# Results of Oil and Natural Gas

Regulatory Impact Analysis

Briefing for Office of Management and Budget and Interagency Group June 27, 2011 8/23/2011 U.S. Environmental Protection Agency 1

# Overview of Briefing • Discuss options analyzed in RIA • Emissions reductions and engineering costs • Discussion of economic impacts analyses



### – Energy system impacts

– Small business analysis

– Labor impacts 

### • Discussion of benefits analysis and secondary impacts 8/23/2011 U.S. Environmental Protection Agency 2Source: Adapted from American Gas Association and EPA Natural Gas STAR Program 

# Oil and Natural Gas Operations

Crude Oil to Refineries ( not in this sector) Production & Processing 1. Drilling and Well Completion 2. Producing Wells 3. Gathering lines 4. Gathering and Boosting Compressors 5. Gas Processing Plant

3 3 1 2

4 5 6 7 8 10a 10b 10c 10d 9 

## Transmission & Storage 6. Transmission Compressor Stations 7. Transmission Pipeline 8. Underground Storage 

## Distribution (not covered by these rules) 9. Distribution Mains 10. Regulators and Meters for: a. City Gate b. Large Volume Customer c. Residential Customers d. Commercial Customer Oil and natural gas systems encompass wells, gas gathering and processing facilities, storage, and transmission and distribution pipelines. These components are all important aspects of the natural gas cycle — the process of getting natural gas out of the ground and to the end user.

# NESHAP Review
• Proposal addresses the residual risk and technology review conducted for two source categories

– Oil and Natural Gas Production Facilities

– Natural Gas Transmissions and Storage Facilities 

### • Proposes standards for emission sources not currently regulated • Proposes amendments to improve NESHAP 8/23/2011 U.S. Environmental Protection Agency 4

# NSPS Review
• Current NSPS covers natural gas processing plants • Many under- regulated or unregulated VOC emission points:

– Well completions and recompletions

– Equipment leaks at natural gas processing plants

– Pneumatic controllers

– Storage vessels

– Reciprocating and centrifugal compressors 8/23/2011 U.S. Environmental Protection Agency 5

# NESHAP Floor Option Analyzed in RIA
• Examined three emissions points

– Small glycol dehydrators at transmission facilities

– Small glycol dehydrators at production facilities

– Storage vessels at production facilities

8/23/2011 U.S. Environmental Protection Agency 6

# Three NSPS Options Analyzed in RIA • Option 2 (selected for proposal):

– Well completion requirements • Reduced emissions completions or completion combustion for new wells that meet conditions (see next slide) • Reduced emissions recompletions for existing wells that meet conditions (see next slide)

– Equipment leaks at processing plants

– Reciprocating compressors at gathering and boosting stations, processing plants, transmission compressor stations, and underground storage facilities

– Centrifugal compressors at processing plants and transmission compressor stations

– Pneumatic controllers at oil and gas production facilities and natural gas transmission and storage facilities

– High throughput storage vessels • Option 1: Same as Option 2, but excludes reduced emission recompletion requirement at existing wells and equipment leaks standard for processing plants • Option 3: Same as Option 2, but adds equipment leak standards at well pads, gathering and boosting stations, and transmission compressor stations 8/23/2011 U.S. Environmental Protection Agency 7

# Reduced Emissions Completions (RECs) • Completions are performed after well bore hole has reached target depth and during lifetime of well to re -stimulate productivity • Completion steps include:

– Inserting and cementing well casing

– Perforating casing at producing horizon

– Often, hydraulic fracturing one or more zones in the reservoir to stimulate production • Emissions are significantly higher when wells are hydraulically fractured • RECs separate flowback water, sand, hydrocarbon condensate, and natural gas to minimize venting to atmosphere and maximize recovery of saleable product • RECs not required for completions when:

– New wells not in proximity to sales line

– Natural gas composition not suitable for entering sales line

– In these instances, but with some exceptions, combustion of emissions is required 8/23/2011 U.S. Environmental Protection Agency 8

