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# A-83-2 7

H-K-CAM 6

REGIONA L FORECAST S O F INDUSTRIA L RESIDUA L FUE L OI L AN D NATURA L 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 hTriangl e Park , Nort hCarolin a 2771 1

Prepare d by : ENERGYAND ENVIRONMENTA L ANALYSIS , IN C 165 5 Nort hFor t Mye r Driv e Arlington , Virgini a 2220 9

Jul y198 4P. 3

»'• ?

Thi s repor t wa s prepare dfo r th e U.S . Environmenta l Protectio nAgenc y b y Energy andEnvironmenta l Analysis , Inc. , Arlington , Virginia , unde r Contrac t Numbe r 68-02-3564 . Th e opinion s an dconclusion s presente din thi s repor t ar e thos e o f th e autho r andno t necessaril y thos e o f th e U.S . Environmenta l Protectio nAgenc y o r th e Federa l Government .P. 4

' ) -

TABL E O F CONTENT S
Pag e

1 . INTRODUCTIO NAND SUMMAR Y1 2 . WORL D OI L PRIC E FORECAST S . . 6 3 . FORECAST S O F RESIDUA L OI L PRICE S T O TH E INDUSTRIA L SECTO R1 2 3. 1 Determinant s o f Residua l Oi l Pricin g 1 2 3. 2 Forecast s o f Resi d Price s 1 6 4 . NATURA L GA S PRICE S 2 6 4: 1 Determinant s o f Natura l Ga s Price s 2 6 4. 2 Methodolog yo f Forecastin g Natura l Ga s Price s 3 0 4. 3 Forecas t Result s fo r Natura l Ga s Price s 3 1
APPENDI XA : DELIVERE D INDUSTRIA L COAL PRIC E FORECAS T 4 0P. 5

LIS T OF TABLE S

Tabl e No . Pag e 1- 1 Worl dOi l Pric e Forecast s 3 1- 2 Bas e Cas e Forecast s o f Fue l Price s

t o the Industria l Secto r 4 1- 3 HighOi l andGa s Price s Forecas t

o f Fue l Price s t o the Industria l Secto r 5 2- 1 Worl dOi l Pric e Forecas t 8 2- 2 Economi c Growt hAssumption s 8 2- 3 Fre e Worl dEnergy Efficienc y

Projection s 9 2- 4 Crud e Oi l DemandForecas t 9 2- 5 Crud e Oi l Suppl y Forecas t 1 0 2- 6 Compariso no f Worl dOi l Pric e Forecast s 1 1 3- 1 Projection s o f Industria l 3. 0 Percen t Sulfu r

Residua l Fue l Oi l Price s 1 7 3- 2 Projection s o f Industria l 1. 6 Percen t Sulfu r

Residua l Fue l Oi l Price s 1 8 3- 3 Projection s o f Industria l 0. 8 Percen t Sulfu r

Residua l Fue l Oi l Price s 1 9 3- 4 Projection s o f Industria l 0. 3 Percen t Sulfu r

Residua l Fue l Oi l Price s 2 0 3- 5 Projection s o f Industria l 3. 0 Percen t Sulfu r

Residua l Fue l Oi l Price s 2 2 3- 6 Projection s o f Industria l 1. 6 Percen t Sulfu r

Residua l Fue l Oi l Price s 2 3 3- 7 Projection s o f Industria l 0. 8 Percen t Sulfu r

Residua l Fue l Oi l Price s 2 4 3- 8 Projection s o f Industria l 0. 3 Percen t Sulfu r

Residua l Fue l Oi l Price s 2 5 4- 1 Projection s o f Industria l Natura l Ga s Price s 3 2 4- 2 Projection s o f Industria l Natura l Ga s Price s 3 3 4- 3 Natura l Ga s DemandandSupply : Bas e Cas e 3 4 4- 4 Bas e Cas e Forecas t o f Fue l Price s t o the

Industria l Secto r 3 5 4- 5 Natura l Ga s Demandan dSupply : HighCas e 3 7 4- 6 HighOi l an dGa s Price s Forecas t o f Fue l Price s t o the Industria l Secto r 3 8P. 6

1 . INTRODUCTION

ANDSUMMARYRESULT S Scop e Thi s repor t summarize s forecast s o f regiona l industria l residua l fue l oi l andnatura l ga s price s prepare db y EEA . Industria l fue l pric e projection s ar e anexogenou s inpu t requiremen t fo r the Industria l Fue l Choic e Analysi s Mode l (IFCAM) , anenerg y deman dmode l develope db y EEA . IFCA M ha s bee nuse db

y EPA t o projec t five-yea r impact s o f alternativ e NSP S fo r industria l fossi l fuel-fire d(coal , distillat e an dresidua l fue l oi l andnatura l gas ) boiler s expecte dt o be installe dbetwee n198 5 and1990 . Thi s repor t focuse s onthe 1985-200 0 timeframe becaus e IFCA M make s fue l choic e decision s fo r new industria l boiler s installe dbetwee n198 5 and199 0 base do nth e least-cos t expecte dafter-ta xne t presen t valu e o f projecte dcapital , 0&M andfue l cost s durin gthe 1985-200 0 time period . Distillat e fue l oi l price s ar e no t include di nthi s repor t becaus e the y ar e expecte dt o remai nhighe r thanprojecte dnatura l ga s an dresidua l fue l oi l price s and , therefore , wil l no t be selecte da s th e least-cos t alternativ e inIFCAM . Regiona l delivere dindustria l coa l price s hav e bee nprojecte dseparatel y b y ICF Incorporate dfo r EPA' s industria l boile r NSP S analysi s andar e presente di nAppendi xA i nthi s report . Naturally , there i s uncertaint y relate dt o energy

marke t condition s inthe 1985-200 0 timeframe . Area s o f uncertaint y relate dt o oi l an

dga s price s include : t Siz e an

dregiona l distributio no f remainin gdomesti c oi l andga s supplie s t Produce r decision s o nthe level s o f futur e drillin gactivit y
• Futur e find-rate s (new domesti c oi l an

dga s fiel ddiscoveries )
• Worl doi l price s anddemandexpectation s
• Residua l fue l oi l pricin gissue s (relationshi pt o crud e oi l costs , sulfu r premiums )


### -1 -P. 7

• Th e marke t interactio nbetwee nnatura l ga s producer s and natura l ga s pipeline s (complicate db y Natura l Ga s Polic y

Ac t natura l ga s wellhea dpricin gprovisions , variabilit y incon trac t term s andconditions , contrac t renegotiation s andex pectation s o f how

pipeline s wil l selec t supply sources )
• Natura l ga s impor t level s andprice s
• Regiona l variabilit y i nenerg y

marke t condition s
• Conservatio nandeconomi c growt hexpectations . Two forecast s o f regiona l industria l residua l fue l oi l andnatura l ga s price s ar e presente di nthi s report . On e se t wa s base donEE A estimate s o f futur e referenc e (o r base ) cas e worl doi l prices . Th e secondse t wa s derive dfro m highe r expecte dworl doi l prices . Summar y Result s Th e tw o crud e oi l pric e case s develope dfo r thes e forecast s ar e show ninTabl e 1-1 . The y ar e intende dt o reflec t a plausibl e rang e fo r crud e oi l prices . Bot hscenario' s show a relativel y

slow pric e increas e inrea l term s throug h1990 . Betwee n1990-2000 , th e Bas e Cas e implie s a 2. 8 percen t pe r annu

m rat e o f increas e (afte r adjustment s fo r inflation ) whil e th e highcas e assume s a roughl y si xpercen t pe r yea r increase . Tabl e 1- 2 show s fo r two region s alternativ e low sulfu r fue l price s fo r natura l gas , residua l oi l andcoa l unde r th e Bas e Cas e scenario . Thi s forecas t implies natura l ga s price s a t o r abov e lo w sulfu r residua l oil . Give nth e highe r capita l and0& M cost s associate dwit hth e us e o f coal , th e differentia l betwee noil/ga s versu s coa l price s doe s no t provid e a significan t incentiv e fo r coa l unti l th e mid-90's . Tabl e 1- 3 show s th e sam e compariso no f end-us e fue l price s fo r th e HighCase . Althoug hbot hoi l andga s price s ar e highe r relativ e t o coal , ga s price s i nthi s scenari o ar e a t o r below highsulfu r resid . In thi s scenario , b

y th e endo f th e centur y natura l ga s price s ar e bein g determine db

y competitio nprimaril y wit hcoal , rathe r tha nfue l oil . Her e th e differentia l betwee noil/ga s versu s coa l price s i s larg e enoug h t o provid e a significan t economi c incentiv e t o selec t coa l b y th e earl y 1990's . 

