PRUDENT DEVELOPMENT Realizing the Potential of North America’s Abundant Natural Gas and Oil Resources National Council • 2011

PRUDENT DEVELOPMENT Realizing the Potential of North America’s Abundant Natural Gas and Oil Resources

A report of the National Petroleum Council September 2011

Committee on Resource Development James T. Hackett, Chair NATIONAL PETROLEUM COUNCIL

David J. O’Reilly, Chair Douglas L. Foshee, Vice Chair Marshall W. Nichols, Executive Director

U.S. DEPARTMENT OF ENERGY

Steven Chu, Secretary

The National Petroleum Council is a federal advisory committee to the Secretary of Energy.

The sole purpose of the National Petroleum Council is to advise, inform, and make recommendations to the Secretary of Energy on any matter requested by the Secretary relating to oil and natural gas or to the oil and gas industries.

All Rights Reserved Library of Congress Control Number: 2011944162 © National Petroleum Council 2011 Printed in the United States of America

The text and graphics herein may be reproduced in any format or medium, provided they are reproduced accurately, not used in a misleading context, and bear acknowledgement of the National Petroleum Council’s copyright and the title of this report. Outline of Report Materials

Summary Report Volume (also available Full Report Volume (printed and available online at www.npc.org) online at www.npc.org) yy Report Transmittal Letter to the yy Outline of Full Report (see below) Secretary of Energy Additional Study Materials (available online yy Outline of Report Materials at www.npc.org) yy Preface yy Summary and Full Report (pdfs with hyperlinks) yy Report Slide Presentations yy Executive Summary yy Webcasts of NPC Report Approval Meeting and y y Study Request Letters Press Conference yy Description of the National Petroleum Council yy Study Topic and White Papers (see page vi for list) yy Roster of the National Petroleum Council yy Study Survey Data Aggregations

Outline of Full Report

Preface

Executive Summary America’s Energy Future Core Strategies Support Prudent Natural Gas and Oil Resource Development and Regulation Better Reflect Environmental Impacts in Markets and Fuel/Technology Choices Enhance the Efficient Use of Energy Enhance the Regulation of Markets Support the Development of Intellectual Capital and a Skilled Workforce Conclusions

outline of report materials i Chapter One: Crude Oil and Natural Gas Resources and Supply Abstract Introduction and Summary Summaries and Key Findings Summary of Scope and Objectives Summary of Methodology North American Oil and Natural Gas Resource Endowment Hydrocarbon Resource Assessment Uses and Definitions Overview of Recent and Current North American Oil and Gas Resource Assessments Key Findings and Observations Analysis of Resource and Production Outlooks and Studies Overview Crude Oil Natural Gas Prospects for North American Oil Development Overview Offshore Arctic Onshore Oil Crude Oil Pipeline Infrastructure Prospects for North American Gas Development Overview Offshore Arctic Onshore Gas Natural Gas Infrastructure North American Oil and Gas Production Prospects to 2050

Chapter Two: Operations and Environment Abstract Introduction and Summary Environmental Challenges Prudent Development Major Findings: Assuring Prudent Development Chapter Organization Resource Play Variations and Associated Environmental Challenges Overview of the Life Cycle of Natural Gas and Oil Exploration and Production Developing Onshore Conventional Natural Gas and Oil Resources

ii PRUDENT DEVELOPMENT: Realizing the Potential of North America’s Abundant Natural Gas and Oil Resources Developing Offshore Conventional Natural Gas and Oil Resources Developing Unconventional Natural Gas and Oil Resources History of Innovation in Environmental Stewardship Onshore Development of Natural Gas and Oil Offshore Development of Natural Gas and Oil Future Expectations History of Natural Gas and Oil Environmental Laws Prior to 1935 Initiation of Natural Gas and Oil Conservation U.S. Oil Production Dominance Environmental Movement Environmental Regulation Refinement Sustainable Strategies and Systems for the Continued Prudent Development of North American Natural Gas and Oil Life-Cycle Assessments and Footprint Analyses Environmental Management Systems Public-Private Partnerships Data Management Systems Offshore Safety and Environmental Management Center for Offshore Safety Outer Continental Shelf Safety Oversight Board Regulatory Framework on the Outer Continental Shelf Lease Sale Planning Process Coastal Marine Spatial Planning Consideration of Studies on the Deepwater Horizon Incident Offshore Operations and Environmental Management Findings Key Findings and Policy Recommendations Key Findings Definitions of Sustainable Development

Chapter Three: Natural Gas Demand Abstract Summary Back to the Future: Two Decades of Natural Gas Studies Range of U.S. and Canadian Natural Gas Demand Projections Potential U.S. and Canadian Total Natural Gas Requirements Compared to Natural Gas Supply U.S. Power Generation Natural Gas Demand Natural Gas Demand Summary Drivers of Power Generation Natural Gas Demand

outline of report materials iii Power Generation Natural Gas Demand Projections Harmonization of U.S. Natural Gas and Power Markets U.S. Residential and Commercial Natural Gas, Distillate, and Electricity Demand U.S. Residential Energy U.S. Industrial Natural Gas and Electricity Demand Industrial Natural Gas Demand Industrial Electricity Demand U.S. Transmission Natural Gas Demand U.S. Transmission Natural Gas Demand Other Transmission Issues Full Fuel Cycle Analysis Canadian Natural Gas and Electricity Demand Canadian Natural Gas Demand Canadian Residential Natural Gas and Electricity Demand Canadian Commercial Natural Gas and Electricity Demand Canadian Industrial Natural Gas and Electricity Demand Canadian Power Generation Demand A View on 2050 Natural Gas Demand Potential Vehicle Natural Gas and Electricity Demand NGV Natural Gas Demand PEV Electricity Demand Total Potential Natural Gas Demand for Vehicles LNG Exports Exports to Mexico U.S. Liquids Demand Policy Recommendations Increase Energy Efficiency Promote Efficient and Reliable Energy Markets Increase Effectiveness of Energy Policies Support Carbon Capture and Sequestration Research and Development Description of Projection Cases

Chapter Four: Carbon and Other Emissions in the End-Use Sectors Abstract Summary Emissions Baseline and Projections Summary of Findings Greenhouse Gas Emissions: Unconstrained Cases Greenhouse Gas Emissions: Constrained Scenarios Sulfur Dioxide, Nitrogen Oxides, and Mercury iv PRUDENT DEVELOPMENT: Realizing the Potential of North America’s Abundant Natural Gas and Oil Resources Life-Cycle Emissions of Natural Gas and Coal in Power Generation Life-Cycle Analysis of Natural Gas and Coal in Power Generation Other LCA Studies Methane Reduction Programs and Technologies Conclusions Recommendations Natural Gas End-Use Technologies Methodology Findings Impact of Non-GHG EPA Rules on the Power Sector Retirement Decision Methodology Results Intra-Study Themes Other Considerations Limitations Policy Considerations Methodology Findings Evaluation of Policy Options and Frameworks Recommendations

Chapter Five: Macroeconomics Abstract Summary Macroeconomic Impacts of the Natural Gas and Oil Industry on the Domestic Economy Related Industries Taxes and the Natural Gas and Oil Industry Federal Corporate Income Taxes Severance Taxes Royalties Other Taxes Generated Directly by the Industry Tax Deductions for the Natural Gas and Oil Industry Natural Gas and Oil Workforce Challenges Challenge #1 – Aging Natural Gas and Oil Workforce Challenge #2 – Long Decline in University-Level Population Seeking Natural Gas and Oil Careers Challenge #3 – The U.S. Need for Increased Investment in K-12 Mathematics and Science Education Responding to the Workforce Challenges

outline of report materials v Natural Gas and Crude Oil Volatility Impacts on Producers and Consumers Commodity Price Volatility Background: Commodity Prices Macroeconomic Impacts of Changing Commodity Prices Energy Sector-Specific Impacts of Changing Commodity Prices Impacts on Volatility Assessing the Business Model of the Natural Gas and Oil Industry Company Roles within the Unconventional Natural Gas Business How the Business Model Works: Process of Unconventional Development International Unconventional: Will It Work? Implications of the Shift to an Unconventional Natural Gas Business Model The U.S. Government’s Role in the Business Model for Unconventional Gas Development Governing Principles for the Government The Government’s Choice of Tools to Employ in the Natural Gas and Oil Industry Business Model Bibliography

Appendices Appendix A: Request Letters and Description of the NPC Appendix B: Study Group Rosters Appendix C: Additional Materials Available Electronically Acronyms and Abbreviations Conversion Factors

List of Study Topic and White Papers Resource & Supply Task Group Subgroup Topic Papers Paper #1-1: Oil and Gas Geologic Endowment Paper #1-2: Data and Studies Evaluation Paper #1-3: Offshore Oil and Gas Supply Paper #1-4: Arctic Oil and Gas Paper #1-5: Onshore Conventional Oil Including EOR Paper #1-6: Unconventional Oil Paper #1-7: Crude Oil Infrastructure Paper #1-8: Onshore Natural Gas Paper #1-9: Natural Gas Infrastructure Task Group White Papers Paper #1-10: (LNG) Paper #1-11: Methane Hydrates

vi PRUDENT DEVELOPMENT: Realizing the Potential of North America’s Abundant Natural Gas and Oil Resources Paper #1-12: Mexico Oil & Gas Supply Paper #1-13: Natural Gas Liquids (NGLs)

Operations & Environment Task Group Environmental & Regulatory Subgroup Topic Papers Paper #2-1: Water/Energy Nexus Paper #2-2: Regulatory Framework Paper #2-3: U.S. Oil and Gas Environmental Regulatory Process Overview Paper #2-4: U.S. Environmental Regulatory and Permitting Processes Paper #2-5: Canadian and Provincial Permitting and Environmental Processes Paper # 2-6: Evolving Regulatory Framework Offshore Operations Subgroup Topic Papers Paper #2-7: Safe and Sustainable Offshore Operations Paper #2-8: Offshore Environmental Footprints and Regulatory Reviews Paper #2-9: Offshore Environmental Management of Seismic and Other Geophysical Exploration Work Paper #2-10: Offshore Production Facilities and Pipelines, Including Arctic Platform Designs Paper #2-11: Subsea Drilling, Well Operations and Completions Paper #2-12: Offshore Transportation Paper #2-13: Offshore Well Control Management and Response Paper #2-14: Offshore Data Management Technology Subgroups Topic Papers Paper #2-15: Air Emissions Management Paper #2-16: Biodiversity Management and Technology Paper #2-17: Management of Produced Water from Oil and Gas Wells Paper #2-18: Oil Production Technology Paper #2-19: Natural Gas Pipelines Challenges Paper #2-20: Regulatory Data Management Paper #2-21: Research, Development and Technology Transfer Paper #2-22: Siting and Interim Reclamation Paper #2-23: Sustainable Drilling of Onshore Oil and Gas Wells Paper #2-24: Waste Management Paper #2-25: Plugging and Abandonment of Oil and Gas Wells Onshore Operations Subgroup Paper #2-26: Life Cycle of Onshore Oil and Gas Operations Paper #2-27: North American Oil and Gas Play Types Task Group White Papers Paper #2-28: Environmental Footprint Analysis Framework Paper #2-29: : Technology and Practices Addressing Hydraulic Fracturing and Completions

outline of report materials vii Demand Task Group Subgroup Topic Papers Paper #3-1: Power Generation Natural Gas Demand Paper #3-2: Residential and Commercial Natural Gas and Electricity Demand Paper #3-3: Industrial Natural Gas and Electricity Demand Paper #3-4: Transmission Natural Gas Demand Task Group White Papers Paper #3-5: What Past Studies Missed Paper #3-6: Natural Gas Exports to Mexico Paper #3-7: Liquids Demand

Carbon and Other End-Use Emissions Subgroup Subgroup Topic Papers Paper #4-1: Baseline and Projections of Emissions from End-Use Sectors Paper # 4-1a: Addendum: GHG Constrained Cases Paper #4-2: Life-Cycle Emissions of Natural Gas and Coal in the Power Sector Paper #4-3: Natural Gas End-Use GHG Reduction Technologies Paper #4-4: Impact of EPA Regulations on the Power Sector Paper #4-5: Policy Options for Deployment of Natural Gas End-Use GHG Reduction Technologies

Macroeconomic Subgroup Subgroup Topic Papers Paper #5-1: Macroeconomic Impacts of the Domestic Oil & Gas Industry Paper #5-2: Commodity Price Volatility Paper #5-3: U.S. Oil & Gas Industry Business Models

viii PRUDENT DEVELOPMENT: Realizing the Potential of North America’s Abundant Natural Gas and Oil Resources Preface

National Petroleum Council studies on two topics: (1) Future Transportation Fuels; and (2) Prudent Development of North Ameri- The National Petroleum Council (NPC) is an organiza- can Natural Gas and Oil Resources. The Secretary tion whose sole purpose is to provide advice to the fed- stated that the Council is uniquely positioned to pro- eral government. At President Harry Truman’s request, vide advice to the Department of Energy on these this federally chartered and privately funded advisory important topics. group was established by the Secretary of the Interior in 1946 to represent the oil and natural gas industry’s In the Fuels Study request, Secretary Chu asked views to the federal government: advising, inform- the Council to “conduct a study which would analyze ing, and recommending policy options. During World U.S. fuels prospects through 2030 for auto, truck, air, War II, under President Franklin Roosevelt, the federal rail, and waterborne transport,” with advice sought government and the War Council on “policy options and pathways for integrating worked closely together to mobilize the oil supplies that new fuels and vehicles into the marketplace includ- fueled the Allied victory. President Truman’s goal was ing infrastructure development.” Expanding on his to continue that successful cooperation in the uncertain September 2009 request, in a supplemental letter postwar years. Today, the NPC is chartered by the Sec- dated April 30, 2010, Secretary Chu further asked retary of Energy under the Federal Advisory Committee that the Fuels Study examine actions industry and Act of 1972, and the views represented are considerably government could take to stimulate the technologi- broader than those of the oil and natural gas industry. cal advances and market conditions needed to reduce life-cycle greenhouse gas emissions in the U.S. trans- About 200 in number, Council members are ap- portation sector by 50% by 2050, relative to 2005 pointed by the Energy Secretary to assure well- levels, while enhancing the nation’s energy security balanced representation from all segments of the and economic prosperity. That study is now under- oil and natural gas industry, from all sections of way, with an anticipated completion in the first half the country, and from large and small companies. of 2012. Members are also appointed from outside the oil and This North American Resources Study report is natural gas industry, representing related interests the Council’s response to the second study request, such as states, Native Americans, and academic, in which Secretary Chu asked the NPC to “reassess financial, research, and public-interest organizations the North American natural gas and oil resources and institutions. The Council provides a forum supply chain and infrastructure potential, and the for informed dialogue on issues involving energy, contribution that natural gas can make in a transition security, the economy, and the environment of an to a lower carbon fuel mix.” He further expressed his ever-changing world. interest in “advice on policy options that would allow prudent development of North American natural Study Request gas and oil resources consistent with government objectives of environmental protection, economic By letter dated September 16, 2009, Secretary of growth, and national security.” In his supplemental Energy Steven Chu requested the NPC to conduct letter of April 2010, Secretary Chu stated: “the

PREFACE 1 United States sees a future in which valuable Subgroups focused on specific subject areas. Figure 1 domestic energy resources are responsibly produced provides an organization chart for the study and to meet the needs of American energy consumers Table 1 lists those who served as leaders of the groups consistent with national, environmental, economic that conducted the study’s analyses. and energy security goals, … [and the United States] has the opportunity to demonstrate global leadership The members of the various study groups were in technological and environmental innovation. drawn from NPC members’ organizations as well as Accordingly, I request the Council’s advice on potential from many other industries, state and federal agen- technology and policy actions capable of achieving cies, environmental nongovernmental organiza- this vision.” Appendix A contains full copies of both tions (NGOs), other public interest groups, financial letters from the Secretary. institutions, consultancies, academia, and research groups. More than 400 people served on the study’s Committee, Subcommittee, Task Groups, and Sub- Study Organization groups and while all have relevant expertise for the study, fewer than 50% work for natural gas and oil In response to the Secretary’s requests, the Council companies. Appendix B contains rosters of these established a Committee on Resource Development study groups and Figure 2 depicts the diversity of par- to study this topic and to supervise preparation of a ticipation in the study process. In addition to these draft report for the Council’s consideration. The Com- study group participants, many more people were mittee leadership consisted of a Chair, Government involved through outreach activities. These efforts Cochair, and four subject-area Vice Chairs. The Coun- were an integral part of the study with the goal of cil also established a Coordinating Subcommittee, informing and soliciting input from an informed three Task Groups, and three Coordinating Subcom- range of interested parties. mittee level analytical Subgroups to assist the Com- mittee in conducting the study. These study groups Study group and outreach participants contrib- were aided by four Coordinating Subcommittee level uted in a variety of ways, ranging from full-time support Subgroups and twenty-one Task Group-level work in multiple study areas, to involvement on a

Figure P-1. Structure of the North American Resource and Development Study Team

Figure 1. Structure of the North American Resource Development Study Team

COMMITTEE ON RESOURCE DEVELOPMENT

COORDINATING SUBCOMMITTEE

RESOURCE & SUPPLY OPERATIONS & ENVIRONMENT DEMAND TASK GROUP TASK GROUP TASK GROUP

ANTITRUST END-USE EMISSIONS REPORT MACROECONOMIC POLICY INTEGRATION ADVISORY AND CARBON WRITING SUBGROUP SUBGROUP SUBGROUP SUBGROUP REGULATION SUBGROUP SUBGROUP

2 PRUDENT DEVELOPMENT: Realizing the Potential of North America’s Abundant Natural Gas and Oil Resources Table 1. North American Resource Development Study Leaders

Chair – Committee Chair – Coordinating Subcommittee James T. Hackett D. Clay Bretches Chairman and Chief Executive Officer Vice President, E&P Services and Minerals Anadarko Petroleum Company Anadarko Petroleum Company

Government Cochair – Committee Government Cochair – Coordinating Subcommittee Daniel P. Poneman Christopher A. Smith Deputy Secretary of Energy Deputy Assistant Secretary for Oil and Natural Gas U.S. Department of Energy U.S. Department of Energy

Vice Chair – Resource & Supply Chair – Resource & Supply Task Group Marvin E. Odum Andrew J. Slaughter President Business Environment Advisor – Upstream Americas Shell Oil Company Shell Exploration & Production Company

Vice Chair – Operations & Environment Chair – Operations & Environment Task Group Aubrey K. McClendon Paul D. Hagemeier Chairman of the Board and Chief Executive Officer Vice President, Regulatory Compliance Chesapeake Energy Corporation Chesapeake Energy Corporation

Vice Chair – Demand Chair – Demand Task Group Daniel H. Yergin Kenneth L. Yeasting Chairman Senior Director, Global Gas and North America Gas IHS Cambridge Energy Research Associates, Inc. IHS Cambridge Energy Research Associates, Inc.

Vice Chair – Policy Chair – Policy Subgroup Philip R. Sharp Susan F. Tierney President Managing Principal Resources for the Future Analysis Group, Inc.

Chair – End-Use Emissions & Carbon Subgroup Fiji C. George Carbon Strategies Director El Paso Corporation

Chair – Macroeconomic Subgroup Christopher L. Conoscenti Exective Director, Energy Investment Banking J.P. Morgan Securities LLC

specific topic, to reviewing proposed materials, or to lation of data and other information, they did not take participating solely in an outreach session. Involve- positions on the study’s policy recommendations. As a ment in these activities should not be construed as federally appointed and chartered advisory commit- endorsement or agreement with all the statements, tee, the NPC is solely responsible for the final advice findings, and recommendations in this report. Addi- provided to the Secretary of Energy. However, the tionally, while U.S. government participants provided Council believes that the broad and diverse study significant assistance in the identification and compi- group and outreach participation has informed and

PREFACE 3 Figure P-2. Study Participant Diversity

Figure 2. Study Participant Diversity 4. Consider the evolutionary path of technology and the ability of the United States to demonstrate technological leadership. 5. Develop policy recommendations following and CONSULTANT/ deriving from the development of facts. FINANCIAL/ LEGAL 6. Provide and adhere to clear objectives and a END detailed scope of work. USERS 7. Set clear expectations for study participants – commitment level and duration. OIL AND GAS NGOs INDUSTRY 8. Communicate regularly with leadership, team members, and external stakeholders.

