OAR Box 1828 

Prepped by Ollie Stewart 

Document Number: 

3) M-K-(A)-16 

Docket Number: 

A-83-27 

p.i 

Printed 11/12/200811:12:47AM Sheet 3 of 325 
< 1 

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A-83-27 

H-K-CAM 6 

REGIONAL FORECASTS OF 

INDUSTRIAL RESIDUAL FUEL 

OIL AND NATURAL GAS PRICES 

Prepared for: 

U.S. ENVIRONMENTAL PROTECTION AGENCY 

Office of Air Quality Planning and Standards 

Research Triangle Park, North Carolina 27711 

Prepared by: 

ENERGY AND ENVIRONMENTAL ANALYSIS, INC 

1655 North Fort Myer Drive 

Arlington, Virginia 22209 

July 1984 
P.3 

»'•? 

This report was prepared for the U.S. Environmental Protection Agency by 

Energy and Environmental Analysis, Inc., Arlington, Virginia, under 

Contract Number 68-02-3564. The opinions and conclusions presented in 

this report are those of the author and not necessarily those of the 

U.S. Environmental Protection Agency or the Federal Government. 
P.4 

') -

TABLE OF CONTENTS 

Page 

1. INTRODUCTION AND SUMMARY 1 

2. WORLD OIL PRICE FORECASTS . . 6 

3. FORECASTS OF RESIDUAL OIL PRICES TO THE 

INDUSTRIAL SECTOR 12 

3.1 Determinants of Residual Oil Pricing 12 

3.2 Forecasts of Resid Prices 16 

4. NATURAL GAS PRICES 26 

4:1 Determinants of Natural Gas Prices 26 

4.2 Methodology of Forecasting Natural Gas Prices 30 

4.3 Forecast Results for Natural Gas Prices 31 

APPENDIX A: DELIVERED INDUSTRIAL COAL PRICE FORECAST 40 
P.5 

LIST OF TABLES 

Table 

No. Page 

1-1 World Oil Price Forecasts 3 

1-2 Base Case Forecasts of Fuel Prices 

to the Industrial Sector 4 

1-3 High Oil and Gas Prices Forecast 

of Fuel Prices to the Industrial Sector 5 

2-1 World Oil Price Forecast 8 

2-2 Economic Growth Assumptions 8 

2-3 Free World Energy Efficiency Projections 9 

2-4 Crude Oil Demand Forecast 9 

2-5 Crude Oil Supply Forecast 10 

2-6 Comparison of World Oil Price Forecasts 11 

3-1 Projections of Industrial 3.0 Percent Sulfur 

Residual Fuel Oil Prices 17 

3-2 Projections of Industrial 1.6 Percent Sulfur 

Residual Fuel Oil Prices 18 

3-3 Projections of Industrial 0.8 Percent Sulfur 

Residual Fuel Oil Prices 19 

3-4 Projections of Industrial 0.3 Percent Sulfur 

Residual Fuel Oil Prices 20 

3-5 Projections of Industrial 3.0 Percent Sulfur 

Residual Fuel Oil Prices 22 

3-6 Projections of Industrial 1.6 Percent Sulfur 

Residual Fuel Oil Prices 23 

3-7 Projections of Industrial 0.8 Percent Sulfur 

Residual Fuel Oil Prices 24 

3-8 Projections of Industrial 0.3 Percent Sulfur 

Residual Fuel Oil Prices 25 

4-1 Projections of Industrial Natural Gas Prices 32 

4-2 Projections of Industrial Natural Gas Prices 33 

4-3 Natural Gas Demand and Supply: Base Case 34 

4-4 Base Case Forecast of Fuel Prices to the 

Industrial Sector 35 

4-5 Natural Gas Demand and Supply: High Case 37 

4-6 High Oil and Gas Prices Forecast of Fuel Prices 

to the Industrial Sector 38 
P.6 

1. INTRODUCTION AND SUMMARY RESULTS 

Scope 

This report summarizes forecasts of regional industrial residual 

fuel oil and natural gas prices prepared by EEA. Industrial fuel price 

projections are an exogenous input requirement for the Industrial Fuel 

Choice Analysis Model (IFCAM), an energy demand model developed by EEA. 

IFCAM has been used by EPA to project five-year impacts of alternative 

NSPS for industrial fossil fuel-fired (coal, distillate and residual 

fuel oil and natural gas) boilers expected to be installed between 1985 

and 1990. 

This report focuses on the 1985-2000 timeframe because IFCAM makes 

fuel choice decisions for new industrial boilers installed between 1985 

and 1990 based on the least-cost expected after-tax net present value of 

projected capital, 0&M and fuel costs during the 1985-2000 time period. 

Distillate fuel oil prices are not included in this report because they 

are expected to remain higher than projected natural gas and residual 

fuel oil prices and, therefore, will not be selected as the least-cost 

alternative in IFCAM. Regional delivered industrial coal prices have 

been projected separately by ICF Incorporated for EPA's industrial 

boiler NSPS analysis and are presented in Appendix A in this report. 

Naturally, there is uncertainty related to energy market conditions 

in the 1985-2000 timeframe. Areas of uncertainty related to oil and gas 

prices include: 

t Size and regional distribution of remaining domestic oil 

and gas supplies 

t Producer decisions on the levels of future drilling activity 

• Future find-rates (new domestic oil and gas field discoveries) 

• World oil prices and demand expectations 

• Residual fuel oil pricing issues (relationship to crude 

oil costs, sulfur premiums) 

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P.7 

• The market interaction between natural gas producers and 

natural gas pipelines (complicated by Natural Gas Policy Act 

natural gas wellhead pricing provisions, variability in contract terms and conditions, contract renegotiations and expectations of how pipelines will select supply sources) 

• Natural gas import levels and prices 

• Regional variability in energy market conditions 

• Conservation and economic growth expectations. 

Two forecasts of regional industrial residual fuel oil and natural 

gas prices are presented in this report. One set was based on EEA 

estimates of future reference (or base) case world oil prices. The 

second set was derived from higher expected world oil prices. 

Summary Results 

The two crude oil price cases developed for these forecasts are 

shown in Table 1-1. They are intended to reflect a plausible range for 

crude oil prices. Both scenario's show a relatively slow price increase 

in real terms through 1990. Between 1990-2000, the Base Case implies a 

2.8 percent per annum rate of increase (after adjustments for inflation) 

while the high case assumes a roughly six percent per year increase. 

Table 1-2 shows for two regions alternative low sulfur fuel prices 

for natural gas, residual oil and coal under the Base Case scenario. 

This forecast implies natural gas prices at or above low sulfur residual 

oil. Given the higher capital and 0&M costs associated with the use of 

coal, the differential between oil/gas versus coal prices does not 

provide a significant incentive for coal until the mid-90's. 

Table 1-3 shows the same comparison of end-use fuel prices for the 

High Case. Although both oil and gas prices are higher relative to 

coal, gas prices in this scenario are at or below high sulfur resid. In 

this scenario, by the end of the century natural gas prices are being 

determined by competition primarily with coal, rather than fuel oil. 

