New EIA Data Further Reveal Flaws in ICF Report Used to Justify EPA Methane Rules
The latest Energy Information Administration (EIA) short-term energy outlook further demonstrates how misleading the study used by the Environmental Defense Fund (EDF) and the U.S. Environmental Protection Agency (EPA) to justify costly methane regulations on the oil and gas industry truly was.
This study, completed by ICF International in conjunction with EDF, claims that federal methane regulations would be would cost just “pennies on the dollar” for producers. But that assumption was based largely on $4/mcf natural gas prices, with the argument that fugitive methane – the primary component of natural gas – could be captured and sold at that high price.
In the real world, natural gas prices have been much lower than $4/mcf for many months and averaged just $2.63/mcf in 2015. Now, new EIA projection forecasts even lower average prices this year. From the outlook:
“Natural gas inventories ended the winter heating season (March 31) at 2,478 billion cubic feet (Bcf), slightly above the previous end-of-March record high, set in 2012. End-of-March inventories were 67% above the level at the same time last year and 53% above the five-year average for that date. Henry Hub spot prices are forecast to average $2.18/million British thermal units (MMBtu) in 2016 and $3.02/MMBtu in 2017, compared with an average of $2.63/MMBtu in 2015.”
Continued low natural gas prices also mean less drilling, which will result in less methane captured. And that captured methane will sell for less – an effective triple whammy when it comes to EDF’s assumptions.
EPA has also predicted oil and gas methane emissions will increase 25 percent over the next decade, based on the shaky assumption that more drilling would inevitably lead to more emissions.
EPA data shows the latter is not necessarily a given. For instance, even using revised (and flawed) data from the EPA’s latest Greenhouse Gas Draft Inventory, methane emissions from natural gas systems fell nearly five percent from 2005 to 2013 (from 177.7 million metric tons CO2 equivalent to 169 mmt CO2 eq.) at the same time natural gas production rose 21 percent. And even if you combine revised oil and natural gas systems emissions for 2013, the increase in production far outpaces methane emissions.
EIA is also projecting natural gas prices will barely break $3/mcf over the next two years. EPA acknowledged in its Regulatory Impact Analysis for methane regulations on new and modified oil and gas infrastructure that a $1/Mcf change in price of natural gas would translate into as much as a $19 million difference in its cost estimate. In other words, if natural gas prices averaged $3/Mcf instead of $4/Mcf, EPA could be overestimating revenue by roughly 24 percent.
Furthermore, assuming a more realistic $3/Mcf price, EDF’s own study shows that the net cost more than doubles from $108 million per year to $241 million per year, as the following graphics from the report illustrate:
It’s no wonder EPA’s projections have been widely criticized. For instance, the National Economic Research Associates (NERA), which evaluated the cost of regulations only on new and modified sources and found a price tag about three times larger than EPA’s projected benefits from its RIA. NERA – which has also conducted economic analyses for the U.S. Department of Energy – found the alleged cost recovery to be “highly uncertain and very likely overstated.” NERA went on to note that the agency’s figures “lack the appropriate peer review that is necessary for use in supporting regulatory policy.”
So why are natural gas prices likely to stay low? In addition to resilient record production despite the current low price environment, another reason is the Obama administration’s Clean Power Plan. It was originally believed that the Clean Power Plan would heavily boost demand for natural gas, which would in turn put upward pressure on prices. But the final version relies much less on natural gas and more on renewables. According to EPA data compiled by the American Wind Energy Association (AWEA), a heavier reliance on renewables could result in natural gas prices that are at least 12 percent lower than what would be expected under EPA’s base case projection.
EIA data echoes AWEA’s, as EIA’s recent analysis of the Clean Power Plan projects natural gas prices may not reach $4/Mcf until after 2030, based upon a high oil and natural gas resource base assumption.
These facts further illustrate why EPA’s obsession with targeting the oil and gas industry with new regulations on methane emissions, which account for only about 3.4 percent of all the greenhouse gases emitted in the United States, makes even less sense than the report used to justify those regulations.