GOV'T – As part of providing a broad review of current FEDERAL knowledge, the study groups examined available AND STATE analyses on North American oil and gas resources, supply, demand, and industry operations. The main focus of the analysis review was on the United States and Canada, as both countries are very large oil and natural gas producers and both have very large future ACADEMIA AND PROFESSIONAL SOCIETIES supply potential in those resources. Mexico is geo- >400 PARTICIPANTS; >50% PARTICIPANTS FROM OUTSIDE graphically part of North America and is recognized THE OIL AND GAS INDUSTRY as an important crude oil supplier to the United States as well as a current importer of approximately 1 billion cubic feet per day of natural gas. These link- enhanced its study and advice. The Council is very ages are discussed in more detail in the Demand and appreciative of the commitment and contributions Resources and Supply chapters. The study team did from all who participated in the process. not, however, attempt to undertake an in-depth review of future resources and supply potential from Mexico. Study Approach The varied analyses reviewed during the study A central goal of the study was to fully comply with included those produced by the Energy Information all regulations and laws that cover a project of this Administration, International Energy Agency, and type. For that reason, every effort was made to con- National Energy Board of Canada, among others. In form to all antitrust laws and provisions as well as addition, the study incorporated the January 2011 the Federal Advisory Committee Act. As part of this Report of the Presidential Oil Spill Commission, the compliance effort, this study does not include a direct National Academy of Engineering Macondo Study, the evaluation of commodity prices despite the extremely (as then incomplete) Joint Investigation Team study important role these play in balancing supply and by the Bureau of Ocean Energy Management (BOEM) demand. and U.S. Coast Guard, and other studies.

After careful thought, the Council decided upon the The NPC also conducted a broad survey of propri- following principles to guide the study: etary energy outlooks. As an integral part of this pro- cess, the public accounting firm Argy, Wiltse & Rob- 1. Identify and involve a broad and diverse set of inson, P.C. received, aggregated, and protected the interests to participate in the study. proprietary data responses. 2. Utilize consensus-based leadership to produce the Using these datasets, both public and private, the best results. study groups organized the material to compare and 3. Provide a broad review of current research and contrast the views through 2050, the period selected conduct new studies only as needed. in the request from Secretary Chu. Most of the

4 PRUDENT DEVELOPMENT: Realizing the Potential of North America’s Abundant Natural Gas and Oil Resources outlooks evaluated, however, extended only through review this Integrated Report and supporting details 2035 and a number ended before that date. For that in different levels of detail, the report is organized in reason, the material framing many aspects of the multiple layers as follows: study for the 15 years between 2036 and 2050 are yy Executive Summary is the first layer and pro- more qualitative than quantitative in nature. vides a broad overview of the study’s princi- To avoid overlap and leverage resources, both the pal findings and resulting policy recommen- Fuels Study and North American Resources Study dations. It describes the significant increases teams created Integration Subgroups to coordinate in estimates of recoverable natural gas and oil work within and between the two parallel projects. resources and the contributions they can make to the nation’s economic, security, and environmental The Resources Study thus evaluated the petroleum well-being if properly produced and transported. resource base and the infrastructure necessary to bring petroleum to the refinery while the Fuels Study yy Report Chapters provide a more detailed discussion focused on refinery capacity, upgrading, and down- of the data, analyses, and additional background stream infrastructure. The Fuels Study also exam- on the findings. These individual chapters of the ined the demand for petroleum motor transportation Integrated Report are titled by subject area – i.e., fuels as well as natural gas demand for transporta- Demand, Macroeconomics, etc. These chapters pro- tion. With regard to the latter, the Resources Study vide supporting data and analyses for the findings received access to the Fuels Study’s initial view on and recommendations presented in the Executive high potential natural gas vehicle demand and the Summary. effect of electric vehicles on natural gas consumption, yy Appendices are at the end of the Integrated Report but the Resource Study advanced timeline did not to provide important background material, such as allow for inclusion of the final Fuels Study analysis in Secretary Chu’s request letters; rosters of the Coun- these areas. By addressing these potential overlaps cil and study groups’ membership; and descriptions and establishing firm means of communication, the of additional study materials available electroni- results of both studies were significantly improved cally. Also included are conversion factors used by and the time necessary for completing each of the all study groups in the creation of the report, as Council’s studies was shortened. well as a list of acronyms and abbreviations. The Resources Study Task Groups and Subgroups yy Topic and White Papers provide a final level of detail carefully evaluated the numerous studies available for the reader. These papers, developed by or for within their respective areas using the grounded per- the study’s Task Groups and Subgroups, formed spective resulting from their combined hundreds of the base for the understanding of each study seg- years of experience. They determined the key drivers ment, such as Onshore Gas and Industrial Demand, for each outlook and developed a fact-based under- and were heavily utilized in the development of the standing of the key issues within demand and sup- chapters of the Integrated Report. A list of short ply as well as end-use emissions, the economy and abstracts of these papers appears in Appendix C prudent environmental operations. From this back- and the full papers can be viewed and downloaded ground, the Committee on Resource Development from the NPC website (http://www.npc.org). brought important findings to the attention of the Council. These findings led to the creation of recom- The Council believes that these materials will be of mendations on government policy that could favor- interest to the readers of the report and will help ably affect the ability of natural gas to manage the them better understand the results. The members country’s “transition to a lower carbon fuel mix.” of the NPC were not asked to endorse or approve all of the statements and conclusions contained in these documents but, rather, to approve the publi- Study Report Structure cation of these materials as part of the study pro- cess. The papers were reviewed by the Task Groups In the interest of transparency and to help readers and Subgroups but are essentially stand-alone anal- better understand this study, the NPC is making the yses of the studies used by each group. As such, study results and many of the documents developed statements and suggested findings that appear in by the study groups available to all interested par- these papers are not endorsed by the NPC unless ties. To provide interested parties with the ability to they were incorporated into the Integrated Report.

PREFACE 5 The Integrated Report and the Topic and White visit the site to download the entire report or indi- Papers are publicly available. They may be individu- vidual sections for free. Also, published copies of the ally downloaded from the NPC website (http://www. report can be purchased from the NPC. npc.org). Readers are welcome and encouraged to

6 PRUDENT DEVELOPMENT: Realizing the Potential of North America’s Abundant Natural Gas and Oil Resources Executive Summary

xtraordinary events have affected energy mar- energy and feedstocks required by America’s indus- kets in the years since the National Petroleum tries. What happens to natural gas supplies affects Council (NPC) reported on the Hard Truths all Americans. E 1 about energy in 2007. That study concluded that Other events have detracted from these positive the world would need increased energy efficiency developments. Consumers have been coping with and all economic forms of . This is still the effects of high petroleum prices. There have been true today, but in the few years since then, significant tragic accidents, such as the Macondo oil spill in the technology advances have unlocked vast natural gas deepwater and the natural gas pipe- and oil resources. The newly and greatly expanded line explosion in San Bruno, California. Concerns North American natural gas and oil resources are have been raised about the environmental impacts already benefiting our country economically and of and extraction. Some are increasing employment. Growing supplies of natural questioning the industry’s ability to develop North gas have resulted in lower prices, helping to revital- American oil and gas resources in an environmen- ize many U.S. industries and, in some parts of the tally acceptable and safe manner. country, lower the cost of producing electricity. The increased competitiveness of natural gas could lead All this sets the context for this study, highlight- to greater use for power generation, helping to fur- ing the need to continue to develop America’s natu- ther reduce emissions from electricity production. ral gas and oil resources in a manner that will balance Technological advances and the expansion of eco- energy, economic, and environmental security needs nomically recoverable natural gas and oil reserves as part of a transition to a lower carbon energy mix. can substantially improve America’s energy security. In his letter asking the NPC to conduct this study, North America has also become much more inte- the Secretary of Energy requested that the assess- grated in energy terms; Canada provides a quarter of ment concentrate on two tasks: developing an up- America’s total oil imports, almost double that of the to-date understanding of the potential natural gas next largest source. and oil supply opportunities in North America2; and examining the contribution that natural gas could The great expansion of economically recoverable make in a transition to a lower carbon fuel mix. He natural gas is central to meeting America’s over- focused the NPC’s attention on interrelated national all needs, as natural gas is one of the cornerstone objectives of enhancing the nation’s energy security fuels on which the nation’s economy depends. and economic competitiveness while minimizing Natural gas provides a quarter of America’s over- environmental impacts, including climate change. all energy and is used to generate a quarter of the He instructed the NPC to use a study process to nation’s electricity. It provides the heat for 56 mil- “venture beyond business-as-usual industry and lion homes and apartments and delivers 35% of the government assessments.”

1 National Petroleum Council, Hard Truths: Facing the Hard 2 This study generally focuses on resources in the United States Truths about Energy, July 2007 (“Hard Truths”). and Canada.

EXECUTIVE SUMMARY 7 AMERICA’S ENERGY FUTURE Fourth, realizing the benefits of natural gas and oil depends on environmentally responsible devel- This study came to four conclusions about natural opment. In order to realize the benefits of these gas and oil. These findings can help guide the nation’s larger natural gas and oil resources, safe, responsi- actions. ble, and environmentally acceptable production and delivery must be ensured in all circumstances. Many First, the potential supply of North American natural gas and oil companies are committed to such natural gas is far bigger than was thought even a goals and work hard to achieve them. The critical path few years ago. As late as 2007, it was thought that to sustained and expanded resource development in the United States would have to become increasingly North America includes effective regulation and a dependent on imported liquefied natural gas, owing commitment of industry and regulators to continuous to what appeared to be a constrained domestic supply. improvement in practices to eliminate or minimize That is no longer the case. It is now understood that environmental risk. These steps are necessary for pub- the natural gas resource base is enormous and that its lic trust. Recognizing that access to available resources development – if carried out in acceptable ways – is can be undermined by safety and environmental inci- potentially transformative for the American econ- dents, all industry participants must continuously omy, energy security, and the environment, includ- improve their environmental, safety, and health prac- ing reduction of air emissions. These resources have tices, preserving the benefits of greater access for the the potential to meet even the highest projections of industry, consumers, and all other stakeholders. demand reviewed by this study. In making these core findings, the NPC examined a broad range of energy supply, demand, environmen- Second – and perhaps surprising to many – tal, and technology outlooks through 2050. The study America’s oil resources are also proving to be much participants addressed issues relating to public health, larger than previously thought. The North American safety, and environmental risks associated with natu- oil resource base offers substantial supply for decades ral gas and oil production and delivery practices, as ahead and could help the United States reduce, but not well as opportunities for natural gas to reduce emis- eliminate, its requirements and costs for oil imported sions from energy use. The NPC’s findings and recom- from outside of North America. The United States mendations are summarized below and explained in and Canada together produce 4% more oil than Rus- detail in the report chapters. sia, the world’s largest producer. However, as Hard Truths stated, “energy independence is not realistic in the foreseeable future,” although economic and 1. NATURAL GAS IS A VERY ABUNDANT energy security benefits flow from reducing imports RESOURCE through efficiency and increasing domestic produc- America’s natural gas resource base is enor- tion. Realizing the potential of oil, like natural gas, in mous. It offers significant, potentially trans- the future will depend on putting in place appropriate formative benefits for the U.S. economy, access regimes that can allow sustained exploration energy security, and the environment. Thanks and development activity to take place in resource- to the advances in the application of technol- rich areas. ogy pioneered in the United States and Canada, North America has a large, economically acces- Third,we need these natural gas and oil resources sible natural gas resource base that includes even as efficiency reduces energy demand and alter- significant sources of unconventional gas such natives become more economically available on a as shale gas. This resource base could supply large scale. Even presuming that the United States over 100 years of demand at today’s consump- uses energy much more efficiently, diversifies its tion rates. Natural gas, properly produced and energy mix, and transitions to a lower carbon fuel mix, delivered, can play an important role in helping Americans will need natural gas and oil for much of the United States reduce its carbon and other their energy requirements for the foreseeable future. emissions. But these potentially transforma- Moreover, the natural gas and oil industry is vital to tive benefits cannot happen without access to the U.S. economy, generating millions of high-paying resource-rich basins and the consistent appli- jobs and providing tax revenues to federal, state, and cation of responsible development practices. local governments.

8 PRUDENT DEVELOPMENT: Realizing the Potential of North America’s Abundant Natural Gas and Oil Resources The United States is now the number one natural decades at current or greatly expanded levels of use. gas producer in the world and together with Canada Figure ES-3 shows estimates of the wellhead devel- accounts for over 25% of global natural gas production opment cost from three estimates of future natural (Figure ES-1). While shale and other unconventional gas resources derived from the recent Massachusetts gas resources are the new game changers, significant Institute of Technology (MIT) study4 on natural gas, conventional resources are being produced in onshore along with low and high estimates of cumulative, total and offshore areas. Lower and less volatile prices for demand from 2010 to 2035.5 The wellhead develop- natural gas in the past two years reflect these new real- ment cost, as estimated by the MIT study, should not ities, with benefits for American consumers and the be read as an expected market price, since many fac- nation’s competitive and strategic interests, including tors determine the price to the consumer in competi- the revitalization of several domestic industries. tive markets. In the longer term, there are additional potential major resources in Arctic and other offshore New applications of technologies such as horizontal drilling and hydraulic fracturing have brought about 4 MIT Energy Initiative, The Future of Natural Gas: An Inter- this recent increase in natural gas production and disciplinary MIT Study, Massachusetts Institute of Tech- the reassessment of the size of the U.S. recoverable nology, 2011 (MIT 2011 Gas Report). As presented on natural gas resource base. Figure ES-2 shows how the Figure ES-3, the MIT “Mean Resource Case” shows the mean resource estimate, based on 2007 technology levels; estimates of U.S. technically recoverable resources the “Advanced Technology Case” shows the mean resource have greatly increased over the past decade, with esti- estimate based on advanced technologies; and the “High mates of recoverable shale gas being the most striking Resource Technology Case” shows the high resource estimate reason for changes over the decade.3 The natural gas using advanced technologies, as defined in that study. resource base could support supply for five or more 5 Figure ES-3 also shows the range of cumulative natural gas demand for 2010 through 2035. The range is based on the NPC Demand Task Group estimate that North American nat- 3 Technically recoverable resources are resources that can be ural gas demand for 2035 could range from 25 to 45 trillion produced using current technology, as defined by the Energy cubic feet per year, with a 2010 beginning point of 26 trillion Information Administration (EIA). cubic feet per year. Figure ES-1. United States and Canada Are Among Leading Natural Gas Producers

Figure ES-1. United States and Canada Are Among Leading Natural Gas Producers

60

40

20 BILLION CUBIC FEET PER DAY

0 USA RUSSIA CANADA IRAN QATAR NORWAY CHINA SAUDI INDONESIA ALGERIA ARABIA

Source: BP Statistical Review of World Energy.

EXECUTIVE SUMMARY 9 nagement, Regulation and Enforcement (BOEMRE). YEAR Figure ES-2. U.S. Natural Gas Technically Recoverable Resources Are Increasing U.S. Natural Gas Technically Recoverable Resources Are Increasing Are Resources Recoverable Technically Gas Natural ES-2. U.S. Figure MASSACHUSETTS INSTITUTE OF TECHNOLOGY NPC SURVEY LOW NPC SURVEY MID NPC SURVEY HIGH AMERICA’S NATURAL GAS ALLIANCE NATIONAL PETROLEUM COUNCIL (NPC) ENERGY INFORMATION ADMINISTRATION/ DEPARTMENT OF ENERGY/MINERALS MANAGEMENT SERVICE ICF INTERNATIONAL, INC. POTENTIAL GAS COMMITTEE INTERSTATE NATURAL GAS ASSOCIATION OF AMERICA 1999 2000 2003 2004 2005 2006 2007 2008 2009 2010 2011 0

4,000 3,000 2,000 1,000 TRILLION CUBIC FEET FEET CUBIC TRILLION Notes: Minerals Management Service (MMS) no longer exists; its functions are now administered by the Bureau of Ocean Energy Ma For a detailed discussion of the survey that NPC used to prepare these “low,” “mid,” and “high” estimates, see Preface as well Resources Supply chapter.

10 PRUDENT DEVELOPMENT: Realizing the Potential of North America’s Abundant Natural Gas and Oil Resources Figure ES-3. North American Technically Recoverable Natural Gas Resources Figure ES-3. North American Natural Gas Resources Can Meet Decades of Demand

10 LOW HIGH DEMAND DEMAND

8 RANGE OF CUMULATIVE DEMAND 2010–2035 6

MIT MEAN RESOURCE CASE

WELLHEAD DEVELOPMENT COST MIT ADVANCED TECHNOLOGY CASE MIT HIGH RESOURCE TECHNOLOGY CASE (2007 DOLLARS PER MILLION CUBIC FEET) 4

3 0 1,000 2,000 3,000 TRILLION CUBIC FEET

Note: The y-axis represents estimated wellhead cost of supply. The cost of supply can vary over time and place in light of di erent regulatory conditions, di erent technological developments and deployments, and other di erent technical conditions. In none of these cases is “cost of supply” to be interpreted as an indicator of market prices or trends in market prices, since many factors determine prices to consumers in competitive markets. Source of MIT information: The Future of Natural Gas: An Interdisciplinary MIT Study, 2011.

regions, or with advances in technology from meth- around the world – ranging from China to Poland, ane hydrate deposits in various locations, mainly off- Ukraine, and South Africa – are now assessing their shore. These opportunities could allow natural gas to own shale gas resources and development potential. continue to play a central role in the North American U.S. companies are playing an important role in these energy economy into the next century. activities.

Development of these natural gas resources will Natural gas can also help the United States reduce require timely investment in the expansion of deliv- greenhouse gas7 (GHG) and other air emissions in ery infrastructure. To date, market signals and the near term, especially if methane emissions from existing regulatory structures have worked well in gas production and delivery are reduced. The biggest bringing about new natural gas delivery and storage opportunity is in the power sector, but there are also infrastructure. opportunities in the industrial, commercial, and resi- dential sectors (Figure ES-4). In recent years, rela- The technological success in the United States opens tively favorable prices for natural gas have displaced up significant new opportunities for global techno- some coal-fired generation. More natural gas use will logical leadership and an expanded global role for likely result from the electric industry’s response to 6 U.S. natural gas and oil companies. Many countries upcoming federal environmental regulations that may encourage retirement of some of the nation’s 6 Unless specifically described in context below, the term “nat- coal-fired power plants. In the long term, if the nation ural gas and oil companies” used in this report includes not only exploration or production companies, but also service companies that support drilling and operations, as well as 7 The major GHG emissions of concern in this report are carbon

companies that transport oil and gas. dioxide (CO2), nitrous oxide (N2O), and methane (CH4).

EXECUTIVE SUMMARY 11 desires deeper reductions in GHG emissions, it will need to address the GHG emissions of all fossil fuels, class resource basins, some of which are including natural gas, by putting a price on carbon8 located in remote areas offshore and in and advancing other technologies, including those the Arctic. Going forward, access to these that can capture and sequester carbon dioxide (CO2). resources depends upon responsible develop- ment practices being consistently deployed.