Here the differential between oil/gas versus coal prices is large enough 

to provide a significant economic incentive to select coal by the early 

1990's. 

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P.8 

TABLE 1-1. WORLD OIL PRICE FORECASTS3 

(1982 $/bbl) 

b c 

Year Base Case Higher case 

1985 25 25.90 

1990 28 31.90 

1995 32 46.50 

2000 37 57.40 

Average refiner acquisition cost of imported crude oil. 

Energy and Environmental Analysis, Inc. 

cCase B. Energy Projections to the year 2010. U.S. Department of Energy, 

Office of Policy, Planning and Analysis. DOE/PE-0029/2. October 1983. 

-3-
P.9 

TABLE 1-2. BASE CASE 

FORECAST OF FUEL PRICES TO THE INDUSTRIAL SECTOR 

($ 1982 per MMBtu) 

Midwest 

Natural gas 

Residual oil (.8%) 

Coal (low sulfur)3 

1985 

4.32 

4.65 

2.69 

1990 

5.34 

5.20 

3.04 

1995 

6.38 

5.84 

3.21 

2000 

7.27 

6.63 

3.37 

Southwest 

Natural gas 

Residual oil (.8%) 

Coal (low sulfur)3 

4.02 

4.50 

2.75 

4.95 

5.06 

3.05 

5.75 

5.70 

3.26 

6.75 

6.48 

3.42 

al.l to 1.7 lbs S02 per MMBtu. 

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P.10 

1 

t 

1 

TABLE .1-3. HIGH OIL AND GAS PRICES 

FORECAST OF FUEL PRICES TO THE INDUSTRIAL SECTOR 

($ 1982) 

1985 1990 1995 2000 

Midwest 

Natural gas 

Residual oi l (.8%) 

Coal (low sulfur) 

4.42 

4.77 

2.69 

5.51 

5.91 

3.04 

7.44 

8.09 

3.21 

8.67 

9.82 

3.37 

Southwest 

Natural gas 

Residual oi l (.8%) 

Coal (low sulfur) 3 

4.05 

4.64 

2.75 

5.15 

5.79 

3.05 

6.71 

7.98 

3.26 

8.02 

9.69 

3.42 

al.l to 1.7 lbs S02 per MMBtu. 

-5-
P.11 

Any forecast of fuel oil and natural gas price forecasts is inherently developed in a context of many uncertainties. Key issues and 

assumptions are highlighted in various sections of this report. Other 

than the fact that any forecast should be reviewed critically, one 

caveat is worth special emphasis. EEA believes these forecasts are more 

reliable for comparing oil/gas prices to coal prices. The forecasts 

should be used with caution where distinctions between fuel oil and 

natural gas prices are important. In particular, the Base Case forecast 

implies a market context where fuel oil is consistently gaining market 

share compared to natural gas, a situation which has not occurred in 

recent history. Due to the time constraints for this study, the methodology employed does not allow for resid prices to rise in response to 

high levels of demand for residual oil. This problem is discussed in 

Section 4. However, the key point is that in the 1990's resid prices, 

and to a lesser extent natural gas prices, are probably understated to 

some degree. 

Organization of this Report 

World oil prices and market conditions are discussed in Section 2. 

Projected industrial residual fuel oil prices are summarized in Section 3. The derivation of projected industrial natural gas prices is 

explained in Section 4. 

2. WORLD OIL PRICE FORECASTS 

Methodology 

EEA's world oil price forecast is based on the WOIL forecasting 

model and forecasting experience related to short- and long-term oil 

market analysis. WOIL is a dynamic world oil pricing model developed by 

EEA in conjunction with the Department of Energy for use in preparing 

the biennial National Energy Policy Plan (NEPP). It generates projections for free world energy production, demand, and prices through the 

year 2010. The model explicitly considers five regions - United States, 

other OECD (Organization for Economic Cooperation and Development) 

countries, OPEC, Mexico, and the Rest of the Free World including lessdeveloped countries. For the countries in the centrally planned economies group (CPE's), only net fuel exports are forecasted. 

-6-
P.12 

For each world region WOIL projects primary energy supplied in 

terms of oil, gas, coal, nuclear and renewables (including production, 

net trade, and stock changes). Energy consumption is estimated based on 

economic activity and equipment efficiency assumptions and is projected 

by fuel type (including electricity) and by sector (residential, commercial, industrial, and transportation). Energy prices are calculated 

from supply/demand balances for resource costs (for example, minemouth 

coal) plus taxes, delivery charges, and other markups to determine 

delivered energy prices. 

To develop oil price and demand projections using WOIL, a detailed 

set of assumptions about key parameters is required. Variations in 

these assumptions will generally affect energy supply, demand and 

prices. The key input parameters in WOIL are: 

• Economic Growth: Each of the five regions in WOIL has a 

separate user-specified potential gross domestic product 

(GDP) for each year in the model run. This user specified 

potential GDP is influenced by the average delivered energy 

price through lagged price elasticities that vary across 

regions. Thus, as world oil prices rise in real terms in 

the future relative to their current levels, regional GDP 

growth rates become lower than their constant-price projected levels. 

• OPEC Oil Production Capacity: WOIL requires the specification of a lower and an upper bound on OPEC production capacity. Actual production capacity is determined by market conditions but must remain within this range. Currently, the 

lower bound is assumed to be 29 Mbbl/day. The upper bound assumes a return to the pre-1979 capacity of 36.6 Mbbl/day by 

1990, with a continued growth in capacity to 41 Mbbl/day by the 

year 2000. 

t Net Free World Energy Trade with the Centrally Planned Economies: 

The EEA base case assumes a certain amount of energy trade with 

the Centrally Planned Economies in oil, natural gas and coal. 

In the current WOIL projection, CPE oil exports are assumed to 

be one million barrels per day in 1983, falling gradually to 

zero in 1990, with total energy exports equal to 1.8 Mbbl/day 

in 1983, falling to one Mbbl/day in 1990 and then increasing to 

2.4 Mbbl/day by 2000 as coal and gas exports are expanded. 
P.13 

Base Case 

The EEA base case price projections are presented in Table 2-1. 

TABLE 2-1. WORLD OIL PRICE FORECAST3 

(1982 $/bbl) 

1982b 

33.55 

1983b 

28 

1985 

25 

1990 

28 

1995 

32 

2000 

37 

3Average refiner acquisition cost of imported crude oil. 

bActual. 

This projection is based on an increase in world oil demand as 

economic growth continues to outstrip gains in efficiency, and on increasing reliance on OPEC crude oil as other Free World reserves are 

depleted and CPE oil exports decrease. 

Between 1983 and 2000 the real Free World economic growth rate is 

estimated to be three percent per year. The GDP projections by region 

are presented in Table 2-2. 