### -2-P. 8

TABL E 1-1 . WORL D OI L PRIC E FORECASTS 3

(198 2 $/bbl )

bc Yea r Bas e Cas e Highe r cas e 198 5 2 5 25.9 0 199 0 2 8 31.9 0 199 5 3 2 46.5 0 200 0 3 7 57.4 0 Averag e refine r acquisitio n cos t o f importe d crud e oil . Energyand Environmenta l Analysis , Inc .
c Cas e B . EnergyProjection s t o th e yea r 2010 . U.S . Departmen t o f Energy , Offic e o f Policy , Plannin g and Analysis . DOE/PE-0029/2 . Octobe r 1983 .



### -3
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TABL E 1-2 . BAS E CAS E FORECAS T O F FUE L PRICE S T O TH E INDUSTRIAL SECTO R

( $ 198 2 pe r MMBtu )

Midwes t Natura l ga s Residua l oi l (.8% ) Coa l (lo

wsulfur) 3 198 5

4.3 2 4.6 5 2.6 9 199 0

5.3 4 5.2 0 3.0 4 199 5

6.3 8 5.8 4 3.2 1 200 0

7.2 7 6.6 3 3.3 7
Southwes t Natura l ga s Residua l oi l (.8% ) Coa l (lo wsulfur) 3 4.0 2 4.5 0 2.7 5 4.9 5

5.0 6 3.0 5 5.7 5

5.7 0 3.2 6 6.7 5

6.4 8 3.4 2

a l. l t o 1. 7 lb s S0 2 pe r MMBtu .



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1 t 1 TABL E .1-3 . HIGH OI L AND GA S PRICE S

FORECAS T O F FUE L PRICE S T O TH E INDUSTRIAL SECTO R ( $ 1982 )

198 5 199 0 199 5 200 0
Midwes t Natura l ga s Residua l oi l (.8% ) Coa l (lo wsulfur ) 4.4 2 4.7 7 2.6 9 5.5 1

5.9 1 3.0 4 7.4 4

8.0 9 3.2 1 8.6 7

9.8 2 3.3 7
Southwes t Natura l ga s Residua l oi l (.8% ) Coa l (lo wsulfur) 3 4.0 5 4.6 4 2.7 5 5.1 5

5.7 9 3.0 5 6.7 1

7.9 8 3.2 6 8.0 2

9.6 9 3.4 2

a l. l t o 1. 7 lb s S0 2 pe r MMBtu .



### -5
-P.1 1

Any forecas t o f fue l oi l andnatura l ga s pric e forecast s i s in herentl y

develope di na contex t o f many uncertainties . Key issue s and assumption s ar e highlighte di nvariou s section s o f thi s report . Othe r tha nth e fac t tha t an y forecas t shoul db e reviewe dcritically , on e cavea t i s wort hspecia l emphasis . EE A believe s thes e forecast s ar e mor e reliabl e fo r comparin g oil/ga s price s t o coa l prices . Th e forecast s shoul db e use dwit hcautio nwher e distinction s betwee nfue l oi l an d natura l ga s price s ar e important . Inparticular , the Bas e Cas e forecas t implie s a marke t contex t wher e fue l oi l i s consistentl y gainin g marke t shar e compare dt o natura l gas , a situatio nwhic hha s no t occurre din recen t history . Du e t o th e time constraint s fo r thi s study , th e method olog y employe ddoe s no t allow fo r resi dprice s t o ris e inrespons e t o hig hlevel s o f deman dfo r residua l oil . Thi s problem i s discusse din Sectio n4 . However , th e key poin t i s tha t i nth e 1990' s resi dprices , andt o a lesse r exten t natura l ga s prices , ar e probabl y understate dt o some degree . Organizatio no f thi s Repor t Worl doi l price s andmarke t condition s ar e discusse dinSectio n2 . Projecte dindustria l residua l fue l oi l price s ar e summarize dinSec tion3 . Th e derivatio no f projecte dindustria l natura l ga s price s i s explaine di nSectio n4 . 2 . WORL DOI L PRIC E FORECAST S Methodolog y EEA' s worl doi l pric e forecas t i s base donthe WOI L forecastin g mode l andforecastin g experienc e relate dt o short - andlong-term oi l marke t analysis . WOI L i s a dynami c worl doi l pricin g mode l develope db y EE A inconjunctio nwit hth e Departmen t o f Energ y fo r us e inpreparin g th e biennia l Nationa l Energy Polic y Pla n(NEPP) . I t generate s projec tion s fo r fre e worl denergy production , demand , andprice s throug hth e yea r 2010 . Th e mode l explicitl y consider s fiv e region s - Unite dStates , othe r OEC D(Organizatio nfo r Economi c Cooperatio nandDevelopment ) countries , OPEC , Mexico , andthe Res t o f th e Fre e Worl dincludin g less develope dcountries . Fo r th e countrie s inthe centrall y planne deco nomie s grou p(CPE's) , onl y ne t fue l export s ar e forecasted .

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Fo r eac hworl dregio nWOI L project s primar y energ y supplie di n term s o f oil , gas , coal , nuclea r andrenewable s (includin gproduction , ne t trade , andstoc kchanges) . Energy consumptio ni s estimate dbase don economi c activit y

andequipmen t efficienc y assumption s andi s projecte d b y fue l typ e (includin gelectricity ) an db y secto r (residential , com mercial , industrial , andtransportation) . Energy price s ar e calculate d fro m supply/deman dbalance s fo r resourc e cost s (fo r example , minemout h coal ) plu s taxes , deliver y charges , andothe r markup s t o determin e delivere denerg y

prices . T o develo poi l pric e anddemandprojection s usingWOIL , a detaile d se t o f assumption s abou t key parameter s i s required . Variation s i n thes e assumption s wil l generall y affec t energy

supply , deman dan

d prices . Th e key

inpu t parameter s i nWOI L are :
• Economi c Growth : Eac ho f th e fiv e region s inWOI L ha s a separat e user-specifie dpotentia l gros s domesti c produc t (GDP ) fo r eac hyea r i nthe mode l run . Thi s use r specifie d potentia l GD P i s influence db y th e averag e delivere denergy pric e throughlagge dpric e elasticitie s tha t vary acros s regions . Thus , a s worl doi l price s ris e inrea l term s i n th e futur e relativ e t o thei r curren t levels , regiona l GD P growt hrate s become lowe r thanthei r constant-pric e pro jecte dlevels . • OPE C Oi l Productio nCapacity : WOI L require s th e specifica tio no f a lowe r anda nuppe r boundonOPE C productio ncapac ity . Actua l productio ncapacit y i s determine db

y marke t con dition s bu t mus t remai nwithi nthi s range . Currently , th e lowe r boundi s assume dt o b e 2 9 Mbbl/day . Th e uppe r boundas sume s a retur nt o th e pre-197 9 capacit y o f 36. 6 Mbbl/da y

b y 1990 , wit ha continue dgrowt hi ncapacit y t o 4 1 Mbbl/da y

b y th e yea r 2000 . t Ne t Fre e Worl dEnergy Trad e wit hthe Centrall y Planne dEconomies : Th e EE A bas e cas e assume s a certai namoun t o f energy trad e wit h th e Centrall y

Planne dEconomie s i noil , natura l ga s andcoal . Inth e curren t WOI L projection , CP E oi l export s ar e assume dt o b e on e millio nbarrel s pe r day i n1983 , fallin ggraduall y t o zer o in1990 , wit htota l energ y export s equa l t o 1. 8 Mbbl/da y i n1983 , fallin gt o on e Mbbl/da y in199 0 an

dthe nincreasin gt o 2. 4 Mbbl/da y

b y 200 0 a s coa l andga s export s ar e expanded .P.1 3

Bas e Cas e Th e EE Abas e cas e pric e projection s ar e presente d i n Tabl e 2-1 .

TABL E 2-1 . WORL D OI L PRIC E FORECAST 3

(198 2 $/bbl )

1982 b
33.5 5 1983 b



### 2 8 198 5



### 2 5 199 0



### 2 8 199 5



### 3 2 200 0



### 3 7 3 Averag e refine r acquisitio ncos t o f importe d crud e oil . b Actual . Thi s projectio ni s base d o n a n increas e i n worl d oi l deman d a s economi c growt hcontinue s t o outstri p gain s i n efficiency , and o n in

creasin g relianc e o n OPE C crud e oi l a s othe r Fre e Worl d reserve s ar e deplete d an d CP E oi l export s decrease . Betwee n198 3 and 200 0 th e rea l Fre e Worl d economi c growt hrat e i s estimate d t o b e thre e percen t pe r year . Th e GD P projection s b yregio n ar e presente d i n Tabl e 2-2 .

