The Potential Role of Future Environmental Regulations on the Domestic Petroleum Industry

Abstract

Abstract Increased environmental compliance requirements could have a significant impact on future U.S. oil and gas supplies. This paper summarizes the results of a recently published National Petroleum Council (NPC) assessment of constraints on future North American natural gas production and use, along with a concurrent study of future oil supplies by the U.S. Department of Energy (DOE). The paper identifies possible environmental and legislative initiatives affecting domestic exploration and production (E and P) operations, characterizes the potential impacts of these initiatives on future compliance costs, and estimates their potential impacts on future oil and gas supplies. The assessment was performed for two potential future environmental regulatory scenarios: a "balanced" scenario, and a more stringent regulatory scenario. Each environmental compliance scenario was assessed under two "reference case" economic scenarios. The estimated impacts of potential increased environmental compliance requirements are presented in terms of the following:unit compliance costs;economically recoverable resources (reserves) and future production potential lost; andincremental industry expenditures. The results of this assessment show that increased environmental compliance requirements could have a significant impact on the U.S. oil and gas industry and future U.S. oil and gas supplies. Depending on the level of future economic growth, the industry could incur an additional $70 to $86 billion in increased environmental compliance expenditures over the 1992 to 2010 time period. Under a high (stringent) regulatory scenario, a substantial portion of otherwise economic oil and gas resources could become uneconomic to develop and produce. Stringent environmental compliance requirements could result in 26% higher initial costs for new gas wells, and 32% higher costs for new oil wells. Annual operating costs could increase by 59% for gas wells and 43% for oil wells. Crude oil production in the U.S. could decrease by 290,000 to 620,000 B/D by 2010 under a high regulatory scenario, depending on the level of future economic growth. Under this stringent environmental regulatory scenario, U.S. gas production could decrease 2.0 to 2.3 Tcf/year. Introduction Environmental protection requirements in the U.S. are becoming increasingly complex and costly, with the domestic oil and gas (E and P) industry facing a wide range of federal, state, and local environmental regulations which continue to become more stringent. Over the last decade, environmental compliance costs for the E and P industry increased at a rate of 3% to 5% per year, with compliance costs estimated to be about $2 billion in 1990 (all cost references in this paper are in U.S. dollars). P. 133