TABLE 2-2. ECONOMIC GROWTH ASSUMPTIONS 

(trillion 1982 $) 

Region 

United States 

OPEC 

Mexico 

Rest of Free World 

Total Free World 

1983 

3.13 

.35 

.15 

1.05 

9.08 

1985 

3.44 

.39 

.17 

1.10 

9.79 

1990 

4.00 

.47 

.21 

1.34 

11.37 

1995 

4.59 

.56 

.26 

1.60 

13.23 

2000 

5.16 

.66 

.32 

1.88 

15.14 
P.14 

The economic growth rates will not lead to an equivalent increase 

in energy demand as gains are still being made in energy efficiency. 

Until adjustments to the higher energy prices of the last 10 years are 

completed, replacement of older inefficient capital stocks by newer, 

more efficient capital will retard the effects of economic growth on 

energy demand. As shown in Table 2-3, WOIL projects Free World energy 

intensity (energy/$ GDP) to decline. WOIL projections of Free World oil 

demand are presented in Table 2-4. 

TABLE 2-3. FREE WORLD ENERGY EFFICIENCY PROJECTIONS 

(bbl equiv./thousand 1982 $ GDP) 

1983 

3.81 

1985 

3.71 

1990 

3.51 

1995 

3.35 

2000 

3.24 

TABLE 2-4. CRUDE OIL DEMAND FORECAST 

(Mbbl/day) 

Region 1983 1985 1990 1995 2000 

United States 

Other OECD 

OPEC 

Mexico 

Rest of Free World 

Total Free World 

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 

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P.15 

On the supply side, an increase in Mexican oil production will more 

than offset the decline in other non-OPEC production until 1990, at 

which time Mexican production will stabilize. After 1990, non-OPEC oil 

production will fall, shifting demand toward OPEC, and resulting in the 

rapid increase in OPEC oil production apparent in Table 2-5. 

TABLE 2-5. 

Regioh 

Total Free World 

OPEC 

Total Non-OPEC 

United States 

Other OECD 

Mexico 

Rest of Free World 

Stock drawdowns 

CRUDE OIL SUPPLY FORECAST 

(Mbbl/day) 

1983 

45.7 

21.9 

23.8 

10.7 

5.4 

3.0 

4.2 

0.5 

1985 

47.2 

23.1 

24.1 

10.2 

5.6 

3.6 

4.5 

0.2 

1990 

50.5 

25.8 

24.7 

9.8 

5.6 

4.5 

4.8 

0 

1995 

53.5 

29.5 

24.0 

8.8 

5.5 

4.6 

5.2 

0 

2000 

56.5 

32.2 

24.3 

8.3 

5.4 

4.7 

5.8 

0 

These oil supply and demand trends result in a gradual strengthening of the oil market with prices stable in real terms through the 

remainder of the 1980s. After 1990, the growth in oil demand and decrease in non-OPEC oil supply will result in a firm oil market characterized by crude oil prices increasing at an average annual rate Of 

2.8 percent between 1990 and 2000. 

High Oil Price Case 

This study also included analyses based on a higher world oil price 

scenario. We elected to utilize an already published forecast by the 

Department of Energy as the basis for a higher crude oil case. Table 2-6 

compares the EEA Base Case with a series of recent DOE forecasts. DOE/ 

OPPA Case B was selected as the higher world oil price scenario. This 

scenario was used as the reference case for the NEPP-1983 projections. 

-10-
Case Ac 

Case B 

e 

DOE/OPPA 

e / 

3

d 

Case C 

D0E/EIAf 

Low 

Middle 

High 

TABLE 2-6. COMPARISON OF WORLD OIL 

PRICE FORECASTS3 

(1982 $/bbl) 

1985 1990 1995 2000 

EEA Base Case 25 28 32 37 

,b 

21.00 

25.90 

30.50 

25.60 

31.90 

40.30 

30.30 

46.50 

59.50 

36.00 

57.40 

80.30 

21.10 

25.90 

29.70 

27.80 

35.50 

44.10 

35.50 

48.00 

63.30 

N.A 

N.A 

N.A 

3Average refiner acquisition cost of imported crude oil. 

Energy Projections to the Year 2010. U.S. Department of Energy, Office 

of Policy, Planning and Analysis. DOE/PE-0029/2. October 1983. p. 5-6. 

cHigh supply and conservation potential. 

Reference Case 

eLow supply and conservation potential. 

Annual Energy Outlook 1983. U.S. Department of Energy, Energy Information 

Administration. D0E/EIA-0383(83). May 1984. p. xiii. Converted from. 

1983 dollars using GNP implicit price deflators. 

-11-
l' 

3. FORECASTS OF RESIDUAL OIL PRICES TO THE INDUSTRIAL SECTOR 

3.1 Determinants of Residual Oil Pricing 

Residual oil has traditionally been considered a low valued byproduct of the refining process. This perception leads many observers 

to note that resid prices at any point in time are set at "whatever 

the market will bear." However, resid prices are determined by a complex 

set of underlying factors including: the price and quality of crude oil, 

demand for resid and other refinery products, refinery configurations and 

capacity utilization, costs of converting resid to lighter petroleum 

products and desulfurization costs. 

This discussion of residual oil prices is organized by the following 

key analytical elements: 

• The price of residual oil relative to crude oil 

• Price distinctions by sulfur content 

• Regional price differences 

There is, in reality, significant interaction among these factors. For 

example, the determinants of prices by sulfur content differ regionally. 

Differences in regional product demand and existing refinery configurations are also important. However, for expositional purposes, each of 

these key elements will be discussed separately. 

Residual Oil Compared to Crude Oil Prices 

Demand for residual oil has declined sharply in the US in recent 

years from approximately 2.8 million barrels per day (MMB/D) in the 

1976-79 period to a low of 1.4 MMB/D in 1983. This drop in resid consumption by one-half over a four year period has been more severe than 

the decline in overall petroleum product consumption, which dropped by 

about 20 percent over the same period. The decline in resid demand 

affected imported supplies more severely than output from US refineries. 

In the late 70's, resid imports accounted for nearly two-thirds of 

domestic supply but by 1982 imports had dropped to 40-45 percent of 

resid supply to US markets. 

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P.18 

r 

1' 

This shrinkage in residual oil consumption led to a decline in 

resid prices relative to crude oil from near parity of low sulfur resid 

with average refinery acquisition costs of crude to a point in the early 

80's where low sulfur resid was priced roughly $1.30-$1.50 per MMBtu 

below crude oil prices. Consequently, a major element of residual oil 

price forecasts for the period 1985-2000 is whether residual oil prices 

will again return to parity (or near parity) with crude oil or remain at 

a substantial discount below crude oil prices. 

This forecast assumes that resid prices will again rise so that low 

sulfur residual oil is near parity with crude oil by the late 1980's. 

