ADMINISTRATOR, ENERGY INFORMATION ADMINISTRATION
DEPARTMENT OF ENERGY
SUBCOMMITTEE ON ENERGY AND POWER
COMMITTEE OF COMMERCE
U.S. HOUSE OF REPRESENTATIVES
MAY 24, 2000
Mr. Chairman and Members of the Committee:
I appreciate the opportunity to appear before you today to discuss the views of the Energy Information Administration (EIA) on prospects for oil and natural gas supply and demand.
EIA is an independent statistical and analytical agency within the Department of Energy. We are charged with providing objective, timely, and relevant data, analysis, and projections for the use of the Energy Department, other agencies, the Congress, and the public. We do not take positions on policy issues, but we do produce data and analysis reports that are meant to help policy makers decide energy policy. Because we have an element of statutory independence with respect to the analyses that we publish, our views are strictly those of EIA. We do not speak for the Department, nor for any particular point of view with respect to energy policy, and our views should not be construed as representing those of the Department or the Administration.
Today's analysis is based on EIA's Annual Energy Outlook, which provides projections and analysis of domestic energy consumption, supply, prices, and carbon emissions through 2020. These projections are not meant to be exact predictions of the future but represent a likely future, assuming known trends in demographics and technology improvements, and also assuming no change in current law, regulation, and policy. EIA does not propose, advocate, or speculate on changes in laws and regulations. So, one of our key assumptions is that all current laws and regulations remain as they were on July 1, 1999. That means, for example, that the Tier 2 vehicle emission and gasoline sulfur standards are not included in the reference case because the regulation was not finalized until December 1999.
Petroleum consumption in the United States increased sharply in the 1970's (Figure 1). From an average of 14.7 million barrels per day in 1970, petroleum consumption rose to 18.9 million barrels per day in 1978, a level that would not be reached again for the next 20 years. More than half (57 percent) of the increase was in the transportation sector and nearly 40 percent of the growth was attributable to motor gasoline. Distillate and residual fuel consumption grew by 0.9 and 0.8 million barrels per day, respectively, between 1970 and 1978.
Domestic oil supply (including crude oil, lease condensate, natural gas liquids, other liquids and processing gains) peaked in 1972 at 11.9 million barrels per day then declined slowly in part because of price controls and aging fields in the Lower 48 States. Completion of the Trans-Alaska Pipeline System brought about a 1.0 million barrel per day increase in domestic oil production in 1978. The rising consumption combined with relatively flat supply resulted in a dramatic increase in net petroleum imports, from 3.1 million barrels per day in 1970 to 8.5 million barrels per day in 1977. Ninety percent of the increase in net imports from 1970 to 1977 came from OPEC countries, as OPEC=s share of U. S. imports rose from 42 percent to 72 percent.
From 1978 to 1980, world oil prices nearly doubled (Figure 2), resulting in a sharp decline in consumption. From the 1978 peak of 18.9 million barrels per day, consumption fell to 15.2 million barrels per day in 1983, a decline of 20 percent. Residual fuel led the decline as industrial users and electric utilities switched to alternative fuel sources. Residual fuel use fell 1.6 million barrels per day over the 5-year period, followed by gasoline (0.8 million barrels per day) and distillate fuel (0.7 million barrels per day.) By 1983, petroleum consumption in the United States had returned to the level of 1971.
Domestic supply remained fairly stable from 1978 to 1983, with rising Alaskan production making up for production declines in the Lower 48 States. Reduced consumption, along with steady supply levels, resulted in a decline in net imports from the 1977 peak of 8.5 million barrels per day to 4.3 million barrels per day in 1983. The decline in petroleum net imports from OPEC countries fell by slightly more than the total decrease as non-OPEC net imports increased slightly during this period. OPEC=s share of U. S. petroleum net imports declined to 43 percent in 1983.
The sharp decline in U. S. and world petroleum consumption resulted in lower demand for OPEC oil, which in turn led to reductions in the world oil prices. From the 1980 peak of $63.30 per barrel, the average world oil price fell to $19.57 per barrel in 1986 (measured in 1998 dollars). The lower prices and growing economy stimulated petroleum consumption growth. With the exception of 1991, petroleum consumption has remained the same or increased each year since 1983. In 1998, petroleum consumption reached 18.9 million barrels per day, slightly exceeding the previous peak in 1978. In contrast to the increase in the 1970=s, the rise in consumption from 1983 to 1998 was almost exclusively among the lighter petroleum products (gasoline, distillate, jet fuel, etc). Residual fuel consumption continued to decline during this period.
