Increased Research and Development Spending from Sections 941 to 949 of the CEB

Two types of uncertainty characterize the effects of proposed authorizations of Federal R&D investments. First, the timing and level of the net change in federal R&D spending is often different from the authorized amount. Second, a statistically reliable relationship between the level of R&D spending for specific technologies and the actual outcome of that R&D has not been developed. Even if both of these uncertainties were resolved, the analysis is complex because the levels of private sector R&D expenditures are usually unknown but often far exceed R&D spending by the Federal government. Consequently, EIA cannot provide an estimate of the impact on technological change of an increase in Federal R&D spending. However, EIA can provide the results of a sensitivity case using an assumption of the technological impact that increased spending on R&D might have.

Sections 941 to 949 of the CEB calls for the allocation of $150 million annually into a fund (the Ultra-Deepwater and Unconventional Natural Gas and Other Petroleum Research Fund) for Federally sponsored R&D. The money is to come from Federal royalty payments that are allocated in each fiscal year from 2004 through 2013 and would not go through the annual appropriations process. The R&D is to be targeted for the development of ultra-deep (greater than 1,500 meters water depth) offshore, unconventional natural gas, and other petroleum resources. Unconventional natural gas and other petroleum resources are “natural gas and other petroleum resources located onshore in an economically inaccessible geological formation, including resources of small producers.”

Dedicated funding outside of the annual appropriations process implies relatively low funding-related uncertainty for this program. However, the uncertainty in relating increased Federal spending to technological progress remains important. Experts in the Department of Energy’s Office of Fossil Energy (FE) believe that the new R&D funding would increase the technological progress for the affected resources (ultra-deep offshore oil and gas and unconventional gas production) by 50 percent over its value in the Reference Case. They arrived at this conclusion by verifying that the proposed additional R&D funding would bring total Federal R&D spending back to the levels represented in the Reference Case of AEO1997 which used the same rates. a The CEB case with the added FE assumptions regarding accelerated technological change due to the Section 941-to-949 programs, referred to as the FE/CEB case, was run to assess the impact of the assumed accelerated technological change b on oil and gas supply and prices.

The pattern of natural gas wellhead prices and production in the FE/CEB case is as expected. Successful R&D increases supply from the ultra-deep and unconventional resources and lowers wellhead prices throughout the forecast. Natural gas wellhead prices are as much as $0.30 per mcf lower than in the Reference Case and as much as $0.20 per mcf lower than in the CEB Case.

Between 2009 and 2025, cumulative crude oil production from the ultra-deep offshore is over 850 million barrels higher than in the Reference Case and over 800 million barrels higher then the CEB Case. Cumulative natural gas production is 3.8 tcf higher than in the Reference Case and 3.2 tcf higher than the CEB Case. It is important to note that the technological improvements assumed for this case would also have an impact in producing areas outside the United States, which would potentially affect world oil markets.

The Table summarizes key comparisons between the FE/CEB Case, the CEB Case, and the AEO2004 Case.

a Coincidently, the Reference Case of AEO1997 has technological change rates that are comparable to the AEO2004 High Technology Case.

b This acceleration is assumed to begin 2 years after the onset of R&D funding for unconventional technologies and 5 years after the onset for ultra-deep offshore technologies.