One reason for this forecasted trend relates to future changes in 

the petroleum product state. In the past, demand for high valued products (e.g., gasoline, distillate) was growing at a rapid rate. Given 

the size of the markets for these light products and refiners' ability 

to price gasoline at a substantial premium above crude oil, refiners 

could afford to subsidize the price of resid below crude oil. In the 

future, the demand growth outlook for gasoline is poor, with most forecasts showing a slight decline in the 1980's then relatively slow 

increases in the 90's. Competitive pressures and a weaker gasoline 

market demand are also tending to keep down the premium of gasoline prices 

above crude oil. In this context, the lower valued products, such as 

residual oil, will have to bear a larger share of crude costs to allow 

refiners to earn any reasonable return on their refinery investments. 

Another evolving trend is the incentive for refiners to use resid 

as a feedstock to produce light products. Refiners currently face an 

excess supply of resid production capacity at a time when the gradual 

shift toward heavier crude oil supplies tends to increase the yield of 

resid per barrel of crude processed. Refiners (especially along the 

Gulf coast) are responding by installing capacity (primarily coking) to 

convert resid into lighter products. In effect, the resid price is low 

enough relative to crude costs to provide incentives to substitute resid 

for crude as a feedstock. 

•13-
P.19 

« 

With respect to resid prices, these trends will tend to reduce the 

excess supplies of resid and increase the opportunity cost of selling 

resid as fuel oil due to its value as a feedstock to produce light 

products. The result will also be to increase the price of resid as a 

fuel oil relative to crude oil as the petroleum product market moves 

toward a more balanced state. 

Difference in Residual Oil Price by Sulfur Content 

Sulfur content and viscosity are two major quality distinctions 

which result in price differences. For the purposes of this study, 

sulfur distinctions are the relevant issue. The forecast of residual 

oil prices by sulfur content is intended to match the four classes in 

IFCAM: 3%, 1.6%, .8% and .3% sulfur by weight. 

In 1982, about 40 percent of total domestic residual fuel oil 

supplies (domestic refinery production and imports) contained more than 

2.0 percent sulfur. The balance was evenly distributed in three groups: < 

* 

0.5 percent sulfur, 0.51-1.00 percent sulfur and 1.01-2.00 percent sulfur. 

Price differences by sulfur content in the forecast period will be 

determined by desulfurization costs. The difference in costs between the 

lowest and highest sulfur content categories is $.65-.70 ner MMBtu ($1982) 

in the late 80's and increases slightly over time. 

Regional Price Differences 

Residual oil prices also differ by region within the US. For the 

purposes of these forecasts, three major regional groups can be distin-

** 

guished: 

• East and Gulf coasts 

t Midwest 

t West coast 

* EIA. Petroleum Supply Annual 1982. D0E/EIA-0340(82)/l. June 1983. 

p. 62, 64. 

** Other distinctions could add the inland waterway system and the 

mountain states. However, these areas are less important in terms 

of the volume of oil and natural gas consumption in these areas. 

•14-
P.20 

The large east coast markets for residual oil are supplied primarily 

by the Caribbean refiners, local refineries and small shipments from Gulf 

coast refineries. The key determinant of resid prices on the east coast 

is the Gulf coast price plus tanker costs to reach terminals along the 

eastern seaboard. This is because the more complex refineries along the 

Gulf coast are the lowest cost sources of residual oil. The refineries 

located on the east coast are less efficient and tend to generate resid 

yields of 12-14 percent (percent of product output) compared to lower 

yields in the Gulf coast. The Caribbean refiners are basically price 

takers, even though imports from the Caribbean provide the bulk of resid 

supplies on the east coast. 

Price differences along the Atlantic seaboard are fairly small, reflecting differences in transportation costs. This analysis assumes such 

differences are small or negligible. 

Resid markets in the midwest have undergone major shifts due to the 

decline of resid consumption. Resid consumption is now heavily concentrated in large end users, such as the steel plants. Amoco, one of the 

major resid suppliers in this region, appears to be withdrawing from this 

market. It is clear that the ceiling on midwestern resid prices is presently set by Gulf coast products barged up the river system. Midwestern 

refineries are relatively efficient producers of low sulfur resid due to 

a high share of coking capacity and a much lighter mix of crude oil than 

in the Gulf coast. Hence, if resid demand were strong, these refineries 

could make low and medium sulfur resid at relatively lower cost than Gulf 

coast refiners. In a strong market, production of these resid grades can 

be a profitable business. Resid prices can swing over a relatively wide 

range in the midwest depending on the size of the resid market. This 

analysis assumes continuation of a relatively weak market for resid, hence 

resid prices in the midwest are set $.15 ($1982) above Gulf coast prices. 

West coast markets are essentially isolated from other resid markets. 

The crude oil mix is heavier than on the Gulf coast, due to the quality 

of Californian and Alaskan crudes. Due to a declining resid market and 

a heavier crude mix, refineries in this region have already installed 

-15-
P.21 

capacity to convert resid to lighter products. Hence, resid tends to be 

a higher valued product relative to crude costs on the west coast due to 

its value as a feedstock. Low sulfur Indonesian crude oil prices would 

set a ceiling on resid prices on the west coast low sulfur due to the 

relatively high share of stringent sulfur regulations in this area. In 

effect, compared to the Gulf coast, resid price is related to the lower 

price of west coast crudes, offset partially by a higher resid to crude 

price ratio. We have assumed resid prices are about $.35 per MMBtu below 

Gulf coast prices in a relatively weak resid market due to the lower 

average crude costs on the west coast. 

3.2 Forecasts of Resid Prices 

Forecasted prices under the assumptions described above are contained in Tables 3-1 through 3-4 for the Base Case and Tables 3-5 through 

3-8 for the High Case. Prices are forecast by Federal Regions as defined 

in Figure 1. The High Case forecasts differ only because of the higher 

crude oil forecasts. 

These forecasts were prepared by reference to EEA's simple refinery 

model, crude oil to resid price relationships used in the DOE's natural 

gas analyses, and EEA's work on resid pricing with major oil companies. 

•16-
1. 

2. 

3. 

4. 

5. 

6. 

7. 

8. 

9. 

10. 

TABLE 3-1. PROJECTIONS OF INDUSTRIAL 

3.0 PERCENT SULFUR RESIDUAL FUEL 

(1982 $/MMBtu) 

Region 

New England 

New York/New Jersey 

Middle Atlantic 

South Atlantic 

Midwest 

Southwest 

Central 

North Central 

West 

Northwest 

1985 

3.94 

3.93 

3.93 

3.91 

4.08 

3.93 

4.05 

3.74 

3.55 

3.50 

1990 

4.43 

4.42 

4.42 

4.40 

4.57 

4.42 

4.54 

4.23 

4.03 

3.99 

OIL PRICES3 

1995 

4.99 

4.98 

4.98 

4.96 

5.12 

4.98 

5.09 

4.79 

4.57 

4.53 

2000 

5.66 

5.65 

5.65 

5.62 

5.79 

5.65 

5.75 

5.47 

5.23 

5.19 

Energy and Environmental Analysis, Inc. EEA Base Case scenario. 

•17-
TABLE .3-2. PROJECTIONS OF INDUSTRIAL 

1.6 PERCENT SULFUR RESIDUAL FUEL OIL PRICES3 

(1982 $/MMBtu) 

i-H 

2. 