After remaining stable from 1978 to 1985, domestic supply again started to decline in 1985 due in part to the much lower oil prices. By 1998, supply had fallen to 9.2 million barrels per day from 11.4 million barrels per day in 1985. Increasing petroleum consumption and declining supply led to rising net import levels that , in 1996, surpassed the 1977 peak. By 1998, petroleum net imports reached 9.8 million barrels per day, comprising 52 percent of domestic petroleum consumption. Net imports from OPEC countries contributed 56 percent of the rise in total net imports from 1983 to 1998, in contrast to the 1970's when they contributed 90 percent of the increase. Net imports from Canada and Mexico made up 24 percent of the increase from 1983 to 1998, and in 1998, these two countries provided 26 percent of U. S. petroleum net imports compared to 50 percent from OPEC countries.
Just as the historical record shows substantial variability in world oil prices, there is considerable uncertainty about future prices. Three AEO2000 cases with different price paths allow an assessment of alternative views on the course of future oil prices. For the reference case, prices are projected to rise by about 2.8 percent a year, reaching $22.04 in 2020 (all prices in 1998 dollars unless otherwise noted). In nominal dollars, the reference case price exceeds $36 in 2020. The low price case has prices declining, after the current price rise, to $14.90 by 2005 and remaining at about that level out to 2020. The high price case has prices reaching $28 by 2015 before leveling off. The leveling off in the high price case is due to the market penetration of alternative energy supplies that could become economically viable at that price, if it is sustained. The AEO2000 price paths do not attempt to predict volatility. Oil prices have been quite volatile in the past, principally as a result of unforeseen political and social circumstances. The oil market volatility over the past 2 years has been the result of oil market fundamentals that are reasonably well understood but nearly impossible to predict. OPEC and some other producers responded to the low prices of 1998 by cutting back on production in the spring of 1999. This occurred just as several countries in Asia began to recover from their financial crisis and to increase oil consumption. The combination of lower production and higher consumption brought inventories down rapidly and, as inventories got to very low levels, prices rose sharply.
All three price cases reflect considerable optimism about the potential for worldwide petroleum supply, even in the face of the substantial expected increase in demand. Production from countries outside OPEC is expected to show a steady increase, exceeding 45 million barrels per day by the turn of the century and increasing gradually thereafter to more than 56 million barrels per day by 2020.
Petroleum Consumption Expected to Increase Steadily
Petroleum consumption in the United States is projected to increase 6.2 million barrels per day, from 18.9 million barrels per day in 1998 to 25.1 million barrels per day in 2020, an annual average rate of 1.3 percent (Figure 3). This compares to the average growth rates of 1.5 percent per year from 1983 to 1998 and 3.2 percent per year from 1970 to 1978. Most of the increase in petroleum consumption occurs in the transportation sector, which accounted for two-thirds of U.S. petroleum use in 1998. Petroleum use for transportation is projected to increase by 5.4 million barrels per day in the reference case between 1998 and 2020.
In the industrial
sector, which accounts for more than a fifth of U.S. petroleum use, consumption
in 2020 is projected to be higher than the 1998 level by 1.2 million barrels per
day in the reference case. More than half the growth is expected in the
petrochemical, construction, and refining sectors. Petroleum use is expected to
decline in the residential, commercial, and electricity generator sectors, where
oil gives ground to natural gas. For electricity generation, our projections
show oil-fired steam plants being retired in favor of natural gas combined-cycle
More than 90 percent of the projected growth in petroleum consumption stems from increased consumption ofAlight products,@ including gasoline, diesel, heating oil, jet fuel, and liquefied petroleum gases, which are more difficult and costly to produce than heavy products. Although refinery investments and enhancements are expected to increase the ability of domestic refineries to produce light products, they are projected to compensate for less than half the additional demand; the remainder will be imported.
