WORKING GROUP PRESENTATION FOR DISCUSSION PURPOSES ONLY.

DO NOT QUOTE OR CITE AS RESULTS ARE SUBJECT TO CHANGE.

May 31, 2018

MEMORANDUM FOR: Ian Mead

Assistant Administrator for Energy Analysis

FROM: John Staub

Director, Petroleum, Natural Gas, and Biofuels Analysis

Subject: Summary of Oil and Gas Supply & Liquid Fuels Markets Working Group

Meeting held on May 31, 2018

This memorandum provides an overview of the presentation given during the first Annual Energy 

Outlook (AEO) 2019 Oil and Gas Supply & Liquid Fuels Markets Working Group meeting and a summary 

of the resulting discussions that took place. The meeting was split into two halves. The first half covered 

the Liquid Fuels Market Module (LFMM) and International Energy Model (IEM). The second half covered 

the Oil and Natural Gas Supply Module (OGSM). The presentation slides are available in separate 

documents on EIA’s website.

LFMM and IEM

The presentation was given by James Preciado, who began the working group by describing the 

differences between this year’s first AEO2019 working group and past ones. Most significantly, this first 

working group is being held before the start of AEO2019 modeling effort to allow more time for

feedback on the AEO2018 results and incorporation of outside stakeholder suggestions.

Three main subjects were covered: an overview of LFMM and IEM; related results from AEO2018, and 

future model development plans. The presentation highlighted the following points:

• LFMM is a linear program that projects petroleum product prices and sources of liquid fuels 

supply for meeting petroleum product demand. The sources of supply include crude oil refined 

into petroleum products, imports of petroleum products, and non-petroleum liquids such as 

biofuels, coal-to-liquids, and gas-to-liquids.

• IEM is an economic model that simulates the interaction between U.S. and global petroleum 

markets. It uses assumptions of economic growth and expectations of future world crude oil and 

liquids production and consumption to compute Brent crude oil prices, provides a supply curve 

of world crude like liquids, and generates a worldwide oil supply/demand balance with regional 

detail.

Results (AEO2018)

The following results were highlighted during the presentation:

• Oil prices continue to rise in the reference case projection.

• The United States becomes a net exporter of crude oil, petroleum products, and natural gas 

liquids in 2029.

• While total crude oil imports decline in the reference case, imports of heavy crude oil increase 

to balance the crude slate.

• Refinery utilization rises in 2020 in reaction to increased international demand for diesel, but 

returns to historical levels.
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WORKING GROUP PRESENTATION FOR DISCUSSION PURPOSES ONLY.

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• Volumes of imports and exports of petroleum products shift as a result of the 2020 International 

Maritime Organization (IMO) regulation on sulfur content of marine fuel.

Model updates (AEO2019)

The following updates were presented as being under consideration for AEO2019:

• Update transportation costs between regions as well as import and exports costs for crude oil 

and petroleum products.

• Assess the ability of the West Coast refineries to process additional volumes of Alaskan crude oil 

production.

• Further analyze the effects of IMO regulations on sulfur content for marine gasoil starting in 

2020 on international crude oil and product markets.

• Some “under the hood” process improvements for benchmarking to the STEO forecast.

Discussion

The discussion focused on three topics: how the models being discussed operated, AEO2018 results, 

and future model development.

LFM and IEM. Several general questions were asked about the LFMM including how it handles changes 

in capacity, movement of products between regions, changing prices, and changes in technology. Staff 

explained that, in regards to downstream capacity, the model is flexible. Although there are no 

atmospheric distillation unit (ADU) retirements, utilization can decline. It was also explained that 

changes in technology can be captured by lowering or raising utilization rates, which can also account 

for retirement of capacity. Staff explained that information is aggregated at the regional level and that 

cost and capacity are accounted for when moving products between refining regions.

When EIA staff were asked about how crude oil prices are accounted for, it was explained that prices are 

exogenous. Staff also stated that crude oil pipelines cannot be built in the model, but that current 

market conditions are captured and some analyst judgement is applied to the projection.

Additional questions included how exports destinations are determined and if peak demand is included. 

EIA staff explained that exported volumes go to the global market, and it is assumed that global demand 

is sufficient to consume anything the U.S. exports. Staff also explained that EIA does not project peak 

petroleum product demand. In the IEO, both production and consumption increase out through 2050.

Results (AEO2018). There was a general question about if the U.S. is a net exporter of crude oil. EIA staff 

explained that the U.S. is not a net exporter of crude oil by itself, but that the U.S. is projected to be a 

net exporter in 2029 when petroleum products and NGLs are included along with crude oil.

