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This CBO review was prepared in response to a request by the House Subcommittee on Fossil and Synthetic Fuels for comments on a study prepared by Shell Oil Company. The Shell study contains two major parts: "Increase in United States 'Old Gas' Reserves Due to Deregulation" and "Economic Analysis of Alternative Natural Gas Regulatory Policies."
 

SUMMARY

The principal finding of the Shell study is that there would be significant additions to "old gas" reserves if old gas prices are decontrolled. The first part of the Shell study estimates the effects of wellhead price decontrol on natural gas produced under the old gas sections of the Natural Gas Policy Act (NGPA). The second part examines the economic effects of three natural gas policy options: continuing current law (NGPA), enacting the Administration's decontrol proposal (H.R. 1760), and extending price controls under the Gephardt proposal (H.R. 2154). The central focus of the Shell study is the response of owners of old gas reserves to decontrol. This emphasis is appropriate because the pricing of old gas is one of the most important issues in the current natural gas debate. This review, therefore, focuses on the analytical, measurement, and methodological issues related to estimating the costs and benefits of decontrolling old gas. In addition, this review also examines the economic analysis of the three proposals.

CBO's principal observation is that the Shell study does not discuss the sensitivity of its results to different assumptions concerning oil prices, gas contracting practices, and the geological features of old gas reserves. A sensitivity analysis would be helpful to determine how the ranking of the policy options is affected by different contingencies. This observation applies equally to the two parts of the study reviewed here: old gas reserves and the economic analysis.

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