Although depletion is incorporated in the Oil and Gas Supply Module (OGSM) of the National Energy Modeling System (NEMS), the Accelerated Depletion Case was developed explicitly to address the issues raised by the six trade associations in their communication with the Department of Energy.
The assumptions embodied in the Accelerated Depletion Case differ significantly from those used in the Reference Case and in the Annual Energy Outlook 2000 (AEO2000).
The assumptions provided by the Office of Fossil Energy, which were developed in consultation with representatives of the six trade groups, are summarized below:
New field discoveries are assumed to be smaller.
As specified by the Office of Fossil Energy, the size of new discoveries was reduced by one-third from the size assumed in the Reference Case, to represent smaller fields being brought into development in the future.
Each newly discovered field adds not only proved reserves but also a much larger volume of inferred reserves. Proved reserves are reserves that can be certified using the original discovery wells; inferred reserves are those hydrocarbons that require additional drilling (developmental and other exploratory) before they are termed proved.
The bulk of reserve additions in any year comes from inferred reserves. Because the new fields are assumed to be smaller in the Accelerated Depletion Case than in the Reference Case, fewer additions are made to inferred reserves.
Overall future drilling in the Accelerated Depletion Case adds less to proved reserves, requiring more drilling to achieve a given level of production than in the Reference Case.
New reserves are assumed to be used more intensively. As stated earlier, the underlying mechanism in the OGSM used to determine production is the P/R ratio.
In the accelerated case, the P/R ratio for new proved reserve additions is assumed to be one-third higher than in the Reference Case, again as specified by the client.
The Accelerated Depletion Case assumes that the smaller fields discovered with the reduced finding rate described above will be used more intensively than fields have been historically.
The expected increased intensity of production is reflected in the higher P/R ratios.
Individual wells are assumed to reach a higher peak earlier in their development and to decline more quickly, changing expected well profitability.
In the Accelerated Depletion Case, the discounted cash flow algorithm and expected well profitability, which are used to determine future drilling levels, were adjusted by changing the expected production path of the representative well to match the assumptions made above.
Initial flow rates were specified by the client to be one-third higher in the Accelerated Depletion Case than they are in the Reference Case, and production was assumed to decline more rapidly after the peak.
Overall recovery from the representative well is roughly the same as in the Reference Case. The change in the production profiles captures the assumption that future wells will draw down reserves more intensively in earlier years than they have historically.
Results:
In the Accelerated Depletion Case, the effects of depletion on future production and prices are stronger than in the Reference Case.
All other things being equal, production in the Accelerated Depletion Case is projected to be lower, because adding proved reserves is more difficult. As a result, total oil and gas production is projected to be lower.
This means that the rate at which the total underlying resource is depleted is actually lower in the Accelerated Depletion Case than in the Reference Case.
Thus, in this instance, the term "accelerated depletion" refers to the rate of reduction in future production caused by individual field depletion, rather than the overall rate of resource depletion.
Domestic production and prices in the Accelerated Depletion Case differ from those in Reference Case in several ways, as outlined below:
Prices for natural gas are higher in the Accelerated Depletion Case, while crude oil prices are roughly the same.
shows how the projected price of natural gas at the wellhead varies from the Reference Case in the Accelerated Depletion Case.
The price difference between the two cases grows over time as the cumulative effect of smaller reserve additions reduces production levels in the Accelerated Depletion Case.
In 2010, the lower 48 wellhead price of natural gas in the Accelerated Depletion Case is projected to be $2.62 per thousand cubic feet - 14 cents higher than in the Reference Case (all prices in 1998 dollars).
By 2020, the wellhead price in the Accelerated Depletion Case is projected to be $4.12 per thousand cubic feet - more than double the 1998 price and $1.33 higher than in the Reference Case.
Because U.S. oil prices are determined primarily by the world oil price, which generally is unaffected by changes in domestic supply and demand, the projected prices for lower 48 oil at the wellhead are roughly the same in the two cases.
Higher natural gas prices lead to lower total energy consumption, lower gas use, and increased use of coal and petroleum.
Total energy consumption is projected to be about 1 percent lower in the Accelerated Depletion Case than in the Reference Case, a difference of 1.2 quadrillion Btu.
