American Oil and Gas Reporter - January 2015 - 228

than exports would.
* The net increase in world production
would be smaller even than the increase
in U.S. production because the domestic
increase would drive some competing
higher-cost supplies from the market.
CBO says counterintuitively, U.S. consumers of gasoline, diesel fuel and other
oil products probably would benefit from
the export ban's repeal, seeing reductions
of as much as 10 cents a gallon in gasoline.
The report says this price break comes
because those fuel prices depend primarily
on the world price of crude oil, which
would decline slightly once lower-priced
U.S. crudes were available in the international market.
By contrast, the prices of domestic
light crude oils, which include tight oil,
seen by some U.S. crude oil producers
and refiners would rise. CBO says U.S.
refineries are better configured than their
international counterparts to process heavy
crudes, so under the export ban, light
crudes are less valuable and therefore
sell for less in the United States than in
global markets. With the export ban lifted,
some domestic refiners would continue
to buy light crudes, and others would increase their imports of heavy crudes. In
either case, CBO says, the cost of their
crude oil inputs would be higher than it
had been under the ban, and because refiners would continue to sell their refined
products at levels closely linked to the
world price of oil, their profits would
fall.
If all the liquefied natural gas export
terminals now proposed in the United
States are approved and export capacity
of 13 trillion cubic feet a year was built
and fully used, the decline in available
gas supplies would boost domestic prices,
unless suppliers greatly increased production in response to price jumps, CBO
says.
The agency adds that the large price
gap between U.S. and international natural
gas markets could narrow if LNG export
facilities began operating and the overseas
supply of natural gas increased. The price
gap also could slip if major foreign suppliers increased outputs to protect their
market shares or if North American demand grew faster than supply. CBO cautions the price gap could widen further if
global demand for gas remains high but
little additional LNG export capacity is
built outside North America, or if U.S.
gas supplies grow faster than demand.
Market Impacts
The increase in U.S. shale gas production has been so large that if it came
from a separate county, that country
would be the world's third-largest natural

supplier, behind Russia and the United
States, CBO says. Because of shale gas,
domestic production of all natural gas is
on pace to increase for the ninth straight
year. With that production boost, the
wholesale price of natural gas in North
America fell by about 70 percent, in inflation-adjusted terms, between 2008 and
2012, reaching its lowest level since 1998.
CBO points out that although natural gas
prices rebounded somewhat in 2013 and
2014, they remain low compared with
the historical record.
U.S. crude oil production also has
boomed, the report says, with domestic
output up for the fifth straight year because
of tight oil. But the agency says the increase in tight oil production, unlike the
corresponding jump in shale gas output,
has had only a modest impact on prices.
Shale development has affected other
energy markets, such as forcing a reduction
in coal use, CBO says. As shale gas and
tight oil production increases, the agency
foresees its effects on other energy markets-such as those for coal, nuclear and
renewable energy sources, as well as for
energy-conserving equipment-increasing
as well. In addition, it says some analysts
predict that energy-intensive production
activities increasingly will relocate to the
United States to take advantage of lower
gas prices.
According to EIA projections, supply
and demand conditions will keep shale
gas and tight oil production growing in
coming years, reversing the trend of the
past several decades. Because of that
growth, the report says the domestic price
of natural gas and oil will be lower than
it would have been in the absence of
shale resources, and so oil and gas consumption and net exports of refined products can be expected to climb.
Federal Budget Impacts
Developing shale resources will affect
two kinds of federal receipts, the CBO
report says. Federal tax revenues will
climb as shale development boosts gross
domestic product, while payments to the
government by private developers of federally owned resources also will increase.
The agency points out the latter number
will be less because most of the nation's
shale gas and tight oil is not owned by
the federal government.
Because the increased oil and gas activity is reflected in higher income, such
as wages and salaries, income from partnerships and sole proprietorships, and
dividends and corporate profits, the federal
government will see higher levels of individual and corporate income taxes and
payroll taxes, the report states, contributing
to federal revenues.

228 THE AMERICAN OIL & GAS REPORTER

CBO says it expects the effect of shale
development on revenues to be slightly
higher in percentage terms than the effect
on GDP. It estimates real GDP will be 0.7
percent higher in 2020 and 0.9 percent
higher in 2040 than it would have been
without shale development. On the basis
of that increase in GDP, the agency reports
it estimates tax revenues will be higher
by 0.8 percent (or about $35 billion) in
2020 and by 1.0 percent in 2040 than
they would have been without shale development.
The federal government does not break
down production from federal lands by
geologic formation, so CBO says it is
difficult to attribute royalties just from
tight oil and shale gas production. But
according to information from state agencies and EIA, it estimates that in 2012,
shale gas probably accounted for 3.0 percent of onshore natural gas produced
from federal acreage and tight oil for
about 25.0 percent of onshore oil from
those lands. It adds those estimates jibe
with the observation that few of the country's current and potential sources of tight
oil and shale gas lie beneath federally
owned land.
Based on those estimates, CBO says
it projects net federal royalties from tight
oil and shale gas will total $300 million
by 2024, with most of those royalties
coming from wells in the southeastern
corner of New Mexico and in the Rocky
Mountain region.
Federal Regulations
"There is a stronger rationale for state
and localities to set environmental standards for shale development if the costs
and benefits of controlling the environmental effects of such development occur
solely within their borders," the CBO report asserts. "The effects of shale development on the availability of water for
other uses may be limited to a local area
(which would not necessarily be a single
local jurisdiction), or they may extend to
a broader region. Similarly, the effects of
shale development on water quality may
be confined to a local area or extend beyond state boundaries."
The rationale for state or local rule
rather than federal is even stronger if the
opportunities and costs of available methods vary among areas, the report indicates.
For example, it says the cost of addressing
water quality concerns associated with
hydraulic fracturing can vary by locality,
depending in part on whether local geology
allows producers to dispose of wastewater
in underground disposal wells. A federal
decision to require that method of disposal
might be overly costly in some areas,

American Oil and Gas Reporter - January 2015

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