2. SURPRISINGLY, OIL IS ALSO AN ABUNDANT RESOURCE After declining in recent years, North American oil production rose in 2009 and 2010 due to advances in Contrary to conventional wisdom, the North technology and significant investment in exploration American oil resource base also could pro- and development by companies over a number of pre- vide substantial supply for decades ahead. ceding years. As a result, the United States and Can- Through technology leadership and sus- ada have several already-producing world-class basins tained investment, the United States and – in particular in the deepwater Gulf of Mexico and Canada together now constitute the largest the Alberta oil sands. These areas contribute substan- oil producer in the world. We have world- tially to North American oil production, and could sustain and grow current production beyond 2030. In addition, onshore conventional oil is a large sup- 8 See http://www.ipcc.ch/pdf/assessment-report/ar4/wg3/ ply source, although made up of a multitude of small ar4-wg3-annex1.pdf. Generally, the term “price on carbon” developments. The long-term decline of production refers to an assessment of the negative externalities of GHG emissions and the associated economic value of reducing or from onshore conventional fields has reversed in avoiding one metric ton of GHG in carbon dioxide equivalent. recent years through techniques such as enhanced oil Discussions in this report do not differentiate between an recovery (EOR) and hydraulic fracturing. The United explicit carbon price (e.g., under a cap and trade or carbon tax States is the third largest oil producer in the world, policy) and anFigure implied ES-4. carbon Natural cost (e.g., Gas Technologiesspecific regulatory Can Help Reduce Greenhouse Gas (GHG) Emissions limitations on the amounts of emissions). after Russia and Saudi Arabia (Figure ES-5). WAS Fig. ES-3

Figure ES-4. Natural Gas Technologies Can Help Reduce Greenhouse Gas Emissions HIGH

NATURAL GAS CARBON CAPTURE FUEL CELLS AND SEQUESTRATION

REFUEL OR REPOWER EXISTING COAL- OR OIL-FIRED PLANTS MEDIUM

COMBINED HEAT & POWER INDUSTRIAL FUEL SWITCHING NEW NATURAL GAS DIFFICULTY OF IMPLEMENTATION RESIDENTIAL/COMMERCIAL POWER PLANTS APPLIANCES DISPATCHING NATURAL GAS PLANTS AHEAD OF COAL PLANTS LOW LOW MEDIUM HIGH GHG REDUCTION POTENTIAL

12 PRUDENT DEVELOPMENT: Realizing the Potential of North America’s Abundant Natural Gas and Oil Resources Foundational Concepts

Based on the request from the Secretary of Since most of the U.S. energy supply is domestic, Energy, the NPC used four key concepts to evaluate energy security is affected by the development potential policy recommendations that arose in the of domestic resources, as well as the security of study: economic prosperity, environmental sustain- delivery and production systems such as natural ability, energy security, and prudent development. gas pipelines, refineries, power plants, and elec- tric power transmission. Likewise, as some of the “Economic prosperity” means not just the U.S. energy supply comes from other countries, level of wealth of a country, but also its economic energy security also involves geopolitical consid- growth, economic security, and economic com- erations associated with protecting and enhancing petitiveness. This goal also includes the notion of U.S. strategic interests internationally. Potential balancing the interests of today’s society against disrupters of energy security cover a range, among those of tomorrow’s. which are turmoil in foreign supplier countries; “Environmentally sustainable” means allowing the disruption of a major supply source or delivery for the maintenance of environmental quality infrastructure; assaults on the supply chain; natu- and resource protection over time. Environmental ral disasters; and global environmental issues and sustainability encompasses impacts such as air and extreme weather events, as characterized by the water pollution that directly affect public health, as 2010 Quadrennial Defense Review Report of the well as these and other impacts affecting ecosystem U.S. Department of Defense. vitality, biodiversity, habitat, forestry and fisher- ies’ health, agriculture, and the global climate. It is The concept of “prudent development of related to the concept of sustainable development North American natural gas and oil resources” as defined by the Brundtland Commission, formerly means development, operations, and deliv- known as the World Commission on Environment ery systems that achieve a broadly acceptable and Development: “meeting the needs of the pres- balance of several factors: economic growth, ent without compromising the ability of future gen- environmental stewardship and sustainability, erations to meet their own needs.” energy security, and human health and safety. Prudent development necessarily involves trade- “Energy security” means minimizing vulner- offs among these factors. Consideration of the ability to energy supply disruptions and the distribution of costs and benefits is a key part of resulting volatile and disruptive energy prices. prudent development.

Longer-term growth in oil production can come strong production in the Gulf of Mexico. Third, new from several new and emerging North American sup- Arctic oil and natural gas supply have a potential of ply sources. One source is , found in geo- the equivalent of over 200 billion barrels of oil. This logical formations where the oil does not easily flow is in addition to existing oil supply and proven natural through the rock, such as in the Bakken formation of gas reserves on the Alaska North Slope. The new Arc- North Dakota, Saskatchewan, Montana, and Mani- tic resources could yield significant supply after 2025. toba. Tight oil has also benefited from technologies Fourth, another very large long-term oil supply source similar to those used for shale gas, including hydrau- lies in the shale oil deposits of Colorado, Utah, and lic fracturing. Over the next 20 years, tight oil pro- Wyoming. The development of these billions of bar- duction could continue to grow. A second potentially rels of oil from these new resource areas will require large supply source is in new offshore areas, particu- sustained investment, substantial advances in tech- larly in the Gulf of Mexico and the Atlantic and Pacific nology, and environmental risk management systems coasts of the United States and Canada. Access to and and approaches.9 In many instances, there will be the potential development of these new U.S. areas would need for new pipelines and other infrastructure. require an Executive Branch level directive to include such areas in the 2012–2017 Leasing Program. New 9 There are several trillion barrels of “oil-in-place.” How much offshore areas could provide both natural gas and oil can be extracted will greatly depend on the technology and in significant quantities to supplement the continuing economics.

EXECUTIVE SUMMARY 13 Figure ES-5. United States and Canada Are among Leading Oil Producers

WAS Figure ES-4 Figure ES-5. United States and Canada Are Among Leading Oil Producers

12

8

4 MILLION BARRELS PER DAY

0 RUSSIA SAUDI USA IRAN CHINA CANADA MEXICO UNITED VENEZUELA IRAQ ARABIA ARAB EMIRATES Source: BP Statistical Review of World Energy.

Continuing significant technological advances substantial advances in technology, and regulatory could extend North American oil production for burdens that are not significantly different than many decades in various areas, such as other off- today. Even under the high potential scenario, the shore areas, other unconventional oil opportunities, United States will still need to import oil for the fore- and eventually, . In recent years, there has seeable future. been rapid learning and deployment of new produc- tion techniques to unlock higher actual and potential Enhanced access is also a key enabler that could natural gas supply, particularly from tight and shale move North American oil production towards the gas reservoirs. Such learnings have not yet been fully higher potential pathway indicated here. Resource- applied to new and emerging oil opportunities. As rich areas such as the eastern Gulf of Mexico, the the emerging oil opportunities develop both onshore Atlantic and Pacific continental margins, and the Arc- and offshore and with application of some of the tic are capable of delivering new volumes of oil supply, technologies now enabling access to unconventional potentially extending over several decades. Indeed, in natural gas, similar upward re-appraisal of potential the Arctic, unless new oil production can be developed oil supply will likely follow. Such appraisals are an as a consequence of sustained exploration, the key ongoing process as new resources are brought into infrastructure link currently operating (the Trans- the development phase. Alaska Pipeline System from the Alaska North Slope Figure ES-6 shows the various sources of current to the crude oil loading terminal at Valdez, Alaska) supply as well as projected supply in 2035 under will have to be decommissioned when the declines “limited potential” and “high potential” scenarios. from existing Alaska North Slope production cause The limited potential scenario is characterized by lim- pipeline flows to fall below minimum operating levels. ited resource access, constrained technology develop- Such an outcome could leave a huge resource stranded ment, as well as greater regulatory barriers. The high with deleterious consequences for the economy and potential scenario is characterized by more access, for energy security.

14 PRUDENT DEVELOPMENT: Realizing the Potential of North America’s Abundant Natural Gas and Oil Resources This current and future development of U.S. and Canadian oil can translate into energy security ben- state, and local governments. In a competi- efits through reducing oil imports. Other potential tive global business environment, where com- benefits include improved balance of trade, jobs, and panies have the ability to move capital around economic multiplier effects from domestic drilling, the world, a dependable and affordable supply production, and delivery. of natural gas and oil is important for creating economic growth, investment, and jobs in the United States. Abundant supplies of natural 3. AMERICA NEEDS NATURAL GAS AND gas are vital to improving the competitiveness OIL EVEN AS ALTERNATIVE RESOURCES of domestic industries that use natural gas as a BECOME AVAILABLE fuel and feedstock. Though North America has Even as the United States uses energy much abundant natural gas and oil resources, these more efficiently and diversifies its energy resources must still be used wisely; and energy mix, Americans will need natural gas and oil efficiency measures should be developed and for the foreseeable future. Natural gas can implemented wherever they are cost effective. enable renewable power through manage- ment of intermittency. Natural gas and oil Together, natural gas and oil make up nearly two- are currently indispensable ingredients in the thirds of U.S. energy use.10 Even with increasing American economy and Americans’ standard energy efficiency, buildings, motor vehicles, indus- of living. A vibrant domestic natural gas and trial facilities, and other energy-using equipment oil industry has the potential to add much- will remain highly dependent on natural gas and oil needed domestic jobs and revenues for federal,

10 EIA, Annual Energy Outlook 2011, Reference Case.

Figure ES-6. More Resource Access and Technology Innovation Could Substantially Increase North American Oil Production Figure ES-6. More Resource Access and Technology Innovation ALSO used as Figure 1-5 Could Substantially Increase North American Oil Production

NATURAL GAS LIQUIDS OIL SANDS OFFSHORE OIL SHALE ARCTIC ONSHORE CONVENTIONAL TIGHT OIL 20

UNCONVENTIONAL OIL

10 } MILLION BARRELS PER DAY {

0 2010 2035 LIMITED 2035 HIGH POTENTIAL Notes: The oil supply bars for 2035 represent the range of potential supply from each of the individual supply sources and types considered in this study. The speci c factors that may constrain or enable development and production can be dierent for each supply type, but include such factors as whether access is enabled, infrastructure is developed, appropriate technology research and development is sustained, an appropriate regulatory framework is in place, and environmental performance is maintained. Note that in 2010, oil demand for the U.S. and Canada combined was 22.45 million barrels per day. Thus, even in the high potential scenario, 2035 supply is lower than 2010 demand, implying a continued need for oil imports and participation in global trade. Source: Historical data from Energy Information Administration and National Energy Board of Canada.

EXECUTIVE SUMMARY 15 for many years to come. Thus, these fuels are criti- in combined operational expenses and capital invest- cal in the U.S. economy, particularly as part of a strat- ment in 2009 – equivalent to over 3% of America’s gross egy to transition towards a low-carbon energy mix in domestic product (GDP).12 In the United States, federal, the future. There is enough supply to meet a range of state, and local governments also benefit from the sub- demand levels for decades – from business as usual, stantial amount of taxes and royalties paid by natural to scenarios with much greater penetrations of natu- gas and oil companies. Taking into account all corpo- ral gas in the power, industrial, and transportation rate income taxes, severance taxes, royalties on federal sectors. And, using these resources much more effi- lands, sales taxes, payroll taxes, property and use taxes, ciently will strengthen the nation’s economic resil- and excise taxes, natural gas and oil companies gener- iency, reduce environmental impacts, and enhance ate over $250 billion in government revenue annually. energy security. As noted in Hard Truths and other studies, investment in and deployment of energy effi- Although natural gas and oil have long been viewed ciency measures is frequently cost effective and will as related fuels, their uses are quite different. Natural gas is especially important for heating, power genera- reduce demands for fossil fuels and the impacts of tion, and industrial uses such as chemical manufac- their associated emissions. Energy efficiency deserves turing. By contrast, around 97% of all energy used in continued and increased efforts.11 the transportation sector comes from oil. The import At the same time, in meeting the needs of U.S. con- picture differs as well. Nearly all of the natural gas con- sumers, the American natural gas and oil industry sumed in North America is produced within the same plays an essential role in the U.S. economy. Compa- continental boundaries, while about half of the crude nies directly engaged in the oil and natural gas indus- oil processed in North American refineries is imported. try employ over 2 million Americans who earn over Within North America, Canada is a net exporter of 13 $175 billion in labor income. The employment figure crude oil and the United States is a net importer. jumps to over 9 million Americans with $533 billion in Low make U.S. manufacturers labor income when including the jobs created by the and farmers more competitive. U.S. firms rely on nat- spending on goods and services of natural gas and oil ural gas- and oil-derived chemicals as building blocks companies and their employees. PricewaterhouseCoo- for the production of electronics (including comput- pers has estimated that the domestic oil and natural gas ers and cell phones), plastics, medicines and medical industry directly generated approximately $464 billion equipment, cleaning products, fertilizers, building materials, adhesives, and clothing. When manufac- 11 Hard Truths recommended that the United States moderate turers use natural gas as a fuel and feedstock, they demand by increasing energy efficiency through improved create a variety of products that are used every day. vehicle fuel economy and by reducing energy consumption in the residential and commercial sectors. Hard Truths con- These products are valued at greater than eight times cluded that: the cost of the natural gas used to create them, pro- 14 “… anticipated energy use in the residential and commercial viding significant benefit to the nation’s economy. sectors could be reduced by roughly 15 to 20 percent through deployment of cost-effective energy-efficiency measures that 12 PricewaterhouseCoopers, “The Economic Impacts of the use existing, commercially available technologies. Assuming Oil and Natural Gas Industry on the U.S. Economy in 2009: that all these measures are put in place over the next decades Employment, Labor Income, and Value Added,” May 2011. and that all other factors such as level of services are held 13 In 2010, U.S. net crude oil imports were 9.1 million barrels constant, U.S. residential/commercial energy consumption per day, which was about 62% of its total refinery crude oil could be reduced by 7 to 9 quadrillion Btu. Technologies to inputs. Canada, in contrast, is a net crude oil exporter, as it accomplish savings of these magnitudes are indicated to be imports crude oil into eastern Canadian refineries but exports available in the marketplace.” (page 43) crude oil to the United States from western Canadian produc- “… a doubling of fuel economy of new cars and light trucks tion. On a net basis, Canada exports 1.4 million barrels per by 2030 is possible through the use of existing and antici- day, but its crude oil exports to the U.S. total 1.99 million bar- pated technologies, assuming vehicle performance and other rels/day, 22% of U.S. crude oil imports. So, for both coun- attributes remain the same as today…. Depending upon tries together, net crude oil imports total 7.7 million barrels how quickly new vehicle improvements are incorporated in per day, or about 47% of combined refinery crude oil runs. the on-road light duty vehicle fleet, U.S. oil demand would Source: BP and EIA. be reduced by about 3-5 million barrels per day in 2030. 14 Based on information in the American Chemistry Coun- Additional fuel economy improvements would be possible cil, “Guide to the Business of Chemistry,” 2011; and Ameri- by reducing vehicle weight, horsepower, and amenities, can Chemistry Council, “Shale Gas and New Petrochemicals or by developing more expensive, step-out technologies.” Investment: Benefits for the Economy, Jobs, and US Manu- (pages 14-15) facturing,” Economics & Statistics, March 2011.

16 PRUDENT DEVELOPMENT: Realizing the Potential of North America’s Abundant Natural Gas and Oil Resources Observers of natural gas markets forecast a about 1% of total U.S. emissions in 2005.17 Com- wide range of future natural gas demand for pared to 2000, natural gas use for power genera- the United States and a narrower range for tion has grown by almost 45% from 2000 to 2010. Canada.15 For the United States, most of the varia- It is projected to increase as much as another 75% tion in natural gas demand comes from the power by 2030.18 sector; for Canada, it comes from the industrial sector. Figure ES-7 shows demand in 2010, along The availability of abundant low cost natural gas is with several projections for 2020 and 2030.16 Over helping to revitalize several industries, including pet- 120 gigawatts (GW) of natural gas combined cycle rochemicals, leading to several billions of dollars of capacity was added from 2000 to 2008. The power new investment in domestic industrial operations that sector has already substituted the use of natural gas would not have been anticipated half a decade ago. for some coal because of low natural gas prices. The Upcoming environmental regulations affecting increased use of these new and efficient natural gas power plants, combined with expectations for future units decreased the GHG emissions from U.S. power natural gas prices informed by published forecasts, will plants by about 83 million metric tons of CO , or 2 have an impact on the use of natural gas in the power sector. Relatively old and inefficient coal-fired power 15 The NPC assessed the numerous recent forecasts of demand plants with limited emission controls will likely retire, for U.S. and Canadian natural gas that exist in the public with various studies estimating retirements ranging domain. Additionally, the NPC studied a number of propri- etary forecasts and conducted a survey. The study subgroups also examined aggregated proprietary data collected via a con- 17 Based on EIA, U.S. Carbon Dioxide Emissions in 2009: A Retro- fidential survey of private organizations, primarily gas and oil spective Review, http://www.eia.doe.gov/oiaf/environment/ companies and specialized consulting groups. The propri- emissions/carbon/ and NPC analysis of EIA, Monthly Energy etary data were collected by a third party and aggregated to Review, April 2011. disguise individual responses. 18 Compared to 2000, natural gas use for power generation has 16 The AEO cases are from the Annual Energy Outlook, prepared grown from 14 billion cubic feet per day (Bcf/d) in 2000 to by the EIA. The proprietary cases are aggregated third-party 20 Bcf/d in 2010, and is projected to be between 19 and forecasts. 35 Bcf/d by 2030 (see Figure ES-7).

Figure ES-7. The Power Sector Shows the Most Variation in Projected U.S. Natural Gas Demand

Figure ES-7. The Power Sector ShowsWAS the Figure Most ES-6, Variation ALSO Figure in Projected 3-2 U.S. Natural Gas Demand

100 VEHICLE COMMERCIAL TRANSMISSION INDUSTRIAL RESIDENTIAL POWER 80

60

40

BILLION CUBIC FEET PER DAY 20

0 2000 2010 AEO AEO MAX. MED. MIN. AEO AEO MAX. MED. MIN. 2010 2011 2010 2011 REFERENCE CASE PROPRIETARY REFERENCE CASE PROPRIETARY 2020 2030 Notes: AEO2010 = EIA’s Annual Energy Outlook (2010); AEO2011 = EIA’s Annual Energy Outlook (2011).