Expected total energy use is lower in the Accelerated Depletion Case because of the higher projected natural gas prices.
Natural gas consumption in 2020 is roughly 3 quadrillion Btu lower in the Accelerated Depletion Case than in the Reference Case.
At the same time, coal use and petroleum use are expected to be 0.7 and 1.0 quadrillion Btu higher, respectively, due to substitution of these fuels for natural gas by consumers faced with higher natural gas prices The increase in petroleum consumption is made possible by higher projected imports.
In the Accelerated Depletion Case, net imports of crude oil and petroleum products increase to 16.9 million barrels per day in 2020, as compared with 15.8 million barrels per day in the Reference Case.
Oil and natural gas production is lower in the Accelerated Depletion Case than in the Reference Case, while imports are higher.
Expected natural gas production in the Accelerated Depletion Case is lower than in the Reference Case, because gas consumption is expected to be lower.
The difference is negligible over the first 5 years of the projection but increases over time. In 2015, natural gas production in the lower 48 States in the Accelerated Depletion Case is projected to be 23.4 trillion cubic feet, 1.3 trillion cubic feet lower than in the Reference Case.
Gas production increases in the Reference Case between 2015 and 2020 but falls in the Accelerated Depletion Case, and by 2020 it is 3.5 trillion cubic feet, or 13 percent, lower than the Reference Case projection of 26.0 trillion cubic feet.
Lower domestic natural gas production in the Accelerated Depletion Case is partially offset by higher imports. While lower 48 production in 2020 is projected to be 3.5 trillion cubic feet lower in the Accelerated Depletion Case than in the Reference Case, natural gas imports are projected to be 640 billion cubic feet higher than in the Reference Case, at 5.5 trillion cubic feet per year.
Most of the additional imports are projected to come from Canada; in addition, imports of liquefied natural gas (LNG) are projected to increase by 40 billion cubic feet.
In both cases, the United States is projected to be a net exporter to Mexico, with exports exceeding imports from Mexico by 200 billion cubic feet.
Increases in imports in response to higher domestic prices for natural gas are constrained in both the Reference and Accelerated Depletion Cases by LNG gasification capacity, expected production levels in Mexico, and limits on pipeline capacity between Canadian gas fields and U.S. markets.
Projected crude oil production in the Accelerated Depletion Case is lower than in the Reference Case throughout most of the projection period.
Although oil is more difficult to find in the Accelerated Depletion Case, its price is largely unaffected by the projected decrease in domestic supply.
The projected shortfall in production is offset by an increase in imports, which are assumed to be available at the world oil price.
Thus, crude oil production in the Accelerated Depletion Case, unlike natural gas production, is not projected to fall as a result of price-related reductions in demand.
The assumed high production-to-reserve ratio for new crude oil reserve additions also helps to keep oil production, particularly onshore, from falling off as rapidly as natural gas production.
In 2020, lower 48 oil production in the Accelerated Depletion Case is projected to be 4.7 million barrels per day, compared with 5.0 million barrels per day in the Reference Case. The difference is concentrated in offshore production in the Gulf of Mexico.
In the Accelerated Depletion Case, smaller fields make some potential projects that were profitable in the Reference Case economically untenable.
End-of-year proved reserves drop sharply for natural gas but relatively slowly for crude oil.
In the Reference Case, end-of-year proved reserves of lower 48 natural gas are projected to be 48 trillion cubic feet higher in 2020 than in 2000, as higher demand requires increased production and therefore more proved reserves.
Over the period, reserve additions are projected to outpace production.
In contrast, end-of-year natural gas reserves in the Accelerated Depletion Case are projected to increase until 2012 and then decline as the effects of increasingly smaller reserve additions per well accumulate.
By 2020, end-of-year reserves in the Accelerated Depletion Case are projected to be 152 trillion cubic feet, 47 trillion cubic feet lower than in the Reference Case and only about 1 trillion cubic feet higher than at the end of 2000.
Both the Reference Case and the Accelerated Depletion Case project lower end-of-year crude oil reserves in 2020 than in 2000, as projected production outstrips projected total reserve additions.
