2.7 0 3.7 1 4.5 2 5.6 4 3 . Middl e Atlanti c 4.7 4 2.4 9 2.7 0 3.7 1 4.5 2 5.6 4 4 . Sout hAtlanti c 4.7 2 2.4 7 2.6 8 3.6 9 4.5 0 5.6 1 5 . Midwes t 6 . Southwes t 7 . Centra l 4.8 9 2.6 4 2.8 5 3.8 6 4.6 7 5.7 8 4.7 0 2.4 5 2.6 6 3.6 7 4.4 8 5.6 0 4.8 6 2.6 1 2.8 1 3.8 2 4.6 4 5.7 5 8 . Nort hCentra l 4.8 0 2.5 3 2.7 3 3.7 3 4.5 5 5.6 6 9 . Wes t 4.6 4 2.4 3 2.6 3 3.6 1 4.4 0 5.4 9 10 . Northwes t , 4.6 0 2.3 9 2.5 8 3.5 7 4.3 6 5.4 5 *Energ y an d Environmenta l Analysis , Inc . **Estimate , no t actual .



### A- 4P.5 3

TABL E A-5 . INDUSTRIAL 0.3 % SULFURRESIDUAL FUE L OI L PRIC E PROJECTIONS *

(198 5 $/MMBtu )

Federa l regio n1985* * 198 8 199 0 199 5 200 0 200 5

1 . New England 5.0 4 2.6 8 2.8 8 3.9 2 4.7 5 5.8 9 2 . New York/Ne w

Jerse y 4.9 8 2.6 1 2.8 2 3.8 6 4.6 9 5.8 3 3 . Middl e Atlanti c 4.9 8 2.6 1 2.8 2 3.8 6 4.6 9 5.8 3 4 . Sout hAtlanti c 4.9 5 2.5 9 2.8 0 3.8 3 4.6 7 5.8 1 5 . Midwes t 5.1 3 2.7 6 2.9 7 4.0 1 4.8 4 5.9 8 6 . Southwes t 4.9 3 2.5 7 2.7 8 3.8 1 4.6 5 5.7 9 7 . Centra l 5.0 9 2.7 3 2.9 3 3.9 7 4.8 1 5.9 4 8 . Nort hCentra l 5.0 6 2.6 4 2.8 5 3.8 9 4.7 2 5.8 5 9 . Wes t 4.8 8 2.5 3 2.7 4 3.7 4 4.5 5 5.6 5 10 . Northwes t 4.8 4 2.4 9 2.6 9 3.7 0 4.5 1 5.6 1 *Energ y an d Environmenta l Analysis , Inc . **Estimate , no t actual .



### A- 5P.5 4

TABL E A-6 . INDUSTRIAL DISTILLAT E FUE L OI L PRIC E PROJECTIONS *

(198 5 $/MMBtu )

Federa l regio n 1985* * 198 8 199 0 199 5 200 0 200 5

1 . New England 6.1 7 3.1 6 3.3 8 4.6 1 5.6 0 6.9 6 2 . New York/Ne w

Jerse y 6.1 5 3.1 3 3.3 6 4.5 9 5.5 8 6.9 4 3 . Middl e Atlanti c 6.1 5 3.1 3 3.3 6 4.5 9 5.5 8 6.9 4 4 . Sout hAtlanti c 6.0 3 3.0 5 3.2 7 4.4 9 5.4 7 6.8 0 

### 5 . 6 . 7 . 8 . 9 . 10 . Midwes t Southwes t Centra l Nort hCentra l Wes t Northwes t 5.9 8 3.0 2 3.2 4 4.4 5 5.4 2 6.7 5 5.8 5 2.8 9 3.1 1 4.3 2 5.3 0 6.6 3 5.9 8 3.0 2 3.2 4 4.4 4 5.4 2 6.7 5 5.6 5 2.8 2 3.0 1 4.2 1 5.1 9 6.4 2 5.4 6 2.7 2 2.9 1 4.1 6 5.0 1 6.2 1 5.3 9 2.7 2 2.9 1 4.1 0 4.9 4 6.1 3 *Energ y an d Environmenta l Analysis , Inc . **Estimate , no t actual .