TABL E 2-2 . ECONOMI C GROWT H ASSUMPTION S

(trillio n198 2 $ )
Regio n United State s OPE C Mexic o Res t o f Fre e Worl d Tota l Fre e Worl d 198 3
3.1 3 

### .3 5 .15 1.0 5 9.0 8 198 5

3.4 4 

### .3 9 .17 1.1 0 9.7 9 199 0

4.0 0 

### .47 .21 1.3 4 11.3 7 199 5

4.5 9 

### .5 6 .26 1.6 0 13.2 3 200 0

5.1 6 

### .6 6 .3 2 1.8 8 15.1 4P.1 4

Th e economi c growt hrate s wil l no t lea d t o a n equivalen t increas e i n energ ydeman d a s gain s ar e stil l bein g mad e i n energ yefficiency . Unti l adjustment s t o th e highe r energyprice s o f th e las t 1 0 year s ar e completed , replacemen t o f olde r inefficien t capita l stock s b ynewer , mor e efficien t capita l wil l retar d th e effect s o f economi c growt ho n energ ydemand . A s shown i n Tabl e 2-3 , WOI L project s Fre e Worl d energ y intensit y(energy/ $ GDP ) t o decline . WOI L projection s o f Fre e Worl d oi l deman d ar e presente d i n Tabl e 2-4 .

TABL E 2-3 . FRE E WORL D ENERGYEFFICIENC YPROJECTION S

(bb l equiv./thousan d 198 2 $ GDP )

198 3
3.8 1 198 5

3.7 1 199 0

3.5 1 199 5

3.3 5 200 0

3.2 4

TABL E 2-4 . CRUD E OI L DEMAND FORECAS T

(Mbbl/day )
Regio n 198 3 198 5 199 0 199 5 200 0
United State s Othe r OEC D OPE C Mexic o Res t o f Fre e Worl d Tota l Fre e Worl d 15. 5 19. 1 

### 3. 0 1. 7 6. 4 45. 7 16. 0

19. 7 

### 3. 4 1. 7 6. 3 47. 2 16. 1

20. 6 

### 4. 0 2. 1 7. 8 50. 5 16. 0

21. 9 

### 4. 5 2. 3 8. 8 53. 5 15. 8

23. 0 

### 5. 2 2. 6 9. 8 56. 5



### -9
-P.1 5

O nth e suppl yside , a n increas e i n Mexica noi l productio nwil l mor e tha noffse t th e declin e i n othe r non-OPE C productio nunti l 1990 , a t whic htim e Mexica nproductio nwil l stabilize . Afte r 1990 , non-OPE C oi l productio nwil l fall , shiftin g deman d towar d OPEC , and resultin g i n th e rapi d increas e i n OPE C oi l productio napparen t i n Tabl e 2-5 .

TABL E 2-5 .

Regioh
Tota l Fre e Worl d OPE C Tota l Non-OPE C Unite d State s Othe r OECD Mexic o Res t o f Fre e Worl d Stoc k drawdown s CRUD E OI L SUPPL Y FORECAS T (Mbbl/day )

198 3
45. 7 21. 9 23. 8 10. 7 

### 5. 4 3. 0 4. 2 0. 5 198 5

47. 2 23. 1 24. 1 10. 2 

### 5. 6 3. 6 4. 5 0. 2 199 0

50. 5 25. 8 24. 7 

### 9. 8 5. 6 4. 5 4. 8 

### 0 199 5

53. 5 29. 5 24. 0 

### 8. 8 5. 5 4. 6 5. 2 

### 0 200 0

56. 5 32. 2 24. 3 

### 8. 3 5. 4 4. 7 5. 8 

### 0
Thes e oi l suppl yan d deman d trend s resul t i n a gradua l strength
enin g o f th e oi l marke t wit hprice s stabl e i n rea l term s throug hth e remainde r o f th e 1980s . Afte r 1990 , th e growt hi n oi l deman d and de
creas e i n non-OPE C oi l suppl ywil l resul t i n a fir moi l marke t char
acterize d b

ycrud e oi l price s increasin g a t a n averag e annua l rat e O f 2. 8 percen t betwee n199 0 an d 2000 . Hig hOi l Pric e Cas e Thi s studyals o include d analyse s base d o n a highe r worl d oi l pric e scenario . W e electe d t o utiliz e a n alreadypublishe d forecas t b yth e Departmen t o f Energ ya s th e basi s fo r a highe r crud e oi l case . Tabl e 2- 6 compare s th e EE ABas e Cas e wit ha serie s o f recen t DO E forecasts . DOE / OPP ACas e B wa s selecte d a s th e highe r worl d oi l pric e scenario . Thi s scenari o wa s use d a s th e referenc e cas e fo r th e NEPP-198 3 projections . -10
-Cas e A c Cas e B e DOE/OPP A e /

3 d Cas e C D0E/EIA f Lo w Middl e Hig h TABL E 2-6 . COMPARISO NO F WORL D OI L PRIC E FORECASTS 3 (198 2 $/bbl )

198 5 199 0 199 5 200 0
EE ABas e Cas e 2 5 2 8 3 2 3 7

, b 21.0 0 25.9 0 30.5 0 25.6 0

31.9 0 40.3 0 30.3 0

46.5 0 59.5 0 36.0 0

57.4 0 80.3 0
21.1 0 25.9 0 29.7 0 27.8 0

35.5 0 44.1 0 35.5 0

48.0 0 63.3 0 N.

A N. A N. A

3 Averag e refine r acquisitio n cos t o f importe d crud e oil . EnergyProjection s t o th e Yea r 2010 . U.S . Departmen t o f Energy , Offic e o f Policy , Plannin g an d Analysis . DOE/PE-0029/2 . Octobe r 1983 . p . 5-6 . c Hig hsuppl yand conservatio n potential . Referenc e Cas e
e Lo wsuppl yand conservatio n potential . Annua l EnergyOutloo k 1983 . U.S . Departmen t o f Energy , EnergyInformatio n Administration . D0E/EIA-0383(83) . Ma y1984 . p . xiii . Converte d from . 198 3 dollar s usin g GN P implici t pric e deflators .

-11
-l '

3 . FORECAST S O F RESIDUA L OI L PRICE S T O TH E INDUSTRIA L SECTO R

3. 1 Determinant s o f Residua l Oi l Pricin g Residua l oi l ha s traditionall ybee nconsidere d a lo wvalue d by
produc t o f th e refinin g process . Thi s perceptio nlead s manyobserver s t o not e tha t resi d price s a t anypoin t i ntim e ar e se t a t "whateve r th e marke t wil l bear. " However , resi d price s ar e determine d b ya comple x se t o f underlyin g factor s including : th e pric e an d qualit yo f crud e oil , deman d fo r resi d and othe r refiner yproducts , refiner yconfiguration s an d capacit yutilization , cost s o f convertin g resi d t o lighte r petroleum product s an d desulfurizatio ncosts . Thi s discussio no f residua l oi l price s i s organize d b yth e followin g ke yanalytica l elements :
• Th e pric e o f residua l oi l relativ e t o crud e oi l

• Pric e distinction s b ysulfu r conten t

• Regiona l pric e difference s Ther e is , i nreality , significan t interactio namon g thes e factors . Fo r example , th e determinant s o f price s b ysulfu r conten t diffe r regionally . Difference s i nregiona l produc t deman d and existin g refiner yconfigura

tion s ar e als o important . However , fo r expositiona l purposes , eac ho f thes e ke yelement s wil l b e discusse d separately . Residua l Oi l Compare d t o Crud e Oi l Price s Deman d fo r residua l oi l ha s decline d sharpl yi nth e U S i nrecen t year s fro m

approximatel y2. 8 millio nbarrel s pe r day(MMB/D ) i nth e 1976-7 9 perio d t o a lo wo f 1. 4 MMB/ D i n1983 . Thi s dro p i nresi d con sumptio nb

yone-hal f ove r a fou r yea r perio d ha s bee nmor e sever e tha n th e declin e i noveral l petroleumproduc t consumption , whichdroppe d b y abou t 2 0 percen t ove r th e sam e period . Th e declin e i nresi d deman d affecte d importe d supplie s mor e severel ytha noutpu t fro mU S refineries . I nth e lat e 70's , resi d import s accounte d fo r nearl ytwo-third s o f domesti c suppl ybu t b y198 2 import s ha d droppe d t o 40-4 5 percen t o f resi d suppl yt o U S markets . -12
-P.1 8

r 1 '