The Accelerated Depletion Case projects lower 48 reserves of 13.45 billion barrels at the end of 2020, about 0.4 billion barrels (4 percent) less than in the Reference Case, as compared with a 24-percent difference in the projections for lower 48 natural gas reserves.
The difference in lower 48 crude oil reserves occurs in offshore reserves, with less drilling expected in the Accelerated Depletion Case because there are fewer profitable fields to be found.
Lower 48 onshore reserves are projected to be higher in the Accelerated Depletion Case than in the Reference Case, as projected oil drilling is higher.
Drilling activity is higher in the Accelerated Depletion Case than in the Reference Case.
Improvements in well profitability as a result of improved production profiles are expected to lead to more drilling in the Accelerated Depletion Case than in the Reference Case.
The total number of wells drilled per year roughly doubles between 2000 and 2020 in the Reference Case, and in the Accelerated Depletion Case the number of wells drilled in 2020 is 6 percent higher than in the Reference Case.
Exploratory wells, which make up a relatively small portion of total wells drilled in both cases, are projected to be 16 percent more numerous in the Accelerated Depletion Case than in the Reference Case in 2020, whereas the number of developmental wells is projected to be only about 4 percent higher.
Sensitivity Analysis:
The Accelerated Depletion Case describes how changing the assumptions about depletion alone may influence U.S. oil and natural gas prices and production.
To determine the interaction of the accelerated depletion with other major variables in the model, the report specifically considers the effects of changes to the world price of oil, the rate of technological change, and the level of access to areas in the Rocky Mountains where development of natural gas is restricted.
The analysis addresses these factors both independently and in combination. The results of these sensitivity cases are presented below.
Sensitivity of Accelerated Depletion to High Natural Gas Imports: The United States, currently a net importer of natural gas, is expected to continue to rely on imported gas in the future.
Accelerated depletion of domestic natural gas resources will cause production to be more difficult in the United States, lowering the amount of natural gas that can be produced at any given price.
Although depletion is not limited to the United States, domestic gas fields are considered to be more mature on average than those in Canada, Mexico, or other overseas producers who could supply LNG, suggesting that the effects of accelerated depletion will be felt more strongly by U.S. producers than by the potential suppliers of U.S. imports. Therefore, the higher natural gas prices that domestic consumers would face in the Accelerated Depletion Case could be avoided if additional natural gas imports were available from other countries where the effects of accelerated depletion were less pronounced.
The Accelerated Depletion with High Natural Gas Imports Case is designed to test the sensitivity of the Accelerated Depletion Case results to a change in assumptions that allow import capacity to increase beyond the reference case levels.
In the Accelerated Depletion with High Natural Gas Imports Case, several assumptions were changed to show how more imports could influence the projections in the Accelerated Depletion Case.
Three changes were made to the Reference Case assumptions to show how higher projected prices in the Accelerated Depletion Case might increase imports of natural gas, and what effect the increase would have on the rest of the market:
First, the total capacity for imports from Canada was increased. Increasing Canadian imports are projected in the Reference Case, based on past trends.
Imports from Canada roughly doubled from 1990 to 1998, when they accounted for about 14 percent of total supply.
Canadian natural gas imports are projected to increase from 1998 to 2020 in both the Reference Case and the Accelerated Depletion Case, but they are constrained by the projected capacity of natural gas pipelines between Canada and the United States.
The Accelerated Depletion with High Natural Gas Imports Case relaxes the constraints on potential Canadian imports by increasing pipeline capacity.
By 2020, the pipeline capacity to carry natural gas from Canada is projected to be 20 percent higher in the Accelerated Depletion with High Natural Gas Imports Case than in the Reference and Accelerated Depletion Cases.
Higher pipeline capacity allows for an increase of 460 billion cubic feet per year in Canadian imports in 2020, 9 percent more than in the Accelerated Depletion Case.
Second, it was assumed that Mexico would become a net exporter of gas to the United States, rather than a net importer as in the Reference and Accelerated Depletion Cases, with higher prices stimulating an increase in Mexico's production of natural gas for export to the United States.
In the Reference and Accelerated Depletion Cases, the United States is projected to export 200 billion cubic feet of gas to the United States in 2020; however, in the Accelerated Depletion with High Natural Gas Imports Case, Mexico is projected to export 90 billion cubic feet per year to the United States in 2020.