### A- 6TABL E A-7 . INDUSTRIAL NATURAL GA S PRIC E PROJECTIONS : CARRIAG E MARKE T ESTIMATE S ASSUMINGFLEXIBL E CARRIAG E MARKET *

(198 5 $/MMBtu )

Federa l regio n 198 8 199 0 199 5 200 0 200 5

1 . Ne w England 2.4 1 2.6 0 3.6 2 4.3 7 5.4 5 2 . New York/Ne w

Jerse y 2.4 9 2.7 0 3.7 1 4.5 2 5.6 4 3 . Middl e Atlanti c 2.3 4 2.5 4 3.6 2 4.3 3 5.3 9 4 . Sout hAtlanti c 2.1 7 2.5 1 3.6 2 4.3 3 5.3 6 5 . Midwes t 2.4 9 2.6 9 3.6 7 4.4 6 5.5 4 6 . Southwes t 2.1 5 2.3 4 3.3 4 4.1 4 5.1 6 7 . Centra l 8 . Nort hCentra l 9 . Wes t 2.3 1 2.5 1 3.6 2 4.3 3 5.3 6 2.3 8 2.6 0 3.6 2 4.3 8 5.4 6 2.4 3 2.6 3 3.6 2 4.4 0 5.4 9 10 . Northwes t 2.2 1 2.5 1 3.6 2 4.3 3 5.3 6 Energy an dEnvironmenta l Analysis , Inc .



### A- 7TABL E A-8 . INDUSTRIAL NATURAL GA S PRIC E PROJECTIONS : NON-CARRIAG E MARKE T ESTIMATE S

ASSUMINGFLEXIBL E CARRIAG E MARKET *

(198 5 $/MMBtu )

Federa l regio n 198 8 199 0 199 5 200 0 200 5

1 . New England 3.2 3 3.6 3 4.5 8 5.3 9 6.4 2 2 . Ne w York/Ne w

Jerse y 3.7 0 3.9 1 4.4 9 5.3 0 6.3 2 3 . Middl e Atlanti c 3.0 4 3.3 2 4.4 7 5.2 8 6.3 0 4 . Sout hAtlanti c 3.0 5 3.2 9 4.5 9 5.4 6 6.5 5 

### 5 . 6 . 7 . 8 . 9 . 10 . Midwes t Southwes t Centra l Nort hCentra l Wes t Northwes t 2.9 8 3.2 6 4.4 1 5.2 3 6.2 7 2.1 5 2.3 4 3.3 4 4.1 4 5.1 6 2.7 1 2.9 6 4.2 3 5.0 1 5.9 9 2.5 3 2.7 3 3.6 3 4.3 2 5.2 1 2.6 2 3.0 0 4.1 1 4.8 9 5.8 8 2.4 2 2.7 5 3.9 0 4.7 4 5.8 2 Energy an d Environmenta l Analysis , Inc . Equivalen t t o carriag e rat e fo r intrastat e markets ,



### A- 8P.5 7

TABL E A-9 . INDUSTRIAL NATURAL GA S PRIC E PROJECTIONS : CARRIAG E MARKE T ESTIMATE S

ASSUMINGMARKE T RIGIDITY * (198 5 $/MMBtu )

Federa l regio n 198 8 199 0 199 5 200 0 200 5
1 . Ne w England 2 . New York/Ne w

Jerse y 3 . Middl e Atlanti c 4 . Sout hAtlanti c 5 . Midwes t 6 . Southwes t 7 . Centra l 8 . Nort hCentra l 9 . Wes t 10 . Northwes t 2.4 1 2.7 8 3.8 9 4.7 0 5.8 7 2.4 9 2.7 4 3.8 4 4.6 5 5.8 1 2.3 4 2.7 3 3.8 1 4.6 3 5.7 9 2.1 8 2.6 7 3.7 8 4.5 9 5.7 6 2.4 9 2.7 3 3.7 7 4.5 8 5.7 5 2.1 5 2.3 4 3.4 6 4.1 9 5.3 6 2.3 1 2.6 1 3.6 9 4.5 1 5.6 7 2.3 8 2.6 1 3.6 0 4.4 1 5.5 7 2.4 3 2.6 3 3.6 2 4.4 3 5.6 0 2.2 1 2.5 0 3.5 4 4.3 5 5.5 1 Energy an d Environmenta l Analysis , Inc .



