Energy and Climate Change CommitteeWritten evidence submitted by ExxonMobil (ISG 35)
Questions for ExxonMobil
1. What are the latest resource and reserve figures for shale gas in America?
According to the U.S. Energy Information Administration’s (EIA) Annual Energy Outlook 2012, the technically recoverable resource for the U.S. as of January 2010 was 2,203 trillion cubic feet (tcf), including an estimated 542 tcf of shale gas. This total compares to a U.S. resource estimate during the period 2000–08 of approximately 1,300 tcf before significant shale gas resources were incorporated. To provide context, annual U.S. natural gas consumption was 24 tcf in 2011.
Other recent publicly available estimates show similar U.S. natural gas resource estimates, notably 2,170 tcf per the Potential Gas Committee and 2,300 tcf per the National Petroleum Council.
Proved U.S. reserves reported by the Energy Information Administration (EIA) were 305 tcf as of year-end 2010, up ~72% from 177 tcf at year-end 2000 to reach an all-time high.
2. How has the development of shale gas affected the American gas market?
Development of shale gas resources has prompted a strong resurgence in domestic production. Dry gas production reached 23 tcf in 2011, up more than 25% from the 2005 level of 18 tcf. The EIA estimates 2012 dry gas production at a record level of nearly 24 tcf, with close to 35% from shale.
The EIA’s Annual Energy Outlook 2013 (Early Release) projects U.S. natural gas production will increase to about 33 tcf in 2040, up approximately 10 tcf or nearly 45% from the 2011 level. Projected growth in shale gas production, from ~8 tcf in 2011 to close to 17 tcf in 2040, is expected to drive this overall increase in U.S. gas production. At the same time, the EIA forecasts U.S. gas consumption will increase by about 5 tcf by 2040, enabling the U.S. to transition to a net gas exporter by 2025. Actual new export projects could be on line as early as 2015–16.
The expectation that the U.S. will now continue to capitalize on its shale gas potential and transition to a net gas exporter is significant. In fact, project developers (including ExxonMobil) have requested authorization to export significant quantities of LNG from the U.S. Related to these applications, a much-anticipated government study has recently been issued that indicates the U.S. economy will benefit by capitalizing on its LNG export potential.
Increased natural gas production in the U.S. has had an impact on prices and fuel use. The below two charts from the EIA’s Natural Gas Weekly Update (Jan. 9, 2013) and Short Term Energy Outlook (Jan. 2013), respectively, provide historical price data for natural gas and the change in the fuel mix for electricity generation.
3. Did the federal government or individual states do anything to help or encourage the development of the shale gas industry (for example, research and development of new technologies/tax breaks etc)?
The history of the technology used in modern shale gas production is long and complex, with hydraulic fracturing being used by the industry for decades.
The U.S. federal government has an oil and gas research program, and that program has long included research relating to development from “unconventional” resource environments. The U.S. Department of Energy has published material that highlights its role in conducting early research related to today’s shale gas development techniques. See: http://www.netl.doe.gov/technologies/oil-gas/publications/brochures/Shale_Gas_March_2011.pdf
The modern shale gas “boom” in the U.S. grew out of the Barnett Shale in Texas, which in turn can be traced to the efforts of George Mitchell, formerly of Mitchell Energy until purchased by Devon Energy. For a discussion of this history, see: http://www.chron.com/business/energy/article/Exec- Mitchell-laid-groundwork-for-shale-gas-surge-1742206.php
The U.S. federal tax code has changed over time and attached is a U.S. Congressional Research Service report dated May 2010 summarizing energy tax policy in the United States over its history. In the context of tax credits that applied to certain unconventional fuels, including for a time natural gas produced from, among other things, … “Devonian shale, coal seams, or a tight formation…”, we would call your attention to page 17 of the report. There were numerous restrictions on qualification of such fuels, and the application was limited to fuels sold before 2003. (See section 45K(e) of the Internal Revenue Code.) Each U.S. state has its own tax provisions, and these vary widely. Some state provisions could be viewed as assisting shale gas production, such as severance tax credits for certain high cost gas.
4. What wider economic benefits have resulted from the development of shale gas?
Technology advances have enabled safe and economic development of large shale gas resources, leading to significant increases in the availability of reliable, affordable natural gas in the U.S. In addition to the direct and indirect effects of the industry’s capital expenditures, this competitive energy supply provides a strong foundation for increasing economic output in the U.S., opening up new and valuable opportunities in many regions and sectors of the economy including those related to energy, chemicals, steel and transportation.
The extent of economic contributions reflect the capital intensity of the shale gas industry, the ability to source inputs from within the United States, the nature of the supply chain, and the quality of the jobs created. A December 2011 report from IHS Global Insight highlighted the following economic impacts related to shale gas development in the U.S.:
Capital expenditures are especially strong in the near future, growing from $33 billion in 2010 to $48 billion by 2015. Nearly $1.9 trillion in shale gas capital investments are expected between 2010 and 2035, including billions of dollars in foreign investment in the U.S. upstream sector.
In 2010, the shale gas industry supported 600,000 jobs; this will grow to nearly 870,000 in 2015 and to over 1.6 million by 2035.