3. 

4. 

5. 

6. 

7. 

8. 

9. 

10. 

Region 

New England 

New York/New Jersey 

Middle Atlantic 

South Atlantic 

Midwest 

Southwest 

Central 

North Central 

West 

Northwest 

1985 

4.21 

4.20 

4.20 

4.17 

4.34 

4.19 

4.31 

4.00 

3.82 

3.77 

1990 

4.73 

4.72 

4.72 

4.70 

4.86 

4.72 

4.83 

4.53 

4.33 

4.29 

1995 

5.32 

5.31 

5.31 

5.29 

5.45 

5.31 

5.42 

5.13 

4.91 

4.87 

2000 

6.04 

6.03 

6.03 

6.01 

6.17 

6.03 

6.14 

5.85 

5.61 

5.57 

3Energy and Environmental Analysis, Inc. EEA Base Case scenario. 

•18-
P.24 

TABLE 3-3. PROJECTIONS OF INDUSTRIAL 

0.8 PERCENT SULFUR RESIDUAL FUEL OIL PRICES5 

(1982 $/MMBtu) 

I—I 2. 

3. 

4. 

5. 

6. 

7. 

8. 

9'. 

10. 

Region 

New England 

New York/New Jersey 

Middle Atlantic 

South Atlantic 

Midwest 

Southwest 

Central 

North Central 

West 

Northwest 

1985 

4.51 

4.50 

4.50 

4.48 

4.65 

4.50 

4.61 

4.31 

4.15 

4.11 

1990 

5.07 

5.06 

5.06 

5.03 

5.20 

5.06 

5.17 

4.87 

4.70 

4.65 

1995 

5.71 

5.70 

5.70 

5.68 

5.84 

5.70 

5.81 

5.51 

5.33 

5.29 

2000 

6.49 

6.48 

6.48 

6.46 

6.63 

6.48 

• 6.59 

6.30 

6.09 

6.05 

Energy and Environmental Analysis, Inc. EEA Base Case scenario. 

-19-
TABLE 3-4. PROJECTIONS OF INDUSTRIAL 

0.3 PERCENT SULFUR RESIDUAL FUEL OIL PRICES3 

(1982 $/MMBtu) 

1. 

2. 

3. 

4. 

5. 

6. 

7. 

8. 

9. 

10. 

Region 

New England 

New York/New Jersey 

Middle Atlantic 

South Atlantic 

Midwest 

Southwest 

Central 

North Central 

West 

Northwest 

1985 

4.81 

4.80 

4.80 

4.78 

4.95 

4.80 

4.92 

4.61 

4.43 

4.38 

1990 

5.41 

5.40 

5.40 

5.37 

5.55 

5.40 

5.51 

5.21 

5.00 

4.96 

1995 

6.10 

6.09 

6.09 

6.07 

6.24 

6.09 

6.20 

5.90 

5.68 

5.64 

2000 

6.94 

6.93 

6.93 

6.91 

7.08 

6.93 

7.04 

6.75 

6.50 

6.45 

Energy and Environmental Analysis, Inc. EEA Base Case scenario. 

-20-
FIGURE 1 

Federal Regions of the United States 

1 

ro 

i—• 

i 

HAtAII " 

REGION NAMES 

1. New England 

2. New York/New Jersey 

3. Middle Atlantic 

4. South Atlantic 

5. Midwest 

6. 

7. 

8. 

9. 

10. 

> 

*ov? V 

' " \ 

\ x. 

Southwest 

Central 

North Central 

West 

Northwest 
TABLE 3-5. PROJECTIONS OF INDUSTRIAL 

3.0 PERCENT SULFUR RESIDUAL FUEL OIL PRICES2 

(1982 $/MMBtu) 

1. 

2. 

3. 

4. 

5. 

6. 

7. 

8. 

9. 

10. 

Region 

New England 

New York/New Jersey 

Middle Atlantic 

South Atlantic 

Midwest 

Southwest 

Central 

North Central 

West 

Northwest 

1985 

4.07 

4.05 

4.05 

4.03 

4.18 

4.05 

4.15 

3.89 

3.72 

3.68 

1990 

5.05 

5.04 

5.04 

5.02 

5.17 

5.04 

5.14 

4.87 

4.68 

4.64 

1995 

6.93 

6.91 

6.91 

6.90 

7.05 

6.91 

7.02 

6.75 

6.47 

6.44 

2000 

8.40 

8.38 

8.38 

8.37 

8.51 

8.39 

8.52 

8.24 

7.90 

7.87 

Energy and Environmental Analysis, Inc. Higher oil and gas prices 

scenario. 

-22-
P.28 

TABLE 3-6. PROJECTIONS OF INDUSTRIAL 

ILFUR RESIDUAL I 

(1982 $/MMBtu) 

1.6 PERCENT SULFUR RESIDUAL FUEL OIL PRICES3 

1. 

2. 

3. 

4. 

5. 

6. 

7. 

8. 

9. 

10. 

Region 

New England 

New York/New Jersey 

Middle Atlantic 

South Atlantic 

Midwest 

Southwest 

Central 

North Central 

West 

Northwest 

1985 

4.34 

4.33 

4.33 

4.30 

4.46 

4.33 

4.42 

4.16 

3.99 

3.96 

1990 

5.40 

5.39 

5.39 

5.37 

5.52 

5.39 

5.48 

5.22 

5.03 

5.00 

1995 

7.41 

7.40 

7.40 

7.39 

7.53 

7.40 

7.50 

7.24 

6.96 

6.93 

2000 

9.00 

8.99 

8.99 

8.98 

9.14 

8.99 

. ,9.10 

8.83 

8.51 

8.48 

3Energy and Environmental Analysis, Inc. Higher oil and gas prices 

scenario. 

-23-
P.29 

TABLE 3-7. PROJECTIONS OF INDUSTRIAL 

0.8 PERCENT SULFUR RESIDUAL FUEL OIL PRICES2 

(1982 $/MMBtu) 

1. 

2. 

3. 

4. 

5. 

6. 

7. 

8. 

9. 

10. 

Region 

New England 

New York/New Jersey 

Middle Atlantic 

South Atlantic 

Midwest 

Southwest 

Central 

North Central 

West 

Northwest 

1985 

4.65 

4.64 

4.64 

4.63 

4.77 

4.64 

4.74 

4.47 

4.33 

4.29 

1990 

5.79 

5.79 

5.79 

5.77 

5.91 

5.79 

5.89 

5.63 

5.45 

5.42 

1995 

7.98 

7.98 

7.98 

7.96 

8.09 

7.98 

8.07 

7.80 

7.58 

7.54 

2000 

9.70 

9.69 

9.69 

9.67 

9.82 

9.69 

9.80 

9.52 

9.29 

9.25 

Energy and Environmental Analysis, Inc. Higher oil and gas prices 

scenario. 

