Witness Testimony

Mr. Howard Gruenspecht
Deputy Administrator
Energy Information Administration
1000 Independence Avenue, SW
Washington, DC, 20585

Ultradeep Water Research and Development: What Are the Benefits?
Subcommittee on Energy and Air Quality
April 29, 2004
10:30 AM

Mr. Chairman and Members of the Committee:

I appreciate the opportunity to appear before you today to discuss the Energy Information Administration's (EIA) recent analysis of provisions related to ultra-deepwater and unconventional technologies incorporated as Sections 941-949 of last year's Conference Energy Bill (CEB).

EIA is the statistical and analytical agency within the Department of Energy. We are charged with providing objective, timely, and relevant data, analysis, and projections for the use of the Department of Energy, other government agencies, the U.S. Congress, and the public. We do not take positions on policy issues, but we do produce data and analysis reports that are meant to help policymakers determine energy policy. Because the Department of Energy Organization Act gives EIA an element of independence with respect to the analyses that we publish, our views should not be construed as representing those of the Department of Energy or the Administration.

In addition to collecting energy data and issuing data reports and baseline energy projections, including the Annual Energy Outlook (AEO) with projections of domestic markets through 2025, the EIA also prepares Service Reports that estimate the impacts of proposed policies or review current energy issues at the request of the Congress or the Administration. In February 2004, in response to a request from Senator Sununu for an analysis of the CEB passed by the House in the Fall of 2003, EIA issued a report entitled Summary Impacts of Modeled Provisions of the 2003 Conference Energy Bill. While my testimony will focus on EIA's analysis, it should be noted that the Office of Fossil Energy (FE) has the lead responsibility for oil and gas technology research and development (R&D) within the Department. Questions regarding potential for technology advances or proposed funding to advance technology in these areas are appropriately directed to that office rather than EIA.

EIA projections are not meant to be exact predictions of the future but represent a likely energy future, given technological and demographic trends, current laws and regulations, and consumer behavior as derived from known data. EIA recognizes that projections of energy markets are highly uncertain, subject to many random events that cannot be foreseen. Thus, the projections are not statements of what will happen but of what might happen, given certain assumptions.

In the interests of brevity, my testimony today does not review in detail the provisions of Sections 941-949 of the CEB that are the subject of this hearing. Rather, it starts with a brief discussion of the challenges inherent in modeling the impacts of R&D programs. Then, it describes the analysis of the Section 941-949 program included in EIA's recent Service Report.

Challenges Related to the Assessment of Energy R&D Programs Two types of uncertainty characterize the effects of proposed authorizations of Federal R&D investments. First, the timing and level of the net change in Federal R&D spending is often different from the authorized amount. Second, a statistically reliable relationship between the level of R&D spending for specific technologies and the actual outcome of that R&D has not been developed. Even if both of these uncertainties could be definitively resolved, the analysis is complex because the levels of private sector R&D expenditures are usually unknown but often far exceed R&D spending by the Federal government. Consequently, EIA cannot provide an estimate of the incremental impact of an increase in Federal R&D spending on technological change. Because of the limitations outlined above, EIA did not include any R&D provisions in the main policy case, referred to as the CEB Case, developed for its Service Report on the CEB.

However, EIA also provided the results of a sensitivity case using an assumption of the technological impact resulting from the increases in Federal spending on Ultra-Deepwater and Unconventional R&D contemplated by Sections 941 to 949 of the CEB. These sections of the bill would allocate $150 million annually into a fund (the Ultra-Deepwater and Unconventional Natural Gas and Other Petroleum Research Fund) for Federally-sponsored R&D. The money is to come from Federal royalty payments that are allocated in each fiscal year from 2004 through 2013 and would not go through the annual appropriations process. The R&D is to be targeted for the development of ultra-deep (greater than 1,500 meters water depth) offshore, unconventional natural gas, and other petroleum resources. Unconventional natural gas and other petroleum resources are "natural gas and other petroleum resources located onshore in an economically inaccessible geological formation, including resources of small producers."

Dedicated funding outside of the annual appropriations process implies relatively low funding-related uncertainty for this program. However, the uncertainty in relating increased Federal spending to technological progress remains important. Experts in FE believe that the new R&D funding would accelerate technological progress for the affected resources (ultra-deep offshore oil and natural gas and unconventional natural gas production) by 50 percent over the value assumed in EIA's Reference and CEB Cases. They arrived at this conclusion by verifying that the proposed additional R&D funding would bring total Federal R&D spending back to the levels represented in the Reference Case of AEO1997, which used the same rates. (Coincidently, the Reference Case of AEO1997 has technological change rates that are comparable to the AEO2004 High Technology Case.) The CEB Case with the added FE assumptions regarding accelerated technological change due to the Section 941-949 program, referred to as the FE/CEB Case, assessed the impact of the assumed accelerated technological change on oil and natural gas supply and prices. This acceleration is assumed to begin 2 years after the onset of R&D funding for unconventional technologies and 5 years after the onset for ultra-deep offshore technologies.

Impacts of the Ultra-Deepwater and Unconventional R&D Program in the CEB

Comparisons between the FE/CEB Case and the main CEB Case provide insight into the impact of the Ultra-Deepwater and Unconventional R&D program based on the FE assumptions regarding the technology impacts of that program. The pattern of natural gas wellhead prices and production in the FE/CEB Case is as expected. Successful R&D increases supply from the ultra-deep and unconventional resources and lowers wellhead prices throughout the forecast. Natural gas wellhead prices are as much as $0.30 per thousand cubic feet lower than in the Reference Case and as much as $0.20 per thousand cubic feet lower than in the CEB Case.

Between 2009 and 2025, cumulative crude oil production from the ultra-deep offshore is more than 850 million barrels higher than in the Reference Case and over 800 million barrels higher then the CEB Case. Cumulative natural gas production is 3.8 trillion cubic feet higher than in the Reference Case and 3.2 trillion cubic feet higher than in the CEB Case. Obviously, if the FE assumptions regarding technological impacts prove to be accurate, the expanded Ultra-Deepwater and Unconventional R&D program could substantially increase offshore and unconventional production. This, in turn, could have significant implications for Federal and State royalty revenues. It is important to note that the technological improvements assumed for this case would also have an impact in producing areas outside the United States, which would potentially affect world oil markets.

The table below summarizes key comparisons between the FE/CEB Case, the CEB Case, and the AEO2004 Reference Case. As noted at the start of my testimony there is significant uncertainty surrounding all energy projections. For reasons discussed above, there is a particularly high degree of uncertainty surrounding estimates related to the impacts of programs intended to promote improvements in technology.

Thank you, Mr. Chairman and members of the Committee. I will be happy to answer any questions you may have.

 Impact of Increased R&D Funded by Royalty Payments on Natural Gas and Oil Supply Using Office of Fossil Energy Assumptions Regarding the Impact of Increased Federal R&D Spending

Sources: National Energy Modeling System date codes aeo2004.d101703e, nrgbill00.d011304d, and nrgbill50.d010904a.

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