The shale gas contribution to GDP was more than $76 billion in 2010. This will increase to $118 billion by 2015 and will triple to $231 billion in 2035.
In 2010, shale gas production contributed about $19 billion in federal, state and local government tax and federal royalty revenues. By 2035, these receipts will more than triple to just over $57 billion.
The significant increase in U.S. natural gas production naturally affects energy-intensive industries or those—like the chemical business—that rely on natural gas as a feedstock. In the U.S., for example, the American Chemistry Council and the National Association of Manufacturers have both published reports highlighting the potential of a manufacturing “renaissance” based upon the stable domestic supply of affordable natural gas.
See: http://www.americanchemistry.com/ACC-Shale-Report (American Chemistry Council) See: http://www.nam.org/~/media/B3EC7031FC554B7D9329A55E3B6CA9D4.ashx (National Association of Manufacturers/PriceWaterhouseCoopers).
5. Has the federal government or have individual states tried to capture these economic benefits, for example, by collecting taxes for a wealth fund?
As discussed in the answer to Question 4 above, shale gas production in the U.S. has resulted in broad, substantial employment and economic benefits. These benefits are being enjoyed both by states that have natural gas resources and other states that supply the industry or generally benefit from lower prices and manufacturing growth. So in the first instance, the benefits are “captured” directly and immediately through jobs and economic growth. Furthermore, increased economic activity results in increased tax revenues for federal, state and local governments. Most states also have severance or other taxes directly related to production, as well as property and income taxes. Each state’s tax structure is different so comparisons are difficult and complex. The IHG Global Insight report noted above discusses the significant revenue gains that federal, state and local governments have enjoyed.
To date, neither the federal government nor individual states have tried to “capture” the benefits as suggested by the question through the creation of a wealth fund. As noted above, a wealth fund is not needed to “capture” benefits. One example of a “unique” program is Pennsylvania’s establishment of a program that remits some of the revenue the state collects from industry to local communities to address “local impacts” associated with development.
6. Some say that low gas prices created as a result of the shale gas revolution are unprofitable and therefore unsustainable in the long term. Do you agree and do you think that American gas prices will rise again in the future?
Prices are and will continue to be influenced by a multitude of factors over time. These include physical and fundamental factors such as supply, demand, inventory, and spare capacity, as well as expectations of the market participants on such matters as potential weather-related effects and outlooks of the growth of supply, demand, and capacity. Certainly, development costs related to shale gas resources can vary significantly depending on a variety of factors and these are only one factor that contributes to market prices.
We expect energy prices will be at levels which efficiently balance supply and demand both in the near term and over the long term. Such energy prices will cause consumers, suppliers and investors to efficiently allocate available energy supplies to their most valuable end use across a variety of economic sectors and uses, and to stimulate development of new supplies if market demands warrant such investments.
Governments play a vital role related to sound energy policy by helping ensure that a stable and unbiased fiscal and regulatory environment exists to promote widespread availability of safe, reliable, and affordable energy options to meet consumer needs. Arbitrary government subsidies, mandates or restrictions related to specific fuels or technologies inhibit efficient markets and instead work to create a scarcity rather than an abundance of practical, economic options to help meet consumer, investor and broad-based public interests related to energy.
7. To what extent has shale gas helped the U.S. transition from coal to gas?
Natural gas is used in a variety of sectors in the U.S. In the power sector, it is widely used, and has been gaining share as an alternative to coal. The U.S. power generation market responded quickly and markedly to lower gas prices in 2012. The EIA’s Early Release 2013 Annual Energy Outlook estimates that 9.3 tcf of gas will be consumed in 2012 in power generation, up 22% from 2011. Conversely, the EIA estimates 828 million short tons of coal will be consumed in power generation in 2012, an 11% decrease from 2011.
As reported by the International Energy Agency, the growing share of natural gas in the power sector is one of the key factors in helping the U.S. reduce CO2 emissions in recent years. As costs arising from greenhouse gas policies are considered, natural gas becomes increasingly competitive due to the fact that it emits up to 60 percent less CO2 than coal when generating electricity.
Growing confidence in reliable, affordable U.S. gas supplies and expectations related to policies governing power plant emissions are supporting investment decisions in favor of gas-fired generation. The EIA’s Electric Power Annual shows Planned Generating Capacity Additions for Natural Gas representing about 60% of total U.S. capacity additions for 2013–15, or about 20 times the capacity additions planned for coal.
8. Has shale gas affected investment in renewable or low carbon technologies?
Development of the robust U.S. shale gas resource is providing a significant new safe and secure low-carbon energy option to meet consumer needs for reliable, affordable supplies while also minimizing greenhouse gas emissions.
At the same time, renewables are playing a bigger role. As renewables—particularly wind and solar—gain share, there is also increasing awareness of the potential downside that these intermittent resources may have on the cost and reliability of electricity supplies. This is particularly important in those areas where a significant share of generating capacity may not be available due to lack of wind or sunshine. When the costs to overcome the challenges of intermittency and reliability are fully accounted for in the economics of wind and solar energy, it becomes clear that they will require subsidies, mandates or a relatively high cost of CO2 to be competitive with other alternatives.