In the forecast, gasoline continues to account for about 45 percent of all the petroleum used in the United States. Between 1998 and 2020, U.S. gasoline consumption is projected to rise from 8.3 million barrels per day to 11.4 million barrels per day. Increased air travel results in a near doubling of projected jet fuel consumption from 1.6 million barrels per day in 1998 to 3.0 million barrels per day in 2020. Consumption of liquefied petroleum gases (LPG=s)Cprimarily in the industrial sectorCalso increases in the projections, from 2.0 million barrels per day in 1998 to 2.5 million barrels per day in 2020. Consumption of Aother@ petroleum products, mostly petrochemical feedstocks, still gas used to fuel refineries, and asphalt and road oil used in road construction, grows from 2.8 million to a projected 3.3 million barrels per day by 2020. Distillate fuel consumption is projected to grow more slowly than other fuels, because of increasing fuel efficiency. Residual fuel use, mainly for electricity generation, is projected to decline by 250,000 barrels per day in the high oil price case but projected to increase by 530,000 barrels per day in the low oil price case.
Crude Oil Production Declines then Stabilizes, Total Supplies Remain Flat
In the reference case, domestic petroleum supply is projected to decline slightly from its 1998 level of 9.2 million barrels per day to 9.1 million barrels per day in 2020. This is the result of two offsetting factors. As U.S. crude oil production falls off, refinery gain and production of natural gas plant liquids increase. In the low oil price case, domestic supply is projected to drop to 8.3 million barrels per day in 2020. In the high oil price case, domestic supply is projected to increase to 9.9 million barrels per day in 2020.
Projected domestic crude oil production continues its historic decline through 2005. After 2005, technological improvements and rising prices are projected to arrest the decline, leading to relatively stable lower 48 production in the remainder of the forecast. In 2020, the projected domestic production level of 5.3 million barrels per day is 1 million barrels per day less than the 1998 level. Conventional onshore production in the lower 48 States, which accounted for 46 percent of total U.S crude oil production in 1998, is projected to increase to a 49-percent share in 2020 because of declining Alaskan production.
Crude oil production from Alaska is expected to decline at an average annual rate of 3.7 percent between 1998 and 2020. The overall decrease in Alaska=s oil production results from a continuing decline in production from most of its oil fields and, in particular, from Prudhoe Bay, the largest producing field, which historically has accounted for more than 60 percent of total Alaskan production. Offshore production ranges from 1.4 to 1.6 million barrels per day throughout the forecast. Technological advances and lower costs for deep exploration and production in the Gulf of Mexico help to offset a decline in production from shallow waters. Production from enhanced oil recovery (EOR), which becomes less profitable as oil prices fall, slows through 2006 and then increases along with projected world oil prices through the remainder of the forecast. The projected EOR production in 2020 is close to the 1998 level.
Although the number of available drilling rigs has been declining since 1982, price increases are a powerful incentive for increased drilling and the purchase of new drilling equipment. The number of available drilling rigs increased by almost 16 percent annually between 1974 and 1982--from 1,767 to 5,644--as natural gas prices more than quadrupled in real terms and oil prices more than doubled. This number dropped off as prices generally declined, and about 1,700 drilling rigs were available in the United States in 1998. Given the historical response to rising prices, even a modest increase in prices is likely to make additional drilling rigs available, and the forecast shows the number of rigs increasing to 1994 by 2020.
Both exploratory drilling and developmental drilling increase in the forecast. With rising prices and declining drilling costs, successful crude oil well completions increase on average by 0.1 and 3.3 percent per year in the low and high oil price cases, respectively, compared with a 1.7 percent projected increase in annual well completions in the reference case. For most of the past two decades lower 48 production of crude oil has exceeded reserve additions and production is expected to exceed reserve additions over the forecast period in all cases, meaning that projected U.S. oil reserves in 2020 will be below 1998 levels.
Petroleum Imports Projected to Increase
With consumption rising and production nearly flat, net imports are expected to continue to rise throughout the forecast period. Petroleum net imports are projected to increase to 16.0 million barrels per day in 2020 in the reference case from 9.8 million barrels per day in 1998. In 1998, net imports of petroleum climbed to 52 percent of domestic petroleum consumption and are projected to reach 64 percent in 2020 in the reference case. OPEC=s share of the U. S. import market is expected to increase to 52 percent in 2020 while the North America and Caribbean share of imports is projected to reach 33 percent. Total annual U.S. expenditures for petroleum imports, which reached a historical peak of $133.7 billion (in 1998 dollars) in 1980, were $46.6 billion in 1998.
