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114th Congress } { Rept. 114-267
HOUSE OF REPRESENTATIVES
1st Session } { Part 2
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TO ADAPT TO CHANGING CRUDE OIL MARKET CONDITIONS
_______
October 1, 2015.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. Upton, from the Committee on Energy and Commerce, submitted the
following
SUPPLEMENTAL REPORT
[To accompany H.R. 702]
[Including cost estimate of the Congressional Budget Office]
This supplemental report shows the cost estimate of the
Congressional Budget Office with respect to the bill (H.R.
702), as reported, which was not included in part 1 of the
report submitted by the Committee on Energy and Commerce on
September 25, 2015 (H. Rept. 114-267, pt. 1).
U.S. Congress,
Congressional Budget Office,
Washington, DC, September 29, 2015.
Hon. Fred Upton,
Chairman, Committee on Energy and Commerce,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 702, a bill to
adapt to changing crude oil market conditions.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contacts are Kathleen
Gramp and Jeff LaFave.
Sincerely,
Keith Hall.
Enclosure.
H.R. 702--A bill to adapt to changing crude oil market conditions
Summary: H.R. 702 would repeal certain restrictions on the
export of domestically produced crude oil and would prohibit
any federal official from imposing or enforcing any such
restrictions. It also would direct the Secretary of Energy to
conduct a study on the purpose, size, and types of oil in the
Strategic Petroleum Reserve (SPR).
CBO estimates that enacting this legislation would reduce
net direct spending by $1.4 billion over the 2016-2025 period
by increasing offsetting receipts from federal oil and gas
leases. CBO estimates that requiring the Department of Energy
to prepare a report on the SPR would have no significant effect
on spending subject to appropriation because that analysis is
being done under current law. Pay-as-you-go procedures apply
because enacting the legislation would affect direct spending.
Enacting the bill would not affect revenues.
CBO estimates that enacting H.R. 702 would not increase net
direct spending or on-budget deficits by $5 billion or more in
any of the four consecutive 10-year periods beginning in 2026.
H.R. 702 contains no intergovernmental or private-sector
mandates as defined in the Unfunded Mandates Reform Act (UMRA)
and would impose no costs on state, local, or tribal
governments.
Estimated cost to the Federal Government: The estimated
budgetary effect of S. 702 is shown in the following table. The
budgetary effects of this legislation fall within budget
functions 300 (natural resources and the environment), 800
(general government) and 950 (undistributed offsetting
receipts).
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By fiscal year, in millions of dollars--
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2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2016-2020 2016-2025
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CHANGES IN DIRECT SPENDING
Estimated Budget Authority.................... * * -50 -95 -105 -155 -215 -220 -275 -330 -250 -1,445
Estimated Outlays............................. * * -50 -95 -105 -155 -215 -220 -275 -330 -250 -1,445
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Note: * = between -$500,000 and $0.
Basis of estimate: H.R. 702 would amend existing law to
allow exports of crude oil without a federal permit, subject to
certain terms and conditions. CBO expects that removing the
existing permitting restrictions would increase demand for oil
produced in the United States, thus raising the prices received
by some domestic firms and encouraging additional production.
CBO estimates that the increases in domestic prices and
production would boost federal receipts from federally owned
oil and gas leases, which are calculated as a percentage of the
value of the oil produced on the lease (also known as the
wellhead price). Based on projected trends in U.S. and
international oil markets, CBO estimates that enacting H.R. 702
would increase offsetting receipts from federal leases by $1.4
billion over the 2016-2025 period, net of payments to states
(which receive 49 percent of proceeds from most onshore federal
oil and gas leases).
Background on current export restrictions
Various laws have imposed conditions on permits for
exporting domestically produced crude oil since the 1970s.
Those restrictions can affect the price received by producers,
which in turn affects income to entities that collect royalties
from producers, including the federal government. For many
years, those export restrictions had a negligible effect on oil
producers because domestic output accounted for a small and
declining share of refiners' crude oil supplies. Given that
historical shortfall in domestic supplies, many existing
refineries were designed to use a mix of imported oil,
particularly oil from countries in Latin America that produce a
type of crude oil known as ``heavy oil.''
Domestic oil markets changed abruptly as U.S. oil
production increased by about 60 percent over the 2009-2014
period. That increase was almost entirely driven by increased
production of ``light oil'' from onshore oil fields.