EXECUTIVE SUMMARY 17

DO NOT OVERWRITE 3-2 WITH THIS FIGURE - SLIGHT DIFFERENCE IN NOTES @ BOTTOM Figure ES-8. Estimated GHG Emission Reductions from the Use of Natural Gas Vary Widely

WAS Figure ES-7

from 12 to 101 GW of capacity by 2020. The study Figure ES-8. Estimated GHG Emission Reductions average of 58 GW of coal-fired capacity retirements from the Use of Natural Gas Vary Widely represents about 6% of total U.S. generating capacity, or around 18% of coal-fired capacity. This will likely 900 INDUSTRIAL 864 increase demand for natural gas at power plants, lead COMMERCIAL 59 to new investment in natural gas-fired generation, and RESIDENTIAL 84 lower GHG emissions from the power sector (on aver- POWER age, around 3.5% of the 2005 U.S. total by 2020). 700 150 In the longer term, increased natural gas supplies, along with the possible introduction of policies to reduce GHG emissions, could yield more substitu- 500 tion of natural gas for other fossil fuels, mainly coal. According to studies reviewed as part of this NPC study, natural gas could help reduce emissions in the long term (such as a 50% reduction from a 2005 base- 300 571 line by 2050). A steeper emissions reduction target, such as 80% or more by 2050, will likely also require more aggressive emission control technologies like car- 126 100 34 bon capture and sequestration (CCS) for both coal and 7 natural gas power plants, if these fossil fuels were to 15 70 remain a significant energy source for power genera- 0 tion. Excluding transportation, the potential reduc- LOW HIGH tion in GHG emissions from natural gas use ranges MILLION METRIC TONS OF CO2 EQUIVALENT PER YEAR (2030) from an equivalent of 126–864 million metric tons of

CO2 per year by 2030, or about 2–12% of total 2005 U.S. GHG emissions (Figure ES-8). This broad range of GHG reductions reflects the potential application U.S. GHG emissions in 2009. There is, however, a very of diverse natural gas technologies across the end-use high degree of uncertainty around estimates of meth- sectors, including appliances, power infrastructure, ane emissions and, therefore, better data are needed and infrastructure retrofits in applications within the while efforts continue to reduce such emissions. residential, commercial, and industrial end-use sectors. Taking into account EPA’s recently revised esti- In addition to emissions of CO2 at the point of natu- mates of methane emissions during production and ral gas combustion, there are emissions of methane delivery, the life-cycle emissions for natural gas are into the atmosphere that result from the production about 35% lower than coal on a heat-content (British 19 and delivery of natural gas. Some emissions occur in thermal unit [Btu]) basis.21 In terms of the production normal operations through venting for safety reasons of electricity, for efficiencies typical of coal- and such as to relieve pressure. Other emissions occur natural gas-fired plants, natural gas has about because of leaks in equipment such as compressor seals 50–60% lower GHG emissions than those of a coal- and connections. Because methane is a GHG that is fired plant (Figure ES-9).22 significantly more potent than CO2 in its global warm- ing potential,20 it is vital to minimize these emissions. Beyond the power sector, there is potential for In the April 2011 annual national GHG inventory increased use of natural gas to displace oil in the trans- update, the Environmental Protection Agency (EPA) portation sector. The NPC Future Transportation estimated that fugitive methane emissions by natu- ral gas companies accounted for approximately 4% of 21 Life-cycle emissions include those from the direct combustion of natural gas, as well as methane emissions from the produc- 19 Methane is a chemical compound that is the primary compo- tion and delivery of natural gas. nent of natural gas. 22 The natural gas combined cycle turbine unit has a heat rate of 20 See a more detailed discussion in Chapter Four about the 7,000 Btu/kWh, while the coal plant at 30% efficiency has a

issues surrounding the relative potency of methane and CO2 heat rate of 11,377 Btu/kWh and the coal plant at 38% effi- from a global warming potential. ciency has a heat rate of 9,000 Btu/kWh.

18 PRUDENT DEVELOPMENT: Realizing the Potential of North America’s Abundant Natural Gas and Oil Resources Figure ES-9. Life-Cycle GHG Emissions for Natural Gas Are About One-Half of Coal

Figure ES-9. Life-Cycle GHG Emissions for Natural Fuels (FTF) study is examining the implications for Gas Are about One-Half of Coal gasoline and diesel demand of natural gas vehicles and plug-in electric vehicles that could create some 3,000 natural gas demand for power generation, as well as fuel cell electric vehicles using hydrogen reformed from natural gas. Since the FTF study will be com- 2,528 pleted after this study, the final results of the FTF study cannot be incorporated here. Consequently, the NPC’s study of natural gas and oil resources examined 2,000 2,000 high-potential-demand cases for natural gas vehicles, plug-in electric vehicles, and fuel cell electric vehicles from published sources. For example, in 2035, U.S. and Canadian transportation could potentially con- sume 13 billion cubic feet per day (Bcf/d) of gas.

EMISSION RATE 1,034 1,000 There is a wide range in the estimates of future EQUIVALENT PER MEGAWATT HOUR)

2 demand for natural gas. The most aggressive esti- mate of total natural gas demand, including trans- portation, is 133 Bcf/d by 2035, an 85% increase from 2010 natural gas requirements of 72 Bcf/d.23

(LBS. OF CO The low-end estimate of total natural gas demand 0 for 2035 is 72 Bcf/d (Figure ES-10). It appears that NATURAL GAS COAL PLANT COAL PLANT COMBINED (30% (38% CYCLE (48% EFFICIENCY) EFFICIENCY) 23 U.S. and Canadian demand for 2035 is based on an extrapo- EFFICIENCY) lation of 2020–2030 Proprietary Maximum and Minimum cases.

Figure ES-10. North American Natural Gas Production Could Meet High Demand Figure ES-10. North American Natural Gas Production Could Meet High Demand

150 LIQUEFIED NATURAL CANADIAN DEMAND GAS EXPORTS U.S. DEMAND EXPORTS TO MEXICO SUPPLY (HIGH POTENTIAL) VEHICLE DEMAND SUPPLY (LIMITED POTENTIAL) 100

50 BILLION CUBIC FEET PER DAY

0 DEMAND SUPPLY LOW DEMAND SUPPLY HIGH DEMAND 2010 2035 Notes: 2035 – Development facilitated by access to new areas, balanced regulation, sustained technology development, higher resource size. 2035 – Development constrained by lack of access, regulatory barriers, low exploration activity, lower resource size.

EXECUTIVE SUMMARY 19 even a 2035 potential demand requirement of up to Risk to the environment exists with oil and natural 133 Bcf/d could be supplied. And based on the MIT gas development, as with any kind of energy produc- 2011 Gas Report, The Future of Natural Gas, this high tion. Natural gas and oil companies have drilled for potential demand could be supplied at a current esti- and delivered energy in the United States and Canada mated wellhead production cost range in 2007 dollars for a century and a half. Through that time, much has of $4.00 to $8.00 per million Btu (MMBtu), as shown changed in how natural gas and oil are produced, and by comparing the information in Figure ES-10 and how drilling and production are regulated. In general, Figure ES-3, and based on current expectations of exploration and production occur in a far safer and cost performance and assuming adequate access to environmentally responsible fashion than in genera- resources for development.24 This wellhead develop- tions past, in no small part as a result of changes in ment cost should not be read as an expected market public environmental awareness, government regu- price, since many factors determine the price to the lation, technological innovations, and companies’ consumer in competitive markets. actions. In spite of the exploration and production improvements, there will undoubtedly be areas that While natural gas and oil bring many benefits, they remain off limits, based on unique environmental come with mixed impacts, as do other sources of attributes.25 The key is that as environmental consid- energy. Production and delivery of energy involves erations evolve, both natural gas and oil companies real health, safety, and environmental considerations and the government continue to work to improve and risks. Using natural gas and oil resources much environmental performance. more efficiently, producing them with lower environ- mental impacts, and diversifying U.S. energy mix are Many, if not most, natural gas and oil companies essential. The nation should adopt energy efficiency have committed themselves to operating at high measures wherever economically attractive, and gov- levels of performance with respect to environment, ernment policies should address impediments to that safety, and health impacts. Oil and gas industry objective. occupational injury statistics from 1994 to 2009 show significant reductions compared to all of private industry.26 As an example of improvements in envi- 4. REALIZING THE BENEFITS OF ronmental performance, on Alaska’s North Slope, the NATURAL GAS AND OIL REQUIRES surface footprint of drill pads has been reduced from ENVIRONMENTALLY RESPONSIBLE 65 acres to 9 acres27 and the volumes of waste gener- DEVELOPMENT ated from 100 barrels of oil equivalent of reserve addi- Achieving the economic, environmental, and tions has shrunk from 7.5 to 3.4 barrels.28 Advances energy security benefits of North Ameri- in water use management practices have resulted in can natural gas and oil supplies requires reduced demands on freshwater sources and many responsible approaches to resource pro- operators are pursuing reuse of produced water in duction and delivery. Development in dif- fracture operations. According to the MIT 2011 Gas ferent geographic areas, such as deepwater offshore basins or onshore areas with shale 25 The most obvious examples are resources located in national gas resources in populated areas, requires parks. different approaches and continued techno- 26 The oil and natural gas industry had an injury and illness logical advances. But in all locales and con- incidence rate of 5.4 per 100 full-time workers in 1994 (com- pared to 8.4 per 100 for all private industry that year), and ditions, the critical path to sustained and improved the rate to 1.6 per 100 in 2009 (compared to 3.6 expanded resource development in North per 100 in that year for all private industry). Source: U.S. America includes effective regulation and Department of Labor, Bureau of Labor Statistics, Survey of a commitment of industry and regulators Occupational Injuries and Illnesses, Table 1, “Incidence rates of nonfatal occupational injuries and illnesses by case type and to continuous improvement in practices to ownership, selected industries, 1994,” 2009. eliminate or minimize environmental risk. These steps are necessary for public trust. 27 American Petroleum Institute, Examples of Technology at Work in the Arctic, Autumn 2008, http://www.api.org/policy/ exploration/upload/Technology_at_Work_Arctic.pdf. 28 U.S. DOE, Environmental Benefits of Advanced Oil and Gas Exploration and Production Technology, DOE-FE-0385, 24 MIT 2011 Gas Report, page 31. October 1999.

20 PRUDENT DEVELOPMENT: Realizing the Potential of North America’s Abundant Natural Gas and Oil Resources Hydraulic Fracturing

Hydraulic fracturing is the treatment applied to areas, with the drilling equipment and produc- reservoir rock to improve the flow of trapped oil tion pipe sealed off using casing and cementing or natural gas from its initial location to the well- techniques. bore. This process involves creating fractures in the � The technology and its application are continu- formation and placing sand or proppant in those ously evolving. For example, testing and devel- fractures to hold them open. Fracturing is accom- opment are underway of safer fracturing fluid plished by injecting water and fluids designed for additives. the specific site under high pressure in a process that is engineered, controlled, and monitored. � The Interstate Oil and Gas Compact Commission (IOGCC), comprised of 30 member states in the Fracturing Facts United States, reported in 2009 that there have been no cases where hydraulic fracturing has � Hydraulic fracturing was first used in 1947 in an been verified to have contaminated water.‡ in Grant County, Kansas, and by 2002, the practice had already been used approximately � A new voluntary chemical registry (FracFocus) a million times in the United States.* for disclosing fracturing fluid additives was launched in the spring of 2011 by the Ground � Up to 95% of wells drilled today are hydrauli- Water Protection Council (GWPC) and the cally fractured, accounting for more than 43% of IOGCC. Texas operators are required by law to total U.S. oil production and 67% of natural gas use FracFocus. production.† � The Environmental Protection Agency concluded � The first known instance where hydraulic fractur- in 2004 that the injection of hydraulic fractur- ing was raised and addressed as a technology of ing fluids into coalbed methane wells poses little concern was when it was used in shallow coalbed or no threat to underground sources of drinking methane formations that contained freshwater water.§ The EPA is currently studying hydraulic (Black Warrior Basin, Alabama, 1997). fracturing in unconventional formations to bet- � In areas with deep unconventional formations ter understand the full life-cycle relationship (such as the Marcellus areas in Appalachia), between hydraulic fracturing and drinking water the shale gas under development is separated and groundwater resources. from freshwater aquifers by thousands of feet � The Secretary of Energy’s Advisory Board is also and multiple confining layers. To reach these studying ways to improve the safety and environ- deep formations where the fracturing of rock mental performance relating to shale gas devel- occurs, drilling goes through the shallower opment, including hydraulic fracturing.¶

* Interstate Oil and Gas Compact Commission, Testimony § U.S. EPA, Office of Water, Office of Ground Water and Submitted to the House Committee on Natural Resources, Drinking Water, “Evaluation of Impacts to Underground Subcommittee on Energy and Mineral Resources, June 18, Sources of Drinking Water by Hydraulic Fracturing of 2009, Attachment B. Coalbed Methane Reservoirs,” (4606M) EPA 816-R-04-003, June 2004. † IHS Global Insights, Measuring the Economic and Energy Impacts of Proposals to Regulate Hydraulic Fracturing, 2009; ¶ Secretary of Energy Advisory Board (SEAB), Natural Gas and EIA, “Natural Gas and Crude Oil Production,” Decem- Subcommittee (http://www.shalegas.energy.gov/aboutus/ ber 2010 and July 2011. members.html), 90-Day Interim Report (http://www. shalegas.energy.gov/resources/081811_90_day_report_ ‡ Interstate Oil and Gas Compact Commission, Testimony final.pdf), Safety of Shale Gas Development, May 5, 2011, Submitted to the House Committee on Natural Resources, http://www.shalegas.energy.gov/ Subcommittee on Energy and Mineral Resources, June 18, 2009, Attachment B.

EXECUTIVE SUMMARY 21 Report, which reviewed three reports of publicly Environmental and Public Health reported incidents related to gas well drilling, there Concerns were only 43 “widely reported” incidents related to gas well drilling in the past decade (to 2010)29 during Environmental and public health concerns which time, there were about 20,000 shale gas wells associated with oil and natural gas development drilled with almost all of them being hydraulically vary according to location and type of resource, fractured.30 whether the resource is onshore versus offshore, and the methods employed to extract and deliver Unfortunately, accidents have occurred in opera- the resource. The following issues are addressed tions of even the most committed companies. Efforts in the chapters of this report: by all industry members to achieve and sustain high environment, health, and safety performance are � Hydraulic fracturing – consumption of fresh- essential. Many in and outside of the natural gas and water (volumes and sources); treatment and/ oil industry worry that accidents or inferior practices or disposal of produced water returned to of some companies could undermine public trust in the surface; instances of naturally occurring the entire industry. Consistent use of responsible radioactive material in produced water; seis- practices to protect the environment and public mic impacts; chemical disclosure of fracture health are important on their own, and will also help fluid additives; potential ground and surface avoid additional restrictions on access to resources water contamination. and support access to additional resources that could � Onshore operations – wellbore integrity; help meet future energy needs. air emissions from combustion, venting, Natural gas and oil resources in North America or leaks; methane migration into drink- are developed in a wide variety of settings, each of ing water; community impacts includ- which has a variety of environmental challenges. ing noise, odors, proximity to residen- For instance, in offshore development, the response tial areas, and volume of truck traffic; to a major oil spill incident is complicated by condi- fragmentation of and impacts on wildlife hab- tions in the marine location, with drilling occurring itats; water contamination; waste manage- up to several thousand feet below sea level. Onshore ment; and human health and safety. natural gas and oil development takes place in a wide � Offshore operations – the marine envi- range of locations, including arid deserts and coastal ronment brings different concerns than wetlands, wildlife habitats, rural and urban settings, for onshore; pressures and temperatures and pristine landscapes and industrial parks. The at remote wellheads make prevention and various locations pose different issues in areas such response to a major release more challenging; as water sourcing, effluent disposal, site preparation and seismic noise associated with exploration and reclamation, and reduced fragmentation and and drilling activities is recognized as a con- protection of wildlife habitat. Specific standards and cern for whale populations and other marine regulations that may be appropriate for production life, including fish. in some areas may not be effective in others. � Arctic ice environments – responding to an oil spill in low temperatures with the presence of broken sea ice; potential threats to sensitive 29 Of these, 47% of the incidents involved groundwater contam- ination by natural gas or drilling fluids; 33% involved on-site habitat; and seismic noise. surface spills; 9% involved off-site disposal issues; and the � Oil sands – volumes of water needed generate remaining 10% involved water withdrawal issues, air quality issues, and blowouts. “With over 20,000 shale wells drilled issues of water sourcing; removal of overbur- in the last 10 years, the environmental record of shale gas den for surface mining can fragment wildlife development has for the most part been a good one – but it habitat and increase the risk of soil erosion is important to recognize the inherent risks and the damage or surface run-off events to nearby water that can be caused by just one poor operation…. In the stud- systems; GHG and other air emissions from ies surveyed, no incidents are reported which conclusively demonstrate contamination of shallow water zones with frac- production. ture fluids.” MIT 2011 Gas Report, Appendix 2E. 30 MIT 2011 Gas Report, pages 39-40.

22 PRUDENT DEVELOPMENT: Realizing the Potential of North America’s Abundant Natural Gas and Oil Resources The different types of natural gas and oil resources and geologic formations also pose different develop- Environmental Regulation of the ment and environmental challenges. The variations Natural Gas and Oil Industry among coalbed natural gas, tight sands, shale gas, oil sands, shale oil, and conventional opportunities can State, federal, and in some cases, regional regu- differ widely and require different approaches for pro- lations are in place to govern oil and natural gas duction and delivery and different risk management production for the purpose of achieving safety, practices to manage environmental impacts. Regula- public health, and environmental protection. The tions and operating practices need to be tailored for interaction of these many layers of regulation is the specific setting. complex and generally effective. However, regu- lation among jurisdictions is uneven and in some The number and variety of companies engaged in cases requires strengthening resources available natural gas and oil development differ dramatically for staffing, keeping abreast of changes in the depending on the location and type of resource. In industry, and enforcement. offshore development, because of the large capital investments and financial risk, generally the com- In certain circumstances, there are federal leg- panies are fewer in number and larger in size than islative exemptions or special considerations onshore. Onshore, around 7,000 companies are afforded the oil and gas industry that some envi- involved in natural gas and oil exploration and pro- ronmental advocates believe result in material defi- duction, including 2,000 drilling operators and hun- ciencies in environmental protection, particularly dreds of service companies. The size of these firms in relation to water and air quality. Others, includ- ranges from those with very few employees to major ing many in the natural gas and oil industry and integrated international oil companies with tens of in state governments, maintain that the special thousands of U.S. employees. classifications under federal law are appropriate and supported by scientific or economic findings, Oil and gas activity has increased dramatically, and addressed by state laws, and are parallel to special development is now occurring in some areas where considerations that exist for many industries. there has not been significant activity for decades. In those circumstances, regulatory capability may There is a range of views on whether outstand- have to be – and in some states,31 already has been ing regulatory issues are best addressed through state or federal regulatory action. Many state – enhanced and companies need to engage with local agencies have been involved in regulating oil and communities. Regulators face the challenge of keep- gas development for much longer than the fed- ing up with increased activity and staying abreast of eral government and have unique knowledge and technological developments. Regulatory programs expertise relative to the local geological, hydro- have to be administered effectively and with clarity logical, environmental, and land use setting, and during a time of extraordinary budget pressures. are responsible for regulation and development of A complex regulatory framework governs opera- private and state natural gas and oil resources, as tional requirements, drilling practices, land use, water well as for implementing certain federal laws and use, and other environmental safeguards. These regulations. involve many agencies of the federal, state, and even Federal agencies have similar responsibilities for local governments. Ensuring best regulatory practices federal mineral development and environmental means providing adequate resources for development performance of companies where the federal gov- ernment owns or controls such mineral rights or 31 For example, Colorado has recently updated its regulations, lands. Some entities believe states are generally in part to address the intensity of development in parts of more adept than federal agencies in their ability the state where less development has occurred historically; in to adapt to changes in technology and new indus- 2010, Pennsylvania instituted a number of policies to update try practices and more efficient. Others believe its regulations and regulatory capability, to address various that only through federal regulation can there be issues relating to increased natural gas development in the state. See: Colorado Oil and Gas Conservation Commission, assurance of a reasonably consistent level of envi- 2009 amended rules (http://cogcc.state.co.us/); and STRON- ronmental and public health protection across the GER, “Pennsylvania Hydraulic Fracturing State Review,” country, and on public and private lands. September 2010.