### A- 9P.5 8

TABL E A-10 . INDUSTRIAL NATURAL GA S PROJECTIONS : NON-CARRIAG E MARKE T ESTIMATE S

ASSUMINGMARKE T RIGIDITY * (198 5 $/MMBtu )

Federa l regio n 198 8 199 0 199 5 200 0 200 5 1 . New England 3.2 3 3.7 5 4.7 6 5.5 0 6.6 7 2 . New York/Ne w

Jerse y 3.2 0 3.6 9 4.5 5 5.2 8 6.4 4 3 . Middl e Atlanti c 3.0 4 3.3 0 4.5 3 5.2 7 6.4 3 4 . Sout hAtlanti c 3.0 5 3.2 7 4.5 9 5.3 7 6.6 1 5 . Midwes t 2.9 8 3.2 3 4.4 2 5.1 6 6.3 4 6 . Southwes t * * 2.1 5 2.3 4 3.4 6 4.1 9 5.3 6 7 . Centra l 8 . Nort hCentra l 9 . Wes t 10 . Northwes t 2.7 1 2.9 3 4.2 1 4.9 0 6.0 2 2.5 3 2.7 3 3.6 3 4.2 6 5.2 6 2.6 0 2.8 7 3.9 7 4.6 6 5.7 7 2.4 2 2.6 7 3.9 5 4.7 0 5.9 1 Energy an d Environmenta l Analysis , Inc . Equivalen t t o carriag e rat e fo r intrastat e markets . * *

A-1 0P.5 9



### APPENDI XB REGIONAL INDUSTRIAL OI L AN D GA S PRIC E FORECAST S FO

RTH E HIG H OI L PRIC E SCENARI O (SUMMER1986 )

### . LIS T O F TABLE S

TABL E NO . TITL E B- l CRUD E OI L PRIC E FORECAS T B- 2 INDUSTRIAL 3.0 % SULFURRESIDUAL FUE L OI L PRIC E PROJECTION S B- 3 INDUSTRIAL 1.6 % SULFURRESIDUAL FUE L OI L PRIC E PROJECTION S B- 4 INDUSTRIAL 0.8 % SULFURRESIDUAL FUE L OI L PRIC E PROJECTION S B- 5 INDUSTRIAL 0.3 % SULFURRESIDUAL FUE L OI L PRIC E PROJECTION S B- 6 INDUSTRIAL DISTILLAT E FUE L OI L PRIC E PROJECTION S B- 7 INDUSTRIAL NATURAL GA S PRIC E PROJECTIONS : CARRIAG E MARKE T

ESTIMATE S B- 8 INDUSTRIAL NATURAL GA S PRIC E PROJECTIONS : NON-CARRIAG E

MARKE T ESTIMATE SP.6 1



# I 1 1 I 1 1 TABL E B-l . CRUD E OI L PRIC E FORECAST *

Averag e Refine r Acquisitio n Cos t o f Crud e Oi l Yea r (198 5 $/bbl )
198 5 (actual ) 26.7 6 198 7 20.1 3 199 0 23.8 7 199 5 27.0 2 200 0 30.6 1 200 5 37.4 2 'Energ y an dEnvironmenta l Analysis , Inc .



### B- lTABL E B-2 . INDUSTRIAL 3.0 % SULFU RRESIDUAL FUE L OI L PRIC E PROJECTIONS *

(198 5 $/MMBtu )

Federa l regio n1985* * 198 7 199 0 199 5 200 0 200 5

1 . New England 4.2 5 3.3 0 3.9 3 4.4 6 5.0 7 6.2 2 2 . New York/Ne w

Jerse y 4.1 8 3.2 4 3.8 7 4.4 0 5.0 1 6.1 6 3 . Middl e Atlanti c 4.1 8 3.2 4 3.8 7 4.4 0 5.0 1 6.1 6 4 . Sout hAtlanti c 4.1 6 3.2 2 3.8 5 4.3 8 4.9 9 6.1 4 5 . Midwes t 4.3 3 3.3 9 4.0 2 4.5 5 5.1 6 6.3 1 6 . Southwes t 4.1 4 3.2 0 3.8 3 4.3 6 4.9 7 6.1 2 7 . Centra l 4.3 0 3.3 5 3.9 9 4.5 2 5.1 2 6.2 7 8 . Nort hCentra l 4.2 4 3.3 2 3.9 6 4.5 0 5.1 1 6.2 7 9 . Wes t 4.0 6 3.1 7 3.7 9 4.3 1 4.9 1 6.0 3 10 . Northwes t 4.0 1 3.1 3 3.7 5 4.2 7 4.8 6 5.9 8 *Energy an d Environmenta l Analysis , Inc . **Estimate , no t actual .



