Challenges and Opportunities for Oil and Gas Development in Different Price Environments

Challenges and Opportunities for Oil and Gas Development in Different Price Environments

Statement of
Michael Ratner
Specialist in Energy Policy
Before
Committee on Energy and Natural Resources
U.S. Senate
Hearing on
“Challenges and Opportunities for Oil and
Gas Development in Different Price
Environments”
April 26, 2016
Congressional Research Service
https://crsreports.congress.gov
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Chairman Murkowski, Ranking Member Cantwell, Senator Heinrich, Members of the Committee, my
name is Michael Ratner. I am a Specialist in Energy Policy at the Congressional Research Service. CRS
appreciates the opportunity to testify on the important issue of oil and natural gas development in
different price environments. In accordance with our enabling statutes, CRS takes no position on policy or
legislation.
Introduction
Why prices for oil and natural gas have declined so drastically in recent years is directly related to the
advent of U.S. shale gas production and the application of related techniques to the oil sector. The drop in
oil prices since mid-2014 has attracted a lot of attention, and has prompted producers to improve their
production methods. This has contributed to the resiliency of U.S. output. U.S. crude oil production in
January 2016, the latest data available, remained over 9 million barrels per day, although it was the fourth
month of decline, while prices remained low. Natural gas is different. U.S. natural gas production
continues to rise, despite sustained low prices. In January 2016, U.S. natural gas production hit a new
monthly high and in March the United States started exporting liquefied natural gas from the lower-48.
Prices
In the United States, oil and natural gas prices are no longer linked. Outside of the United States, contract
natural gas prices tend to be indexed to oil, but that is changing. Prices for both commodities are currently
low, compared to just five years ago. Regardless of the price level, some analysts contend that external
costs such as national security and the environment are not fully incorporated into the price, although
analysts disagree about the magnitude of the externalities. Oil is in the $40 per barrel range, up recently
but still relatively low, and U.S. natural gas is under $2 per million British thermal units. One does not
have to think far back to when prices for both were much higher. In 2011, oil was close to $100 per barrel
and natural gas was about $4 per million British thermal units. Also, keep in mind that ten years ago shale
gas and tight oil were almost unknown. Any price assumptions in my testimony are not forecasts, and
CRS has not evaluated the likelihood of any scenario.
Producers
In a low price environment, both oil and natural gas producers as well as service companies face financial
challenges. Companies have cut capital expenditures, laid off workers, filed for bankruptcy protection,
gone into bankruptcy, sold assets, or been downgraded by credit agencies. Cutting capital expenditures, in
particular, will have effects on production beyond a five-year time frame, especially in more challenging
areas. However, the responsiveness of shale production could potentially smooth any related price effects.
The longer prices stay low the harder it will be for companies to survive. Nevertheless, some companies
will remain financially solid and will weather low prices better. As prices rise companies will reassess
their strategies.
Consumers
On the other hand, consumers of all types should benefit from low prices. Individuals and companies have
seen their oil and natural gas related expenses decline. How consumers view the future of oil and natural
gas, especially prices, influences their decision on purchasing new equipment that uses oil or natural gas.
This will have an impact on future production needs and prices. As an example, prior to the fall in oil
prices there was a lot of discussion on sectors where natural gas could replace oil products, mainly long-
haul trucking, rail, and marine. Now, there is less talk of substitution in trucking or rail, although marine
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remains an area of interest, which appears to be driven more by regulations than by prices. Similarly on
electricity, there has been a shift to natural gas-fired generation versus coal. While this has mostly been an
increase in utilization, new construction tends to focus on natural gas or renewables, in part because of
regulatory issues and financial incentives. Oil remains the dominant fuel for transportation and different
price levels may affect the fuel efficiency of a car one buys, but it is not as likely to significantly influence
the fuel type consumed.
Other Issues
There are a variety of other areas that will be affected by high or low prices, including related sectors like
infrastructure, trade, the environment, and geopolitics, among other topics. As I mentioned, the United
States began exporting liquefied natural gas earlier this year. With the lifting of restrictions at the end of
last year, exporting crude oil from the United States has become easier. Regarding the environment, there
will be positive and negative consequences that are outside my expertise. For geopolitics, countries that
rely on oil and natural gas revenues for their budget have been hurt by low prices. This includes both U.S.
allies and adversaries. Finally, oil and natural gas prices are big economic factors; however, the U.S.
economy is well diversified and not reliant on state-controlled energy companies. Nevertheless, some
local economies will benefit, while others do not depending upon the scenario.
Thank you for the opportunity to appear before the committee. I will be happy to elaborate on my opening
remarks and address any questions you may have.

Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff
to congressional committees and Members of Congress. It operates solely at the behest of and under the direction of
Congress. Information in a CRS Report should not be relied upon for purposes other than public understanding of
information that has been provided by CRS to Members of Congress in connection with CRS’s institutional role.
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