# Directly Averted Emissions in 2015 (short tons) Pollutant NESHAP

Amendments NSPS

Option 1 NSPS

Option 2 (Proposed) NSPS

Option 3 HAPs 1,300 17 thousand 36 thousand 37 thousand VOCs 9,200 470 thousand 970 thousand 980 thousand Methane 4,900 1.6 million 3.4 million 3.5 million 9

# Product Recovery and NSPS Controls • Many of the control options capture natural gas and hydrocarbon condensates that would otherwise be flared, vented, or disposed • The captured gas and condensate is directed into production • The captured gas could represent nearly 1% of domestic production • Estimated 180 billion cubic feet (bcf) captured for the proposed NSPS option in 2015 • EIA forecasts domestic dry gas production of 22,450 bcf in 2015 • In the cost analysis, captured gas is valued at $4 per thousand cubic feet

– RECs can capture > 10,000 thousand cubic feet of gas

– We assume 8,250 thousand cubic feet of gas is captured per REC ($33,000 revenues per REC) • Condensates valued at $70/barrel

– RECs can capture up to 600 barrels condensate

– We assume 100 barrels is captured per REC ($7000 revenues per REC) 8/23/2011 U.S. Environmental Protection Agency 10

# Capital and Annualized Engineering Costs (2008 dollars) NESHAP Amendments NSPS

Option 1 NSPS

Option 2 (Proposed )* NSPS

Option 3 Capital Costs $52 million $340 million $740 million $1.1 billion Annualized Costs Without Revenues from Additional Product Recovery $16 million $340 million $740 million $870 m illion With Revenues from Additional ProductRecovery $16 million -$20 million -$45 million $76 million 8/23/2011 U.S. Environmental Protection Agency 11 Note: About 180 million Mcf natural gas and 730,000 barrels of condensate are estimated to be recovered under the Proposed Option. Using price assumptions, this estimated recovery is valued at about $730 million for natural gas and $50 million for condensate.

# Negative Costs • Some firms already voluntarily adopt cost - effective emissions controls (evidence from EPA Natural Gas Star program, media reports, and industry presentations) 

### • Engineering cost estimates are accurate but may not fully account for economic factors that may be present, such as:

– Loss of flexibility: firms face complex planning requirements in a dynamic environment. New regulation may reduce firm flexibility to adapt to changing circumstances or new information.

– Adjustment costs: producers that change behavior to comply with regulation likely incur adjustment costs. These adjustment costs may be viewed by firms to be high.

– Incomplete information: producers may not have complete knowledge of choices and economic consequences of those choices, such as emergent environmenta l technologies or emissions estimates.

– Inconsistent incentives: operations are complex, often involving several contracting firms. Appropriate incentives may not be in place to capture all potential profit opportunities. 12

# Economic Impact Analyses Presented in RIA • Energy system analysis for NSPS • Small businesses analysis • Labor impacts

13

# Energy System Impacts, NSPS Only • We used the U.S. Energy Information Administration‘s National Energy Modeling System (NEMS) used to develop Annual Energy 

### Outlook 2011 • Baseline projections consistent with Annual Energy Outlook 2011 

### • We project baseline and regulatory impact scenarios for 2015 • Energy system impacts of NESHAP amendments not analyzed

14

# Successful Domestic Oil and Natural Gas Wells Drilled

Note: Estimated using U.S. EIA NEMS Future Scenario, 2015 2011 Baseline Proposed NSPS # Successful Wells Drilled Natural Gas 16,373 19,097 18,935 Crude Oil 10,352 11,025 11,025 Total 26,725 30,122 29,960 % Change in Successful Wells Drilled from Baseline Natural Gas - 0.9% Crude Oil 0.0% Total - 0.5% 15

# Domestic Crude Oil and Natural Gas Production

Note: Estimated using U.S. EIA NEMS Future Scenario, 2015 2011 Baseline Proposed

NSPS Domestic Production Natural Gas (tcf) 21.05 22.43 22.45 Crude Oil (million bbls/day) 5.46 5.81 5.81 % Change in Domestic Production Natural Gas 0.1% Crude Oil 0.0% 16