Although crude oil is expected to continue as the major component of petroleum imports, refined products represent a growing share. More imports of refined products will be needed as growth in demand for refined products exceeds the expansion of domestic refining capacity. Net refined products make up 28 percent of net imports in 2020 in the reference case, compared with 12 percent in 1998.
The United States Remains One of the Top Producing Countries
The United States was by far the largest crude oil producing country in the world in 1970, at 9.6 million barrels per day (Figure 4). The Soviet Union followed with 7.0 million barrels per day followed by four members of OPEC. By 1999, Saudi Arabia=s oil production had increased to 7.8 million barrels per day, the only one of the top six producers in 1970 that had a higher production level in 1999. The Soviet Union had broken apart but Russia remained in second place in global oil production in 1999. The United States had fallen to third and Iran fourth. China and Norway replaced Venezuela and Libya as the fifth and sixth largest oil producers.
The top six countries produced 29.6 million barrels per day of crude oil in 1999, down 1.7 million barrels per day from the 1970 combined production level. However, crude oil production has become much more widely dispersed than in 1970. The production total of the top six producers amounted to 68 percent of the world=s crude oil produced in 1970, but in 1999, the top six countries produced just 45 percent of the world total. Whereas four members of the top six in 1970 were members of OPEC, just two of the top six were from OPEC in 1999.
U.S. production has fallen, because production elsewhere has been less costly. The United States has remained a major producer, however, because of a relatively low tax regime and innovative use of advanced technology.
Strategic Petroleum Reserve
The United States began putting crude oil into the Strategic Petroleum Reserve (SPR) in 1977 (Figure 5). The SPR is considered the first line of defense against an interruption in oil supplies and, therefore, is also considered a deterrent to possible oil import cutoffs. Between 1980 and 1985, inputs into the SPR averaged more than 200,000 barrels per day. By 1990, the inventory level had reached 586 million barrels. Since then, sales and additions have resulted in relatively small fluctuations in the total stockpile.
The 1999 end-of-year inventory amounted to 567 million barrels.
Demand for natural gas, with increases principally from the electric generation sector, is expected to rise to more than 30 trillion cubic feet (tcf) in 2020. As demand increases, pressure on natural gas supply will grow. These demand-side pressures will begin to raise questions like: Is there enough gas to meet demand at affordable prices? and Can we produce the gas fast enough to keep up with demand?
Last year U.S. natural gas consumption was just over 21tcf and accounted for 24 percent of domestic energy consumption. Gas consumption is expected to grow 1.8 percent annually from 1998 to 2020--faster than any other major fuel source, mainly because of the growth in gas-fired electricity generation. Domestic gas production is expected to increase a bit more slowly than consumption over the forecast, rising from 19 Tcf in 1998 to 26 Tcf in 2020. Growing production reflects rising wellhead prices, relatively abundant natural gas resources, and improvements in technologies, particularly for producing offshore and unconventional gas.
Net imports are expected to rise to make up the difference between domestic production and consumption, because they are generally expected to be lower priced than competing domestic sources (Figure 6). Net imports are expected to climb from 3.0 Tcf in 1998 to 5.0 Tcf in 2020Bsomewhat faster than the growth in overall consumption. Projected imports continue to be dominated by pipeline imports from Canada over the forecast period.
Rising Natural Gas Demand
The industrial sector is the largest gas-consuming sector, with significant amounts of gas used in the bulk chemical, refining, and metal durables sectors. Industrial gas consumption is expected to increase by 1.8 Tcf over the forecast--less than 1 percent per year--particularly in the refining and metal durables sectors, because of relatively low and stable gas prices. Combined, the residential and commercial sectors add 1.8 trillion cubic feet from 1998 to 2020. Gas demand in the residential and commercial sectors is driven by increasing population and declining consumer prices for delivered gas. The declines in prices paid by the consumer reflect expected gas distribution efficiencies in an increasingly competitive market.