-24-
~1» 

TABLE 3-8. PROJECTIONS OF INDUSTRIAL 

0.3 PERCENT SULFUR RESIDUAL FUEL OIL PRICES3 

(1982 $/MMBtu) 

t-H 2. 

3. 

4. 

5. 

6. 

7. 

8. 

9. 

10. 

Region 

New England 

New York/New Jersey 

Middle Atlantic 

South Atlantic 

Midwest 

Southwest 

Central 

North Central 

West 

Northwest 

1985 

4.96 

4.96 

4.96 

4.94 

5.09 

4.96 

5.05 

4.79 

4.63 

4.58 

1990 

6.19 

6.18 

6.18 

6.17 

6.31 

6.18 

6.28 

6.01 

5.81 

5.77 

1995 

8.55 

8.54 

8.54 

8.52 

8.67 

8.54 

8.63 

8.37 

8.09 

8.06 

2000 

10.41 

10.40 

10.40 

10.38 

10.54 

10.40 

10.50 

10.24 

9.91 

9.87 

Energy and Environmental Analysis, Inc. Higher oil and gas prices 

scenario. 

-25-
P.31 

4. NATURAL GAS PRICES 

4.1 Determinants of Natural Gas Prices 

The major factors affecting the demand for natural gas in the 80's 

are significantly different from those in the 1990's. In the next five 

years natural gas will be strongly affected by major factors which will 

become less important by the late 80's-early 90's. 

The first of these factors is natural gas deregulation and resolution of contract pricing issues. Under the Natural Gas Policy Act of 

1978 a large share of gas will be deregulated in the 1985-87 period. 

Upon deregulation, wellhead gas prices will be determined by pricing 

provisions in contracts between natural gas producers and pipeline companies. Many of these contracts contain provisions which would imply 

sharp price increases if literally enforced. These pricing provisions 

contain indefinite price escalator clauses, often keying natural gas 

wellhead prices to fuel oil prices. Both producers and pipeline companies recognize that compliance with these provisions could lead to a 

"price spike." Such a price increase would exacerbate the problems 

currently faced by the natural gas industry of a decline in natural gas 

consumption of 12 percent from 19.4 trillion cubic feet (TCF) in 1981 

to 17 TCF in 1983. Legislation is also being debated in the Congress 

which could help resolve these pricing issues. In the absence of new 

legislation, the outcome of pipeline-producer negotiations to resolve 

the pricing dilemma will have a major impact on the strength of the 

natural gas market recovery in the next few years. However, by the 

early 1990's the contract volumes containing these provisions will become relatively less important as gas contracted since 1982 (largely 

with more market-oriented conditions) begin to weigh more heavily in 

determining the average cost of natural gas. 

The other major near term factor is the current excess supply of 

natural gas, popularly referred to as the "gas bubble." The combination 

of reduced gas demand and the growth in reserve additions in 1980-82 

spurred by producer expectations of higher prices has resulted in gas 

-26-
P.32 

supplies (or deliverability) which exceed current consumption levels. 

The existence of the bubble tends to depress the wellhead price of gas 

that is subject to market forces. Some observers believe this excess 

supply situation will persist through the end of the decade, acting as 

a depressing factor to keep gas prices down while other observers believe 

a gas shortage will emerge due to producer-pipeline decisions to cut back 

on the development of new gas supplies in the context of the current gas 

surplus. 

While these two factors, contract pricing problems and excess supply, will have major impacts on gas prices over the next five years, the 

market for natural gas should have stabilized by the early 1990's so that 

longer run considerations will begin to play major roles in the determination of the price of natural gas. These longer run factors include: 

the growth of demand for energy, oil prices and the cost of finding/ 

developing new supplies of natural gas. The interaction of these factors will determine the size of the natural gas market and gas prices 

in the future. 

One way to illustrate possible trends in gas prices is to specify 

possible alternative outcomes in terms of oil prices and gas supply 

(i.e., the cost of adding new gas supplies). Three extreme outcomes are 

possible: 

• Gas priced above residual oil 

• Gas priced comparably with residual oil 

• Gas priced below residual oil 

The first outcome with gas prices higher than low sulfur residual oil 

would effectively price gas out of marginal markets where it competes 

with fuel oil. In such a scenario, the gas market would be severely 

contracted because of the loss of boiler loads and a large share of process heat applications which could switch to fuel oils. Gas prices would 

be determined by competition in high valued markets, such as with electric 

heat pumps or certain industrial process heat applications with a substantial use premium over fuel oil. This scenario could result from a 

-27-
combination of the following factors: 

• High energy demand growth 

• Low oil prices 

• Low estimates of the undiscovered gas resource base which 

lead to sharp increases in the cost of finding new gas 

supplies 

• Inability of gas pipelines/producers and the regulatory 

process to make gas more competitive by cost reductions, 

rate reforms, use of spot markets, etc. 

The opposite extreme is for natural gas to be priced below residual fuel 

oil. Here, gas would retain markets with respect to fuel oil. This case 

is more likely under some combination of the following circumstances: 

• Lower energy demand growth 

• Higher market penetration by electricity 

• High oil prices 

t Higher gas resource base or improved technology leading to 

slower increases in the cost of finding and developing new 

supplies of natural gas 

• Large volumes of gas imports and supplemental at competitive prices (reducing the production pressures from the 

lower-48 gas resource base) 

In this type of scenario, gas prices are determined in competition with 

coal and other low cost alternatives, rather than with fuel oil. 

The intermediate case would show natural gas priced somewhere in 

the range of low to high sulfur residual fuel oil, with residual oil as 

the marginally competitive energy alternative. 

Where the actual forecast of natural gas prices lies among these, 

three scenarios is an empirical question, not predetermined by concepts 

or logic. Currently, gas pricing while still heavily price controlled 

by regulation, is closest to the intermediate scenario where natural gas 

competes with fuel oil at the margin. 

In reality, natural gas prices can differ substantially by region 

due to gas transmission and distribution costs and possibly due to different wellhead prices among supplying regions. Thus, in various consuming centers gas burnertip prices bear different relationships with 

alternative fuel prices. For example, if burnertip gas prices in the 

-28-
P.34 

midwest were at parity with low sulfur residual oil, gas prices in New 

England would likely be above low sulfur resid while gas prices in the 

Gulf coast might be at parity with high sulfur resid due to lower transmission/distribution costs applicable to that major source of gas 

supplies. 

In summary, forecast natural gas prices in the 1990's could be 

above, comparable to or below residual fuel oil, depending on the critical factors discussed above. At any point in time, significant regional 

price differences on the order of $.50-1.00 per million Btu are likely 

to exist. Depending on the price of gas relative to alternative fuels, 

the gas market will differ in terms of both types of markets retained 

(e.g., boiler load) and variation in market share by region. 