EXECUTIVE SUMMARY 23 and enforcement of regulations, ensuring that regu- yy Better reflect environmental impacts in markets latory staff has the technical capabilities to make and fuel/technology choices. sound decisions, and creating a regulatory culture yy Enhance the efficient use of energy. that embraces efficiency, innovation, and effective- ness. It also depends upon providing consistency of yy Enhance the regulation of markets. regulation and understanding the specific planning yy Support the development of intellectual capital and and practices required by the particular character of a skilled workforce. production and operating risks of different resource areas. As policymakers consider the recommendations of this report and seek to create policies to implement An example of the type of permitting and over- them, they should rely to the greatest extent possible sight that accompanies the development of a natural on market-based policies to provide signals and incen- gas and oil project is illustrated in Figure ES-11. Not tives to industry and consumers. These approaches every development project is exactly the same, and have the best chance of providing cost-effective and in fact, there are significant differences between the creative solutions to responsibly meet the nation’s Pennsylvania illustration and Deepwater Offshore energy needs. development, as well as development on federal lands where the federal National Environmental Policy Act process is applied. However, the requirement for Support Prudent Natural Gas and regulatory interaction at each stage of the process is Oil Resource Development and common. Also, some of the state regulatory and over- Regulation sight functions identified in this illustration are also delegated from federal regulatory programs. The fed- The NPC found several key areas where more eral programs are not highlighted in this illustration. could be done to support prudent natural gas and oil resource development and regulation. Funda- mental to all of these issues is that commitment to CORE STRATEGIES excellent environmental performance and continu- The NPC used the fundamental concepts of eco- ous improvement must be maintained at both the nomic prosperity, environmental sustainability, leadership level of companies and throughout their energy security, and prudent development as lenses organizations. for viewing the potential of natural gas and oil as In support of these outcomes, the NPC recom- energy sources and the potential of gas to help reduce mends the establishment of industry-led, regionally GHG emissions. In doing this, the NPC kept in mind based, “councils of excellence” for identification and that the United States generally relies on markets to dissemination of effective environment, health, and produce efficient use of resources in the economy and safety practices for natural gas and oil production on private entrepreneurs to innovate. Government and delivery.32 The intention is to involve industry, policy plays an important role in helping markets government, academics, nongovernmental organiza- function through setting the rules of the road, such tions (NGOs), and other stakeholders in processes as establishing the rule of law to support contracts, that are light on bureaucracy, dedicated to sharing enforcing property rights, maintaining a regulatory technical information, and benefit from the substan- regime, and through providing public goods (such tive work of many existing industry and public-sector as basic research and development). Designing and organizations such as the Society of Petroleum Engi- implementing government policy in markets, how- neers, the State Review of Oil and Natural Gas Envi- ever, should be done with care and consideration of ronmental Regulations (STRONGER), the Ground possible unintended consequences. Water Protection Council, the Interstate Oil and Gas As described more fully in this report, the NPC pro- Compact Commission, the standard-setting program poses a number of recommendations for adoption by governments and companies. These recommenda- 32 These exchanges of environmental, health, and safety prac- tions are organized around five core strategies: tices (as well as other similar exchanges referenced elsewhere in this report) must be conducted in compliance with appli- yy Support prudent natural gas and oil resource devel- cable laws and regulations, including federal and state anti- opment and regulation. trust laws.

24 PRUDENT DEVELOPMENT: Realizing the Potential of North America’s Abundant Natural Gas and Oil Resources of the American Petroleum Institute (API), and oth- protection has improved. This has occurred as compa- ers.33 Since there is lack of general information and nies have applied more sophisticated technologies to awareness about what may be effective practices in drilling and production practices. a given region, and since companies vary in their access to the most-recent information about effective In recent years, public confidence in natural gas and practices, such councils could address such deficien- oil development and in some of the associated regula- cies and provide for the more rapid dissemination of tory mechanisms has frayed. The tragic circumstances information. of the Macondo accident in the Gulf of Mexico in 2010 and community attention to real and perceived safety, Leaders in government should be committed to water quality, and other environmental impacts of high-quality environmental supervision and out- shale gas extraction in some parts of the country comes by ensuring adequate resources for efficient have heightened public awareness and concerns. In and effective regulation and enforcement. Govern- some cases, natural gas and oil production activity is ment officials should also ensure that their regula- increasing in populated areas and in closer proximity tory requirements evolve and keep pace with the to residential areas. development of new and highly effective practices. The NPC recommends cooperation between the Companies gain exposure to and adopt new tech- councils of excellence and regulators. Community nologies and operating practices in different ways engagement needs to be a core value and fundamen- and at different rates. More systematic mechanisms tal practice of companies, and these councils may be to identify, evaluate, and disseminate information ways to communicate constructive avenues to share to companies and regulators about effective environ- information with communities and to listen to their mental, health, and safety practices with a regional concerns. Companies should also increase efforts focus would improve information transfer. In light to reduce emissions from their gas production and of the many existing organizations involved in one delivery activities. Finally, governments should or another aspect of this work, the focus should be structure policies to support prudent development on developing mechanisms for information sharing, of resources. and not the establishment of new bureaucracies. The goal would be to promote more consistently high- Establish Councils of Excellence for quality performance on environment, safety, and Sharing Effective Environmental, health issues across all companies. The concept is Health, and Safety Practices for the council(s) to be nimble, flexible, technically competent, and aimed at collecting and disseminat- Over many decades, natural gas and oil compa- ing effective environmental, health, and safety prac- nies have made continuous and significant improve- tices to all interested parties, rather than reinventing ments in production processes and practices. These the wheel. have resulted in energy production with lower envi- ronmental impacts. Although accidents, spills, and There are existing examples of mechanisms for other problems have occurred, overall environmental sharing (and developing new) effective practices, including the recently formed Center for Offshore 33 STRONGER is a nonprofit organization whose purpose is to Safety under API, as well as activities by the Society assist states in documenting the environmental regulations of Petroleum Engineers and the Petroleum Technol- associated with the exploration, development, and production of crude oil and natural gas; it uses a voluntary peer-review ogy Transfer Council. Each has its own particular process of state regulatory approaches in order to share inno- mission, structure that includes non-industry rep- vative techniques and environmental protection strategies, resentatives, and programmatic activities with the and to identify opportunities for program improvement. The goal of enhancing the performance of its members. Ground Water Protection Council is a nonprofit organiza- Another example is the API’s standard-setting orga- tion whose members consist of state groundwater regulatory agencies, which promote and ensure the use of best manage- nization – which is separate from API’s advocacy ment practices and fair but effective laws regarding compre- organization and is responsible for developing many hensive groundwater protection. The Interstate Oil and Gas standards and recommended practices for onshore Compact Commission is a chartered multistate government and offshore operations through a standard- agency that promotes the conservation and efficient recov- ery of domestic oil and natural gas resources while protecting development process that encourages third-party health, safety, and the environment. participation.

EXECUTIVE SUMMARY 25 Natural gas and oil companies should draw upon existing activities, as appropriate, and form “council(s) of environmental safeguards and practices. of excellence” that may be affiliated with or grow out While the leaders of many natural gas and oil of an existing organization. Their function would be companies are already committed to excellent to act as a centralized repository and more systematic environmental performance and take action mechanism to collect, catalog, and disseminate envi- to ensure this at their firms, all leaders of nat- ronmental, health, and safety standards, practices, ural gas and oil companies should commit and procedures, and management systems that pertain lead their firms to excellent environmental to a region and resource play. Because development performance. These companies should con- of natural gas and oil resources differs depending on sider more effective environmental, health, factors such as the geology, water resources, geog- and safety performance as critical success fac- raphy, and land uses of the region, what constitutes tors for their enterprises. effective practice may well be regionally defined. As yy Natural gas and oil companies should estab- such, there may be a need for multiple councils, each lish regionally focused council(s) of excellence with a regional focus. The council(s) would be indus- in effective environmental, health, and safety try led, but should be open to companies, regulators, practices. These councils should be forums policymakers, nongovernmental stakeholders, and in which companies could identify and dis- the public. Their information would be publicly acces- seminate effective environmental, health, and sible to interested parties as well as government agen- safety practices and technologies that are cies. Experience in developing a first regional council appropriate to the particular region. These (potentially in the Marcellus region) could provide may include operational risk management insights for other subsequent councils. approaches, better environmental manage- A result of such council(s) of excellence should be ment techniques, and methods for measuring continuous improvement by all company participants environmental performance. The governance (and others, including nonparticipating companies structures, participation processes, and trans- and regulators). Effective practices are not static. parency should be designed to: promote engage- They must evolve with changing technology, and dif- ment of industry and other interested parties, ferent effective practices will apply in different types and enhance the credibility of a council’s prod- of development areas. ucts and the likelihood they can be relied upon by regulators at the state and federal level. There are many existing organizations that are already seeking to collect and disseminate relevant information and assist state regulators to have more Adopt Policies for More Effective effective environment, health, and safety regulatory approaches. These organizations include STRON- Regulation of Natural Gas and Oil GER, the GWPC, and the IOGCC. The proposed coun- Production and Operations cils should benefit from their efforts and be useful to Most regulation relating to natural gas and oil pro- them as well. One of these existing multistate organi- duction in onshore areas occurs at the state rather zations should be considered as a possible vehicle for than the federal level. In the 33 states where natural housing these councils. gas and oil resources are currently in development, state agencies establish most of the terms and condi- Recommendation tions under which natural gas and oil production may occur. This is particularly true for mineral resources The NPC makes the following recommenda- located on or under lands in private ownership. The tions for more effective environmental perfor- federal government has jurisdiction over develop- mance of natural gas and oil production and ment on federal land, where federal mineral rights delivery operations: exist under privately owned lands, and in the offshore areas of the Outer Continental Shelf. yy The leaders of companies set the expectations for their individual organizations and focus Within this context of natural gas and oil devel- attention on the critical nature and importance opment on private and public lands, there are mul- tiple and overlapping areas of regulatory jurisdiction.

26 PRUDENT DEVELOPMENT: Realizing the Potential of North America’s Abundant Natural Gas and Oil Resources States are heavily involved in regulating the terms and resources, including sufficient staff, training, and conditions of access to and environmental impacts of technical expertise. A fee-based funding mechanism resource development and extraction, while local gov- is one approach that could provide these resources ernments often regulate land-use issues. The federal in states where there are neither the resources nor government regulates certain aspects of air pollution, adequate industry contributions to support this func- water resource protection, and wastewater disposal. tion, provided that such fees support the institutional Where the federal government itself owns the land or mission of efficient and effective regulation and are mineral rights, the federal government also controls not used solely to increase taxes for general budgetary land use, terms and conditions of access and use, and support. many other issues. For both state and federal regulation, it is important Recommendation that regulatory requirements and oversight evolve to incorporate new technological developments and The NPC makes the following recommenda- practices. This is necessary to identify new standards tions for more effective regulatory programs: that may arise from the development of new science yy Leaders of governments must be commit- or technical information, and to keep up with the pace ted to efficient and effective oil and natural of industry activity. gas regulation; create organizational cultures While regulation of companies’ access to and devel- aimed at that outcome; and ensure that their opment of natural gas and oil resources exists in regulatory requirements evolve with improve- every state where such resources are located, states ments in scientific information, technology, use different approaches and different standards in and operational practices. regulating the industry due to varying geologic, cli- yy State and federal agencies should seek a bal- mate, environmental, institutional, and statutory ance between prescriptive and performance- factors. Over the years, the states have adopted tools based regulations to encourage innovation to help each other do their jobs better. An example and environmental improvements while is the STRONGER organization, which provides peer maintaining worker and public safety. reviews of state regulatory approaches. STRONGER is a nonprofit organization comprised of environmen- yy Federal agencies should undertake efforts to tal, state, and industry stakeholders. STRONGER’s better coordinate and streamline permitting mission is to assist states by sharing innovative tech- activities on federal lands and in the Outer niques and environmental protection strategies for Continental Shelf. exploration, development, and production of oil and y natural gas. Another example is the IOGCC through y Regulators at the federal and state level should which oil- and gas-producing states share informa- gain practical insights from the work of cred- tion and tools to solve common problems, focus on ible council(s) for excellence in effective envi- model statutes and environmental stewardship, and ronmental, safety, and health practices. acknowledge their differences. yy Regulators at the federal and state level should Effective regulatory oversight should support the have sufficient funding to ensure adequate multiple objectives of prudent development and take personnel, training, technical expertise, and into account different operating conditions for devel- effective enforcement to properly regulate opment and operations. Such oversight benefits not natural gas and oil companies. just the public, but also industry, by providing skilled yy STRONGER should be bolstered and increase regulatory personnel who can handle issues effi- the scope of its activities. All states with natu- ciently and effectively and keep abreast of technologi- ral gas and oil production should actively par- cal developments. In addition, effective and credible ticipate in STRONGER and use its recommen- regulatory oversight should take into consideration dations to continuously improve regulation. standards set by independent standard-setting orga- It should be adequately funded, including nizations – and strengthen regulation consistent from the federal government. with evolving standards for prudent development. To achieve these goals, regulators require adequate

EXECUTIVE SUMMARY 27 Figure ES-11. The NaturalFigure Gas ES-11. and Oil The Industry Natural GasIs Well and Regulated: Oil Industry Is Well Regulated: Project Development Requirements in Pennsylvania

1. LEASE LAND 2. SEISMIC ACQUISITION 3. SITE SELECTION 4. LOCAL CONSTRUCTION FEMA/Local-Flood Plain Determination Multiple Use Stipulations DCNR - Seismic Survey Agreement U.S. FAA – Air Clearance Consult Non-Surface Use Stips U.S. Fish & Wildlife PA Biological Review Federal ESA Review DCNR Pre-const. EA Forestry Approval of Location NOI to DEP (w/ Local Notice & Comment) DCNR – Species of Concern PA Game PA DEP – Road Const. Plan Managing Agencies – Seasonal Activity High Occupancy Road Permits PA Fish & Boat DCNR Location and Approval Restrictions Local Zoning Issues PNDI – Mapping DEP – COE - Wetlands & Stream Crossings PA DOT – Road Const. Permits Seasonal Game Restrictions PA Game Comm. – Right-of-Way & Spec. Use PA Game Commission – Species of Concern PA County – Local Road Const. Permits START Stream, Road & Pad Buers DEP Explosive Permits PA Fish & Boat – Species of Concern SRBC – Water Access Permits

LEASE CONDITIONS Holiday Work Restrictions PA DOT – State Road Permits U.S. F&W – Federal ESA Issues; Seasonal Stips Local Municipal – Zoning & Land Development Permits Disturbance Limits PA County – Local Road Use Permits Penn-State Historical Preservation - Road Use Bonds Cultural Resources

DEP – Pre-Const. Meeting Collect Seismic Data Storm water - Submit Bid to SLO Evaluate Data Pre-Const. Notice (BMP) Activity Notice – Various Agencies Build Location & Access Roads DEP – Inspection Compliance Monitoring (Life of Well)

5. DRILLING AND COMPLETION 6. WELL START UP AND PRODUCTION 7. RESTORATION AND RELEASE Local Water Well Survey & Tests DEP – Coal/Non-Coal Determination Repeat Steps 3 & 4 Surface Owner Sign-o DEP – Air Permits DEP – File Drilling Plan – Compliant Frac Focus Report DEP – Plugging Permit with PA Const. & Op. Stds. EPA – SPCC Requirements SRBC – Post Drill Report Landowner / Lease - Adhere END DEP – Pre-Spud Notication to Restoration Requirements Local Sewage Permits DEP – Solid Waste Mgmt Permit SRBC – Registration DEP – Gas Flaring Permit DEP PERMIT TO DRILLDEPTO PERMIT DEP – Post Drill Reports DEP/SRBC Water Mgmt Plan DECOMMISSIONING

INFRASTRUCTURE & HOOK UP

Construct Maintenance Activities Release of Cuttings & Waste Mgmt. (Tested & Gathering Lines Land & Location Sent to DEP Licensed Landll) Repeat Steps 3 & 4 Well Test & Clean Up Construct Inspections (Life of Well) Adhere to Previous Permit Conditions Permanent Obey All Lease Stips All Water Recycled Facilities DEP Operator – Shut-In Production EPA Plug Well Obey Local Ordinance Requests Solids – Disposed osite at Connect SRBC

Approved, Permitted Facility to Sales Line PRODUCEWELL Decommission & Remove Inspections & Oversight BACK TEMPORARY FLOW SPUD, DRILL & FRAC WELL DRILL & FRAC SPUD, COE Equipment PA Fish & Boat U.S. F&W Abandon Gathering Lines

PA Game Operator OF PRODUCTIONTERMINATION (See Steps 3 & 4) DCNR Monitor Well Integrity DEP (Reg. Req.) SRBC DCNR Local Operator

LEGEND: Source: Adapted from “Governor’s Marcellus Shale Advisory, Commission Report” by Jim Cawley, Lt. Governor, Commonwealth of BMP – Best Management Practice EPA – Environmental Protection Agency PNDI – PA Natural Diversity Inventory Pennsylvania, July 22, 2011. Full Report Found at http://www.pa.gov. Also see Pennsylvania Public Records for Grugan COE – U.S. Army Corps of Engineers ESA – Federal Endangered Species Act SLO – State Lands O ce development: Gathering Line - Permit #ESX10-035-0002, GP0518291004, GP0818291001; COP Tract 289 Pad E - DCNR – PA Dept. of Conservation & FAA – Federal Aviation Administration SPCC – Spill Prevention, Control & Permit #ESX10-081-0076, API #37-081-20446 (Well #E-1029H); COP Tract 285 Pad C - Permit #GP0718291001, ESX10-035-0007. Natural Resources Countermeasure Plan NOI – Notice of Intent Additional reporting and oversight required for exceptions to permitted activity not shown. DEP – PA Dept. of Environmental Protection PA DOT – PA Dept. of Transportation SRBC – Susquehanna River Basin Commission EA – Environmental Assessment U.S. F&W – U.S. Fish & Wildlife Service

28 PRUDENT DEVELOPMENT: Realizing the Potential of North America’s Abundant Natural Gas and Oil Resources Figure ES-11. The Natural Gas and Oil Industry ProjectIs Well Regulated: Development Project Requirements Development Requirementsin Pennsylvania in Pennsylvania

1. LEASE LAND 2. SEISMIC ACQUISITION 3. SITE SELECTION 4. LOCAL CONSTRUCTION FEMA/Local-Flood Plain Determination Multiple Use Stipulations DCNR - Seismic Survey Agreement U.S. FAA – Air Clearance Consult Non-Surface Use Stips U.S. Fish & Wildlife PA Biological Review Federal ESA Review DCNR Pre-const. EA Forestry Approval of Location NOI to DEP (w/ Local Notice & Comment) DCNR – Species of Concern PA Game PA DEP – Road Const. Plan Managing Agencies – Seasonal Activity High Occupancy Road Permits PA Fish & Boat DCNR Location and Approval Restrictions Local Zoning Issues PNDI – Mapping DEP – COE - Wetlands & Stream Crossings PA DOT – Road Const. Permits Seasonal Game Restrictions PA Game Comm. – Right-of-Way & Spec. Use PA Game Commission – Species of Concern PA County – Local Road Const. Permits START Stream, Road & Pad Buers DEP Explosive Permits PA Fish & Boat – Species of Concern SRBC – Water Access Permits

LEASE CONDITIONS Holiday Work Restrictions PA DOT – State Road Permits U.S. F&W – Federal ESA Issues; Seasonal Stips Local Municipal – Zoning & Land Development Permits Disturbance Limits PA County – Local Road Use Permits Penn-State Historical Preservation - Road Use Bonds Cultural Resources

DEP – Pre-Const. Meeting Collect Seismic Data Storm water - Submit Bid to SLO Evaluate Data Pre-Const. Notice (BMP) Activity Notice – Various Agencies Build Location & Access Roads DEP – Inspection Compliance Monitoring (Life of Well)

5. DRILLING AND COMPLETION 6. WELL START UP AND PRODUCTION 7. RESTORATION AND RELEASE Local Water Well Survey & Tests DEP – Coal/Non-Coal Determination Repeat Steps 3 & 4 Surface Owner Sign-o DEP – Air Permits DEP – File Drilling Plan – Compliant Frac Focus Report DEP – Plugging Permit with PA Const. & Op. Stds. EPA – SPCC Requirements SRBC – Post Drill Report Landowner / Lease - Adhere END DEP – Pre-Spud Notication to Restoration Requirements Local Sewage Permits DEP – Solid Waste Mgmt Permit SRBC – Registration DEP – Gas Flaring Permit DEP PERMIT TO DRILLDEPTO PERMIT DEP – Post Drill Reports DEP/SRBC Water Mgmt Plan DECOMMISSIONING

INFRASTRUCTURE & HOOK UP

Construct Maintenance Activities Release of Cuttings & Waste Mgmt. (Tested & Gathering Lines Land & Location Sent to DEP Licensed Landll) Repeat Steps 3 & 4 Well Test & Clean Up Construct Inspections (Life of Well) Adhere to Previous Permit Conditions Permanent Obey All Lease Stips All Water Recycled Facilities DEP Operator – Shut-In Production EPA Plug Well Obey Local Ordinance Requests Solids – Disposed osite at Connect SRBC

