Western Energy Alliance Economic Impact Data:Keeping it Real for Policymakers – the Job and

Economic Impacts of Legislation, Lawsuits and Regulation

The Western Energy Alliance ProjectThe Western Energy Alliance hired JohnDunham & Associates to perform the

followingeconomic analysis: Pricing Model for Generic Oil and Gas Wells

by Development Basin Economic Impact of Oil and Gas Producers

in the 13 Western States Regulatory Impact Model

The Western Energy Alliance Project JDA specializes in the development of

models and messages to communicate complex economic ideas to policy makers and the public

While these models should not be used to make financial decisions, they demonstrate the “impact” of regulations.

This can help the industry as a whole in its ability to influence and shape the regulatory and tax environment

The Western Energy Alliance ProjectExamples of How This Analysis is Used: The American Meat Institute used a very similar model to

demonstrate how price controls proposed by GIPSA would cost consumers well in excess of $100 million

The Auto Alliance used a similar model to demonstrate the negative economic effects of CAFE standards across Congressional Districts

DIAGEO has demonstrated the fiscal benefits of reductions in beverage alcohol controls in Connecticut

Verizon used similar models to show how accelerated depreciation generates productivity gains for the economy

Altria, MillerCoors and the WSWA have used these models to document the economic cost of excise tax increase proposals.

Pricing Model for Generic Well‣ Designed to Calculate out the cost components of a generic oil or gas well – from exploration and leasing to production and distribution to the supply network.

‣ Model is based on data gathered from the US Department of Energy, the Bureau of Economic Analysis, and interviews with dozens of industry professionals

‣ A Revenue model is included that assumes a 20-year well live with an exponential decline in production (nearly all production is in first 4 years)

‣Currently the model is state driven but will be broken out to reflect specific generic well types (vertical v horizontal) and different production areas (Williston, San Juan, DJ, etc)

Economic Impact Model‣ The Economic Impact Model analyzes the footprint of the

oil and gas production industry in the 13 western states ‣ Based on an industry defined as exploration to pipeline‣ The model is based on actual employment at company

facilities in the states allocated across the region based on the location of the office/facility and the actual location of each producing well.

‣ The model uses standard input/output modeling techniques and the IMPLAN input/output tables for 2010.

‣ Impacts by state and congressional district, and include supplier and induced impacts in every state and DC.

‣ Data are accessed using an interactive web-based “wizard”

Economic Impact Model The model shows that the industry

generates nearly 230,000 jobs all across the country, paying nearly $15.5 billion in wages.

The total economic impact of the industry is over $51billion.

Based on our model, the industry generates over $5.8 billion in business and personal taxes (not including royalties, severance taxes etc.)

Economic Wizard Available on Western Energy Alliance’s Website

Economic Impact Model

The power of the first two models will be harnessed through the development of regulatory and tax impact models in the future.

These models will be used to forecast “shocks” to the existing system and calculate economic and cost impacts based on the difference.

For example, taxes, which reduce the demand for products will reduce the well-head price of oil or natural gas. This will limit production.

Changes in production will then be translated into lost jobs, taxes, and economic activity at the national, state and Congressional district level.

These impacts will ricochet throughout the economy – impacting Districts in key states like Ohio or Florida

Regulatory Impact Model

BLM Well Completion Rules: A Bureau of Land Management proposal would require that

companies drilling new wells on Federal leaseholds (and those re-stimulating existing wells) submit a plan outlining the details of well completion operations for approval prior to performing them.

The proposed will also require operators to implement a number of costly “solutions” to a perceived problem of contaminated groundwater.

Our estimate is that nearly 5,100 wells currently in the permitting process and about 1,100 wells requiring re-stimulation in the first year following implementation will be impacted.

Regulatory Impact Model

Economic Impact of BLM Regulation

Estimated Total Estimated Impacted Estimated Number of Wells in

State Oil Wells Gas Wells Total Wells Oil Wells Gas Wells Total WellsArizona 3 1 4 - - - Colorado 3,187 5,718 8,905 212 380 592 Idaho - 5 5 - - - Montana 398 240 638 63 - 63 Nebraska 106 11 117 - - - Nevada 14 14 27 - - - New Mexico 4,519 2,564 7,083 700 - 700 North Dakota 1,993 6 1,999 99 - 99 Oregon - 6 6 - - - South Dakota 22 2 24 1 - 1 Utah 1,392 2,098 3,490 252 380 632 Washington - 3 3 - - - Wyoming 685 3,461 4,146 491 2,480 2,971 Total 12,318 14,129 26,447 1,818 3,240 5,058

Estimated Oil and Gas Wells Waiting to Be Permitted or Drilled

Our estimated costs were significantly higher than the minor administrative costs outlined in the Agency’s preliminary benefit-cost analysis of the regulations:

Regulatory Impact Model

BLM Percent JDA Percent DifferenceInitial Delay Costs -$ 0.00% 56,404,007$ 4.39% 56,404,007$ Pre Completion Delay Costs -$ 0.00% 38,326,948$ 2.99% 38,326,948$ Administrative Costs 3,798,558$ 6.52% 2,503,710$ 0.20% (1,294,848)$ Enhanced Casing Costs -$ 0.00% 439,793,100$ 34.25% 439,793,100$ Cement Bond Log Costs 44,383,950$ 76.13% 736,773,570$ 57.38% 692,389,620$ Mechanical Integrity Test Costs 10,116,000$ 17.35% 10,116,000$ 0.79% -$ Total Costs 58,298,508$ 100.00% 1,283,917,335$ 100.00% 1,225,618,827$

Cost Component Comparison

Cost Component Comparison per WellBLM Estimate JDA Estimate

Initial Delay Costs -$ 11,151$ Pre Completion Delay Costs -$ 7,577$ Administrative Costs 751$ 495$ Enhanced Casing Costs -$ 86,950$ Cement Bond Log Costs 8,775$ 145,665$ Mechanical Integrity Test Costs 2,000$ 2,000$ Total Costs 11,526$ 253,839$

JDA will complete the economic impact analysis including the addition of payments for government royalties, severance taxes etc.

JDA will include a detailed methodology and summary of the impact analysis. This will be completed within 2 weeks.

JDA will next break down the pricing model to basin specific data. This will allow for a more detailed examination of targeted regulation and cost changes. The new data will be available at the end of Summer 2012

Next Steps

John DunhamPresident, John Dunham & Associates32 Court StreetBrooklyn, NY 11201Email: jrd@guerrillaeconomics.comPhone: 212-239-2105

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