Model development.There were three main categories of questions about future AEO development and 

assumptions: IMO regulation impacts, how LFMM adjusts to increasing share of U.S. light oil, and what 

future process improvements are planned.

EIA staff explained that investment ahead of IMO regulation is slow. Adoption of scrubbers is proceeding 

slowly and the capacity to add more to ships by 2020 is limited. Current thinking has not changed since 

AEO2018 and assumes the majority of ships will not have scrubbers by 2020. Similarly increased refining 

capacity to produce IMO compliant fuels is also progressing slowly. Some investment has been made, 
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but not much more is expected to come online before 2020. With respect to the ultra-low sulfur diesel 

fuel (ULSD) outlook, staff explained that U.S. imports of ULSD is expected to decrease, and 

internationally demand of ULSD is expected to increase and drive US exports of ULSD.

In regard to the increasing share of lighter oil production within the United States, LFMM has the ability 

to build downstream unit capacity to accommodate the domestic processing of lighter crude oil. It is

already occurring in the model and there is an increase in light oil refining capacity. Staff explained that 

the IMO regulations limits the sulfur content of marine bunker fuel from currently 3.5% to 0.5% Sulphur 

in 2020.

In regards to process improvements, the current plan is to improve matching the AEO results to baseline 

STEO forecasts, especially in the side cases. 

OGSM

The presentation was given by Dana Van Wagener. Three main subjects were covered: the results from 

AEO2018, a review of changes to the Short-Term Energy Outlook (STEO); and plans beyond AEO2018. 

The following points were highlighted:

Results (AEO2018)

The following AEO2018 results were highlighted during the presentation:

• U.S. crude oil and natural gas production continues to be driven by growth in tight oil and shale 

gas supply.

• The Southwest region leads growth in U.S. crude oil production and the East region leads growth 

in natural gas in the Reference case.

• Bakken and Wolfcamp lead growth in tight oil production.

• Marcellus and Utica lead production of shale gas.

• U.S. crude oil and natural gas production are sensitive to resource availability and technological 

improvements.

• Natural gas plant liquids production increases from 2017 levels in all AEO2018 cases.

• The East and Southwest regions lead the production of natural gas plant liquids in the Reference 

case.

• Crude oil price projections are sensitive to global conditions, while U.S. natural gas prices 

depend more on domestic resource assumptions.

• Key oil and natural gas supply assumptions including technically recoverable resources and 

annual average rate of technological improvement.

In addition, some comments were made that related to the latest forecasts in EIA’s STEO:

• West Texas Intermediate oil prices are forecast to average over $60/barrel in both 2018 and

2019 in the latest STEO.

• Higher prices drive crude oil production growth higher in the latest STEO than in the AEO2018 

Reference case.

• Henry Hub natural gas prices are forecast to average $3.01/MMBtu in 2018 and $3.11/MMBtu 

in 2019 in the latest STEO.
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• Marketed natural gas production is projected to grow by a record 7.4 Bcf/d on average in 2018 

in the latest STEO.

Model updates (AEO2019)

The following items were mentioned as possible areas for improvement during future AEO cycles:

• Add Northern Great Plains region to AEO2019 published regional crude oil and natural gas 

supply tables

• Expand short-term supply curve options

• Include the coastal plain of the Arctic National Wildlife Refuge

• Update Tight oil and shale gas assumptions for

o Estimated ultimate recovery

o Lateral length

o Well spacing

• Update NGPL assumptions for the DJ and Anadarko basins

• Update lower 48 offshore and Alaska field declines and announced discoveries

• Update according to current laws and regulations

Discussion

The ensuing discussion centered around the AEO2018 results and future model development.

Results (AEO2018)

There were several questions about both the AEO2018 natural gas projections and the technology and 

price assumptions used in the model. EIA staff explained that natural gas production increases 

throughout the projection — despite low natural gas prices — because both strong demand (including 

demand from LNG) and production derived from a large resource base. In response to questions about 

the percentage of associated gas in the projection, EIA staff explained that in 2017, associated gas 

production was 3.4 tcf of the 27 tcf total, and 6.5 tcf of the 43 tcf total in 2050.

In regard to technology improvement assumptions and how it relates to recently reduced drilling and 

leasing costs, EIA staff explained that long-term modeling of technological progress is difficult in terms 

of timing and significance. In addition to technological progress, costs are a function of price and drilling 

activity levels. The model reflects the significant decrease in costs in 2015-2016 when prices and activity 

levels fell, and the recent increase in costs as prices and activities levels have increased. EIA staff 

responded to a specific question about technology improvement, explaining that it takes 3-6 years to 

ramp up production for tier 2 EURs, depending on the size of the play and the price environment. EIA 

staff also clarified that tight oil estimates include shale oil and that drilling cost improvements are 

modeled on a per well basis.