Approved, Permitted Facility to Sales Line PRODUCEWELL Decommission & Remove Inspections & Oversight BACK TEMPORARY FLOW SPUD, DRILL & FRAC WELL DRILL & FRAC SPUD, COE Equipment PA Fish & Boat U.S. F&W Abandon Gathering Lines

PA Game Operator OF PRODUCTIONTERMINATION (See Steps 3 & 4) DCNR Monitor Well Integrity DEP (Reg. Req.) SRBC DCNR Local Operator

LEGEND: Source: Adapted from “Governor’s Marcellus Shale Advisory, Commission Report” by Jim Cawley, Lt. Governor, Commonwealth of BMP – Best Management Practice EPA – Environmental Protection Agency PNDI – PA Natural Diversity Inventory Pennsylvania, July 22, 2011. Full Report Found at http://www.pa.gov. Also see Pennsylvania Public Records for Grugan COE – U.S. Army Corps of Engineers ESA – Federal Endangered Species Act SLO – State Lands O ce development: Gathering Line - Permit #ESX10-035-0002, GP0518291004, GP0818291001; COP Tract 289 Pad E - DCNR – PA Dept. of Conservation & FAA – Federal Aviation Administration SPCC – Spill Prevention, Control & Permit #ESX10-081-0076, API #37-081-20446 (Well #E-1029H); COP Tract 285 Pad C - Permit #GP0718291001, ESX10-035-0007. Natural Resources Countermeasure Plan NOI – Notice of Intent Additional reporting and oversight required for exceptions to permitted activity not shown. DEP – PA Dept. of Environmental Protection PA DOT – PA Dept. of Transportation SRBC – Susquehanna River Basin Commission EA – Environmental Assessment U.S. F&W – U.S. Fish & Wildlife Service

EXECUTIVE SUMMARY 29 Commit to Community Engagement Recommendation Every natural gas and oil company must be commit- ted to community engagement. Even though a com- The NPC makes the following recommenda- pany may believe its environmental performance is at tions to increase community engagement by the highest level, maintaining transparency regarding natural gas and oil companies and, in so doing, issues is important to public stakeholders. Industry support prudent development practices: needs to explain its production practices and environ- yy Natural gas and oil companies should engage mental, safety, and health impacts in nonproprietary terms. The public should have the information neces- affected communities to establish shared sary to have an understanding of the challenges, risks, understandings of expectations and aware- and benefits associated with natural gas and oil pro- ness of issues and facts. duction, including the cumulative impacts in a region yy Engagement should include sharing of infor- of the development of multiple wells. Transparent mation relevant to the community on a trans- reporting of comparable and reliable information parent and comparable basis. can provide companies the tangible and intangible benefits of stronger relationships with communi- yy The industry and state and federal agencies ties, employees, and public interest groups. This is an must develop and disseminate science-based essential part of earning and maintaining public trust information on practices and risks to inform and critical to establishing appropriate public policies the public and build public confidence. and regulations. yy All levels of the natural gas and oil industry While providing information is important, natural should use appropriate and comprehensive gas and oil companies should also work with com- predevelopment planning, risk assessment, munities and seek ways to reduce the tangible or per- and innovative applications of technology, ceived negative impacts of development. This should which must be adapted to the variability of include predevelopment planning to identify issues resource types and regional differences. such as noise and traffic and seek ways to mitigate yy Every natural gas and oil company that uses them. Companies should ask for alternative views, hydraulic fracturing should participate in and reflect stakeholders’ positions in strategic objec- FracFocus and comply with applicable state- tives and communications. mandated registries. The Department of the One recent example of the natural gas and oil Interior should require every natural gas and industry’s community engagement is found in Frac- oil company that uses hydraulic fracturing on Focus, the hydraulic fracturing chemical registry federal lands to participate in FracFocus. website. A joint project of the GWPC and the IOGCC, FracFocus provides a place where companies can post information about the chemicals used in the hydrau- Actions to Measure and Reduce lic fracturing of oil and gas wells. Many natural gas and oil companies participate in FracFocus, but not Methane Emissions all companies do so. Increasing the participation in Since methane is a potent GHG, emissions should FracFocus to all natural gas and oil companies that be minimized in production and delivery. The engage in hydraulic fracturing, and adding into the EPA Gas STAR program is a voluntary industry- system all wells currently in drilling or production, government partnership that has helped to elimi- would be an important step in raising the level of nate over 900 Bcf of methane emissions since 1993. community engagement. However, Gas STAR lacks robust quantification pro- Another example is the practice of drilling multiple tocols to document the reductions and does not fully wells from a single pad, which can significantly reduce account for reduction practices employed within the truck traffic and minimize surface disturbance. the industry. Moreover, not all companies partici- Much effort is now going into innovations aimed at pate in Gas STAR. An enhanced Gas STAR industry- significantly reducing the water usage for hydraulic government partnership, or an alternative, could fracturing, and it is expected that the effects will be provide an improved forum to review the barriers seen over the next few years. to greater adoption of methane emission-reducing

30 PRUDENT DEVELOPMENT: Realizing the Potential of North America’s Abundant Natural Gas and Oil Resources technologies, develop and fund research for a variety In places, the term of leases can pose access prob- of new methane reduction technologies, and update lems. For example, offshore areas could make an processes and practices to improve emissions account- important contribution to natural gas and oil supply ing and reduction protocols. over the next 20 to 30 years. Steps that could allow these areas to be considered for development, such as Compliance with the EPA mandatory reporting of updated resource assessments and the development GHG emissions should result in improved character- of environmental impact studies, are important to ization of the emissions profile of the industry and sustaining supply potential. Also, proposals that put enable identification and adoption of technologies to into question the status of existing leases where drill- minimize the loss of natural gas. ing activity has not yet taken place (“use it or lose it”) are a threat to adequate access and resource develop- ment. It can take considerable time to develop lease Recommendation exploration and drilling plans and receive requisite The NPC makes the following recommenda- approvals, since drilling activity requires water and air tions to reduce methane emissions: discharge permits and other environmental assess- ments. In some areas, such as the high-cost, finan- yy Use industry-government partnerships to cially risky offshore environment, 10-year lease terms promote technologies, protocols, and prac- are a minimum length of time for these processes and tices to measure, estimate, report, and reduce decisions to be made. Longer lease periods would be emissions of methane in all cycles of produc- more effective in frontier areas such as the Arctic, tion and delivery. which have shorter annual drilling windows, very limited processing and transport infrastructure, and yy Ensure greater adoption of these tech- more complex permitting procedures and environ- nologies and practices within all sectors of mental review processes. the natural gas industry, with a focus on significantly reducing methane emissions A second necessary condition to enable develop- while maintaining high safety and reliability ment is predictable regulatory regimes. The public standards. has a right to expect regulatory compliance by com- panies and proper government oversight. However, examples of overlapping or conflicting regulations Other Policies to Support that unreasonably impede development should be Prudent Development addressed. State or Canadian provincial regulations are usually more adapted to local subsurface and sur- Access to resources is a necessary condition for oil face conditions, which can vary widely across regions and gas development. The ability to develop subsur- of North America. Timely decision-making and regu- face areas with known or potential natural gas or oil latory clarity should also be objectives of government resources often depends on decisions of owners of policy. Delays and “regulatory congestion” not only land and mineral rights and of policymakers. In cir- create uncertainty and draw out projects, but they cumstances of limited or contested access, even where can also negatively affect the economics of projects there is a known natural gas or oil resource, explora- and add costs. Regulators should take care to ensure tion and development activities cannot be undertaken that they aim their regulatory processes on achieving effectively. Access limitations can be explicit, such meaningful outcomes, and minimize situations where as recent moratoria applied to shale exploration and long review periods produce diminishing returns to development in some areas. Limitations can occur the public. less explicitly, resulting from ineffective or unpredict- able permitting regimes, or public opposition. Recent The third necessary condition to enable develop- advancements in technology and operating practices ment is continued support for research and technol- may be able to alleviate some environmental concerns ogy development. Much research and technology that originally contributed to these access restric- development is conducted by private companies, and tions. Policymaking on issues affecting access should it is important to not jeopardize this private enter- reflect a balance of economics, energy security, and prise system of innovation. However, sometimes the environmental protection. payoff period for such research is too long to attract

EXECUTIVE SUMMARY 31 private support. Therefore, private investment can- not be counted on to perform this work. In other federal agencies may be appropriate homes cases, the intellectual property developed by research for a range of research and technology devel- is better held as a public good rather than being held opment efforts, the Department of Energy privately. This can occur when the benefits of the should lead in identifying, in some cases research would accrue to the United States as a whole, funding, and in other cases supporting yet do not meet the criteria of any individual company public-private partnerships for research and to justify the investment. development on energy and certain environ- mental issues of national interest (e.g., pre- commercial issues or issues where companies Recommendation cannot retain intellectual property). Examples where federal involvement is needed include: The NPC makes the following recommenda- tions regarding other policies to support −− The environmental impact of oil spills prudent development of natural gas and oil and cleanup, including residual effects of resources: chemical dispersants, and science-based risk assessments yy Policymakers on issues affecting access should reflect the balance of economic, −− Science and pre-commercial technology energy security, and environmental issues, relating to methane hydrates and consider technology and operational −− Technology and methods for understand- advancements that allow environmentally ing, quantifying, and mitigating the envi- responsible development. ronmental impacts and other risks of natu- yy Revise policies applicable to frontier areas ral gas and oil development to continue to with long lead times, challenging physical improve the environmental performance of conditions, or new technology applications exploration and development activities (e.g., deep offshore Gulf of Mexico and Arctic). −− Assessments of resource base in areas −− Allow the length of leases to correspond currently off limits to exploration and to the long development lead times neces- production. sary to allow for appropriate incentives for private-sector investments in exploration and prudent development. Better Reflect Environmental −− Maintain tailored royalty relief targeted Impacts in Markets and Fuel/ towards supporting pre-commercial invest- Technology Choices ment by early adopters of new technology or entrants into new types of resources with Potential Policies for Internalizing potential for the long-term resource devel- the Cost of Carbon Impacts into opment. Fuel Prices yy Congress should ensure adequate funding to the Energy Information Administration for In recent years, the substitution of natural gas for the collection, analysis, and communication of coal in electric power generation has decreased GHG data on natural gas, oil, and other elements of emissions. Moreover, if the EPA’s proposed non-GHG the energy system. All are essential to support rules for power plants take effect, additional GHG informed decisions by governments, private emissions reductions are expected to occur. firms, and the public. In his letter asking the NPC to conduct this study, yy Even as natural gas and oil companies con- the Secretary of Energy asked the NPC to examine the tinue to fund their own proprietary technol- contribution that natural gas could make in a transi- ogy and other research, federal government tion to a lower carbon fuel mix. He did not ask the agencies should also support the develop- NPC to weigh in on the merits of adopting a climate ment of new technology. While different policy. However, the NPC does believe that any con- sideration of climate policy should take into account

32 PRUDENT DEVELOPMENT: Realizing the Potential of North America’s Abundant Natural Gas and Oil Resources the impacts on the national economy and competi- tiveness, the environment, and energy security, and Recommendation be part of a global framework. The NPC makes the following recommenda- The NPC recognizes, however, that the United tions with respect to potential policies for States, with its market-based economy, will find it diffi- internalizing the cost of carbon impacts into cult if not impossible to substantially further decrease fuel and technology choices: its GHG emissions without introducing higher costs or regulatory controls associated with GHG emissions yy As Congress, the administration, and rel- from development, delivery, or combustion of fossil evant agencies consider energy policies, they fuels. Absent a price on carbon, energy efficiency and should recognize that the most effective and those power sources with lower carbon intensity – efficient method to further reduce GHG emis- such as renewables, nuclear, and natural gas – will tend sions would be a mechanism for putting a to be undervalued as individuals, businesses, and gov- price on carbon emissions that is national, ernments make decisions. A price on carbon, implied economy-wide, market-based, visible, pre- or explicit, or similar regulatory action that prices the dictable, transparent, applicable to all sources environmental costs of fossil fuel emissions, will help of emissions, and part of an effective global to accelerate shifts to lower carbon-intensity sources framework. of electric power. Such policies could take the form of −− Should policymakers implement clean an explicit carbon price, such as a carbon tax, or other energy standards or other electric gen- market mechanisms. eration performance standards, such poli- If policymakers were to adopt a carbon-pricing cies should allow natural gas to qualify as mechanism, the policy should ensure that the carbon a clean energy source based on relative price signal is not distorted to favor one energy source carbon-related emissions performance. over another except with respect to carbon inten- yy Any policy should include consideration of sity. There should be a level playing field with regard the impacts on the national economy and to carbon-related attributes of energy alternatives. industry and should provide a predictable Designed appropriately, a carbon policy could provide investment climate. To minimize adverse the economic incentive for further improvements in impacts on energy security and affordabil- energy efficiency; increased use of lower-carbon fuels ity, implementation should address the need such as natural gas; as well as for the development of for phase-in of carbon prices and emission other low- to zero-emitting technologies including controls. renewables, nuclear, and technologies that allow for

capture and sequestration of CO2. Other policies can introduce an implied carbon price, such as through the use of a performance standard, a clean energy stan- Policies for Keeping Options Open for dard (CES), or coal plant retirement incentives. If the Advanced Technology for CCS United States were to proceed with a CES, then such a CES policy should include natural gas as a “qualified Direct and indirect policies to set a price on carbon clean energy” source for both new and existing natu- emissions from fossil fuel combustion and delivery ral gas power plants. All energy resources included would value natural gas’ ability to provide energy in a CES should be qualified on the basis of life-cycle with lower GHG emissions than other fossil fuels. analysis that reflects total emissions from the fuel, However, if very deep reductions in GHG emissions including production, delivery, and combustion. are desired over the long run, fossil fuels, including natural gas, could play only a limited role in providing A national carbon policy, incorporating the charac- energy unless there is a means to capture and seques- teristics in the recommendation below, would help pro- ter the CO2 emissions from burning fossil fuels. CCS vide predictable signals for decisions about long-lived could provide such a means. capital investments and allow for innovation and incre- mental steps towards a lower carbon energy mix. Pro- Currently, CCS research is focused on coal-fired viding clarity on carbon policy would reduce regulatory power production. However, all fossil fuels, includ- uncertainty and help business investment decisions. ing natural gas, would benefit from CCS; thus, CCS

EXECUTIVE SUMMARY 33 research, development, and demonstration should be fuel neutral and include options that allow for Recommendation potential applications in and out of the power sec- tor. Therefore, CCS research and development To keep the option open in the long run of using funding should include natural gas. The petroleum natural gas in a situation where deeper reduc- refining and natural gas processing industries have tions in GHG emissions are desired or necessary, the NPC makes the following recommenda- been separating CO2 from gas streams for decades and have invested significant research in develop- tions regarding advanced technology for CCS: ing technologies for making this separation. Even yy The federal government should work with so, separating CO2 remains expensive. Additional the states, universities, and companies in the research might lower this cost. There is also a electric, oil and gas, chemical, and manufac- need for further research on aspects of long-term turing sectors to: geological storage. −− Fund basic and applied research efforts on CCS such as the cost of carbon capture, CO2 separation from flue gas on the scale of a large electric power plant has not been demonstrated to geologic issues, and the separation of CO2 date. Full-scale demonstration projects would pro- from combusted gases vide the opportunity to learn how current CCS tech- −− Develop some number of full-scale CCS nologies might work on a large scale. Several dem- demonstration projects on a range of tech- onstration projects are underway and more have nologies and applications been proposed. CCS demonstration projects will −− Establish a legal and regulatory framework require government support in the near term, since that is conducive to CCS they will be uneconomic without a significant price on carbon. −− Find mechanisms to support the use of anthropogenic CO2 without raising its cost A way to reduce the cost of research and devel- to users in appropriate EOR applications opment of CCS is to combine it with commercial −− Strive to be fuel, technology, and sector opportunities for using captured CO2. Enhanced oil neutral, and include a range of geologic recovery is a technique currently in use for increas- storage options. ing the amount of oil that can be extracted from an oil field. When CO2 is injected into certain types of

oil fields for EOR, the CO2 enhances oil mobility and can increase recovery from a reservoir. This use of Policies for Providing Information

CO2 in EOR can be a method of geologic sequestra- about Environmental Footprints and tion and it can provide first movers with repositories Full Fuel Cycle Impacts for scaled-up capture projects. CO2 EOR production has been increasing for the last two decades and now All energy choices involve trade-offs of one form or amounts to about 10% of onshore conventional oil another. Environmental footprint analyses incorpo- volumes. rate the impacts that energy choices have on a variety of impact measures, including water and air quality, There are various mechanisms to support fund- land and water resource use, human health, and wild- ing for research, development, and demonstration life health. Such footprint analyses provide a method programs, and policymakers should consider inno- for comparing the impacts of energy resources on dif- vative methods to address support for CCS research ferent environmental outcomes. For example, a well- and development. In addition, the need to “develop constructed footprint analysis would compare on a the legal and regulatory framework to enable CCS” common basis the water use or land use associated remains as important today as it was when Hard with extraction of one energy resource such as shale Truths was published in 2007. These include policies gas development, with other energy resources such as that provide for a clear transfer of long-term respon- coal or biofuels. In that example, water use could be sibility for closed storage sites, after appropriate site measured in terms of energy content of the fuel or in integrity verification, to a government or other public terms of each fuel’s ability to power a common unit of entity for long-term management. electricity.

34 PRUDENT DEVELOPMENT: Realizing the Potential of North America’s Abundant Natural Gas and Oil Resources In theory, an environmental footprint analysis is In contrast to environmental footprint analysis, an objective, science-based assessment of the poten- a full fuel cycle (FFC) analysis is a tool that can help tial positive and negative impacts of each energy inform choices about end-use technologies, such as a source. In practice, however, environmental foot- natural gas versus an electric water heater. Such an print analyses are in early stages of development, FFC analysis incorporates information about both with analyses exhibiting different techniques for the impacts (e.g., CO2 emissions) of energy consump- measuring impacts and widely varying assump- tion at the point of ultimate consumption, as well as tions that often end up producing apples-to-oranges those impacts attributable to the energy consumed or comparisons across fuel and energy resources. There vented as part of the fuel extraction, processing, and are technical issues such as incomplete data and the transportation. FFC analysis could also account for lack of consensus around quantification of impacts impacts associated with energy losses from thermal and risks. This latter fact complicates the ability of combustion in power-generation plants and energy this potentially important technique to provide poli- losses in transmission and distribution to homes and cymakers with useful information to evaluate the rel- commercial buildings. ative importance of the different impacts. Moreover, FFC analysis could inform energy-related policies at the different resource types for the same fuel may different levels and branches of government. FFC and have different impacts, such as with shale gas versus footprint analyses are particularly useful in under- conventional gas. Environmental footprint results, standing the complete impact of energy-related deci- however, are not intended to be a rationale for not sions on total energy consumed and total emissions, mitigating the impacts of any fuel. especially when comparing two or more fuel options Policymakers should refine their understanding of to achieve the same end-use result. FFC analysis could the life-cycle and environmental footprint of energy be applied in various decision-making settings, such sources, including natural gas and oil, as part of pro- as: development and implementation of appliance viding a high-quality information base for making and building energy efficiency standards; compari- decisions about energy choices that reflect the dif- sons of different technology choices such as a natu- ferent nature and intensity of impacts. Information ral gas water heater to an electric water heater; home from environmental footprint analyses could be incor- energy rating systems (HERS) index; and decisions porated into analyses used in making investment and about whether to approve power plant applications. purchasing decisions by consumers, producers, and Continued development of FFC methodologies state and federal governments. used to assess environmental benefits and costs of energy supplies would be instructive to policymakers, Recommendation consumers, and the industry alike.