# Domestic Crude Oil and Natural Gas Wellhead

Prices (Lower 48 Onshore Production)

Note: Estimated using U.S. EIA NEMS Future Scenario, 2015 2011 Baseline Proposed NSPS Lower 48 Average Wellhead Price Natural Gas (2008$ per Mcf) 4.09 4.24 4.20 Crude Oil (2008$ per bbl) 84.00 94.99 94.97 % Change in Lower 48 Average Wellhead Price from Baseline Natural Gas - 0.9% Crude Oil 0.0% 17

# Other Energy System Impacts from NSPS, With Additional Natural Gas Recovery, 2015 • No change in net imports of natural gas or crude oil 

### • Increase in wells drilled in tight sands and coalbed methane • Decrease in wells drilled in shale gas • Decrease in prices for delivered natural gas for all sectors 

### • Largest percentage increase in consumption for electric sector • Slight increase in CO2

### - equivalent emissions from energy- related 

### sources (―consumer- side), not accounting for emissions reductions from NSPS controls (―producer- side‖) 18

# Impacts on Small Businesses, NESHAP

Amendments • According to SBA and U.S. Census, there were 6,427 

## small businesses in affected NAICS codes in 2008 • We estimated compliance cost to revenue ratios for 

## affected firms • 447 potentially affected facilities owned by 163 firms • Unable to find financial and/or employment data for 43 

## firms (27%) • Of the remaining 118 firms, 62 (53%) are small 19

# Impacts on Small Businesses, NESHAP

Amendments • Average compliance costs for small firms ~ $41 thousand 

## (2008$) • Average revenue for small firms ~ $120 million (2008$) 

## • Average cost to revenue ratio < 0.01% • 6 firms with cost to revenue ratio > 1% but < 3% • 4 firms with cost to revenue ratio > 3% 

## • Conclusion: No SISNOSE 20

# Impacts on Small Businesses, NSPS • New sources present challenges for estimating firm - level impacts • Estimated compliance cost to revenue ratios for sample of:

– Integrated firms

– Drilling firms



### – Firms owning processing plants

– Firms owning transmission pipelines 

## • Estimated impacts with revenue from additional product recovery 21

# Impacts on Small Businesses, NSPS • Impacts on processing and transmission segments of oil and gas industry minimal • Impacts most significant in exploration and production 

## because of completion - related requirements; these requirements are also expected to have significant cost 

## savings as a result of revenue from additional product recovery 

## • Conclusion: No SISNOSE 22

# Labor Impacts • We opted not to quantitatively estimate employment 

## impacts using Morgenstern et al. (2002) as we have in recent RIAs for two main reasons:

– Revenues from additional product recovery pose challenges to using demand and net employment impacts from study



### – Oil and natural gas industry not studied by Morgenstern et al. 

## • We developed engineering - based estimates of labor associated with control equipment 23

# Labor Associated with Pollution Controls
• We estimated labor required to install, maintain, and 

## operate control equipment associated with the NSPS and NESHAP amendments 

## • Labor component of engineering cost analysis provided basis for the estimates • Divided estimates into one-time labor and annual labor 

## • Estimate jobs in full -time equivalents (FTE) by dividing labor hours by 2080 (40 hours x 52 weeks) 24

# Labor Associated with Pollution Controls

• Labor requirements dominated by NSPS Reduced Emission Completions: 2,200 annual FTE 25 

### One-time Labor 

### (FTE) Annual

Labor 

### (FTE) Proposed NSPS 230 2,400 Proposed NESHAP Amendments 120 100 

### Total 350 2,50026



# Health and Welfare Benefits • HAPs - health

– Benzene (main risk driver)