-29-
P.35 

4.2 Methodology of Forecasting Natural Gas Prices 

The forecasts of natural gas prices developed in this study rely 

primarily oh the Hydrocarbon Supply Model developed by EEA for the 

Strategic Analysis and Energy Forecasting Division of the Gas Research 

Institute. This model structure generates the cost of finding new gas 

supplies in response to a projected, exogenous forecast of the demand 

for natural gas over time. EEA also used its Energy Overview Model to 

check the consistency of the gas demand forecasts with the supply 

results from the Hydrocarbon Supply Model. EEA's Energy Overview Model 

is a proprietary national/regional gas market model designed to address 

the factors discussed earlier which influence trends in the natural gas 

market. Key assumptions underlying the forecast of natural gas prices 

are highlighted below: 

(1) Crude oil and fuel oil prices were based on the forecasts 

from Sections 2 and 3 of this report. 

(2) The Natural Gas Policy Act (NGPA) would be implemented 

under current provisions, decontrolling gas prices over 

the 1985-87 period. 

(3) The contract pricing issues would be resolved so that 

prices of decontrolled gas would be keyed to market 

determined prices. 

(4) Canadian imports would be priced according to its VRIP 

policy (dual pricing), with prices after decontrol 

tracking lower-48 market prices. Mexican imports would 

be priced to match Canadian imports. 

(5) Canadian import licensing will reach levels of availability of two TCF per year by 1987, implying pending 

licenses will be approved. 

See the GRI Hydrocarbon Model in Gas Research Insights, May, 1983 

distributed by the Gas Research Institute. 

-30-
P.36 

(6) The gas industry will be able to have an effective dual 

market pricing system. That is, prices to marginal gas 

consumers in the industrial/electric utility markets 

will be adjusted to no more than $.25 per MMBtu above 

full recovery of gas transmission costs. This would be 

achieved by some combination of rate reform, common carrier, 

spot market pricing practices. 

(7) The electric utility industry decisions to replace oil/gasfired units (or reduce capacity utilization) will continue 

to be constrained by relatively slow electricity demand 

growth, regulatory rate practices and capital constraints. 

(8) Commitments to such supplemental gas supply sources as 

LNG, SNG and gas from coal will be lower than contracted 

levels for LNG/SNG and limited to the Great Plains coal 

gasification project. 

The gas prices projected under the High Case used exactly the same 

assumptions except for the higher crude and fuel oil prices as described 

in earlier sections of this report. 

4.3 Forecast Results for Natural Gas Prices 

Tables 4-1 and 4-2 contain forecasted regional prices to industrial 

gas users under the Base Case and High Case scenarios respectively. 

Base Case 

Table 4-3 presents summary results of trends in the natural gas 

market under the Base Case scenario. In this case, the gas market 

recovers in 1985 then begins a steady decline through the year 2000. 

The sharpest decline occurs in the boiler markets, where the gradual 

retirement/reduced load factors of utility gas-fired boilers is exacerbated by losses reflecting fuel switching from natural gas to 

residual oil under this relatively low oil price case. Table 4-4 shows 

a comparison of fuel prices to industrial users which highlight the fact 

that gas prices are at or above low sulfur residual oil prices. In 

effect, by the mid-90's the cost of finding new gas supplied is causing 

gas prices to rise more rapidly than oil prices. 

-31-
TABLE 4-1. PROJECTIONS OF INDUSTRIAL 

NATURAL GAS PRICES3 

(1982 $/MMBtu) 

P.37 

Region 1985 1990 1995 2000 

1. 

2. 

3. 

4. 

5. 

6. 

7. 

8. 

9. 

10. 

New England 

New York/New Jersey 

Middle Atlantic 

South Atlantic 

Midwest 

Southwest 

Central 

North Central 

West 

Northwest 

4.38 

4.29 

4.16 

4.57 

4.32 

4.02 

3.86 

3.68 

4.02 

4.44 

5.21 

5.21 

5.17 

5.46 

5.34 

4.95 

4.91 

4.47 

4.94 

5.23 

6.25 

6.27 

6.22 

6.47 

6.38 

5.75 

5.92 

5.27 

5.96 

5.85 

7.49 

7.30 

7.25 

7.40 

7.27 

6.75 

6.81 

6.12 

6.56 

6.63 

Energy and Environmental Analysis, Inc. EEA Base Case scenario. 

-32-
TABLE 4-2. PROJECTIONS OF INDUSTRIAL 

NATURAL GAS PRICES3 

(1982 $/MMBtu) 

P.38 

Region 1985 1990 1995 2000 

1. 

2. 

3. 

4. 

5. 

6. 

7. 

8. 

9. 

10. 

New England 

New York/New Jersey 

Middle Atlantic 

South Atlantic 

Midwest 

Southwest 

Central 

North Central 

West 

Northwest 

4.43 

4.35 

4.29 

4.61 

4.42 

4.05 

3.91 

3.72 

4.04 

4.21 

5.39 

5.38 

5.36 

5.66 

5.51 

5.15 

5.09 

4.58 

5.03 

5.10 

7.37 

7.36 

7.36 

7.31 

7.44 

6.71 

6.53 

5.79 

6.49 

6.38 

8.58 

8.57 

8.57 

8.49 

8.67 

8.02 

7.75 

6.89 

7.61 

7.28 

Energy and Environmental Analysis, Inc. Higher oil and gas prices 

scenario. 

-33-
TABLE 4-3. NATURAL GAS DEMAND AND SUPPLY 

BASE CASE 

(Quadrillion Btu's) 

P.39 

Demand 

Boiler 

Other industrial3 

Subtotal industrial utility 

Residential/commercial 

Plant and lease, 

transmission losses, misc. 

Estimated 

1983b 

-

__________ 

8.7 

7.1 

2.0 

1985 

5.7 

4.1 

9.8 

6.9 

1.9 

1990 

5.0 

4.1 

9.1 

6.7 

1.8 

1995 

4.2 

3.9 

8.1 

6.2 

1.7 

2000 

3.5 

3.8 

7.3 

6.0 

1.6 

Total demand 17.8 18.6 17.6 16.0 14.9 

Supply 

Lower-48 

Imports and Supplemental 

Net storage withdrawal 

Total supply 

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 

Process heat and feedstock uses. 

?From Natural Gas Monthly; EIA (February, 1984) converted at 1025 Btu's 

per MCF. 

-34-
P.40 

TABLE 4-4. BASE CASE 

FORECAST OF FUEL PRICES*TO THE INDUSTRIAL SECTOR 

($ 1982 per MMBtu) 

Midwest 

Natural gas 

Residual oil (.8%) 

Coal (low sulfur)3 

Southwest 

Natural gas 

Residual oil (.8%) 

Coal (low sulfur)3 

1985 

4.32 

4.65 

2.69 

4.02 

4.50 

2.75 

1990 

5.34 

5.20 

3.04 

4.95 

5.06 

3.05 

1995 

6.38 

5.84 

3.21 

5.75 

5.70 

3.26 

2000 

7.27 

6.63 

3.37 

6.75 

6.48 

3.42 

al.l to 1.7 lbs S02 per MMBtu. 

-35-
P.41 

The other industrial market (.process heat and feedstock uses of 

energy) declines more slowly as the growth in energy demand is slightly 

offset by shifts away from natural gas. 