Third, U.S. imports of LNG in the Accelerated Depletion with High Natural Gas Imports Case are projected to increase to 450 billion cubic feet per year in 2020, compared with only 330 billion cubic feet in the Reference Case and 370 billion cubic feet in the Accelerated Depletion Case.
Total U.S. imports of natural gas are projected to be 6.36 trillion cubic feet in 2020, compared with 5.52 trillion cubic feet in the Accelerated Depletion Case.
Higher imports lead to lower domestic prices for natural gas than are projected in the Accelerated Depletion Case, as more plentiful supplies allow consumers to buy more gas at lower prices.
In the Accelerated Depletion with High Natural Gas Imports Case, the lower 48 wellhead price of natural gas in 2020 is projected to be $3.69 per million cubic feet - $0.90 higher than in the Reference Case but $0.43 lower than in the Accelerated Depletion Case.
As a result, lower 48 production of natural gas is projected to be lower, at 22.1 trillion cubic feet per year in 2020, than in the Accelerated Depletion Case (22.5 trillion cubic feet in 2020).
Because the change in assumptions is limited to imports of natural gas, the projected level of domestic oil production in the High Natural Gas Imports Case is nearly the same as in the Accelerated Depletion Case.
The assumptions for the Accelerated Depletion with High Natural Gas Imports Case do not extend the projected effects of accelerated depletion to either Mexican or Canadian resources.
Although those resources are also subject to depletion, development of a methodology to introduce similar accelerated depletion assumptions into the Mexican and Canadian markets is beyond the scope of this analysis.
Sensitivity of Accelerated Depletion to World Oil Prices:
The world price of oil is determined by the international market.
Although the U.S. consumes roughly one quarter of all oil consumed internationally, the changes in supply and demand considered in this analysis are small enough to ignore in the context of the world market, and the world price of oil is assumed to be independent of domestic petroleum market changes.
World oil prices determine the level of domestic crude oil production, with the difference between domestic supply and demand being made up by imports.
Higher oil prices lead to increased drilling for oil, increased domestic production, and lower demand and imports.
The impact of higher oil prices on natural gas prices is limited, because of the limited opportunities for further fuel switching from oil to natural gas.
The Reference Case projects that roughly three quarters of all petroleum used in 2020 will be for transportation.
The total amount of oil used in transportation is not very sensitive to price, and the NEMS projections show no substitution of natural gas for oil in the transportation sector.
When the world oil price assumption is changed, substitution between the two fuels is projected for other sectors of the economy - notably commercial, industrial, and electric generation - but those opportunities are also limited.
In total, changes in oil prices have only limited impact on natural gas demand, prices, and production.
This analysis uses the high and low oil price cases developed for AEO2000 to assess the impact of the world price of oil on production and prices in the Accelerated Depletion Case.
The oil price assumptions are designed to represent long-term trends and do not capture short-term fluctuations in prices.
Through 2001 the forecast was calibrated to more recent projections from EIA's Short-Term Energy Outlook, which became available after the completion of AEO2000.
The world price in 2020 is projected to be $22.04 per barrel (in real 1998 dollars) in the Reference and Accelerated Depletion Cases in this report, $28.04 in the High World Oil Price Case, and $14.90 in the Low World Oil Price Case. In all the cases, the price changes smoothly with each year to reach its 2020 target.
The world oil market has been volatile in recent years. Prices increased sharply during 1999 and the first months of 2000, as the spot price for West Texas Intermediate crude climber from just over $12 a barrel in February 1999 to over $30 a barrel in March 2000.
Such volatility is not expected to have much influence on average prices in the long term, as market forces are expected to return prices to a lower level over the next several years.
In the Accelerated Depletion Case, the lower 48 wellhead price for crude oil closely follows the path set by the world price of crude.
In 2020, the lower 48 wellhead price is $21.21 per barrel in the Accelerated Depletion Case, compared with $21.27 in the Reference Case. In the High and Low World Oil Price Cases, the lower 48 wellhead price in 2020 is projected to be $27.59 and $13.88 per barrel, respectively.
Source: United States Information Administration.
© 2000 Mena Report (www.menareport.com)