– Toluene



### – Formaldehyde 

## • VOCs

– PM 2.5 

### precursor – health, visibility

– Ozone precursor – health, vegetation, climate 

## • Methane

– Greenhouse gas - climate

– Ozone precursor (long term) – health, vegetation, climate – Carbonyl sulfide

– Ethyl benzene

– Mixed xylenes27 • Due to data, methodology, and time limitations under court-ordered schedule, we could not monetize the health benefits for reductions in HAPs • Due to time and resource limitations under court-ordered schedule, we could not estimate secondary formation of ozone and PM 2.5 and associated health benefits from reductions in VOCs for proposal • No interagency agreed upon valuation for non - CO2 GHGs currently exists to monetize the climate benefits for methane reductions. In absence of social cost of methane values, we present monetized climate benefit estimates using a GWP approach and the social cost of CO2 as a sensitivity analysis. • Therefore, we provide a break- even analysis to estimate the benefit- per-ton needed for the benefits to exceed the costs 

# Break- Even Analysis Approach

# Break- Even Analysis Results, Proposed NSPS
• NSPS with Additional Natural Gas Recovery - Revenue from additional product recovery already exceeds the costs, which renders a 

### break- even analysis unnecessary.

28

# Break- Even Analysis Results, Proposed NESHAP Amendments • VOCs : Each ton would need to be valued at $1,700 for the benefits to exceed the costs (without taking into account any additional benefits from methane and HAP reductions). Previous analysis have shown that PM 2.5 

### benefits from VOC reductions could range from $280 to $7,000 

### per ton and ozone benefits could range from $240 to $1,000 per ton. • Methane: Each ton would need to be valued at $3,300 for the benefits to exceed the costs. Using the climate benefit approximation approach 

### described in the appendix, the climate benefits from methane reductions could range from $110 to $1,400 per ton depending on the discount rate. • HAPs: Each ton would need to be valued at $12,000 for the benefits to 

### exceed the costs. 29

# Secondary Environmental Impacts • “Producer-side” secondary impacts from control techniques (in short tons)



## • “Consumer-side” secondary impacts from a shift in fuel mix at a national - level 30

Emissions Category CO 2 NOx PM CO THC Completions of New Wells (NSPS) 587,991 302 5 1,644 622 Recompletions of Existing Wells (NSPS) 398,341 205 - 1,114 422 Pneumatic Controllers (NSPS) 22 1 3 - - Storage Vessels (NSPS) 856 1 0 2 1 Total NSPS 987,210 508 8 2,760 1,045 Total NESHAP (Storage Vessels) 5,543 3 0 16 6

# Total Change in CO 2

# - equivalent Emissions in 2015 (million metric tons)

31 Emissions Source Proposed NESHAP Amendments Proposed

NSPS Directly averted CO 2- e emissions - 0.09 - 64.71 Additional CO 2- e emissions from producer-side secondary impacts 0.01 0.9 Modeled change in energy- related CO 2- e emissions (consumer-side) N/A 1.57 Total Change -0.09 -62.25

#  ̳GWP Approach‘ to Value Methane

Climate Benefits • Averted methane emissions estimates proposed by the rule are significant and will provide climate benefits to society • In absence of interagency agreed upon social cost of methane estimates to value methane reductions, approximate  ̳GWP approach‘ estimates are presented in the RIA as a sensitivity analysis.

– The  ̳GWP approach‘ uses the global warming potential of methane to convert methane reductions to CO 2-e emissions. Social cost of carbon (SCC) estimates from the interagency process (2010) are used to value these CO2 -e reductions.

– A GWP estimate for methane of 21 from the IPCC Second Assessment Report is used to convert methane to CO 2-e.

– For the proposed NSPS Option 2 and NESHAP (with secondary impacts considered), climate benefits range from over $370 million to over $4.7 billion with a 3% discount rate estimate of $1.6 billion in 2015 (2008 dollars)

– Due to the uncertainties in these estimates, no direct comparisons are made between these benefit estimates and the cost of the proposed rule 32

# Appendix

8/23/2011 U.S. Environmental Protection Agency 3334

# Conceptual Diagram of Secondary Impacts

35