Thi s shrinkag e i nresidua l oi l consumptio nle d t o a declin e i n resi d price s relativ e t o crud e oi l fro mnea r parit yo f lo wsulfu r resi d wit haverag e refiner yacquisitio ncost s o f crud e t o a poin t i nth e earl y 80' s wher e lo wsulfu r resi d wa s price d roughl y$1.30-$1.5 0 pe r MMBt u belo wcrud e oi l prices . Consequently , a majo r elemen t o f residua l oi l pric e forecast s fo r th e perio d 1985-200 0 i s whethe r residua l oi l price s wil l agai nretur nt o parit y(o r nea r parity ) wit hcrud e oi l o r remai na t a substantia l discoun t belo wcrud e oi l prices . Thi s forecas t assume s tha t resi d price s wil l agai nris e s o tha t lo w sulfu r residua l oi l i s nea r parit ywit hcrud e oi l b yth e lat e 1980's . On e reaso nfo r thi s forecaste d tren d relate s t o futur e change s i n th e petroleumproduc t state . I nth e past , deman d fo r hig hvalue d prod
uct s (e.g. , gasoline , distillate ) wa s growin g a t a rapi d rate . Give n th e siz e o f th e market s fo r thes e ligh t product s an d refiners ' abilit y t o pric e gasolin e a t a substantia l premiumabov e crud e oil , refiner s coul d affor d t o subsidiz e th e pric e o f resi d belo wcrud e oil . I nth e future , th e deman d growt houtloo k fo r gasolin e i s poor , withmos t fore
cast s showin g a sligh t declin e i nth e 1980' s the nrelativel yslo w increase s i nth e 90's . Competitiv e pressure s an d a weake r gasolin e marke t deman d ar e als o tendin g t o kee p downth e premiumo f gasolin e price s abov e crud e oil . I nthi s context , th e lowe r value d products , suc ha s residua l oil , wil l hav e t o bea r a large r shar e o f crud e cost s t o allo w refiner s t o ear nanyreasonabl e retur no nthei r refiner yinvestments . Anothe r evolvin g tren d i s th e incentiv e fo r refiner s t o us e resi d a s a feedstoc k t o produc e ligh t products . Refiner s currentl yfac e a n exces s suppl yo f resi d productio ncapacit ya t a tim e whe nth e gradua l shif t towar d heavie r crud e oi l supplie s tend s t o increas e th e yiel d o f resi d pe r barre l o f crud e processed . Refiner s (especiall yalon g th e Gul f coast ) ar e respondin g b yinstallin g capacit y(primaril ycoking ) t o conver t resi d int o lighte r products . I neffect , th e resi d pric e i s lo w enoug hrelativ e t o crud e cost s t o provid e incentive s t o substitut e resi d fo r crud e a s a feedstock . •13
-P.1 9

«

Wit hrespec t t o resi d prices , thes e trend s wil l tend t o reduc e th e exces s supplie s o f resi d and increas e th e opportunit ycos t o f sellin g resi d a s fue l oi l du e t o it s valu e a s a feedstoc k t o produc e ligh t products . Th e resul t wil l als o b e t o increas e th e pric e o f resi d a s a fue l oi l relativ e t o crud e oi l a s th e petroleumproduc t marke t move s towar d a mor e balance d state . Differenc e i nResidua l Oi l Pric e b ySulfu r Conten t Sulfu r conten t an d viscosit yar e tw o majo r qualit ydistinction s whic hresul t i npric e differences . Fo r th e purpose s o f thi s study , sulfu r distinction s ar e th e relevan t issue . Th e forecas t o f residua l oi l price s b

ysulfu r conten t i s intende d t o matc hth e fou r classe s i n IFCAM : 3% , 1.6% , .8 % and .3 % sulfu r b yweight . I n1982 , abou t 4 0 percen t o f tota l domesti c residua l fue l oi l supplie s (domesti c refiner yproductio nan d imports ) containe d mor e tha n 2. 0 percen t sulfur . Th e balanc e wa s evenl ydistribute d i nthre e groups : < * 0. 5 percen t sulfur , 0.51-1.0 0 percen t sulfu r and 1.01-2.0 0 percen t sulfur . Pric e difference s bysulfu r conten t i nth e forecas t perio d wil l b e determine d bydesulfurizatio ncosts . Th e differenc e i ncost s betwee nth e lowes t and highes t sulfu r conten t categorie s i s $.65-.7 0 ne r MMBt u ($1982 ) i nth e lat e 80' s and increase s slightl yove r time . Regiona l Pric e Difference s Residua l oi l price s als o diffe r byregio nwithi nth e US . Fo r th e purpose s o f thes e forecasts , thre e majo r regiona l group s ca nb e distin

-

* * guished :
• Eas t and Gul f coast s t Midwes t t Wes t coas t

* EIA . Petroleum

Suppl yAnnua l 1982 . D0E/EIA-0340(82)/l . Jun e 1983 . p . 62 , 64 . * * Othe r distinction s coul d add th e inlan d waterwa ysyste mand th e mountai nstates . However , thes e area s ar e les s importan t i nterm s o f th e volum e o f oi l and natura l ga s consumptio ni nthes e areas . •14
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Th e larg e eas t coas t market s fo r residua l oi l ar e supplie d primaril y byth e Caribbea nrefiners , loca l refinerie s and smal l shipment s fro mGul f coas t refineries . Th e ke ydeterminan t o f resi d price s o nth 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 d o nth e eas t coas t ar e les s efficien t and tend t o generat e resi d yield s o f 12-1 4 percen t (percen t o f produc t output ) compare d t o lowe r yield s i nth e Gul f coast . Th e Caribbea nrefiner s ar e basicall ypric e takers , eve nthoug himport s fro m th e Caribbea nprovid e th e bul k o f resi d supplie s o nth e eas t coast . Pric e difference s alon g th e Atlanti c seaboar d ar e fairl ysmall , re flectin g difference s i ntransportatio ncosts . Thi s analysi s assume s suc h difference s ar e smal l o r negligible . Resi d market 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 d consumption . Resi d consumptio ni s no wheavil yconcen trate d i nlarg e end users , suc ha s th e stee l plants . Amoco , on e o f th e majo r resi d supplier s i nthi s region , appear s t o b e withdrawin g fro mthi s market . I t i s clea r tha t th e ceilin g o nmidwester nresi d price s i s pre sentl yse t b

yGul f coas t product s barge d u p th e rive r system . Midwester n refinerie s ar e relativel yefficien t producer s o f lo wsulfu r resi d du e t o a hig hshar e o f cokin g capacit yan d a muc hlighte r mi xo f crud e oi l tha n i nth e Gul f coast . Hence , i f resi d deman d wer e strong , thes e refinerie s coul d mak e lo wan d medium sulfu r resi d a t relativel ylowe r cos t tha nGul f coas t refiners . I na stron g market , productio no f thes e resi d grade s ca n b e a profitabl e business . Resi d price s ca nswin g ove r a relativel ywid e rang e i nth e midwes t dependin g o nth e siz e o f th e resi d market . Thi s analysi s assume s continuatio no f a relativel ywea k marke t fo r resid , henc e resi d price s i nth e midwes t ar e se t $.1 5 ($1982 ) abov e Gul f coas t prices . Wes t coas t market s ar e essentiall yisolate d fro mothe r resi d markets . 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 nand Alaska ncrudes . Du e t o a declinin g resi d marke t and a heavie r crud e mix , refinerie s i nthi s regio nhav e alreadyinstalle d -15
-P.2 1

capacit yt o conver t resi d t o lighte r products . Hence , resi d tend 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 wsulfu r Indonesia ncrud e oi l price s woul d se t a ceilin g o nresi d price s o nth e wes t coas t lo wsulfu r du e t o th e relativel yhig hshar e o f stringen t sulfu r regulation s i nthi s area . I n effect , compare d t o th e Gul f coast , resi d pric e i s relate d t o th e lowe r pric e o f wes t coas t crudes , offse t partiall yb ya highe r resi d t o crud e pric e ratio . W e hav e assume d resi d price s ar e abou t $.3 5 pe r MMBt u belo w Gul f coas t price s i na relativel ywea k resi d marke t du e t o th e lowe r averag e crud e cost s o nth e wes t coast . 3. 2 Forecast s o f Resi d Price s Forecaste d price s unde r th e assumption s describe d abov e ar e con taine d i nTable s 3- 1 throug h3- 4 fo r th e Bas e Cas e and Table s 3- 5 throug h 3- 8 fo r th e Hig hCase . Price s ar e forecas t b yFedera l Region s a s define d i nFigur e 1 . Th e Hig hCas e forecast s diffe r onl ybecaus e o f th e highe r crud e oi l forecasts . Thes e forecast s wer e prepare d b yreferenc e t o EEA' s simpl e refiner y model , crud e oi l t o resi d pric e relationship s use d i nth e DOE' s natura l ga s analyses , and EEA' s wor k o nresi d pricin g wit hmajo r oi l companies .

•16
-

### 1 .

2 . 3 . 4 . 5 . 6 . 7 . 8 . 9 . 10 . TABL E 3-1 . PROJECTION S O F INDUSTRIA L

3. 0 PERCEN T SULFU RRESIDUAL FUE L

(198 2 $/MMBtu )

Regio n New Englan d 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 198 5 3.9 4 3.9 3 3.9 3 3.9 1 4.0 8 3.9 3 4.0 5 3.7 4 3.5 5 3.5 0 199 0

4.4 3 4.4 2 4.4 2 4.4 0 4.5 7 4.4 2 4.5 4 4.2 3 4.0 3 3.9 9 

### OI L PRICES 3

199 5 4.9 9 4.9 8 4.9 8 4.9 6 5.1 2 4.9 8 5.0 9 4.7 9 4.5 7 4.5 3 200 0

5.6 6 5.6 5 5.6 5 5.6 2 5.7 9 5.6 5 5.7 5 5.4 7 5.2 3 5.1 9 Energ y andEnvironmenta l Analysis , Inc . EEA Bas e Cas e scenario .