Accommodating more oil from new locations and with new physical
characteristics required operational changes at refineries and
investments in new transportation and storage facilities.
During that transition period, many producers had to accept
prices that were discounted well below global prices in order
to sell light oil in the U.S. market.
Such large discounts to global prices could recur in the
future if growth in the supply of U.S. oil causes domestic
refiners to need economic incentives to process more
domestically produced oil, especially light oil. If the amount
of added production is relatively small, firms may be able to
handle the additional oil using several low-cost options, such
as expanding exports to Canada, exchanging oil with Mexico,
processing ``condensates'' (a type of ultra-light oil) for
export, or making operational changes that would alter the mix
of oils being blended in the refinery. If the volume of new
supplies grows larger, however, refiners probably would need to
add more costly refinery capacity or would set the price of
light oils at levels comparable to those of less expensive
alternative supplies. Based on information from several
industry, academic, and government experts about the cost and
complexity of various processing options, CBO estimates that
the additional costs to refiners could range from less than $1
to about $7 per barrel of oil over the next 10 years, depending
on the amount and characteristics of the surplus oil.\1\ CBO
anticipates that refiners would recover those costs by
discounting the prices they pay to producers for crude oil.
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\1\See Energy Information Administration (EIA),Technical Options
for Processing Additional Light Tight Oil Volumes within the United
States, April 2015 http://www.eia.gov/analysis/studies/petroleum/lto/
pdf/lightightoil.pdf; EIA, Implications of Increasing Light Tight Oil
Production for U.S. Refining, May 2015 http://www.eia.gov/analysis/
studies/petroleum/morelto/pdf/lightoilprod.pdf; and Center for Energy
Studies, Rice University Baker Institute for Public Policy, To Lift or
Not to Lift, March 2015 http://bakerinstitute.org/research/lift-or-not-
lift-us-crude-oil-export-ban-implications-price-and-energy-security/.
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Additional royalty and bonus bid collections under H.R. 702
Allowing domestic producers of crude oil to export oil
without any statutory restrictions would expand the market for
U.S. oil and therefore would probably result in higher wellhead
prices, which are the basis for royalty payments to the federal
government. Any increase in wellhead prices would depend on
global buyers' willingness to pay more than the domestically
discounted price for the crude oil, net of the logistical and
shipping costs of getting domestically produced oil to overseas
markets. CBO expects most of the effects on federal royalties
(and on bonus bids that firms pay for the right to drill for
oil on federal land) would occur after 2016 because of the time
needed for lawmakers to enact the legislation and for producers
to develop the contractual and physical arrangements for
exports. (For the purposes of this estimate, CBO assumes that
the bill would be enacted early in fiscal year 2016.)
CBO's estimate of the budgetary effects of eliminating
export restrictions reflects the weighted average of various
scenarios of future oil production and processing costs. It
includes projections of domestic oil production in 2025 that
are 15 percent to 50 percent higher under current law than 2014
levels. We expect that additional production of light oil will
account for nearly all of that increase in each scenario.
Variations in the timing of that growth affect estimates of
when domestic pricing discounts would be large enough to create
incentives for export activity, resulting in projections of
negligible effects in some years and estimated increases in
wellhead prices for light oil of up to $6 per barrel, net of
export-related expenses, in other years.\2\
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\2\For example, if production spikes in the near term, CBO
anticipates that export activities would start early in the 10-year
period; by contrast, if production grows slowly, the domestic pricing
discounts may not be large enough to justify significant export
activities until later in that period.
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Under those conditions and the economic assumptions used in
CBO's March 2015 baseline projections, CBO estimates that
authorizing exports of domestically produced crude oil without
restrictions would increase wellhead prices of light oil by an
average of roughly $2.50 per barrel over the 2016-2025 period,
on an expected value basis. Although this estimate reflects
CBO's best judgment of possible outcomes, actual changes in
wellhead prices resulting from such exports would depend on
factors that are inherently unpredictable, such as global oil
prices, competition from other international suppliers, and
administrative actions related to exports that are authorized
under current law.