Projected gas consumption by electric generators, not including industrial cogenerators, increases more than two and one half times during the forecast, from 3.7 trillion cubic feet in 1998 to 9.3 trillion cubic feet in 2020. The significant growth in gas-fired generation is partly driven by electric industry restructuring, but is mainly spurred by the addition of new gas turbines and combined-cycle facilities and increased utilization of existing gas-fired power plants. Lower capital costs, short lead times, and projected improvements in gas turbine heat rates give gas an advantage over coal for new generation in most regions of the United States. In 1998 electricity generators were the third-largest natural gas consuming sector. By 2020, however, the projected enormous growth in gas-fired generation makes electricity generators the second largest gas-consuming sector--rising to within 1 tcf of the industrial sector. Over the entire forecast, natural gas consumption is projected to grow by more than 10 tcf, and more than half of the increase comes from the electric generation sector.
Through 2020, the share of electricity produced with natural gas rises from 14 percent to 31 percent of the total, while the coal share declines from 52 percent to 49 percent. Nuclear power declines as a source of electric power--from 19 percent to 9 percent of electricity generation as no new nuclear power plants are expected to be brought on line between 1998 and 2020 and 40 percent of the current stock retires.
Before the advent of natural gas combined-cycle plants, fossil-fired baseload capacity additions were limited primarily to pulverized-coal steam units; today, however, combined-cycle plants cost about half as much and are about 40 percent more efficient than new coal plants. The lower capital costs and higher efficiencies of combined-cycle plants offset their higher fuel costs (Figure 7).
To meet the new demand growth, utilities can be expected to use existing plants more intensively, import power from Canada and Mexico, and purchase power from cogenerators and wholesale generators. Even so, 300 gigawatts of new capacity will be needed from 1998 to 2020 to meet projected demand. Of that new capacity, 90 percent is projected to be combined-cycle or combustion turbine technology fueled primarily by natural gas. In other words, more than 900 of the 1,000 new power plants--assuming an average plant capacity of 300 megawatts--that are expected to be built between now and 2020 are projected to be gas-fired. New coal plants are not projected to be cost-competitive until 2010, when rising natural gas prices exceed the price of coal by $2 per million BTU, leading to the projected construction of new coal-steam power plants in some regions.
Many of the new gas-fired plants built over the next 20 years will replace nuclear power plants. In AEO2000 about 40 percent of the existing nuclear capacity is expected to be taken out of service by 2020. No new nuclear units are expected to become operable by 2020, because natural gas and coal-fired plants are projected to be more economical.
Growing Natural Gas Supply
Over the forecast period, increased U.S. natural gas production comes primarily from lower 48 onshore conventional nonassociated sources. Conventional onshore production accounted for 35 percent of total U.S. domestic production in 1998 and is expected to increase to 41 percent in 2020. Offshore production, mainly from wells in the Gulf of Mexico, also rises. Innovative, cost-saving technology and large finds, particularly in the deep waters of the Gulf, have encouraged interest in this area. Lower-48 offshore Gulf Coast natural gas production increased to 5.7 tcf in 1997--the highest yet recorded -- and dropped off slightly in 1998 to 5.6 tcf. Unconventional gas production increases at the fastest rate of any other source over the forecast period, largely because of expanded tight sands gas production in the Rocky Mountain region.
The Rocky Mountain (primarily unconventional sources) and offshore Gulf of Mexico regions are expected to account for just over half of the incremental natural gas production between 1998 and 2020, as improvements in both unconventional and offshore technologies continue. Increased production from the offshore Gulf Coast and onshore Southwest regions account for almost one-third of the total increase in the same period. Alaskan gas is not expected to be transported to the lower 48 States through 2020,because projected natural gas prices are not high enough to support the required transportation system.
One of the key activities in producing natural gas is drilling. With rising prices and generally declining drilling costs, drilling in 2020 is expected to reach 22,600 wells in the reference case and result in 16,900 successful natural gas well completions. This level of drilling is below the level reached in 1981 of more than 29,000 total wells drilled (just under 20,000 successful), but represents approximately a 15-percent increase over current levels. (Figure 8)
Technology improvements have both reduced effective exploration and development costs, and increased the recoverability of in-place resources. Major advances in data acquisition, data processing, and the technology of displaying and integrating seismic data with other geologic data-combined with lower cost computer power and experience gained using new techniques-have exerted downward pressure on costs.
Uncertainties about the pace of technological development are one of the key factors that could affect natural gas production and prices. Alternative cases were used to assess the sensitivity of the projections to changes in success rates, exploration and development costs, and finding rates as a result of technological progress. The assumed technology improvement rates were increased and decreased by approximately one-third in the rapid and slow technology cases.