In this scenario, coal is marginally economic until the mid to late 

1990's when coal economics would become more favorable in the new boiler 

market. 

The residential/commercial sector experiences a steady decline in 

gas use, primarily from improved energy efficiency as new building stock 

with less energy use per square foot replaces older buildings. 

Higher Oil and Gas Prices 

Table 4-5 presents natural gas market trends under the higher crude 

oil price scenario. In this situation, although the gas market still 

declines over time, its rate of decline is much slower. Table 4-6 shows 

a comparison of fuel prices. Here natural gas prices are rising less 

rapidly than oil prices. By the year 2000, oil prices are roughly $3.20 

higher in the High Case over the Base Case while gas prices are $1.25-

1.50 greater in the High Case. Natural gas prices track high sulfur 

resid and by the end of the century fall below high sulfur residual oil 

prices. In this case, by the late 90's natural gas prices are beginning 

to be determined by competition with coal, rather than fuel oil. Coal 

is clearly more competitive with oil and gas by the early 90's. 

In this case, the decline in the boiler market largely reflects the 

retirement of utility gas-fired boilers. Industrial sector uses, 

boiler and non-boiler, are relatively stable with energy growth and oilto-gas shifts roughly offsetting increased coal penetration. The 

residential/commercial sector gas demand declines more rapidly in the 

case due to greater efficiency (caused by higher oil and gas prices) and 

relatively higher market penetration by electricity into these sectors. 

-36-
TABLE 4-5. NATURAL GAS DEMAND AND SUPPLY 

HIGH CASE 

(Quadrillion Btu's) 

Demand 

Boiler 

Other industrial3 

Subtotal industrial utility 

Residential/commercial 

Plant and lease, 

transmission losses, misc. 

Estimated 

1983b 

-

_ 

8.7 

7.1 

2.0 

1985 

5.6 

4.1 

9.7 

6.9 

1.9 

1990 

5.4 

4.2 

9.6 

6.7 

1.8 

1995 

5.3 

4.4 

9.7 

6.0 

1.8 

2000 

4.5 

4.5 

9.0 

5.8 

1.7 

Total demand 17.8 18.5 18.1 17.5 16.5 

Supply 

Lower-48 

Imports and Supplementals 

Net storage withdrawal 

Total supply 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 

Process heat and feedstock uses. 

}From Natural Gas Monthly; EIA (February, 1984) converted at 1025 Btu's 

per MCF. 

-37-
P.43 

TABLE 4-6. HIGH OIL AND GAS PRICES 

FORECAST OF FUEL PRICES TO THE INDUSTRIAL SECTOR 

($ 1982) 

Midwest 

Natural gas 

Residual oil (.8%) 

Coal (low sulfur)3 

1985 

4.42 

4.77 

2.69 

1990 

5.51 

5.91 

3.04 

1995 

7.44 

8.09 

3.21 

2000 

8.67 

9.82 

3.37 

Southwest 

Natural gas 

Residual oil (.8%) 

Coal (low sulfur)3 

4.05 

4.64 

2.75 

5.15 

5.79 

3.05 

6.71 

7.98 

3.26 

8.02 

9.69 

3.42 

31.1 to 1.7 lbs S02 per MMBtu. 

-38-
P.44 

Caveats 

As stated earlier, there are many uncertainties inherent in these 

forecasts, especially as one tries to forecast beyond 1990. From the 

perspective of this study given its focus on oil and gas prices, the 

Base Case fuel oil prices should probably be higher than presented 

above. This is because fuel oil prices were forecast first, then used 

as an input into the natural gas market outlook. Since the Base Case 

implies significant growth in fuel oil demand in the 90's, it could tend 

to place upward pressure on residual oil prices. This would raise resid 

prices above those forecast somewhat, perhaps on the order of $.30-.50 

per MMBtu ($ 1982). We would expect only this relatively minor increase 

because refineries can easily increase resid yields over a relatively 

small price range and many of the mothballed refineries and shut-in 

facilities (which tend to have relatively high resid yields) could be 

brought back on-line to expand resid supplies. Since there has not been 

any recent period of a consistent competitive advantage for residual oil 

over natural gas across a broad segment of the U.S. market, the interaction between resid and natural gas prices probably warrants a more 

careful analysis. From the perspective of uses of these price forecasts, especially in the Base Case, more reliance should be placed on 

the differentials between oil/gas versus coal prices rather than on 

natural gas versus residual oil prices. 

Other than the forecasts of crude oil prices, which have been 

bounded by a range, probably the other critical factor is the projection 

of increased cost of finding new lower-48 gas supplies in the mid-90's 

and beyond. We could emphasize that no major technological advances are 

assumed in the natural gas supply forecasts. 

-39-
P.45 

APPENDIX A. DELIVERED INDUSTRIAL 

COAL PRICE FORECAST 

• Reference: Memorandum from C. Ebert (ICF Incorporated) to J. 

Greenwald (EPA). Revised Industrial Coal Prices for 

Industrial NSPS Analyses. May 31, 1984. Attachment A. 

• Converted from January 1983 dollars to 1982 dollars using the average 

annual 1982 and fourth quarter 1982 GNP implicit price deflators. 

-40-
t— co 

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P.48 

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*• 4 

8. 

9. 

10. 

aICF 

Region 

North Central 

West 

Northwest 

Incorporated. 

DELIVERED INDUSTRIAL COAL PRICE 

(1982 $/MMBtu) 

(Continued) 

Sulfur content 

Coal type (lb S02/MMBtu) 

Bituminous <1.08 

1.08 - 1.67 

1.67 - 2.50 

Subbituminous <1.08 

1.08 - 1.67 

1.67 - 2.50 

Bituminous <1.08 

1.08 - 1.67 

1.67 - 2.50 

Subbituminous <1.08 

1.08 - 1.67 

1.67 - 2.50 

Bituminous <1.08 

1.08 - 1.67 

1.67 - 2.50 

Subbituminous <1.08 

1.08 - 1.67 

1.67 - 2.50 

-43-

FORECAST3 

1985 

1.76 

1.61 

1.70 

1.22 

1.17 

1.19 

2.54 

2.39 

2.40 

2.62 

2.52 

2.48 

2.92 

2.63 

2.59 

2.38 

2.40 

1.93 

1990 

1.90 

1.74 

1.81 

1.32 

1.32 

1.21 

2.69 

2.64 

2.64 

2.71 

2.61 

2.56 

3.06 

2.80 

2.72 

2.59 

2.48 

1.99 

1995 

1.98 

1.90 

1.88 

1.41 

1.42 

1.28 

2.75 

2.90 

2.81 

2.83 

2.72 

2.60 

3.13 

2.99 

2.83 

2.62 

2.59 

2.08 

2000 

2.07 

2.01 

1.86 

1.52 

1.45 

1.33 

2.91 

3.05 

2.92 

2.92 

2.84 

2.69 

3.27 

3.18 

2.88 

2.71 

2.67 

2.19 

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