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Oil and Gas Supply Module - NEMS Documentation

July 5, 2018

Introduction

The purpose of this report is to define the objectives of the Oil and Gas Supply Module (OGSM), to describe the model's basic approach, and to provide detail on how the model works. This report is intended as a reference document for model analysts, users, and the public. It is prepared in accordance with the U.S. Energy Information Administration's (EIA) legal obligation to provide adequate documentation in support of its statistical and forecast reports (Public Law 93-275, Section 57(b)(2)).

Projected production estimates of U.S. crude oil and natural gas are based on supply functions generated endogenously within the National Energy Modeling System (NEMS) by the OGSM. The OGSM encompasses both conventional and unconventional domestic crude oil and natural gas supply. Crude oil and natural gas projections are further disaggregated by geographic region. The OGSM projects U.S. oil and natural gas supply for six Lower 48 onshore regions, three offshore regions, and Alaska. The general methodology relies on projected profitability to determine exploratory and developmental drilling levels for each region and fuel type.

OGSM also provides projected Canadian natural gas production (excluding production used to support Canadian liquefied natural gas (LNG) exports) to the NGMM and is used in determining Canadian imports to the United States as a result of the North American market equilibration that occurs in the NGMM. LNG imports into Canada also are determined in the NGMM. Canadian natural gas production is represented for two regions—Western Canada and Eastern Canada.

The OGSM utilizes both exogenous input data and data from other modules within NEMS. The primary exogenous inputs are resource levels, costs, production profiles, and tax rates − all of which are critical determinants of the expected returns from projected drilling activities. Regional projections of natural gas wellhead prices and production are provided by the Natural Gas Market Module (NGMM). Projections of the crude oil wellhead prices at the OGSM regional level come from the Liquid Fuels Market Model (LFMM). Important economic factors, namely interest rates and gross domestic product (GDP) deflators, flow to the OGSM from the Macroeconomic Activity Module (MAM). Controlling information (e.g., projection year) and expectations information (e.g., expected price paths) come from the Integrating Module (i.e. system module).

Outputs from the OGSM go to other oil and gas modules (NGMM and LFMM) and to other modules of NEMS. To equilibrate supply and demand in the given year, the NGMM employs short-term supply functions (with the parameters provided by the OGSM) to determine nonassociated gas production and natural gas imports. Crude oil production is determined within the OGSM using short-term supply functions, which reflect potential oil or gas flows to the market for a one-year period. The gas functions are used by the NGMM and the oil volumes are used by the LFMM for the determination of equilibrium prices and quantities of crude oil and natural gas at the wellhead. The OGSM also provides projections of natural gas plant liquids production to the LFMM. Other NEMS modules receive projections of selected OGSM variables for various uses. Domestic oil and natural gas production is passed to the Integrating Module for reporting purposes. Projections of oil and natural gas production are also provided to the MAM to assist in projecting aggregate measures of output.

Model purpose

The OGSM is a comprehensive framework used to analyze oil and natural gas supply potential and related issues. Its primary function is to produce domestic projections of crude oil and natural gas production in response to price data received endogenously (within NEMS) from the NGMM and LFMM. Projected natural gas and crude oil wellhead prices are determined within the NGMM and LFMM, respectively. As the supply component only, the OGSM cannot project prices, which are the outcome of the equilibration of both demand and supply.

The basic interaction between the OGSM and the other oil and gas modules is represented in Figure 1-1. The OGSM provides expected natural gas production to the NGMM for use in its short-term domestic nonassociated gas production functions and associated-dissolved natural gas production. The interaction of supply and demand in the NGMM determines nonassociated gas production.

The OGSM provides domestic crude oil production to the LFMM. The interaction of supply and demand in the LFMM determines the level of imports. System control information (e.g., projection year) and expectations (e.g., expected price paths) come from the Integrating Module. Major exogenous inputs include resource levels, finding-rate parameters, costs, production profiles, and tax rates − all of which are critical determinants of the oil and natural gas supply outlook of the OGSM.

The OGSM operates on a regionally disaggregated level, further differentiated by fuel type. The basic geographic regions are Lower 48 onshore, Lower 48 offshore, and Alaska, each of which, in turn, is divided into a number of subregions (see Figure 1-2). The primary fuel types are crude oil and natural gas, which are further disaggregated based on type of deposition, method of extraction, or geologic formation. Crude oil supply includes lease condensate. Natural gas is differentiated by nonassociated and associated-dissolved gas. Nonassociated natural gas is categorized by fuel type: high-permeability carbonate and sandstone (conventional), low-permeability carbonate and sandstone (tight gas), shale gas, and coalbed methane.

The OGSM provides mid-term (currently through year 2050) projections and serves as an analytical tool for the assessment of alternative supply policies. One publication that utilizes OGSM projections is the Annual Energy Outlook (AEO). Analytical issues that OGSM can address involve policies that affect the profitability of drilling through impacts on certain variables, including:

  • drilling and production costs
  • regulatory or legislatively mandated environmental costs
  • key taxation provisions such as severance taxes, state or federal income taxes, depreciation schedules and tax credits
  • the rate of penetration for different technologies into the industry by fuel type

The cash flow approach to the determination of drilling levels enables the OGSM to address some financial issues. In particular, the treatment of financial resources within the OGSM allows for explicit consideration of the financial aspects of upstream capital investment in the petroleum industry.

The OGSM is also useful for policy analysis of resource base issues. OGSM analysis is based on explicit estimates for technically recoverable crude oil and natural gas resources for each of the sources of domestic production (i.e., geographic region/fuel type combinations). With some modification, this feature could allow the model to be used for the analysis of issues involving:

  • the uncertainty surrounding the technically recoverable crude oil and natural gas resource estimates
  • access restrictions on much of the offshore Lower 48 states, the wilderness areas of the onshore Lower 48 states, and the 1002 Study Area of the Arctic National Wildlife Refuge (ANWR).

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