Changes in production in the alternative technology cases reflect the benefits of lower costs and higher productivity for conventionally recoverable gas, as well as an array of technological enhancements for unconventional gas recovery. The changes in supply lead to price changes that affect new investment in gas-fired technologies, especially in the industrial and electricity generation sectors. Rapid technology improvements yield benefits in the form of both lower prices and increased production to meet higher consumption requirements.
Production from unconventional gas resources (tight sands, shales, and coalbeds) is particularly responsive to changes in the assumed levels of technological progress. Whereas the reference case projects total U.S. natural gas production in 2020 at 26.4 trillion cubic feet, the rapid technology case projects 28.1 trillion cubic feet of production in 2020, with the increase coming primarily from offshore and unconventional sources.
Offshore gas production in the Gulf of Mexico is expected to grow from 5.5 trillion cubic feet in 1998 to a peak of 6.7 trillion cubic feet in 2015 in the reference case. In the rapid technology case, however, offshore Gulf of Mexico production peaks at 7.7 trillion cubic feet in 2017, and projected cumulative offshore production between 1998 and 2020 is 148.3 trillion cubic feet, compared with 137.1 trillion cubic feet in the reference case. The rapid technology assumption has a similar but less dramatic, effect on unconventional gas recovery (UGR). Cumulative UGR production between 1998 and 2020 is projected to be 132.9 trillion cubic feet in the rapid technology case, compared with 129.5 trillion cubic feet in the reference case. Changes in production in the alternative technology cases reflect the benefits of lower costs and higher finding rates for conventionally recoverable gas, as well as an array of technological enhancements for unconventional gas recovery.
Slowly Rising Natural Gas Wellhead Prices
Wellhead prices for natural gas in the lower 48 States increase on average by 1.7 percent a year in the reference case to $2.81 per thousand cubic feet in 1998 dollars (Figure 9). The increase reflects rising demand for natural gas and the impact of the progression of discoveries from larger and more profitable fields to smaller, less economical ones. The natural gas price projections are highly sensitive to changes in the assumptions about technological progress. Over the projection period, lower 48 wellhead prices increase at an average annual rate of 3.0 percent in the slow technology case, rising fairly steadily to $3.74 (1998 dollars) per thousand cubic feet in 2020. In the rapid technology case, average natural gas wellhead prices remain below 1997 level of $2.39 through 2020.
Natural Gas Imports
Net natural gas imports are expected to grow slightly in the forecast from 14 percent of total gas consumption in 1998 to 16 percent in 2020. Most of the increase is attributable to imports from Canada, primarily from western Canada, although some new gas is also expected from Sable Island in the offshore Atlantic. Gas trade with Mexico is expected to consist primarily of exports. Conversion of power plants from heavy fuel oil to natural gas, in compliance with Mexico's environmental regulations, is expected to gain momentum and it is uncertain whether indigenous production can be increased enough to satisfy rising demand. LNG provides another source of gas imports, and gross LNG imports are expected to grow at a rate of 7.2 percent a year, reaching a level of 390 bcf by 2020.
In summary, over the next 20 years petroleum consumption in the United States is expected to be driven primarily by the demand for Alight products@ in the transportation sector. Petroleum consumption is expected to rise to over 25 million barrels per day in 2020, and domestic petroleum supplyCincluding refinery gain and natural gas plant liquids--is projected to decline slightly to just over 9 million barrels per day in 2020. Net imports are projected to increase to 16 million barrels per day in 2020. Continued dependence on petroleum imports is projected, reaching 64 percent in 2020. Although imports are projected to grow, the United States is one of the largest oil producing countries in the world, and domestic production is expected to remain a significant source of petroleum supply.
Over the next 20 years the U.S. natural gas market is expected to be largely driven by the demand for electricity. From now through 2020 gas consumption by electricity generators is expected to increase more than two and one half times. Total gas consumption is expected to rise to more than 31 tcf in 2020, and U.S. production is expected to increase to 26 tcf. Net imports, primarily from Canada, are projected to increase to 5 tcf by 2020. In spite of this increase, technically-recoverable natural gas resources are believed to be adequate to sustain growing production volumes for many years without dramatic price increases.