•17 -TABL E .3-2 . PROJECTION S O F INDUSTRIA L 1. 6 PERCEN T SULFU RRESIDUA L FUE L OI L PRICES 3

(198 2 $/MMBtu )i-H 

### 2 . 3 . 4 . 5 . 6 . 7 . 8 . 9 . 

### 10 . Region
NewEnglan

d NewYork/NewJersey Middl e Atlanti c Sout hAtlanti c Midwes t Southwes t Centra l Nort hCentra l Wes t Northwes t 198 5
4.2 1 4.2 0 4.2 0 4.1 7 4.3 4 4.1 9 4.3 1 4.0 0 3.8 2 3.7 7 199 0

4.7 3 4.7 2 4.7 2 4.7 0 4.8 6 4.7 2 4.8 3 4.5 3 4.3 3 4.2 9 199 5

5.3 2 5.3 1 5.3 1 5.2 9 5.4 5 5.3 1 5.4 2 5.1 3 4.9 1 4.8 7 200 0

6.0 4 6.0 3 6.0 3 6.0 1 6.1 7 6.0 3 6.1 4 5.8 5 5.6 1 5.5 7

3 Energ yan d Environmenta l Analysis , Inc . EE ABas e Cas e scenario .

•18
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TABL E 3-3 . PROJECTION S O F INDUSTRIA L 0. 8 PERCEN T SULFURRESIDUA L FUE L OI L PRICES 5

(198 2 $/MMBtu )I—I 

### 2 . 3 . 4 . 5 . 6 . 7 . 8 . 

### 9' . 10 . Regio n
NewEnglan

d NewYork/Ne wJersey Middl e Atlanti c Sout hAtlanti c Midwes t Southwes t Centra l Nort hCentra l Wes t Northwes t 198 5
4.5 1 4.5 0 4.5 0 4.4 8 4.6 5 4.5 0 4.6 1 4.3 1 4.1 5 4.1 1 199 0

5.0 7 5.0 6 5.0 6 5.0 3 5.2 0 5.0 6 5.1 7 4.8 7 4.7 0 4.6 5 199 5

5.7 1 5.7 0 5.7 0 5.6 8 5.8 4 5.7 0 5.8 1 5.5 1 5.3 3 5.2 9 200 0

6.4 9 6.4 8 6.4 8 6.4 6 6.6 3 6.4 8

• 6.5 9 6.3 0 6.0 9 6.0 5 Energyan d Environmenta l Analysis , Inc . EE ABas e Cas e scenario .

-19
-TABL E 3-4 . PROJECTION S O F INDUSTRIA L 0. 3 PERCEN T SULFU RRESIDUA L FUE L OI L PRICES 3

(198 2 $/MMBtu )



### 1 . 2 . 3 . 4 . 5 . 6 . 7 . 8 . 9 . 

### 10 . Region
NewEnglan

d NewYork/NewJersey Middl e Atlanti c Sout hAtlanti c Midwes t Southwes t Centra l Nort hCentra l Wes t Northwes t 198 5
4.8 1 4.8 0 4.8 0 4.7 8 4.9 5 4.8 0 4.9 2 4.6 1 4.4 3 4.3 8 199 0

5.4 1 5.4 0 5.4 0 5.3 7 5.5 5 5.4 0 5.5 1 5.2 1 5.0 0 4.9 6 199 5

6.1 0 6.0 9 6.0 9 6.0 7 6.2 4 6.0 9 6.2 0 5.9 0 5.6 8 5.6 4 200 0

6.9 4 6.9 3 6.9 3 6.9 1 7.0 8 6.9 3 7.0 4 6.7 5 6.5 0 6.4 5 Energ yan d Environmenta l Analysis , Inc . EE ABas e Cas e scenario .

-20
-FIGUR E 1 

# Federa l Region s o fth e Unite d State s

1 r o i— • i

HAtAI I "

REGIO N NAMES 1 . Ne wEnglan d 2 . Ne wYork/NewJerse

y 3 . Middl e Atlanti c 4 . Sout h Atlanti c 5 . Midwes

t 6 . 7 . 8 . 9 . 10 . >

*ov? V ' " \

\ x.

Southwes

t Centra l Nort h Centra l Wes t Northwes

tTABL E 3-5 . PROJECTION S O F INDUSTRIAL 3. 0 PERCEN T SULFURRESIDUA L FUE L OI L PRICES 2

(198 2 $/MMBtu )



### 1 . 2 . 3 . 4 . 5 . 6 . 7 . 8 . 9 . 

### 10 . Regio n Ne wEngland Ne wYork/Ne wJerse y Middl e Atlanti c Sout hAtlanti c Midwes t Southwes t Centra l Nort hCentra l Wes t Northwes t 198 5 4.0 7 4.0 5 4.0 5 4.0 3 4.1 8 4.0 5 4.1 5 3.8 9 3.7 2 3.6 8 199 0

5.0 5 5.0 4 5.0 4 5.0 2 5.1 7 5.0 4 5.1 4 4.8 7 4.6 8 4.6 4 199 5

6.9 3 6.9 1 6.9 1 6.9 0 7.0 5 6.9 1 7.0 2 6.7 5 6.4 7 6.4 4 200 0

8.4 0 8.3 8 8.3 8 8.3 7 8.5 1 8.3 9 8.5 2 8.2 4 7.9 0 7.8 7 Energyand Environmenta l Analysis , Inc . Highe r oi l and ga s price s scenario .

-22
-P.2 8

TABL E 3-6 . PROJECTION S O F INDUSTRIAL

ILFU RRESIDUA L I (198 2 $/MMBtu ) 1. 6 PERCEN T SULFURRESIDUA L FUE L OI L PRICES 3



### 1 . 2 . 3 . 4 . 5 . 6 . 7 . 8 . 9 . 

### 10 . Regio n Ne wEngland Ne wYork/Ne wJerse y Middl e Atlanti c Sout hAtlanti c Midwes t Southwes t Centra l Nort hCentra l Wes t Northwes t 198 5 4.3 4 4.3 3 4.3 3 4.3 0 4.4 6 4.3 3 4.4 2 4.1 6 3.9 9 3.9 6 199 0

5.4 0 5.3 9 5.3 9 5.3 7 5.5 2 5.3 9 5.4 8 5.2 2 5.0 3 5.0 0 199 5

7.4 1 7.4 0 7.4 0 7.3 9 7.5 3 7.4 0 7.5 0 7.2 4 6.9 6 6.9 3 200 0

9.0 0 8.9 9 8.9 9 8.9 8 9.1 4 8.9 9

. ,9.1 0 8.8 3 8.5 1 8.4 8

3 Energ yand Environmenta l Analysis , Inc . Highe r oi l and ga s price s scenario .

-23
-P.2 9

TABL E 3-7 . PROJECTION S O F INDUSTRIA L 0. 8 PERCEN T SULFURRESIDUA L FUE L OI L PRICES 2

(198 2 $/MMBtu )



### 1 . 2 . 3 . 4 . 5 . 6 . 7 . 8 . 9 . 

### 10 . Regio n
NewEnglan

d Ne wYork/NewJersey Middl e Atlanti c Sout hAtlanti c Midwes t Southwes t Centra l Nort hCentra l Wes t Northwes t 198 5
4.6 5 4.6 4 4.6 4 4.6 3 4.7 7 4.6 4 4.7 4 4.4 7 4.3 3 4.2 9 199 0

5.7 9 5.7 9 5.7 9 5.7 7 5.9 1 5.7 9 5.8 9 5.6 3 5.4 5 5.4 2 199 5

7.9 8 7.9 8 7.9 8 7.9 6 8.0 9 7.9 8 8.0 7 7.8 0 7.5 8 7.5 4 200 0

9.7 0 9.6 9 9.6 9 9.6 7 9.8 2 9.6 9 9.8 0 9.5 2 9.2 9 9.2 5 Energ yand Environmenta l Analysis , Inc . Highe r oi l and ga s price s scenario .

-24
-~1

»

TABL E 3-8 . PROJECTION S O F INDUSTRIA L

0. 3 PERCEN T SULFURRESIDUA L FUE L OI L PRICES 3

(198 2 $/MMBtu )t-H 

### 2 . 3 . 4 . 5 . 6 . 7 . 8 . 9 . 

### 10 . Regio n
NewEnglan

d NewYork/NewJersey Middl e Atlanti c Sout hAtlanti c Midwes t Southwes t Centra l Nort hCentra l Wes t Northwes t 198 5
4.9 6 4.9 6 4.9 6 4.9 4 5.0 9 4.9 6 5.0 5 4.7 9 4.6 3 4.5 8 199 0

6.1 9 6.1 8 6.1 8 6.1 7 6.3 1 6.1 8 6.2 8 6.0 1 5.8 1 5.7 7 199 5

8.5 5 8.5 4 8.5 4 8.5 2 8.6 7 8.5 4 8.6 3 8.3 7 8.0 9 8.0 6 200 0

10.4 1 10.4 0 10.4 0 10.3 8 10.5 4 10.4 0 10.5 0 10.2 4 9.9 1 9.8 7 Energ yan d Environmenta l Analysis , Inc . Highe r oi l an d ga s price s scenario .

