A Response To The RAND Issue Paper Comments on The National
Petroleum Council's 1999 Study on Natural Gas
Recently, the RAND Corporation published an Issue Paper* on the
subject of industry access to undeveloped gas resources in the
Rocky Mountain Region. The RAND paper is critical of the 1999
National Petroleum Council report titled "Meeting the Challenges
of the Nation's Growing Natural Gas Demand" (the NPC Study).
The NPC Study and other recent work have shown that access restrictions
in the Rockies and elsewhere are a major and growing obstacle
to meeting our nation's growing demand for natural gas. The NPC
Study further showed the large favorable impact on future gas
production and prices that would result from improving access
to undeveloped resources.
After consultation with members of the supply team that conducted
the NPC study, we have concluded that the RAND Issue Paper makes
a number of misleading, out of context, and untrue statements
about the NPC Study. The paper reflects several misunderstandings
regarding both the approach and conclusions of the NPC Rocky Mountain
access study.
It should also be noted that the RAND paper was based on an incomplete
study, by RAND's own admission. The authors of the RAND paper
have so far only reviewed the work of others on the subject. Because
of this, it is misleading to publish conclusions and commentary
on land access issues in a manner that suggests that new ground
has been broken and that they are offering new information.
The rebuttals to the points that RAND makes on page 3 of its
paper are as follows:
Point 1:
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RAND Statement:
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The studies should
consider the restricted portion of only the economically
viable resource. It is the viable resource that is relevant
to understanding the amount of resource that would be produced
in the absence of access restrictions".
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NPC Response:
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The NPC study
did evaluate both technically recoverable and economic resources.
In various scenarios evaluated in the study, NPC found that
a high percentage of the assessed undiscovered resource
base in the Rockies is either economic now or will become
economic through 2015. This conclusion has been verified
by the current high level of industry interest in the region
and the region's growing gas production. While the NPC Study
did not publish price-supply curves, the study used economic
viability of new prospects as the primary determinant of
future industry activity, reserve additions and production.
The NPC study showed that most of the assessed Rocky Mountain
volumes are economic to develop, either now or in the near
future, and that a large volume of these resources is likely
to be in areas where industry access is restricted.
NPC evaluated
the impact on future activity of increasing industry access
and found that greater access and reduced regulatory costs
will result in significantly higher gas production. The
NPC Increased Access Case used the same economic and financial
assumptions as the NPC Reference Case. As shown on Figure
S-5, page S-26 of Volume II of the NPC Study, Lower 48 gas
production in 2015 would be approximately 1.5 TCF greater
with less access restrictions. Regarding the Rockies, gas
production in the Rockies Foreland would be 800 BCF greater
in 2015 with less access restrictions. To put this in context,
this incremental Rockies production would satisfy approximately
one-quarter of California gas demand in 2015.
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RAND Statement:
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"The NPC
Study failed to include proved reserves in the resource
base".
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NPC Response:
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The NPC Study
does include the entire resource base, including proved reserves.
As shown on Table S-2, page S-11 of Volume II of the NPC study,
the NPC estimates that the Rockies resource base is 382 TCF.
Of this amount, 36 TCF is proven. However, of the total resource
base in the Rockies, 137 TCF is subject to some form of access
restriction. The restricted portion of the resource base is
a very high percentage of the undeveloped resource base. A
large portion of this is completely off limits to exploration. |
Point 3:
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RAND Statement:
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"The study
should account for the fact that access restrictions are sometimes
waived. The studies find that three common lease stipulations
are waived in 20 - 30 percent of the time, but the study fails
to account for this finding in its preliminary analysis". |
NPC Response:
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It should be
noted for the record that the NPC Study did not make the
above statement regarding lease stipulations being waived
20 - 30 percent of the time, and to state otherwise is completely
untrue. It is our understanding that this statement was
made in the other study cited in the Rand Issue Paper. The
NPC Study was a landmark report in quantifying the effects
of access restrictions in Rockies. Based on detailed analysis
of six calibration areas in the Rockies, the NPC Study arrived
at three lease classifications and its percentages:
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Lease
Type
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Percentage
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| Off Limits |
9%
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| Higher
Costs Due to Access Issues |
32%
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| Standard
Lease Terms |
59%
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Those areas under
Standard Lease Terms were not subject to any access restrictions.
Those areas with higher costs were subject to increased
drilling costs and drilling delays. The cost penalty was
computed as a weighted average of the types of restrictions
and mitigation measures that were expected to be encountered
in the high cost areas.
While it may
be true that access restrictions are sometimes waived, it
is often the case that new restrictions are placed on "standard
lease terms" and other areas as approvals for drilling
are reviewed and granted. The net effect could well be a
greater cost penalty than the values used in the NPC Study.
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Point 4:
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RAND Statement:
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"The study
should account for access restrictions that could restrict
pipeline and road development outside the potential drilling
areas. These may preclude development even in areas where
drilling is otherwise permitted". |
NPC Response:
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It is unclear
what is being asserted because it sounds as though RAND is
saying that access to Rocky Mountain resources is even lower
than what NPC has evaluated.
The NPC Study
does consider pipeline and other infrastructure costs. These
are accounted for in the model. The model solves for lower
wellhead prices in remote areas, to reflect higher transportation
costs.
In both the Reference
Case and the Increased Access Case, the NPC Study assumes
that favorable economics for pipeline augmentation must
exist for at least three years before a given pipeline corridor
is expanded. This factor was decided upon after consideration
of several issues including right-of-way access. In other
words it would take time to work out access related right-of-way
issues. It should be noted that Rockies gas production in
both the Reference and Increased Access Cases is constrained
due to limited pipeline capacity.
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Point 5:
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RAND Statement:
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"The study
should factor in that restrictions on timing apply to drilling
only (i.e., drilling permitted only in certain months). Once
a well is drilled, there are no restrictions on production
or maintenance. Thus normally inaccessible resources can be
developed via multiple season drilling and produced year round". |
NPC Response:
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This is precisely
what the NPC Study assumes in "High Cost Areas."
As noted above
in Point 3, the NPC analysis concluded that 32% of the Rockies
is subject to conditions mentioned in the above statement.
As discussed in detail on page S-21 of Volume II of the
NPC Study, the condition cited above was subject to drilling
delays and higher costs.
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Concluding Comments
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One of the most
important conclusions in the NPC study was that the Rocky
Mountain region will supply a growing amount of the country's
natural gas needs. Therefore, policy makers should weigh
carefully the economic and environmental benefits of this
growing gas supply against policies that might restrict
access to the region's important natural gas resources.
We see no new information in the RAND report that rebuts
or even challenges this conclusion.
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Contact: William
F. Whitsitt (202) 742-4300
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