An additional question was asked about global geopolitical events and how they are accounted for 

within the model. In response, staff explained the model relies on exogenous oil price paths which can 

be structured to represent different geopolitical scenarios, but that the model does not include the kind 

of macro level ideas mentioned in the question.
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There was one question about how EIA estimates the amount of flared and vented gas from oil or gas 

wells. EIA staff explained that volumes of flared and vented gas are not tracked or estimated for the 

AEO.

Model development (AEO2019)

There were were several specific questions concerning AEO2019 plans. There was an observation about 

natural gas plant liquids (NGPL) supply which does not appear to increase as much as natural gas 

production and it was asked if this will change in the next AEO. EIA staff explained that NGPL growth in 

the near term is from the more liquid rich portions of plays, and that the drier portions are developed 

later, resulting in relatively less NGPLs as time goes on.

Another participant asked if the WTI-Brent spread would change over time. Staff responded that the 

differential is generally flat at $5.00 per barrel to $5.50 per barrel and stays there throughout the 

projection. It was also asked which regulations and legislative changes would be updated. Staff 

responded that this has not been completed yet and would have to be reviewed first to identify what 

has changed since AEO2018. The two areas where changes have been identified so far include the lifting 

of drilling ban in the Artic National Wildlife Refuge (ANWR) and Section 45Q tax changes for CO2 

enhanced oil recovery. Staff explained that NETL is updating the representation of Section 45Q for CO2 

EOR into their version of the NEMS model and EIA might do something similar or utilize their work if it is 

available in time for the AEO2019.

There was another question about if EIA used estimates of lateral length (on horizontal wells) at the 

county level. EIA staff explained that lateral length is estimated at the play and county level. Staff went 

on to explain that they know that lateral length has changed in the past, and that updates for lateral 

length are made as more information becomes available for how particular formations are being 

completed.

Further, there was a comment from the audience that depending on global macro economic issues (not 

in the AEO modeling), things peak and decline, and that they do not form smooth rollovers (a comment 

on general production profiles). 

Attendees

Guests (in person)

John Powell DOE

Amir Zaman Rystad

Katherine Ehly NGSA

Brett Murray ARI

Joseph Kile CBO

Jeffry Eppink Enegis LLC

Registered Guests (WebEx/phone)

Scott Greenip State Department

Irene Chang Exxon Mobil
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WORKING GROUP PRESENTATION FOR DISCUSSION PURPOSES ONLY.

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Steven McCusker Exxon Mobil

Paul Tanaka Exxon Mobil

Whitney Herndon RHG

Shree Vikas ConocoPhillips

Greg Levelle ConocoPhilips

Robert Kleinburg Schlumberger

Celest Marshall API

Geoffrey Brand API

Svetlana Ikonnikova Bureau of Economic Geology (BEG)

Bill Fairhurst BEG

Gurcen Gulen BEG

Victor del Caprio BEG

Bill Fairhurst BEG

Michael Schaal Energy Ventures Analysis Inc.

Jose Benitez Energy Ventures Analysis Inc.

Steven Kopitz Princeton Energy

Paul Touradji Touradji Capitol Management

Deborah Gordon Carnegie

Jairam Gopal Deloitte

Oliyanka Ogunsola DOE

Brian Lavoie DOE

Erica Folio DOE

Jennifer Li DOE

Donald Remson NETL

Ray Boswell NETL

Emily Newes NREL

Yan Zhou ANL

Andy Kydes OnLocation

Ken Walsh Leidos

Yelena Dandurova Leidos

Greg Leveille COP

John Highes Twin Comm

Jerry Eyster GE

Ben Salisbury FBR

Dustin Pool Hess

Greg Terzian Hess

Jack Weixel Point Logic Energy

Charles Nevle Point Logic Energy

Ben Schlesinger BSA Energy

Robert Schutz Leenalabs

Michell DeRubis FTI Consulting

Jarrett Whistance University of Missouri
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WORKING GROUP PRESENTATION FOR DISCUSSION PURPOSES ONLY.

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Eder Garcia Mexico Energy Department

Anja Singh Hart Energy

EIA attendees (in person)

James Preciado (presenter)

Dana Van Wagener (presenter via Webex0

Meg Coleman

John Staub

John Conti

Ian Mead

Angelina LaRose

Faouzi Aloulou

Hannah Breuhl

David Daniels

EIA attendees (WebEx/phone)

Dana Van Wagener

Troy Cook

Melissa Lynes

Mark Schipper

Elizabeth May

Adrian Geagla

Neil Agarwal

Sean Hill