Finally, because solar and wind cannot be relied on to always generate power when electricity is needed, other more flexible types of generation, such as hydro, coal or natural gas, must remain on standby to ensure reliability of the power system. However, hydropower is limited in supply and coal power generation emits the highest amount of CO2 and is slow to start up. That makes natural gas the generation fuel of choice to complement wind and solar.
The United States represents a good example of how these variables can impact fuel demand for electricity. Coal faces a significant challenge from policies to reduce greenhouse gas emissions; wind and solar face challenges related to economics and reliability considerations; and nuclear faces unique considerations regarding public perceptions of safety. At the same time, new gas-fired generating units use very efficient technologies and are easy to build at a reasonable cost, flexible to operate and supported by abundant gas supplies. As a result, gas is increasingly viewed as the most economical fuel choice for electricity generation for the United States.
As noted in the tables below, over the time period in which shale gas production led to an expansion of natural gas power generation in the U.S., at the expense of coal, renewable energy generation (particularly wind and solar) grew as well. Growth in the second half of the decade exceeded first- half growth.
9. Have accusations about the environmental impact of shale gas affected the industry in any way?
See answer to Question 10.
10. Has the industry had to respond in any way to concerns over the environmental impacts of shale gas extraction?
Questions 9 and 10 are closely related, and will be answered together below.
Industry understands that its operations have the potential to adversely affect individuals, communities and the environment. As with any industrial activity, shale gas development does entail some risks. However, the industry has wide experience with managing these risks. Sound operational practices exist that must be followed. Risk management occurs individually within our companies, as well as through broader discussions through trade associations and with relevant regulatory authorities.
Accusations regarding potential environmental impacts of shale gas development certainly exist, and industry has taken action to respond to them and provide our perspective on issues to the public, policy makers, and other stakeholders. Concerns can lead to temporary delays, moratoria, and precautionary bans. Regardless of the claim, industry has remained committed to working with local communities and governments to understand their concerns and share information, and to operating with the highest standards of environmental protection. When addressing accusations, all facts should be considered and evaluated, and findings should be based on factual evidence and sound science.
Industry has responded to concerns regarding potential environmental impacts in many ways. ExxonMobil has presented its views through our Corporate Citizenship Reports, a www.aboutnaturalgas.com website in the U.S., a www.europeunconvetionalgas.org site in Europe, and through various “blog” postings (see: http://www.exxonmobilperspectives.com/category/natural-gas/. We have also developed brochures and other material for informing and holding discussions with stakeholders. Other companies have pursued similar efforts.
Industry has also worked collectively to address concerns. In Europe, industry has principally worked together through OGP. In the U.S., industry works through the American Petroleum Institute (including developing shale gas production guidance documents), Americas Natural Gas Alliance, and numerous state associations as well. To respond to public concerns over the chemical additives to fracturing fluids, industry is voluntarily submitting data to the www.fracfocus.org national online registry. As of December 2012, over 33,000 wells have been registered with the site with eight states: Colorado, Oklahoma, Louisiana, Texas, North Dakota, Montana, Mississippi and Pennsylvania using FracFocus as a means of official state chemical disclosure. FracFocus presents a prominent example of state regulatory officials and industry working together to address public concerns.
11. The IEA’s report “Golden Rules for a Golden Age of Gas”, 9 of the 20 rules the report lists which exemplify responsible regulation come from Colorado. What are your thoughts on unconventional gas regulation in the U.S. Which are the best and worst?
The International Energy Agency “Golden Rules for a Golden Age of Gas” is a quality document that is consistent with expert views regarding the outlook for energy demand and supply, put unconventional development into context, and identified responsible and achievable protections. The report highlighted the significant role unconventional gas could play in the future energy supply, and confirms that its development can be done without environmental harm when proper established procedures are followed.
Due to the nature of hydraulic fracturing in unconventional gas development each drilling site is unique. Wide variability exists in the surrounding geography and underground geology which affect the fluids used in hydraulic fracturing, what systems are both available and best for the flowback water disposal, and other operational design features. Therefore, no “one size fits all” approach exists that best regulates unconventional resources development.
Given these factors and size of the United States, we have strongly supported the traditional regulatory approach that exists in the U.S. where each state holds the authority to regulate oil and gas operations, not the federal government. State regulators have the best understanding of the local geology and environment that allow them to evaluate the safety and integrity of the wells drilled in their region.
Both industry and government playing their respective roles help to maintain public confidence in the technologies and processes that are safely producing natural gas. Effective standards and enforcement, as well as industry’s commitment to operational integrity, excellence, and accountability, are the pillars of responsible development.
Finally, virtually every state that holds shale gas resources in the U.S. has undertaken a process over the past two to three years to review and update their regulations. Prominent recent examples include Pennsylvania, Ohio, New York (still pending), and Texas (still pending). Such regulatory reviews and adjustments are a continual work in progress. Colorado was one of the first to do this, particularly with respect to the disclosure of fracturing fluid additives, and that may be the reason the “Golden Rules” document cites Colorado so predominantly.
January 2013