### B-2P.6 3

» , TABL E B-3 . INDUSTRIAL 1.6 % SULFURRESIDUAL FUE L OI L PRIC E PROJECTIONS *

(198 5 $/MMBtu )

Federa l regio n1985* * 198 7 199 0 199 5 200 0 200 5

1 . New England 4.4 6 3.5 0 4.1 4 4.6 7 5.2 9 6.4 7 2 . New York/Ne w

Jerse y 4.4 0 3.4 4 4.0 8 4.6 1 5.2 3 6.4 1 3 . Middl e Atlanti c 4.4 0 3.4 4 4.0 8 4.6 1 5.2 3 6.4 1 4 . Sout hAtlanti c 4.3 7 3.4 2 4.0 6 4.5 9 5.2 1 6.3 9 5 . Midwes t 4.5 4 3.5 9 4.2 3 4.7 6 5.3 8 6.5 6 6 . Southwes t 4.3 5 3.4 0 4.0 4 4.5 7 5.1 9 6.3 7 7 . Centra l 4.5 1 3.5 5 4.2 0 4.7 3 5.3 4 6.5 2 8 . Nort hCentra l 4.4 6 3.5 2 4.1 7 4.7 1 5.3 3 6.5 2 9 . Wes t 4.2 8 3.3 7 4.0 0 4.5 2 5.1 3 6.2 8 10 . Northwes t 4.2 4 3.3 3 3.9 6 4.4 7 5.0 8 6.2 4 *Energ y an d Environmenta l Analysis , Inc . **Estimate , no t actual .



### B- 3P.6 4



### • i

TABL E B-4 . SULFURRESIDUAL FUE L

Federa l regio n



### 1 . 2 . 3 . 4 . 5 . 6 . 7 . 8 . 9 . 10 . *E n ** £ New England New York/Ne w

Jerse y Middl e Atlanti c Sout hAtlanti c Midwes t Southwes t Centra l Nort hCentra l Wes t Northwes t ergy an d Environmenta l stimate , no t actual . INDUSTRIAL 0.8 % OI L PRIC E PROJECTIONS * (198 5 $/MMBtu )

1985* *

4.8 0 4.7 4 4.7 4 4.7 2 4.8 9 4.7 0 4.8 6 4.8 0 4.6 4 4.6 0 Analysis , 198 7

3.7 8 3.7 2 3.7 2 3.7 0 3.8 7 3.6 8 3.8 3 3.7 4 3.6 2 3.5 8 Inc .



### B- 4 199 0

4.4 5 4.3 9 4.3 9 4.3 7 4.5 4 4.3 5 4.5 1 4.4 1 4.2 7 4.2 3 199 5

5.0 2 4.9 6 4.9 6 4.9 3 5.1 0 4.9 2 5.0 7 4.9 8 4.8 3 4.7 8 200 0

5.6 7 5.6 0 5.6 0 5.5 8 5.7 5 5.5 6 5.7 2 5.6 3 5.4 6 5.4 1 200 5

6.9 8 6.8 3 6.8 3 6.8 1 6.9 8 6.7 9 6.9 4 6.8 5 6.6 5 6.6 1P.6 5 \ m 

# 1 1 i , TABL E B-5 . INDUSTRIAL 0.3 % SULFU RRESIDUAL FUE L OI L PRIC E PROJECTIONS *

Federa l regio n



### 1 . 2 . 3 . 4 . 5 . 6 . 7 . 8 . 9 . 10 . New Englan d New York/New

Jerse y Middl e Atlanti c Sout hAtlanti c Midwes t Southwes t Centra l Nort hCentra l Wes t Northwes t (198 5 $/MMBtu )

1985* *

5.0 4 4.9 8 4.9 8 4.9 5 5.1 3 4.9 3 5.0 9 5.0 6 4.8 8 4.8 4 198 7

3.9 3 3.8 7 3.8 7 3.8 4 4.0 2 3.8 2 3.9 8 3.9 0 3.7 5 3.7 1 199 0

4.6 2 4.5 5 4.5 5 4.5 3 4.7 0 4.5 1 4.6 7 4.5 8 4.4 2 4.3 7 199 5

5.2 0 5.1 4 5.1 4 5.1 1 5.2 8 5.0 9 5.2 5 5.1 6 4.9 8 4.9 4 200 0

5.8 6 5.8 0 5.8 0 5.7 7 5.9 5 5.7 5 5.9 1 5.8 3 5.6 3 5.5 8 200 5

7.1 2 7.0 5 7.0 5 7.0 3 7.2 0 7.0 1 7.1 7 7.0 8 6.8 4 6.8 0 *Energ y an d Environmenta l Analysis , Inc . **Estimate , no t actual .