-25
-P.3 1

4 . NATURA L GA S PRICE S 4. 1 Determinant s o f Natura l Ga s Price s Th e majo r factor s affectin g th e deman d fo r natura l ga s i nth e 80' s ar e significantl ydifferen t fro m thos e i nth e 1990's . I nth e nex t fiv e year s natura l ga s wil l b e strongl yaffecte d bymajo r factor s whic hwil l becom e les s importan t b yth e lat e 80's-earl y90's . Th e firs t o f thes e factor s i s natura l ga s deregulatio nand resolu
tio no f contrac t pricin g issues . Unde r th e Natura l Ga s Polic yAc t o f 197 8 a larg e shar e o f ga s wil l b e deregulate d i nth e 1985-8 7 period . Upo nderegulation , wellhea d ga s price s wil l b e determine d b ypricin g provision s i ncontract s betwee nnatura l ga s producer s and pipelin e com panies . Man yo f thes e contract s contai nprovision s whic hwoul d impl y shar p pric e increase s i f literall yenforced . Thes e pricin g provision s contai nindefinit e pric e escalato r clauses , ofte nkeyin g natura l ga s wellhea d price s t o fue l oi l prices . Bot hproducer s and pipelin e com panie s recogniz e tha t complianc e wit hthes e provision s coul d lea d t o a "pric e spike. " Suc ha pric e increas e woul d exacerbat e th e problem s currentl yface d b

yth e natura l ga s industr yo f a declin e i nnatura l ga s consumptio no f 1 2 percen t fro m 19. 4 trillio n cubi c fee t (TCF ) i n198 1 t o 1 7 TC F i n1983 . Legislatio ni s als o bein g debate d i nth e Congres s whic hcoul d hel p resolv e thes e pricin g issues . I nth e absenc e o f ne w legislation , th e outcom e o f pipeline-produce r negotiation s t o resolv e th e pricin g dilemm a wil l hav e a majo r impac t o nth e strengt ho f th e natura l ga s marke t recover yi nth e nex t fe wyears . However , b yth e earl y1990' s th e contrac t volume s containin g thes e provision s wil l be
com e relativel yles s importan t a s ga s contracte d sinc e 198 2 (largel y wit hmor e market-oriente d conditions ) begi nt o weig hmor e heavil yi n determinin g th e averag e cos t o f natura l gas . Th e othe r majo r nea r term facto r i s th e curren t exces s suppl yo f natura l gas , popularl yreferre d t o a s th e "ga s bubble. " Th e combinatio n o f reduce d ga s deman d and th e growt hi nreserv e addition s i n1980-8 2 spurre d b

yproduce r expectation s o f highe r price s ha s resulte d i nga s -26
-P.3 2

supplie s (o r deliverability ) whic hexcee d curren t consumptio nlevels . Th e existenc e o f th e bubbl e tend s t o depres s th e wellhea d pric e o f ga s tha t i s subjec t t o marke t forces . Som e observer s believ e thi s exces s suppl ysituatio nwil l persis t throug hth e end o f th e decade , actin g a s a depressin g facto r t o kee p ga s price s downwhil e othe r observer s believ e a ga s shortag e wil l emerg e du e t o producer-pipelin e decision s t o cu t bac k o nth e developmen t o f ne wga s supplie s i nth e contex t o f th e curren t ga s surplus . Whil e thes e tw o factors , contrac t pricin g problem s and exces s sup ply , wil l hav e majo r impact s o nga s price s ove r th e nex t fiv e years , th e marke t fo r natura l ga s shoul d hav e stabilize d b yth e earl y1990' s s o tha t longe r runconsideration s wil l begi nt o pla ymajo r role s i nth e determin

atio no f th e pric e o f natura l gas . Thes e longe r runfactor s include : th e growt ho f deman d fo r energy , oi l price s and th e cos t o f finding / developin g ne wsupplie s o f natura l gas . Th e interactio no f thes e fac
tor s wil l determin e th e siz e o f th e natura l ga s marke t and ga s price s i nth e future . On e wa yt o illustrat e possibl e trend s i nga s price s i s t o specif y possibl e alternativ e outcome s i nterm s o f oi l price s and ga s suppl y (i.e. , th e cos t o f addin g ne wga s supplies) . Thre e extrem e outcome s ar e possible :
• Ga s price d abov e residua l oi l

• Ga s price d comparabl ywit hresidua l oi l

• Ga s price d belo wresidua l oi l Th e firs t outcom e wit hga s price s highe r tha nlo wsulfu r residua l oi l woul d effectivel ypric e ga s ou t o f margina l market s wher e i t compete s wit hfue l oil . I nsuc ha scenario , th e ga s marke t woul d b e severel y contracte d becaus e o f th e los s o f boile r load s and a larg e shar e o f pro ces s hea t application s whic hcoul d switc ht o fue l oils . Ga s price s woul d b e determine d b

ycompetitio ni nhig hvalue d markets , suc ha s wit helectri c hea t pump s o r certai nindustria l proces s hea t application s wit ha sub
stantia l us e premiumove r fue l oil . Thi s scenari o coul d resul t fro ma
-27
-combinatio no f th e followin g factors :
• Hig henerg ydeman d growt h

• Lo woi l price s
• Lo westimate s o f th e undiscovere d ga s resourc e bas e whic h lea d t o shar p increase s i n th e cos t o f findin g ne wga s supplie s
• Inabilit yo f ga s pipelines/producer s and th e regulator y proces s t o mak e ga s mor e competitiv e b ycos t reductions , rat e reforms , us e o f spo t markets , etc . Th e opposit e extrem e i s fo r natura l ga s t o b e price d belo wresidua l fue l oil . Here , ga s woul d retai nmarket s wit hrespec t t o fue l oil . Thi s cas e i s mor e likel yunde r som e combinatio no f th e followin g circumstances :
• Lowe r energ ydeman d growt h
•Highe rmarke tpenetratio n b yelectricit y
• Hig hoi l price s t Highe r ga s resourc e bas e o r improve d technolog yleadin g t o slowe r increase s i n th e cos t o f findin g an d developin g ne w supplie s o f natura l ga s
• Larg e volume s o f ga s import s an d supplementa l a t competi

tiv e price s (reducin g th e productio npressure s fro mth e lower-4 8 ga s resourc e base ) I nthi s typ e o f scenario , ga s price s ar e determine d i n competitio nwith coa l an d othe r lo wcos t alternatives , rathe r tha nwithfue l oil . Th e intermediat e cas e woul d sho wnatura l ga s price d somewher e i n th e rang e o f lo wt o hig hsulfu r residua l fue l oil , wit hresidua l oi l a s th e marginall ycompetitiv e energ yalternative . Wher e th e actua l forecas t o f natura l ga s price s lie s amon g these , thre e scenario s i s a n empirica l question , no t predetermine d b yconcept s o r logic . Currently , ga s pricin g whil e stil l heavil ypric e controlle d byregulation , i s closes t t o th e intermediat e scenari o wher e natura l ga s compete s wit hfue l oi l a t th e margin . I nreality , natura l ga s price s ca n diffe r substantiall yb yregio n du e t o ga s transmissio nand distributio ncost s an d possibl ydu e t o dif

feren t wellhea d price s amon g supplyin g regions . Thus , i n variou s con sumin g center s ga s burnerti p price s bea r differen t relationship s wit h alternativ e fue l prices . Fo r example , i f burnerti p ga s price s i n th e -28
-P.3 4

midwes t wer e a t parit ywit hlo wsulfu r residua l oil , ga s price s i nNe w Englan d woul d likel yb e abov e lo wsulfu r resi d whil e ga s price s i nth e Gul f coas t migh t b e a t parit ywit hhig hsulfu r resi d du e t o lowe r trans mission/distributio ncost s applicabl e t o tha t majo r sourc e o f ga s supplies . I nsummary , forecas t natura l ga s price s i nth e 1990' s coul d b e above , comparabl e t o o r belo wresidua l fue l oil , dependin g o nth e criti

ca l factor s discusse d above . A t anypoin t i ntime , significan t regiona l pric e difference s o nth e orde r o f $.50-1.0 0 pe r millio nBt u ar e likel y t o exist . Dependin g o nth e pric e o f ga s relativ e t o alternativ e fuels , th e ga s marke t wil l diffe r i nterm s o f bot htype s o f market s retaine d (e.g. , boile r load ) and variatio ni nmarke t shar e b yregion .