CBO estimates that removing export restrictions would
affect the wellhead prices of medium oil differently than light
oil because of differences in their physical characteristics
and in the market conditions for those types of crudes. Medium
oil, particularly medium-sour which is produced in the Gulf of
Mexico, is one of the most favored types of oil for U.S.
refineries. In addition, CBO anticipates that the domestic
refining system will be able to accommodate any growth in the
production of this type of oil over the next 10 years,
suggesting that price discounts directly tied to this type of
oil are unlikely over that period. Thus, CBO expects that any
changes in wellhead prices for producers of medium oil,
particularly producers in the Outer Continental Shelf (OCS)
that resulted from enactment of H.R. 702 would largely depend
on the extent to which changes in other domestic and global
markets would indirectly affect the price of medium oil. As a
result, CBO estimates that any increases in the price of medium
oil would be smaller than the increases for light oil.
Additional Receipts from Onshore Oil Production. CBO
estimates that higher wellhead prices would increase federal
royalties and the amounts producers would pay to acquire leases
on federal lands (bonus bids) by about $550 million over the
2016-2025 period. About 70 percent of that amount ($375
million) would come from additional royalties from production
that CBO expects would occur under current law. The remaining
30 percent ($175 million) would come from royalties and bonus
bids associated with new production that we estimate would
occur because higher wellhead prices would provide an incentive
for firms to produce more oil. On net, after accounting for
states' share of those receipts, CBO estimates that removing
export restrictions would increase federal receipts from
onshore oil and gas production by about $280 million over the
2016-2025 period. How CBO arrived at those estimates is
detailed below.
Under current law, CBO projects that oil production on
federal lands will average about 145 million barrels a year
over the 2016-2025 period.\3\ We estimate that, of that amount,
about 105 million barrels of light oil and 25 million barrels
of medium oil will be produced each year. If export
restrictions are lifted, we estimate that the wellhead price
for light oil would increase by roughly $2.50, on average, over
the next 10 years and that the wellhead price for medium oil
would increase by about half that amount. As a result, we
estimate that royalties paid by the producers of that oil
(equal to 12.5 percent of the wellhead price) would be $375
million higher if export restrictions are removed.
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\3\Firms produced 137 million barrels of oil on federal lands in
2014.
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CBO also estimates that, under current law, firms operating
on leased federal land in certain western states, particularly
in California, will produce about 15 million barrels of heavy
oil each year over the 2016-2025 period. We anticipate that
most of that oil will be processed in nearby refineries
configured to handle heavy oil. Because those refineries cannot
economically substitute domestic light oil for heavy oil, we
expect that growing supplies of cheaper light oil will not
threaten to displace oil produced in the region. As a result,
western refiners will not have the leverage to demand price
discounts from local producers, unlike refiners in other parts
of the country that process lighter oils. Thus, CBO expects
that, if export restrictions were lifted, any change in the
price paid to producers of heavy oil would be negligible.
CBO also expects that, if export restrictions are removed,
higher wellhead prices would provide an incentive for firms in
most parts of the country to produce more oil. In particular,
we expect that firms would increase oil production in three
states--North Dakota, Texas, and Oklahoma--that contain the
most light oil and accounted for about 90 percent of the
increase in total U.S. oil production over the 2009-2014
period. Because federal lands make up only two percent of the
total land area in those states, we expect that nearly all new
production in those states would occur on nonfederal lands.
CBO estimates that in certain western states containing
significant amounts of federal land and parts of North Dakota
there would be a small increase in production (2 million
barrels per year) on such land if export restrictions were
lifted.\4\ Using CBO's March 2015 forecast of oil prices and
the increase expected from lifting restrictions on oil exports,
we estimate that royalties from new production on federal lands
would total $150 million over the next 10 years. We also
estimate that bonus bids would increase by 1 percent ($25
million) over that period. In total, we estimate that new
onshore production driven by higher prices would increase
offsetting receipts by $175 million over the 2016-2025 period;
49 percent of that amount would go to states.
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\4\That amount is equal to about 2 percent of federal production in
those states in 2014.