B- 5TABL E B-6 . INDUSTRIA L DISTILLAT E FUE L OI L PRIC E PROJECTIONS * (198 5 $/MMBtu )

Federa l regio n 1985* * 198 7 199 0 199 5 200 0 200 5

1 . Ne wEnglan d 6.1 7 4.6 6 5.4 4 6.1 3 6.9 2 8.4 1 2 . Ne wYork/Ne wJerse y6.1 5 4.6 3 5.4 2 6.1 1 6.9 0 8.3 9 3 . Middl e Atlanti c 6.1 5 4.6 3 5.4 2 6.1 1 6.9 0 8.3 9 4 . Sout h Atlanti c 6.0 3 4.5 3 5.3 1 5.9 9 6.7 6 8.2 4 5 . Midwes t 5.9 8 4.4 9 5.2 6 5.9 4 6.7 1 8.1 8 6 . Southwes t 5.8 5 4.3 7 5.1 4 5.8 1 6.5 9 8.0 5 7 . Centra l 5.9 8 4.4 9 5.2 6 5.9 4 6.7 1 8.1 8 8 . Nort h Centra l 5.6 5 4.1 6 4.9 3 5.6 1 6.3 8 7.8 5 9 . Wes t 5.4 6 4.0 1 4.7 6 5.4 2 6.1 7 7.6 0 10 . Northwes t 5.3 9 3.9 4 4.6 9 5.3 5 6.1 0 7.5 2 *Energ yan

d Environmenta l Analysis , Inc . **Estimate , no t actual . 

### B-6P.6 7

TABL E B-7 . INDUSTRIAL NATURAL GA S PRIC E PROJECTIONS: CARRIAG E MARKE T ESTIMATES '

(198 5 $/MMBtu )



### Federa l regio n 198 7 199 0 199 5 200 0 200 5

1 . New England 3.5 9 4.2 5 4.7 9 5.4 2 6.6 1 2 . New York/Ne w

Jerse y 3.7 2 4.3 9 4.9 6 5.6 0 6.6 8 3 . Middl e Atlanti c 3.2 7 4.1 8 4.7 4 5.3 6 6.5 4 4 . Sout hAtlanti c 2.9 5 3.9 5 4.6 8 5.3 0 6.4 4 

### 5 . 6 . 7 . 8 . 9 . 10 . Midwes t Southwes t Centra l Nort hCentra l Wes t Northwes t 3.0 9 4.3 0 4.8 8 5.5 1 6.6 9 2.2 8 3.4 4 4.4 3 5.0 6 6.2 2 2.8 4 4.0 3 4.6 3 5.2 5 6.3 9 2.5 3 3.7 8 4.8 0 5.4 3 6.6 3 2.8 9 4.1 8 4.8 3 5.4 6 6.6 5 2.3 3 3.5 8 4.5 7 5.1 9 6.3 5 Energy an d Environmenta l Analysis , Inc .



### B-7P.6 8

TABL E B-8 . INDUSTRIA L NATURA L GA S PRIC E PROJECTIONS : NON-CARRIAG E MARKE T ESTIMATES "

(198 5 $/MMBtu )

Federa l regio n 198 7 199 0 199 5 200 0 200 5

1 . Ne w Englan d 2 . Ne w York/Ne wJerse y 

### 3.7 8 5.2 9 6.5 2 7.1 0 8.1 8 3.8 7 5.1 1 6.3 2 6.9 1 7.9 9 3 . Middl e Atlanti c 3.7 1 4.6 1 5.9 1 6.5 0 7.6 0 4 . Sout h Atlanti c 3.3 2 4.4 1 5.8 1 6.4 5 7.6 3 5 . Midwes t 3.5 1 4.4 3 5.7 4 6.3 4 7.4 5 6 . Southwes t * 2.2 8 3.4 4 4.4 3 5.0 6 6.2 2 7 . Centra l 8 . Nort h Centra l 9 . Wes t 3.1 7 3.9 8 5.2 1 5.7 8 6.8 4 2.7 7 3.4 1 4.3 9 4.9 1 5.8 7 3.1 7 4.0 1 5.1 4 5.7 1 6.7 7 10 . Northwes t 2.8 7 3.5 9 4.8 3 5.4 6 6.6 4 Energ yan

d Environmenta l Analysis , Inc . * Equivalen t t o carriag e rat e fo r intrastat e market .



### B- 8