-29
-P.3 5

4. 2 Methodolog y

o f Forecastin gNatura l Ga s Price s Th e forecast s o f natura l ga s price s develope di nthi s study rel y primaril y

ohthe Hydrocarbo nSuppl y Mode l develope db

y EE A fo r the Strategi c Analysi s andEnergy Forecastin gDivisio no f th e Ga s Researc h Institute . Thi s mode l structur e generate s the cos t o f findingnew ga s supplie s i nrespons e t o a projected , exogenou s forecas t o f the demand fo r natura l ga s ove r time . EE A als o use dit s Energy Overvie w

Mode l t o chec kth e consistenc y o f th e ga s demandforecast s wit hthe suppl y result s fro

m the Hydrocarbo nSuppl y Model . EEA' s Energy Overview

Mode l i s a proprietar y

national/regiona l ga s marke t mode l designe dt o addres s th e factor s discusse dearlie r whic hinfluenc e trend s i nthe natura l ga s market . Key

assumption s underlyin gthe forecas t o f natura l ga s price s ar e highlighte dbelow : (1 ) Crud e oi l andfue l oi l price s wer e base donth e forecast s fro m Section s 2 and3 o f thi s report . (2 ) Th e Natura l Ga s Polic y Ac t (NGPA ) woul dbe implemente d unde r curren t provisions , decontrollin gga s price s ove r th e 1985-8 7 period . (3 ) Th e contrac t pricin gissue s woul dbe resolve ds o tha t price s o f decontrolle dga s woul dbe keye dt o marke t determine dprices . (4 ) Canadia nimport s woul db e price daccordin gt o it s VRI P polic y (dua l pricing) , wit hprice s afte r decontro l trackin glower-4 8 marke t prices . Mexica nimport s woul d be price dt o matc hCanadia nimports . (5 ) Canadia nimpor t licensin gwil l reac hlevel s o f avail abilit y o f tw o TC F pe r yea r b

y 1987 , implyingpendin g license s wil l be approved .
Se e the GR I Hydrocarbo nMode l i nGa s Researc hInsights , May , 198 3 distribute db

y the Ga s Researc hInstitute . -30 -P.3 6

(6 ) Th e ga s industr y wil l be abl e t o hav e aneffectiv e dua l marke t pricin gsystem . Tha t is , price s t o margina l ga s consumer s i nth e industrial/electri c utilit y market s wil l b e adjuste dt o no mor e than$.2 5 pe r MMBt uabov e ful l recover y

o f ga s transmissio ncosts . Thi s woul dbe achieve db

y some combinatio no f rat e reform , commo ncarrier , spo t marke t pricin gpractices . (7 ) Th e electri c utilit y industr y

decision s t o replac e oil/gas fire dunit s (or reduc e capacit y utilization ) wil l continu e t o b e constraine db

y relativel y

slow electricit y

demand growth , regulator y

rat e practice s an

dcapita l constraints . (8 ) Commitment s t o suc hsupplementa l ga s suppl y source s a s LNG , SN Gandga s fro

m coa l wil l be lowe r thancontracte d level s fo r LNG/SNGandlimite dt o th e Grea t Plain s coa l gasificatio nproject . Th e ga s price s projecte dunde r the HighCas e use dexactl y th e same assumption s excep t fo r th e highe r crud e an dfue l oi l price s a s describe d inearlie r section s o f thi s report . 4. 3 Forecas t Result s fo r Natura l Ga s Price s Table s 4- 1 and4- 2 contai nforecaste dregiona l price s t o industria l ga s user s unde r th e Bas e Cas e andHighCas e scenario s respectively . Bas e Cas e Tabl e 4- 3 present s summary result s o f trend s inth e natura l ga s marke t unde r th e Bas e Cas e scenario . I nthi s case , th e ga s marke t recover s i n198 5 the nbegin s a steady declin e throug hth e yea r 2000 . Th e sharpes t declin e occur s i nth e boile r markets , wher e th e gradua l retirement/reduce dloadfactor s o f utilit y gas-fire dboiler s i s ex acerbate db

y losse s reflectin gfue l switchin gfro m natura l ga s t o residua l oi l unde r thi s relativel y lo w oi l pric e case . Tabl e 4- 4 show s a compariso no f fue l price s t o industria l user s whic hhighligh t th e fac t tha t ga s price s ar e a t o r abov e lo w sulfu r residua l oi l prices . In effect , b

y th e mid-90' s the cos t o f findin gne w ga s supplie di s causin g ga s price s t o ris e mor e rapidl y tha noi l prices . -31 -TABL E 4-1 . PROJECTION S O F INDUSTRIA

L NATURA L GA S PRICES 3 (198 2 $/MMBtu ) P.3 7

Regio n 198 5 199 0 199 5 200 0 

### 1 . 2 . 3 . 4 . 5 . 6 . 7 . 8 . 9 . 

### 10 . NewEnglan

d Ne wYork/NewJersey Middl e Atlanti c Sout hAtlanti c Midwes t Southwes t Centra l Nort hCentra l Wes t Northwes t 4.3 8 4.2 9 4.1 6 4.5 7 4.3 2 4.0 2 3.8 6 3.6 8 4.0 2 4.4 4 5.2 1

5.2 1 5.1 7 5.4 6 5.3 4 4.9 5 4.9 1 4.4 7 4.9 4 5.2 3 6.2 5

6.2 7 6.2 2 6.4 7 6.3 8 5.7 5 5.9 2 5.2 7 5.9 6 5.8 5 7.4 9

7.3 0 7.2 5 7.4 0 7.2 7 6.7 5 6.8 1 6.1 2 6.5 6 6.6 3 Energyand Environmenta l Analysis , Inc . EE ABas e Cas e scenario .

-32
-TABL E 4-2 . PROJECTION S OF INDUSTRIAL NATURA L GA S PRICES 3 (198 2 $/MMBtu ) P.3 8

Region 198 5 199 0 199 5 200 0 

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

w Jerse y Middl e Atlanti c SouthAtlanti c Midwes t Southwes t Centra l Nort hCentra l Wes t Northwes t 4.4 3 4.3 5 4.2 9 4.6 1 4.4 2 4.0 5 3.9 1 3.7 2 4.0 4 4.2 1 5.3 9

5.3 8 5.3 6 5.6 6 5.5 1 5.1 5 5.0 9 4.5 8 5.0 3 5.1 0 7.3 7

7.3 6 7.3 6 7.3 1 7.4 4 6.7 1 6.5 3 5.7 9 6.4 9 6.3 8 8.5 8

8.5 7 8.5 7 8.4 9 8.6 7 8.0 2 7.7 5 6.8 9 7.6 1 7.2 8 Energy an dEnvironmenta l Analysis , Inc . Highe r oi l an dga s price s scenario .

-33 -TABL E 4-3 . NATURA L GA S DEMAN

DAN DSUPPLY BAS E CAS E (QuadrillionBtu's ) P.3 9

Deman d Boile r Othe r industrial 3 Subtota l industria l utility Residential/commercia l Plan t an

d lease , transmissio n losses , misc . Estimated 1983 b

-

_________ _ 

### 8. 7 7. 1 2. 0 198 5



### 5. 7 4. 1 9. 8 6. 9 1. 9 199 0



### 5. 0 4. 1 9. 1 6. 7 1. 8 199 5



### 4. 2 3. 9 8. 1 6. 2 1. 7 200 0



### 3. 5 3. 8 7. 3 6. 0 1. 6 Tota l deman d 17. 8 18. 6 17. 6 16. 0 14. 9 Suppl y Lower-4 8 Import s an

d Supplementa l Ne t storag e withdrawa l Tota l suppl y 16. 3 

### 1. 1

. 4 17. 8 17. 1



### 1. 5

- 18. 6 16. 1



### 1. 5

- 17. 6 14. 7



### 1. 3

- 16. 0 13. 8



### 1. 1

- 14. 9
Proces s hea t and feedstoc k uses .
? Fro mNatura l Ga s Monthly ; EI A(February , 1984 ) converte d a t 102 5 Btu' s pe r MCF . -34
-P.4 0

TABL E 4-4 . BAS E CAS E FORECAS T O F FUE L PRICES*T O TH E INDUSTRIAL SECTO R

( $ 198 2 pe r MMBtu )

Midwes t Natura l ga s Residua l oi l (.8% ) Coa l (lo

wsulfur) 3

Southwes t Natura l ga s Residua l oi l (.8% ) Coa l (lo

wsulfur) 3 198 5

4.3 2 4.6 5 2.6 9

4.0 2 4.5 0 2.7 5 199 0

5.3 4 5.2 0 3.0 4

4.9 5 5.0 6 3.0 5 199 5

6.3 8 5.8 4 3.2 1

5.7 5 5.7 0 3.2 6 200 0

7.2 7 6.6 3 3.3 7

6.7 5 6.4 8 3.4 2

a l. l t o 1. 7 lb s S0 2 pe r MMBtu .