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Additional Royalties from Offshore Oil Production. Removing
restrictions on exports of crude oil might affect federal
royalties from offshore leases differently than onshore leases
because of differences in the physical and economic
characteristics of the crude oil produced in those areas. On
balance, CBO estimates that enacting the bill would increase
royalties collected from leases in the OCS by about $1.2
billion over the 2016-2025. That estimate is based on CBO's
March, 2015 baseline projections for oil production on the OCS,
excluding the portion of production on which royalties are not
paid under the terms of the 1995 Royalty Relief Act (about 20
percent in 2014). CBO estimates that royalty-bearing production
will average about 550 million barrels a year over the 2016-
2025 period, with a royalty rate of about 15 percent. Crude oil
production from the OCS totaled roughly 530 million barrels in
calendar year 2014, or about 17 percent of total domestic
production.
Most of that estimated increase in OCS royalties reflects
the indirect effects of higher prices for light oil on the
prices paid for the medium-sour crude oil produced from
offshore leases. Although prices for different types of
domestic crude oil generally move in tandem, several factors
suggest that OCS wellhead prices will not change as much as
prices for light oil. For example, prices for OCS oil have
usually been a few dollars lower than the key benchmark prices
for light oil, and CBO expects that those price differences
will return once oil markets adjust to the new levels of
supply. In addition, CBO anticipates that competition in the
domestic oil market may affect the extent to which the pricing
discounts needed to accommodate new supplies of light oil will
be borne by producers of other types of oil. CBO accounts for
this uncertainty by projecting that OCS wellhead prices would
rise by about half as much as prices for light oil if H.R. 702
was enacted.
Global demand for medium-sour oil could create incentives
for exporting OCS oil, but CBO estimates that such transactions
probably would have no significant effect on the wellhead
prices for OCS production because of uncertainty regarding
market conditions. According to industry reports, foreign
refiners may benefit from importing medium-sour crudes from the
United States because of the premiums they currently pay when
importing oil from other suppliers.\5\ The net benefit to U.S.
producers would depend on whether other international suppliers
would respond by lowering the prices they charge in order to
maintain market share, which is difficult to predict.
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\5\See Wood Mackenzie,Implications of Changing U.S. Crude Oil
Export Policy, Presentation by Harold York at the Annual Meeting of the
American Fuel and Petrochemical Manufacturers, March 2015 http://
crudecoalition.org/app/uploads/2015/06/Implications-Changing_US_
Crude_Oil_Export_Policy-Wood-McKenzie.pdf.
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Finally, CBO estimates that the changes in wellhead prices
would have no significant effect on OCS production over the
2016-2025 period and would have a negligible effect on bonus or
rental payments for new OCS leases. Given the high cost of
acquiring and developing oil resources in the deep waters of
the OCS, CBO anticipates that investment decisions will be
affected more by firms' expectations for global oil prices than
by the proportionately small changes in prices that we project
would result from enacting this legislation. Similarly, CBO
estimates that implementing the legislation would have a
negligible effect on proceeds from the heavy oil produced from
the OCS.
Pay As You Go considerations: The Statutory Pay-As-You-Go
Act of 2010 establishes budget-reporting and enforcement
procedures for legislation affecting direct spending or
revenues. The net changes in outlays that are subject to those
pay-as-you-go procedures are shown in the following table.
CBO ESTIMATE OF PAY-AS-YOU-GO EFFECTS FOR H.R. 702, AS REPORTED BY THE HOUSE COMMITTEE ON ENERGY AND COMMERCE ON SEPTEMBER 25, 2015
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By fiscal year, in millions of dollars--
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2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2015-2025 2015-2025
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NET INCREASE OR DECREASE (-) IN THE DEFICIT
Estimated Budget Authority............. 0 0 0 -50 -95 -105 -155 -215 -220 -275 -330 -250 -1,445
Estimated Outlays...................... 0 0 0 -50 -95 -105 -155 -215 -220 -275 -330 -250 -1,445
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Increase in long-term direct spending: CBO estimates that
enacting the legislation would not increase net direct spending
by $5 billion or more in any of the four consecutive 10-year
periods beginning in 2026.
Intergovernmental and private-sector impact: H.R. 702
contains no intergovernmental or private-sector mandates as
defined in UMRA and would impose no costs on state, local, or
tribal governments.
Estimate prepared by: Federal costs: Kathleen Gramp, Jeff
LaFave, and Ron Gecan; Impact on state, local, and tribal
governments: Jon Sperl; Impact on the private sector: Amy Petz.
Estimate approved by: Theresa Gullo, Assistant Director for
Budget Analysis.
[all]
