Try as they might, natural gas industry observers and players are hard pressed to find a plausible scenario for significantly higher natural gas prices in the near term. A sustained turnaround appears years away.

Bernstein Research analysts tested a bullish scenario for gas in a recent report, and after analyzing major-sector demand and other factors, said they were “unlikely to come close to what a bullish view would entail.”

Susan Klann

The analysts used assumptions necessary to drive gas demand by a 15% compound annual growth rate. They looked at potential from transport, power, industrial, commercial, residential and weather-related demand. And they determined that, save for liquefied natural gas (LNG) exports, demand would be insufficient, and by a long shot.

Rather, they forecast gas demand growing at 1.8% CAGR over the consumption period they studied, from 2012 to 2020.

The only major sector promising significant consumption growth is electric power, the analysts said, which will expand nearly 3%. Residential growth will be moderate; commercial consumption will fall modestly; and industrial sector growth will be flat.

An emerging market is transport, but they characterized it as using a “trivial” amount only.

The solution? Producers and end users are getting creative. Having passed through anger and denial in reaction to protracted weak gas prices, they are joining forces in long-term price contracts—an arrangement made popular 25 years ago or more, when what was then known as the gas “bubble” refused to pop.

At press time, steelmaker Nucor Corp. announced it had forged a long-term agreement with Encana Oil & Gas (USA) Inc. for an onshore gas-drilling program that it said “will ensure a reliable, low-cost supply of natural gas for our existing and expected future needs for more than 20 years.”

That supply basin is Colorado’s Piceance, and the deal will enable Encana to drill up to 4,000 Mesaverde wells, doubling its well count in the state. Drilling will largely take place on the company’s 50,000-acre lease on federal land in Rio Blanco and Garfield counties.

The agreement calls for Nucor to pay its share of costs plus an additional amount of carried interest as each well is drilled, subject to caps. Either party may suspend drilling if natural gas prices fall below a predetermined threshold. The deal builds upon a smaller onshore gas drilling agreement with Encana established in 2010.

The pluses for end users are the same as they ever were: They can better manage exposure to price volatility and overall energy demand for manufacturing operations.

Nucor will put the new supply to use at its direct reduced iron (DRI) facility under construction in Convent, Louisiana, which is expected to start up in mid-2013 and will significantly increase Nucor’s natural gas consumption.

“This new facility, together with our ability to ensure a long-term low cost of natural gas, is an important phase in the execution of Nucor’s raw material strategy of providing 6- to 7 million tons per year of low-cost, high-quality iron units to our steel mills,” according to the company. It may eventually expand the site.

Nucor also uses substantial amounts of natural gas in its steel-manufacturing operations throughout the U.S. Wells drilled under the two agreements are expected to provide enough natural gas to equal Nucor’s use at all of its steel mills in the U.S., plus the consumption of two DRI facilities, or alternatively, three DRI plants.

“The production of the wells that have thus far been drilled and are producing under the 2010 agreement is exceeding the expectations that Nucor modeled for that investment by more than 60%,” the company said.

Nucor’s chairman and chief executive officer Dan DiMicco said, “We are always searching for ways to improve our competitive position and drive sustained value creation over cycles. The increased exposure to natural gas prices that will accompany our current and potential DRI production, combined with the tremendous advances that have been made in the natural gas industry, have created a unique opportunity to leverage our strong balance sheet to create what we believe will be a lasting competitive advantage for Nucor.”

Plentiful domestic gas supplies and continuing weak gas prices are allowing U.S. manufacturers to shore up economics and better compete against foreign rivals, while giving gas producers the backing they need to keep on drilling. More such deals will follow.

Comments