A recent report produced by the Center for Energy Studies at Rice University’s Baker Institute for Public Policy found that while severe restrictions on the national level would have a large impact on the natural gas industry, local policies are “largely irrelevant to the broader U.S. natural gas market.”

Among the impacts:

Taxes: The effects of new taxes on oil and gas production are not straightforward, the report said. While “it may seem that a tax would raise production costs and diminish profitability, and hence reduce production at the margin … by altering product or input prices the tax can be shifted forward to consumers or back to suppliers.” Who bears the burden of increased taxes depends on “the relative elasticity of supply and demand for natural gas, as well as the elasticity of supply of the production inputs, particularly land,” the report said.

Local tax increases can affect gas production in an area in much the same way that a declining gas price can, only at a much more localized level. If a tax is levied in a certain region, producers in that region may decide to reduce lease purchases or overall development activity in that region in favor of moving production to an alternative area. Regarding a possible federal tax increase on producers, the effects are unclear, the researchers said. It’s likely that a change in the U.S. tax code “might trigger pricing responses by providers of inputs to production, in particular landowners,” therefore minimalizing effects, the report said.

Hydraulic fracturing: The researchers examined several different scenarios involving bans on hydraulic fracturing. They included:

  • A federal ban on any new shale gas development;
  • Several bans in regions of prolific shale development;
  • A statewide ban in Colorado; and
  • A reversal of the New York ban.

Unsurprisingly, a sweeping federal ban would be the most constraining ban possible. According to the researchers, in such a scenario net U.S. production would fall, leading to price increases at the Henry, La., hub, where gas would likely reach $8 per thousand cubic feet (Mcf) by 2020 and more than $10 per Mcf by 2030. Higher prices would drive down demand, with the industrial sector seeing the largest decline in demand. In spite of higher prices, the power generation sector would likely see increased demand through 2030, with demand increases of 2% per year.

Widespread regional bans on hydraulic fracturing would also lead to higher prices and reduced U.S. production, though the changes would be less significant than those caused by a federal ban. Some of the lost production from shale gas development in the affected regions would be offset by production gains in areas not facing bans, as well as from non-shale basins.

Gas flaring: Natural gas flaring is related to oil production rather than gas production. However, as gas flaring has increased substantially in both North Dakota and Texas during the last few years, pressure from environmental groups in particular has driven state governments to consider steps to reduce gas flaring.

In the scenario examined by the researchers, policies eliminate gas flaring by 2018, adding slightly less than 1 billion cubic feet of gas per day (Bcf/d) to the U.S. gas market prior to 2020. Additional input levels would then likely decline to about 600 million cubic feet per day (MMcf/d). Though the necessary infrastructure would raise wellhead costs for oil producers, the overall impact of anti-flaring measures would be relatively small. The change to gas prices would average only about 4 cents per Mcf through 2020, with negligible differences beyond that, and the increased supply would be offset by decreased imports from Canada, the report said.

LNG export ban: The researchers acknowledged that it is unlikely the U.S. government would suspend all LNG export licenses, but still evaluated the possible effects to contrast them with the effects of more moderate policies.

Such an extreme policy would largely alter gas prices. The price at Henry Hub would be reduced by up to 35 cents per Mcf by 2030. Gas prices in Asia would rise by more than 50 cents by 2030, and prices in Europe would also increase, though not to the same extent. Other countries would increase their own gas production as a result of the higher global prices.

In the U.S., the gas supply would be effectively bottlenecked. Production would fall off, and domestic demand would increase by about 400 MMcf/d by 2030 due to the lower prices. However, the increase would not offset the reduced demand from LNG exports.

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