The NPC makes the following recommenda- tions on environmental footprint analyses to Recommendation enhance the evaluation of the environmental The NPC makes the following recommenda- impact of energy resource choices: tions for full fuel cycle analyses to enhance yy The federal government should support the the evaluation of the environmental impact of development of consistent methodologies energy choices: for assessing environmental footprint effects yy The federal government should complete such as impacts on water and land. development of and adopt consistent method- yy As sound methodologies are established and ologies for assessing full fuel cycle effects. vetted, regulators and other policymakers yy As sound methodologies are established, regu- should use environmental footprint analyses lators and other policymakers should use full to inform regulatory decisions and in imple- fuel cycle analyses to inform regulatory deci- menting other policies where energy resource sions and implementation of other policies choices involve economic and environmental where fuel and technology choices involve trade-offs. energy and environmental trade-offs.

EXECUTIVE SUMMARY 35 Enhance the Efficient Use of Energy local authorities. To help state and local governments, the federal government can further support develop- Given the importance of energy efficiency and the ment and periodic update of national model energy continuing availability of untapped economical effi- codes, allowing and encouraging states to adopt the ciency opportunities, the NPC finds that stronger most recent of such codes.34 These model codes are action is still needed: typically updated on a three-year schedule. The fed- eral government can also provide technical assistance, y y To enhance efficiency of energy use in buildings and training, and other measures to improve state and appliances, through: local ability to enact and enforce codes. −−Continued progress to adopt stronger efficiency standards for buildings and appliances While building codes typically apply only to new structures or major renovations, appliance standards −−Regulatory changes to remove the disincentives can reduce energy consumption in existing buildings. for natural gas utilities and electric utilities to Efficient new appliances in the residential and com- deploy energy efficiency measures. mercial sectors could reduce energy consumption yy To eliminate barriers to combined heat and power and, in turn, GHG emissions from these sectors by as a way to increase the efficiency of electricity 12% and 7%, respectively. FFC analysis could provide the basis for these appliance standards.35 production.

Enhance Efficiency of Energy Use in Recommendation Buildings and Appliances The NPC makes the following recommenda- Building and Appliance Efficiency Standards tions to support the adoption of energy effi- ciency in buildings and appliances: Buildings constitute a major source of demand for power, space heating and cooling, and lighting. yy The federal government should continue to In many situations, avoiding energy consumption support the updating of national model build- through installation of more efficient appliances or ing codes issued by existing institutions and changes to the building shell can be the most cost- to provide technical assistance, training, and effective strategy for satisfying customers’ energy other support for state and local enactment needs. Compared to implementing energy efficiency, and enforcement of the updated codes. all other energy resources and technologies involve y trade-offs among economic, environmental, and y The federal government should continue to energy security objectives. update energy efficiency standards for appli- ances and equipment over which it has statu- The 2007 NPC Hard Truths report identified many tory authority. energy efficiency policy options, most of which are yy Federal and state governments should consider still applicable today. Implementing energy-efficient incentives for products and buildings that are technologies can reduce the need to produce, deliver, more efficient than required by laws and stan- and transform energy, thus avoiding emissions and resource use, mitigating environmental and health dards, such as Energy Star qualifying products. impacts, saving consumers money, and enhancing yy State and local governments should adopt energy security. For instance, if the United States programs to support cost-effective energy effi- used energy at 1973 efficiency levels in all sectors ciency in buildings. of the economy, about 56% more energy would be consumed today – equal to another 52 quadrillion Btu that otherwise would have had to be extracted, 34 The International Energy Conservation Code (IECC) issued by delivered, combusted, or otherwise harnessed to pro- the International Code Council (ICC) develops national model duce usable energy for consumers’ needs. Increasing energy codes for residential buildings. The American National energy efficiency can thus provide long-term benefits. Standards Institute (ANSI), the American Society of Heating, Refrigerating, and Air-Conditioning Engineers (ASHRAE), Significant energy savings have been achieved in and the Illuminating Engineering Society of North America the United States through building codes and appli- (IESNA) Standard 90.1 are national model energy codes for ance and equipment standards. Building codes are commercial buildings. administered by the 50 states and by thousands of 35 See Chapter Four.

36 PRUDENT DEVELOPMENT: Realizing the Potential of North America’s Abundant Natural Gas and Oil Resources Utility Regulatory Policies to Support Greater or heating and produce electricity as a secondary Cost-Effective Energy Efficiency product for their own consumption or for sale. CHP can operate at nearly 70% energy-efficiency rates ver- Gas and electric utilities are natural entities to pro- sus about 32% for base-load coal plants. Today CHP vide some types of energy efficiency programs, such accounts for almost 9% of total electricity produced. as installing weather-proofing or distributing appli- ance rebates, because those utilities have information Greater use of CHP can provide a significant oppor- about the consumption patterns of their customers, tunity to lower energy costs and thus improve the have an ongoing relationship with them, and often competitiveness of manufacturing, while provid- have the expertise to implement energy efficiency ing larger societal benefits such as improving overall programs. Moreover, treating energy efficiency as a efficiency of power generation, lowering emissions, resource in their portfolio of supply options can help increasing reliability of the electric grid, and reducing utilities deliver supply for their customers at lower transmission losses. CHP’s power can be used inter- overall costs. nally or sold to the electricity grid.

Under traditional ratemaking policies, however, In many areas, regulatory barriers prevent other- utilities that sell electric power or natural gas to end- wise economic investments in CHP. These barriers use consumers have the incentive to sell more of their include rules relating to interconnecting CHP facilities product to consumers once rates have been set: higher to the grid, policies limiting the sale of CHP power to sales means higher revenues and lower sales means just the market, problems with pricing, and the ability to the opposite. To overcome this disincentive, ratemak- enter into long-term contracts for the power output ing policies should align the financial interests of both from CHP. Greater flexibility, for instance, is needed electric and gas utilities with those of their customers to allow manufacturing facilities to sell power to one in providing cost-effective energy efficiency measures. another, or in regulated states to wheel power from one facility to another. Additionally, typical environ- mental regulations also measure emissions of power Recommendation combustion as a function of heat input (e.g., emis- The NPC makes the following recommendation sions per Btu consumed) rather than emissions asso- to remove the disincentives for natural gas ciated with output (e.g., emissions per kilowatt-hour of output). This regulatory design disadvantages CHP utilities and electric utilities to deploy energy units and other, more efficient technologies. Higher efficiency measures: efficiency generally means lower fuel consumption yy State and federal utility regulators should and lower emissions of all pollutants. adopt for utilities: −− Ratemaking policies to align utility finan- Recommendation cial incentives with the adoption of cost- effective energy efficiency measures The NPC makes the following recommenda- tions to eliminate the barriers to CHP and thus −− Goals and targets for the deployment of increase the efficiency of electricity production cost-effective energy efficiency so as to sup- in the United States: port the adoption of cost-effective energy efficiency measures on a timely basis. yy State and federal utility regulators should adopt policies for both natural gas and electric utilities that remove barriers to CHP in inter- Remove Barriers to Combined Heat connection, power sales, and power transfers. and Power to Increase the Efficiency of yy Policymakers should include CHP and energy Electricity Production efficiency in any clean energy standard. Another opportunity for energy savings comes yy The EPA should use output-based perfor- from combined heat and power (CHP) facilities. Such mance standards for emissions from power facilities can function within industrial plants such as generation, including CHP, as a means to paper mills or chemical plants. CHP can also be found reflect inherent energy efficiency differences in large institutions such as universities or hospitals. in power generation technologies. These facilities produce steam for industrial purposes

EXECUTIVE SUMMARY 37 Enhance the Regulation of Markets Moreover, other factors provide further dampening on the potential for natural gas price volatility. First, In large part, the U.S. economy relies on open substantial investments in LNG import capacity made markets for goods and services that are influenced over the past decade could now serve almost one-third by government policy and regulation. Government of annual U.S. demand. Second, new investments regulation creates the rules of the road for markets. have been made in natural gas storage. Third, some Accordingly, the design and implementation of regu- states use demand response and energy efficiency in lations matter to accomplish desired results without order to manage price volatility. introducing needless restrictions or costs. In this study, the NPC found three areas where changes to Natural gas prices are currently low in comparison government regulation would enhance the function- to recent history, making gas-fired generation attrac- ing of energy markets and promote the goals of pru- tive relative to coal in some situations. One form of dent development of natural gas and oil resources, risk faced by builders of new natural gas-fired power and national economic prosperity, environmental plants is the perception that natural gas prices are more volatile than the prices of competing fuels sustainability, and energy security. These areas for such as coal. This perception is grounded in histori- improved regulation are: cal experience when utilities made investments in yy Mechanisms for utilities to manage the impacts of (or purchases of power from) natural gas-fired power price volatility generation technologies only to have the prices unex- yy Harmonization of market rules and service arrange- pectedly rise. The price increases created difficulties, as these costs needed to be allocated between produc- ments between the wholesale natural gas and ers and consumers in states with traditionally regu- wholesale electric markets lated electric utilities and natural gas utilities. Some yyEnvironmental regulatory certainty affecting regulators and electric utilities may fear another spike investments and fuel choices in the power sector. in prices, and be reluctant to engage in another era of gas-fired power generation investments. Also, in Mechanisms for Utilities to Manage the many states, the regulatory legacy resulting from out- Impacts of Price Volatility of-market, take-or-pay contracts from several decades ago creates regulatory risk and a barrier for electric Crude oil and natural gas price volatility poses a and gas utilities, if they were to enter into long-term challenge to the natural gas and oil industry and the contracts for natural gas and then gas prices change consumers of its products. Volatility is a measure in ways that introduce questions about the prudency of the pace and magnitude of price changes. Price of those original contract decisions. Even where vari- changes send signals to consumers and producers that ous contract instruments were used more recently for lead them to adapt their behavior to match market price hedging purposes, some utilities have been sub- conditions. Consumers tend to consume more when ject to hindsight review by state utility commissions prices are lower and less when prices rise. Higher and more recently have had to refund some hedging prices tend to encourage the development of addi- costs to ratepayers. These experiences with regula- tional supply, while lower prices tend to discourage tory risk have made investment in gas-fired genera- additional supply. Well-functioning and transparent tion less attractive for utilities. commodities futures markets provide producers and consumers of crude oil and natural gas the ability to Recommendation mitigate price volatility. The NPC makes the following recommenda- North American natural gas markets, with vast tions to allow natural gas utilities and electric domestic supplies, have been relatively insulated power utilities to manage their natural gas from global supply and demand shocks. Despite this, price risk: there have still been fluctuations in U.S. natural gas prices due to supply and demand imbalances, espe- yy The NPC supports changes in regulatory policy cially in the past decade. The recent development that remove regulatory barriers from utilities of unconventional natural gas resources, however, is managing their natural gas investment port- dramatically increasing supply relative to demand and folios using appropriate hedging approaches, dampening the expectation of future price volatility.

38 PRUDENT DEVELOPMENT: Realizing the Potential of North America’s Abundant Natural Gas and Oil Resources Further growth in natural gas use for power genera- including long-term contracts. Any such rules tion, however, should not be taken for granted. The should not impede the ability of utilities to increased use of natural gas for electricity produc- appropriately hedge their price risk. tion, especially during peak periods in regional gas yy Regulators (such as state utility commis- and electric markets, is raising concerns about poten- sions) and other policymakers should allow tial operational problems for both pipeline operators market participants such as utilities to use and power generators. Some power generators have mechanisms to mitigate and manage the identified some terms and conditions of natural gas impacts of price volatility. These mechanisms services that are inhibiting them from building and 37 include long-term contracts for natural gas, operating gas-fired generation plants. Conversely, use of hedging instruments by regulated some pipelines have stated that they are not being entities like utilities, and investment in stor- adequately compensated for providing service to gas- age facilities. fired generators that are backstopping intermittent renewables.38 Accordingly, federal and state regulators and industry leaders are calling for more formalized Harmonization of Market Rules and coordination between the electric and gas sectors. Service Arrangements between the This will not be an easy task. Both the natural gas Wholesale Natural Gas and Wholesale pipeline network and the electric transmission grid Electric Markets operate under different complex systems of rules and regulations that have evolved independently over From 2000 to 2010, the use of natural gas for decades. For example, the natural gas industry uses power generation has increased from 16 to 24% of a standardized definition of an operating day, but the total electric sector generation. In terms of fuel use, power sector has multiple definitions of operating the power sector’s use of natural gas grew from 14 to days. The scheduling rules and timelines for power 20 Bcf/d (rising from 22 to 31% of total gas demand). generators (e.g., for day-ahead and real time markets) Natural gas use for power generation is expected to may not synchronize between electric control areas increase further in the future, in light of three factors: or with pipeline capacity nomination schedules or yy A change in expectations about North American rights. Gas-fired generators not holding firm pipe- natural gas supply and costs due to the economic line transportation frequently have to commit power viability of shale gas development. Concerns about to the regional electricity grid before they have the high and volatile natural gas prices, flat production, assurance of pipeline capacity. With the prospects and increasing LNG imports have changed to fore- that natural gas will become an even larger supply casts of lower and more stable natural gas prices source for power generation, and with the increasing and abundant North American natural gas supplies need for natural gas generation to backstop intermit- that could meet almost any natural gas demand tent renewable generation, coordinating these respec- requirement.36 tive operating and regulatory systems will become increasingly complicated. yy An expectation of strong growth in intermittent renewable generation capacity that increasingly As natural gas and electric markets become more requires backup by gas-fired generation to stabilize entwined, greater coordination between the two will grid operations. be required. One way to enhance this coordination yy An expectation of substantial retirements of coal- and to minimize surprises is to increase the transpar- fired generation in the next few years as a conse- ency of operations. The Federal Energy Regulatory quence of implementation of the EPA’s proposed Commission has done this for natural gas markets non-GHG regulations, combined with lower gas by requiring interstate pipelines to post on the web price expectations. 37 See Chapter Three for a more complete discussion of issues relating to the interaction of natural gas and electric whole- sale markets. 36 See, for example, EIA, 2011 Annual Energy Outlook, Refer- ence Case wellhead price forecast for 2030 declined from 38 INGAA Foundation, Firming Renewable Electric Power Gen- $7.80 (2007$) per MMBtu for the 2009 Reference Case to erators: Opportunities and Challenges for Natural Gas Pipelines, $5.66 (2009$) for the 2011 Reference Case. March 2011.

EXECUTIVE SUMMARY 39 extensive data on their operations. Increasing the information about generation and transmission oper- yy Transmission operators should identify any ations would increase transparency and would benefit transmission bottlenecks or power market rules the smooth functioning of the market. that limit the ability of natural gas combined- cycle plants to replace coal-fired generation. Another interdependency issue that needs to be addressed is the recovery of costs incurred by pipe- lines in providing service to gas-fired generators Environmental Regulatory Certainty and, in turn, the recovery of those costs by gas-fired Affecting the Power Sector generators from electric customers. The diversity of various organized and non-organized wholesale The EPA is in the process of finalizing a number of power markets requires different approaches. regulations that will affect the power sector over the next several years. These include the Clean Air Trans- Finally, there is an expectation that any retirement- port Rule (now finalized and called the Cross-State related reduction in coal-fired generation can be met, Air Pollution Rule); the proposed Air Toxics rule (also to some extent, by existing gas-fired generation. How- known as the “Maximum Achievable Control Technol- ever, none of the retirement studies examined whether ogy” rule); and proposed regulations regarding cool- there were any electric transmission bottlenecks to ing water intake structures (the “316(b) Rule” under doing so. the Clean Water Act); and coal combustion byproducts (coal ash). Compliance costs associated with these regulations may contribute to some power plant own- Recommendation ers’ decisions to retire some coal-fired power plants The NPC recommends continuing the efforts rather than retrofit them to comply with the new envi- to harmonize the interaction between the nat- ronmental rules. There is debate in the industry with ural gas and electric markets: respect to costs, benefits, and effects on reliability. yy The Federal Energy Regulatory Commission, Economics suggest that natural gas generation will the North American Electric Reliability Cor- be a likely source of power to replace generation from poration, the North American Energy Stan- retired coal units. According to studies reviewed by dards Board, the National Association of the NPC, the estimated amount of coal-fired capac- Regulatory Utility Commissioners, and each ity that will retire through 2020 ranges from 12 GW formal wholesale market operated by the to 101 GW of capacity. Based on the study average of Regional Transmission Organizations should, 58 GW, this represents about 6% of total U.S. generat- with robust participation from market partici- ing capacity, or around 18% of coal-fired capacity. If pants, undertake to: this amount of coal-fired generation is replaced by gas- fired generation as a result of these regulations, there −− Develop policies, regulations, and standard- could be a decrease in power sector CO2 emissions of ized business practices that improve the 11% of total emissions by 2020. Other impacts would coordinated operations of the two indus- include lower electric power sector emissions of sulfur tries and reduce barriers that hamper the dioxide, nitrogen oxides, and mercury, with reductions operation of a well-functioning market of 19%, 16%, and 12%, respectively, below 2005 levels. −− Increase the transparency of wholesale elec- tric power and natural gas markets Current uncertainty regarding the timing and con- tent of some of the pending EPA regulations contrib- −− Address the issue of what natural gas ser- utes to some power plant owners and operators wait- vices generators should hold, including firm ing to make decisions on affected power plants and on transport and storage, and what services alternatives in the marketplace. These decisions may pipeline and storage operators should pro- include whether and when to retire aging coal-fired vide to meet the requirements of electricity power plants, as well as whether and when to build generators as well as compensation for such other generation types, including natural gas genera- services for pipeline and storage operators tion. Increasing the certainty with respect to the timing and generators of new regulations would support timely investment decisions affecting an important amount of power

40 PRUDENT DEVELOPMENT: Realizing the Potential of North America’s Abundant Natural Gas and Oil Resources generation capacity and regarding impacts on fuel mar- Support the Development of kets. Resolution of the EPA rules, as well as compliance timelines and implementation decisions affecting indi- Intellectual Capital and a Skilled vidual plants, must take into consideration reliability Workforce impacts, recognizing that there are a variety of tools available to address location-specific reliability issues. Compared to other industries, the workforce in the natural gas and oil industry and the agencies that regulate them has an older average age. A large gap Recommendation exists between the number of retiring technical pro- fessionals and the number of graduates coming out of The NPC makes the following recommenda- junior college, college, and graduate school with the tion to provide more regulatory certainty to knowledge and skills required to work in the industry. the power sector: Figure ES-12 illustrates this for one segment. This yy Policymakers should take into account the leads to potential workforce challenges for the indus- benefits for market conditions from the final- try and its regulators. ization of EPA regulations affecting the power sector, especially those regulations not related Part of this is pure demographics, as the baby to controlling GHG emissions. These benefits boomer generation has begun to retire from the work- include reduced uncertainty in the market and force. But there also is not enough industry activity provision of near-term investment signals, as on university campuses. Moreover, government study well as the reduction of emissions of sulfur grants to undergraduate and graduate-level engi- dioxide, nitrogen oxide, mercury, and particu- neering and geosciences projects often do not relate lates, along with collateral reductions of GHG to the natural gas and oil industry. Despite a recent emissions from power generation. uptick in enrollments in and natural gas and oil-focused geosciences programs, the

Figure ES-12. More Petroleum Engineers Are Approaching Retirement (2010) Figure ES-12. More Petroleum Engineers are Approaching Retirement (2010) WAS Figure ES-11, ES-13 20

10 PERCENT OF WORKFORCE

0 <200 20 24 25 29 30 34 35 39 40 44 45 49 50 54 55 59 60 64 65+ AGE RANGE Source: Society of Petroleum Engineers.