-35
-P.4 1

Th e othe r industria l marke t (.proces s hea t an dfeedstoc kuse s o f energy ) decline s mor e slowl y a s th e growt hi nenerg y demandi s slightl y offse t b y shift s away

fro m natura l gas . I nthi s scenario , coa l i s marginall y economi c unti l th e mi dt o lat e 1990' s whe ncoa l economic s woul dbecome mor e favorabl e inth e new boile r market . Th e residential/commercia l secto r experience s a steady declin e in ga s use , primaril y

fro m improve denerg y

efficienc y

a s new buildin gstoc k wit hles s energ y

us e pe r squar e foo t replace s olde r buildings . Highe r Oi l andGa s Price s Tabl e 4- 5 present s natura l ga s marke t trend s unde r th e highe r crud e oi l pric e scenario . Inthi s situation , althoug hth e ga s marke t stil l decline s ove r time , it s rat e o f declin e i s muc hslower . Tabl e 4- 6 show s a compariso no f fue l prices . Her e natura l ga s price s ar e risin gles s rapidl y tha noi l prices . B y th e yea r 2000 , oi l price s ar e roughl y $3.2 0 highe r i nth e HighCas e ove r th e Bas e Cas e whil e ga s price s ar e $1.25 - 1.5 0 greate r i nthe HighCase . Natura l ga s price s trac khighsulfu r resi dandb

y th e en do f the centur y

fal l below

highsulfu r residua l oi l prices . Inthi s case , b y th e lat e 90' s natura l ga s price s ar e beginnin g t o b e determine db

y competitio nwit hcoal , rathe r thanfue l oil . Coa l i s clearl y

mor e competitiv e wit hoi l an dga s b y the earl y

90's . I nthi s case , th e declin e i nth e boile r marke t largel y reflect s th e retiremen t o f utilit y gas-fire dboilers . Industria l secto r uses , boile r andnon-boiler , ar e relativel y stabl e wit henergy

growt han

doil to-ga s shift s roughl y offsettin gincrease dcoa l penetration . Th e residential/commercia l secto r ga s deman ddecline s mor e rapidl y i nth e cas e du e t o greate r efficienc y (cause db

y highe r oi l an

dga s prices ) an

d relativel y

highe r marke t penetratio nb y electricit y

int o thes e sectors .

-36 -TABL E 4-5 . NATURAL GA S DEMAND AND SUPPL Y HIGH CAS E (Quadrillio n Btu's )

Deman d Boile r Othe r industrial 3 Subtota l industria l utilit y Residential/commercia l Plan t an

d lease , transmissio n losses , misc . Estimate d 1983 b

-

_ 

### 8. 7 7. 1 2. 0 198 5



### 5. 6 4. 1 9. 7 

### 6. 9 1. 9 199 0



### 5. 4 4. 2 9. 6 

### 6. 7 1. 8 199 5



### 5. 3 4. 4 9. 7 

### 6. 0 1. 8 200 0



### 4. 5 4. 5 9. 0 5. 8 1. 7 Tota l demand 17. 8 18. 5 18. 1 17. 5 16. 5 Suppl y Lower-4 8 Import s and Supplemental s Ne t storag e withdrawa l Tota l suppl y 17. 8 17. 1 16. 5 16. 1 15. 2 1. 4 1. 6 1. 4 1. 3
18. 5 18. 1 17. 5 16. 5
Proces s hea t and feedstoc k uses . } Fro m Natura l Ga s Monthly ; EI A(February , 1984 ) converte d a t 102 5 Btu' s pe r MCF .
-37
-P.4 3



### TABL E 4-6 . HIGH OI L AND GA S PRICE S FORECAS T O F FUE L PRICE S T O TH E INDUSTRIAL SECTO R

( $ 1982 )

Midwes t Natura l ga s Residua l oi l (.8% ) Coa l (lo

wsulfur) 3 198 5

4.4 2 4.7 7 2.6 9 199 0

5.5 1 5.9 1 3.0 4 199 5

7.4 4 8.0 9 3.2 1 200 0

8.6 7 9.8 2 3.3 7


### Southwes t Natura l ga s Residua l oi l (.8% ) Coa l (lowsulfur) 3 4.0 5 4.6 4 2.7 5 5.1 5

5.7 9 3.0 5 6.7 1

7.9 8 3.2 6 8.0 2

9.6 9 3.4 2
3 

### 1. 1 t o 1. 7 lb s S0 2 

### pe r MMBtu .

-38
-P.4 4

Caveat s A s state dearlier , ther e ar e many uncertaintie s inheren t i nthes e forecasts , especiall y a s on e trie s t o forecas t beyond1990 . Fro m th e perspectiv e o f thi s study give nit s focu s onoi l an dga s prices , the Bas e Cas e fue l oi l price s shoul dprobabl y b e highe r tha npresente d above . Thi s i s becaus e fue l oi l price s wer e forecas t first , the nuse d a s aninpu t int o the natura l ga s marke t outlook . Sinc e the Bas e Cas e implie s significan t growt hinfue l oi l demandi nthe 90's , i t coul dtend t o place upwar dpressur e onresidua l oi l prices . Thi s woul drais e resi d price s abov e those forecas t somewhat , perhap s onth e orde r o f $.30-.5 0 pe r MMBt u( $ 1982) . W e woul dexpec t onl y thi s relativel y

mino r increas e becaus e refinerie s ca neasil y increas e resi dyield s ove r a relativel y smal l pric e rang e andmany o f the mothballe drefinerie s an dshut-i n facilitie s (whic hten dt o hav e relativel y

highresi dyields ) coul dbe brough t bac kon-lin e t o expandresi dsupplies . Since ther e ha s no t bee n an y recen t perio do f a consisten t competitiv e advantag e fo r residua l oi l ove r natura l ga s acros s a broa dsegmen t o f th e U.S . market , th e inter actio nbetwee nresi dandnatura l ga s price s probabl y warrant s a mor e carefu l analysis . Fro m th e perspectiv e o f use s o f these pric e fore casts , especiall y

i nth e Bas e Case , mor e relianc e shoul dbe place don th e differential s betwee noil/ga s versu s coa l price s rathe r thanon natura l ga s versu s residua l oi l prices . Othe r tha nth e forecast s o f crude oi l prices , whic hhav e bee n bounde db

y a range , probabl y

the othe r critica l facto r i s the projectio n o f increase dcos t o f findin gnew lower-4 8 ga s supplie s inthe mid-90' s andbeyond . W e coul demphasiz e tha t n o majo r technologica l advance s ar e assume dinth e natura l ga s suppl y forecasts .

-39 -P.4 5

APPENDI XA . DELIVERE DINDUSTRIAL COAL PRIC E FORECAS T

• Reference : Memorandu m fro m C . Eber t (ICF Incorporated ) t o J . Greenwal d(EPA) . Revise dIndustria l Coa l Price s fo r Industria l NSP S Analyses . May 31 , 1984 . Attachmen t A . • Converte dfro

m Januar y 198 3 dollar s t o 198 2 dollar s usingthe averag e annua l 198 2 andfourt hquarte r 198 2 GN P implici t pric e deflators .

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I- " c o —vi o - H o 0 0 vo o r o •— 1 3 3 > c r •*** (— 3 ' 2 O C 2 C D f D C O 3= . C L c r | — C

- O VO

CD VO m 3 > C OP.4 8

* «:. V

* • 4



### 8 .

9 .



### 10 .

a IC F Regio n
Nort hCentra l

Wes t

Northwes t

Incorporated . DELIVERE D INDUSTRIA L COA L PRIC E (198 2 $/MMBtu ) (Continued )

Sulfu r conten t Coa l typ e (lbS0 2 /MMBtu ) Bituminou s <1.0 8

1.0 8 - 1.6 7 1.6 7 - 2.5 0 Subbituminou s <1.0 8

1.0 8 - 1.6 7 1.6 7 - 2.5 0 Bituminou s <1.0 8

1.0 8 - 1.6 7 1.6 7 - 2.5 0 Subbituminou s <1.0 8

1.0 8 - 1.6 7 1.6 7 - 2.5 0 Bituminou s <1.0 8

1.0 8 - 1.6 7 1.6 7 - 2.5 0 Subbituminou s <1.0 8

1.0 8 - 1.6 7 1.6 7 - 2.5 0

-43
- FORECAST 3

198 5
1.7 6 1.6 1 1.7 0 1.2 2 1.1 7 1.1 9 2.5 4 2.3 9 2.4 0 2.6 2 2.5 2 2.4 8 2.9 2 2.6 3 2.5 9 2.3 8 2.4 0 1.9 3 199 0

1.9 0 1.7 4 1.8 1 1.3 2 1.3 2 1.2 1
2.6 9 2.6 4 2.6 4 2.7 1 2.6 1 2.5 6
3.0 6 2.8 0 2.7 2 2.5 9 2.4 8 1.9 9 199 5

1.9 8 1.9 0 1.8 8 1.4 1 1.4 2 1.2 8 2.7 5 2.9 0 2.8 1 2.8 3 2.7 2 2.6 0
3.1 3 2.9 9 2.8 3 2.6 2 2.5 9 2.0 8 200 0

2.0 7 2.0 1 1.8 6 1.5 2 1.4 5 1.3 3 2.9 1 3.0 5 2.9 2 2.9 2 2.8 4 2.6 9
3.2 7 3.1 8 2.8 8 2.7 1 2.6 7 2.1 9

i

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