[House Report 114-267]
[From the U.S. Government Publishing Office]


114th Congress   }                                  {    Rept. 114-267
                        HOUSE OF REPRESENTATIVES
 1st Session     }                                  {           Part 2

======================================================================



 
            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--
                                               ---------------------------------------------------------------------------------------------------------
                                                 2016   2017   2018    2019     2020     2021     2022     2023     2024     2025   2016-2020  2016-2025
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                               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
--------------------------------------------------------------------------------------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \3\Firms produced 137 million barrels of oil on federal lands in 
2014.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \4\That amount is equal to about 2 percent of federal production in 
those states in 2014.
---------------------------------------------------------------------------
    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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    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
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                             By fiscal year, in millions of dollars--
                                        ----------------------------------------------------------------------------------------------------------------
                                          2015   2016   2017   2018    2019     2020     2021     2022     2023     2024     2025   2015-2025  2015-2025
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                       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
--------------------------------------------------------------------------------------------------------------------------------------------------------

    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.

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