EXECUTIVE SUMMARY 41 prospective graduates will not have the experience or the raw numbers to replace the number of retiring, yy Congress should provide financial support for well-seasoned professionals. higher-education programs, including faculty positions and research programs in areas of Increased support for new faculty positions and national interest related to energy resources. research programs could address this problem at various levels of higher education: in community The NPC also supports the recommendations of colleges, universities, graduate programs, faculty the National Academy of Sciences’ Rising Above appointments, and in various fields (in the geosci- the Gathering Storm with respect to the need to ences, in addition to other areas of earth sciences, “move the United States’ K-12 education system engineering, below-surface-water hydrology, and in science and mathematics to a leading position environmental programs). In addition, there is evi- by global standards.” dence that support at the K-12 (kindergarten to 12th grade level) would also be helpful.39 Because science literacy is important for public understanding of energy issues, energy science should be included in CONCLUSIONS curricula at these levels. The NPC reiterates the important findings of this study: The North American natural gas resource base Recommendation is very large indeed, a size that has only become appar- ent over the last half decade. Natural gas plays a criti- The NPC makes the following recommenda- cal role in supplying a quarter of the United States’ tions to increase the number of qualified natu- energy and what is likely to be a growing share of elec- ral gas and oil professionals: tric generation, including enabling renewable energy. Similarly, the oil resources are also very large, with yy Natural gas and oil companies should review major opportunities for development. The United and consider increasing their financial sup- States needs these resources to reduce oil imports port for educational/training activities to sup- even after continued efforts to improve energy effi- port the development of the next generation ciency, and even as the nation transitions to a lower- of professionals with knowledge and skills in the fields necessary for prudent develop- carbon energy system. Realizing the benefits of these ment of the nation’s natural gas and oil natural gas and oil resources requires environmentally resource base. responsible development of them in all circumstances, continually taking advantage of new technologies and evolving effective practices. That is the route forward 39 See, for example: National Academies, Rising Above the Gath- for advancing America’s economic, environmental, ering Storm, Revisited, 2010. and energy security objectives.

42 PRUDENT DEVELOPMENT: Realizing the Potential of North America’s Abundant Natural Gas and Oil Resources REQUEST LETTERS AND DESCRIPTION OF THE NPC request letters and description of the npc 1 2 PRUDENT DEVELOPMENT: Realizing the Potential of North America’s Abundant Natural Gas and Oil Resources request letters and description of the npc 3 4 PRUDENT DEVELOPMENT: Realizing the Potential of North America’s Abundant Natural Gas and Oil Resources DESCRIPTION OF THE NATIONAL PETROLEUM COUNCIL In May 1946, the President stated in a letter to the Secretary of the Interior that he had been impressed by the contribution made through government/industry cooperation to the success of the World War II petroleum program. He felt that it would be beneficial if this close relationship were to be continued and suggested that the Secretary of the Interior establish an industry organization to advise the Secretary on oil and natural gas matters.

Pursuant to this request, Interior Secretary J. A. Krug established the National Petroleum Council (NPC) on June 18, 1946. In October 1977, the Department of Energy was established and the Council was transferred to the new department.

The purpose of the NPC is solely to advise, inform, and make recommendations to the Secretary of Energy on any matter requested by the Secretary, relating to oil and natural gas or the oil and gas industries. Matters that the Secretary would like to have considered by the Council are submitted in the form of a letter outlining the nature and scope of the study. The Council reserves the right to decide whether it will consider any matter referred to it.

Examples of studies undertaken by the NPC at the request of the Secretary include: yy Industry Assistance to Government – Methods for Providing Petroleum Industry Expertise During Emergencies (1991) yy Petroleum Refining in the 1990s – Meeting the Challenges of the Clean Air Act (1991) yy The otentialP for Natural Gas in the United States (1992) yy U.S. Petroleum Refining – Meeting Requirements for Cleaner Fuels and Refineries (1993) yy The Oil Pollution Act of 1990: Issues and Solutions (1994) yy Marginal Wells (1994) yy Research, Development, and Demonstration Needs of the Oil and Gas Industry (1995) yy Future Issues – A View of U.S. Oil & Natural Gas to 2020 (1995) yy U.S. Supply – Inventory Dynamics (1998) yy Meeting the Challenges of the Nation’s Growing Natural Gas Demand (1999) yy U.S. Petroleum Refining – Assuring the Adequacy and Affordability of Cleaner Fuels (2000) yy Securing Oil and Natural Gas Infrastructures in the New Economy (2001) yy Balancing Natural Gas Policy – Fueling the Demands of a Growing Economy (2003) yy Observations on Petroleum Product Supply (2004) yy Facing the Hard Truths about Energy: A Comprehensive View to 2030 of Global Oil and Natural Gas (2007) yy One Year Later: An Update on Facing the Hard Truths about Energy (2008).

The NPC does not concern itself with trade practices, nor does it engage in any of the usual trade association activities. The Council is subject to the provisions of the Federal Advisory Committee Act of 1972.

Members of the National Petroleum Council are appointed by the Secretary of Energy and represent all seg- ments of the oil and gas industries and related interests. The NPC is headed by a Chair and a Vice Chair, who are elected by the Council. The Council is supported entirely by voluntary contributions from its members.

Additional information on the Council’s origins, operations, and reports can be found at www.npc.org.

request letters and description of the npc 5 NATIONAL PETROLEUM COUNCIL MEMBERSHIP

2010/2011 Term

Gary A. Adams Vice Chairman, Oil and Gas Deloitte LLP George A. Alcorn, Sr. President Alcorn Exploration, Inc. Robert Neal Anderson Head of Consulting Wood MacKenzie, Ltd. Thurmon M. Andress Managing Director BreitBurn Energy LP Robert H. Anthony Commissioner Oklahoma Corporation Commission Alan S. Armstrong President and Chief Executive Officer The Williams Companies, Inc. Gregory L. Armstrong Chairman and Chief Executive Officer Plains All American Pipeline, L.P. Robert G. Armstrong President Armstrong Energy Corporation Gregory A. Arnold President and Chief Executive Officer Truman Arnold Companies Philip K. Asherman President and Chief Executive Officer Chicago Bridge & Iron Company N.V. Ralph E. Bailey Chairman Emeritus Fuel Tech, Inc. Fredrick J. Barrett Chairman and Chief Executive Officer Bill Barrett Corporation Riley P. Bechtel Chairman and Chief Executive Officer Bechtel Group, Inc. Michel Bénézit President, Refining and Marketing Total S.A. Anthony J. Best President and Chief Executive Officer SM Energy Company Donald T. Bollinger Chairman of the Board and Bollinger Shipyards, Inc. Chief Executive Officer John F. Bookout Houston, Texas James D. Boyd Vice-Chair and Commissioner California Energy Commission Ben M. Brigham Chairman, President and Brigham Exploration Company Chief Executive Officer Jon S. Brumley Chief Executive Officer Enduro Resource Partners LLC Philip J. Burguieres Chief Executive Officer EMC Holdings, L.L.C. Matthew D. Cabell President Seneca Resources Corporation Kateri A. Callahan President Alliance to Save Energy Robert B. Catell Chairman, Advanced Energy Research Stony Brook University and Technology Center Clarence P. Cazalot, Jr. Chairman, President and Corporation Chief Executive Officer Eileen B. Claussen President Pew Center on Global Climate Change Kim R. Cocklin President and Chief Executive Officer Atmos Energy Corporation T. Jay Collins President and Chief Executive Officer Oceaneering International, Inc. Theodore F. Craver, Jr. Chairman, President and Edison International Chief Executive Officer William A. Custard President and Chief Executive Officer Dallas Production, Inc. Patrick D. Daniel President and Chief Executive Officer Inc.

request letters and description of the npc 7 NATIONAL PETROLEUM COUNCIL

Charles D. Davidson Chairman and Chief Executive Officer Noble Energy, Inc. D. Scott Davis Chairman and Chief Executive Officer UPS Chadwick C. Deaton Chairman and Chief Executive Officer Incorporated David R. Demers Chief Executive Officer Westport Innovations Inc. Claiborne P. Deming Chairman of the Executive Committee Murphy Oil Corporation David M. Demshur Chairman of the Board, President and Core Laboratories N.V. Chief Executive Officer John M. Deutch Institute Professor, Massachusetts Institute of Technology Department of Chemistry Laurence M. Downes Chairman and Chief Executive Officer New Jersey Resources Corporation W. Byron Dunn Principal Tubular Synergy Group, LP Bernard J. Duroc-Danner Chairman, President and Weatherford International Ltd. Chief Executive Officer Gregory L. Ebel President and Chief Executive Officer Spectra Energy Corp Randall K. Eresman President and Chief Executive Officer Encana Corporation Ronald A. Erickson Chief Executive Officer Holiday Companies Behrooz Fattahi 2010 President Society of Petroleum Engineers International John A. Fees Chairman The Babcock & Wilcox Company Fereidun Fesharaki Chairman FACTS Global Energy William L. Fisher Professor and Barrow Chair, The University of Texas Jackson School of Geosciences James C. Flores Chairman of the Board, President and Plains Exploration & Production Chief Executive Officer Company Douglas L. Foshee Chairman and Chief Executive Officer El Paso Corporation Paul L. Foster President and Chief Executive Officer Western Refining, Inc. Randy A. Foutch Chairman and Chief Executive Officer , Inc. Robert W. Gee President Gee Strategies Group, LLC Asim Ghosh President and Chief Executive Officer Inc. James A. Gibbs Chairman Five States Energy Company, LLC John W. Gibson Chief Executive Officer ONEOK, Inc. Russell K. Girling President and Chief Executive Officer TransCanada Corporation Lawrence J. Goldstein Director Energy Policy Research Foundation, Inc. Andrew Gould Chairman Limited Simon Greenshields Co-Head of Global Commodities Morgan Stanley James T. Hackett Chairman and Chief Executive Officer Anadarko Petroleum Corporation Gary L. Hall President Hall-Houston Exploration Partners, L.L.C. Frederic C. Hamilton Chairman and Chief Executive Officer The Hamilton Companies LLC

8 PRUDENT DEVELOPMENT: Realizing the Potential of North America’s Abundant Natural Gas and Oil Resources NATIONAL PETROLEUM COUNCIL

Harold G. Hamm Chairman of the Board and Continental Resources, Inc. Chief Executive Officer John J. Hamre President and Chief Executive Officer Center for Strategic & International Studies John A. Harju Associate Director for Research, University of North Dakota Energy & Environment Research Center Jeffrey O. Henley Chairman of the Board Oracle Corporation John B. Hess Chairman, President and Chief Executive Officer Jack D. Hightower Chairman, President and Bluestem Energy L.P. Chief Executive Officer Stephen L. Hightower President and Chief Executive Officer Hightowers Petroleum Co. Jeffery D. Hildebrand President and Chief Executive Officer Hilcorp Energy Company John D. Hofmeister Founder and Chief Executive Officer Citizens for Affordable Energy, Inc. Forrest E. Hoglund Chairman and Chief Executive Officer SeaOne Maritime Corp. Stephen A. Holditch Noble Endowed Chair and Texas A&M University Head of the Harold Vance Department of Petroleum Engineering Martin J. Houston Executive Director BG Group plc Ray L. Hunt Chairman of the Board, President and Hunt Consolidated, Inc. Chief Executive Officer Hillard G. Huntington Executive Director, Stanford University Energy Modeling Forum John R. Hurd General Partner Hurd Enterprises, Ltd. Ray R. Irani Executive Chairman Corporation Eugene M. Isenberg Chairman and Chief Executive Officer , Inc. Terrence S. Jacobs President and Chief Executive Officer Penneco Oil Company Robert J. Johnson Past President National Association of Black Geologists and Geophysicists A. V. Jones, Jr. Chairman Van Operating, Ltd. Jon Rex Jones Chairman Jones Management Corp. Jerry D. Jordan Chairman and General Counsel Knox Energy, Inc. Fred C. Julander President Julander Energy Company Andy Karsner Executive Chairman Manifest Energy, Inc. Richard C. Kelly Former Chairman of the Board Xcel Energy Inc. Richard D. Kinder Chairman and Chief Executive Officer Kinder Morgan Inc. Peter D. Kinnear Chairman of the Board and FMC Technologies, Inc. Chief Executive Officer Frederick M. Kirschner Bryn Mawr, Pennsylvania John Krenicki, Jr. President and Chief Executive Officer GE Energy Infrastructure

request letters and description of the npc 9 NATIONAL PETROLEUM COUNCIL

Fred Krupp President Environmental Defense Fund Vello A. Kuuskraa President Advanced Resources International, Inc. Stephen D. Layton President E&B Natural Resources Management Corporation Virginia B. Lazenby Chairman and Chief Executive Officer Bretagne, LLC David J. Lesar Chairman of the Board, President and Company Chief Executive Officer Nancy G. Leveson Professor of Aeronautic and Astronautics Massachusetts Institute of Technology Michael C. Linn Executive Chairman Linn Energy, LLC Andrew N. Liveris Chairman, President and The Dow Chemical Company Chief Executive Officer Daniel H. Lopez President New Mexico Institute of Mining and Technology Amory B. Lovins Chairman and Chief Scientist Rocky Mountain Institute Aubrey K. McClendon Chairman of the Board and Chesapeake Energy Corporation Chief Executive Officer W. Gary McGilvray President and Chief Executive Officer DeGolyer and MacNaughton Lee A. McIntire Chairman of the Board and CH2M HILL Companies, Ltd. Chief Executive Officer Lamar McKay Chairman and President BP America Inc. James T. McManus, II Chairman, President and Energen Corporation Chief Executive Officer Rae McQuade President North American Energy Standards Board Cary M. Maguire President and Chief Executive Officer Maguire Oil Company Kenneth B. Medlock, III James A. Baker III and Susan G. Baker Rice University Fellow in Energy and Resource Economics and Deputy Director, Energy Forum, James A. Baker III Institute for Public Policy Adjunct Professor, Economics Department F. H. Merelli Chairman, President and Cimarex Energy Co. Chief Executive Officer Augustus C. Miller Chairman and Chief Executive Officer Miller Oil Co., Inc. David B. Miller Partner EnCap Investments L.P. Merrill A. Miller, Jr. Chairman, President and National Oilwell Varco, Inc. Chief Executive Officer Michael J. Miller President Miller Energy Company T. O. Moffatt Chairman The Energy Council Jack B. Moore President and Chief Executive Officer Cameron Michael G. Morris Chairman, President and American Electric Power Co., Inc. Chief Executive Officer

10 PRUDENT DEVELOPMENT: Realizing the Potential of North America’s Abundant Natural Gas and Oil Resources NATIONAL PETROLEUM COUNCIL

Steven L. Mueller President and Chief Executive Officer Southwestern Energy Company James J. Mulva Chairman and Chief Executive Officer ConocoPhillips David L. Murfin President Murfin Drilling Co., Inc. Mark B. Murphy President Strata Production Company Richard S. Neville President Western Petroleum Company James E. Newsome Principal Delta Strategy Group J. Larry Nichols Executive Chairman Devon Energy Corporation Patrick F. Noonan Chairman Emeritus The Conservation Fund Gerardo Norcia President and Chief Operating Officer Michigan Consolidated Gas Company John W. B. Northington President Northington Strategy Group Thomas B. Nusz President and Chief Executive Officer , LLC Marvin E. Odum President Shell Oil Company David J. O’Reilly Chairman of the Board, Retired Geoffrey C. Orsak Dean, Bobby B. Lyle School of Engineering Southern Methodist University James W. Owens Retired Chairman of the Board Caterpillar Inc. C. R. Palmer Chairman Emeritus Rowan Companies, Inc. Mark G. Papa Chairman and Chief Executive Officer EOG Resources, Inc. Robert L. Parker, Jr. Executive Chairman Parker Drilling Company Donald L. Paul Executive Director of the Energy Institute University of Southern California and William M. Keck Chair in Energy Resources Allan G. Pulsipher Executive Director, Louisiana State University Center for Energy Studies Daniel W. Rabun Chairman of the Board, President and Ensco plc Chief Executive Officer W. Matt Ralls President and Chief Executive Officer Rowan Companies, Inc. Keith O. Rattie Chairman Questar Corporation Lee R. Raymond Former Chair National Petroleum Council June Ressler President and Chief Executive Officer Cenergy Companies Corbin J. Robertson, Jr. President and Chief Executive Officer Quintana Minerals Corporation James E. Rogers Chairman, President and Duke Energy Corporation Chief Executive Officer Henry A. Rosenberg, Jr. Chairman of the Board Crown Central LLC Paolo Scaroni Chief Executive Officer S.p.A. David T. Seaton Chief Executive Officer Fluor Corporation Peter A. Seligmann Chairman of the Board and Conservation International Chief Executive Officer S. Scott Sewell President Delta Energy Management, Inc. Bobby S. Shackouls Former Chair National Petroleum Council

request letters and description of the npc 11 NATIONAL PETROLEUM COUNCIL

Philip R. Sharp President Resources for the Future Inc. R. Gordon Shearer President and Chief Executive Officer Hess LNG LLC Scott D. Sheffield Chairman and Chief Executive Officer Pioneer Natural Resources Company Adam E. Sieminski Chief Energy Economist, Deutsche Bank AG Global Markets/Commodities Timothy Alan Simon Commissioner, State of California Public Utilities Commission Robert C. Skaggs, Jr. President and Chief Executive Officer NiSource Inc. Carl Michael Smith Executive Director Interstate Oil and Gas Compact Commission Frederick W. Smith Chairman, President and FedEx Corporation Chief Executive Officer Frank M. Stewart President and Chief Operating Officer American Association of Blacks in Energy John P. Surma Chairman, President and U.S. Steel Corporation Chief Executive Officer Cindy B. Taylor President and Chief Executive Officer Oil States International, Inc. Dean E. Taylor Chairman, President and Inc. Chief Executive Officer Berry H. Tew, Jr. State Geologist and Oil and Gas Supervisor Geological Survey of Alabama Susan F. Tierney Managing Principal Analysis Group, Inc. Rex W. Tillerson Chairman, President and Exxon Mobil Corporation Chief Executive Officer Scott W. Tinker Director, Bureau of Economic Geology The University of Texas and State Geologist of Texas Jackson School of Geosciences William Paschall Tosch Managing Director J.P. Morgan Securities Inc. H. A. True, III Partner True Oil LLC Robert B. Tudor, III Chairman and Chief Executive Officer Tudor, Pickering, Holt & Co., LLC William P. Utt Chairman, President and KBR, Inc. Chief Executive Officer W. Bruce Valdez Executive Director Southern Ute Indian Tribe Growth Fund J. Craig Venter Chairman and President J. Craig Venter Institute Philip K. Verleger, Jr. David Mitchell Encana Professor University of Calgary Haskayne School of Business Bruce H. Vincent President Swift Energy Company John B. Walker President and Chief Executive Officer EnerVest, Ltd. Douglas J. Wall President and Chief Executive Officer Patterson-UTI Energy, Inc. Cynthia J. Warner President and Chairman Sapphire Energy, Inc. Michael D. Watford Chairman, President and Ultra Petroleum Corp. Chief Executive Officer

12 PRUDENT DEVELOPMENT: Realizing the Potential of North America’s Abundant Natural Gas and Oil Resources NATIONAL PETROLEUM COUNCIL

John S. Watson Chairman of the Board and Chevron Corporation Chief Executive Officer Roger P. Webb Interim Executive Director Georgia Institute of Technology The Strategic Energy Institute J. Robinson West Chairman and Chief Executive Officer PFC Energy, Inc. Craig E. White President and Chief Executive Officer Philadelphia Gas Works David W. Williams Chairman of the Board, President and Noble Corporation Chief Executive Officer Mary Jane Wilson President and Chief Executive Officer WZI Inc. Timothy E. Wirth President United Nations Foundation Patricia A. Woertz Chairman, Chief Executive Officer Archer Daniels Midland Company and President David M. Wood President and Chief Executive Officer Murphy Oil Corporation Patrick Wood, III Principal Wood3 Resources Martha B. Wyrsch President Vestas Americas, USA George M. Yates President and Chief Executive Officer HEYCO Energy Group, Inc. John A. Yates Chairman of the Board Yates Petroleum Corporation J. Michael Yeager Group Executive and Chief Executive– BHP Billiton Petroleum Petroleum Daniel H. Yergin Chairman IHS Cambridge Energy Research Associates, Inc. John F. Young President and Chief Executive Officer Energy Future Holdings Corp.

request letters and description of the npc 13