natural gas’ impact on the industrial sector: not the industry’s … · 2012-03-27 · energy...

Prepared for National Petrochemical & Refiners Association

1899 L Street, Suite 1000 Washington, D.C. 20036-3896

Prepared by

August 4, 2003

Natural Gas’ Impact On The Industrial Sector:

Not The Industry’s Finest Hour

Energy Ventures Analysis, Inc. 1901 N. Moore Street, Suite 1200

Arlington, VA 22209-1706 (703) 276-8900

Energy Ventures Analysis, Inc. 2

Overview OF Impact On The Industrial Sector

The Primary Response To Date To High Prices Has Been Demand Destruction In the Industrial Sector Industrial demand 1 declined 2.8 BCFD, or 13 percent, from 2000.

Some of this decrease represents a permanent loss in demand.

On a composite basis, for the six energy intensive industries that account for 65 to 70 percent of gas demand within the industrial sector, production has declined sharply, since it peaked at the beginning of 2000.

It is not clear when industrial production for these industries will return to 2000 levels.

Further declines are projected for industrial sector gas demand in 2003 – primarily because of further production declines for the six critical industries.

Some regions are impacted more than others.

Overview Of Impacts On The Industrial Sector

1. All gas consumption data for both the industrial and electric sectors has been restated to place this data on a comparable basis and eliminate the inconsistencies contained in the Energy Information Administration (EIA) format for gas consumption. A summary of this restated data is presented in the appendix to this report.



Industrial Demand

0

100

200

300

400

500

600

700

800

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

(BCF)

2000 2001 2002

Excludes pow er demand due to electric plants transferred from the electric sector to the industrial sector. Source: EIA & EVA, Inc.



Six Energy Intensive Industries

75

80

85

90

95

100

105

110

115

120

1998 1999 2000 2001 2002 2003

(Index 1997=100)

Food Paper ChemicalsPetroleum Stone, Clay and Glass Primary Metals

Total and Composite

95

100

105

110

115

120

1998 1999 2000 2001 2002 2003

(Index 1997=100)

Total Industrial ProductionComposite 6-key Ind.(1)

(1)Composite of six energy intensive industries


Regional Impacts Industrial Gas Demand by State1

Legend500 to 2,100 BCF/YR

200 to 500 BCF/YR

100 to 200 BCF/YR50 to 100 BCF/YR

Less than 50 BCF/YR

Natural Gas Demand in the Industrial Sector (2001)


Impact On Specific Industries: Chemicals

The Industries Most Heavily Impacted By High Gas Prices Are: Chemical Industry1

Primary Metals

High Gas Prices Represent A Fundamental Change For The U.S. Chemical Industry There have been a series of bankruptcies, plant closings and reductions in

production levels at several facilities, because they can no longer compete at the current elevated gas prices

The golden era of the U.S. chemical industry (i.e., the 1980s and 1990s) is over U.S. chemical sector is based heavily upon natural gas and natural gas liquids. European and Asian chemical sector is based heavily upon oil (i.e., naphtha).

1 Basic organic chemicals (35%), petrochemicals (18%) and nitrogen fertilizers (13%) account for approximately two-thirds of the gas consumption within the chemical sector.


There has been a fundamental shift in the cost ratio of these two feedstocks In the 1990s the simple ratio between gas and oil prices was approximately 0.6, while

at present that ratio is approximately 1.0. This is about a 40 percent shift in the relative competitive advantage of feedstocks. Dow Chemical has noted that the U.S. has the highest gas prices in the world.1

The petrochemical segment of the chemical industry has been affected more by

high gas prices than most other segments of the chemical industry (i.e., see chart on page 8).

One of the clearest indicators of this shift is the change in U.S. balance of payments for chemicals

From over $8 billion surplus in 1999 to an estimated $9 billion deficit for 2003. U.S. used to be the world’s largest supplier of chemicals. Anecdotal evidence of Latin American chemical producers switching from importing

U.S. chemicals to importing European chemicals.


(1) Natural Gas Week, July 7, 2003.


Impact On Specific Industries: Petrochemicals

Production In The Chemical Industry

80

85

90

95

100

105

110

Jan-00 Apr-00 Jul-00 Oct-00 Jan-01 Apr-01 Jul-01 Oct-01 Jan-02 Apr-02 Jul-02 Oct-02 Jan-03 Apr-03

(Index: 1997=100)

Chemicals Petrochemicals/Other

Sources: Federal Reserve Board, CMAI

Gas Price Level (Scale Not Shown)


One of the Hardest Hit Segments in the Chemical Sector is the Fertilizer Industry The U.S. ammonia-based fertilizer industry can not compete with foreign

imports (i.e., Trinidad, Mexico, Russia and the Middle East) at elevated gas prices.1

Tidewater plants along the Gulf of Mexico are particularly vulnerable. Inland facilities have a modest transportation advantage.

The combination of the very high gas prices during 2000/2001 and in 2003 have caused several firms to declare bankruptcy and others to shut down plants.2

Impact On Specific Industries: Fertilizers

1. On average it takes 34 MMBTU to produce a metric ton of ammonia. With worldwide prices for ammonia ranging from $140 to $200 per ton, natural gas at $3.50 per MMBTU delivered can represent between 60 and 85 percent of total revenue, which leaves a minimal margin for other cost, such as labor, building costs, etc.

2. Bankrupt fertilizer firms include Farmland (Midwest and Louisiana), Vicksburg Chemical (MS), Agrifos (TX), Mulberry Phosphates (FL), and Agway (Syracuse, NY). Mississippi Chemical (Yazoo City, MS) has had a one year credit extension and Terra Industries (Sioux City, IA) has acknowledged limited ability to effectively hedge future gas prices. Mississippi Chemicals has permanently shut down its Donaldsonville, LA plant and Air Products has ceased production at its Pace, FL plant. Additional plant shut downs in early June include PSC Chemicals in Geismar, LA and Memphis, TN; Terra Industries in Verdigris, OK; Koch in Enid, OK and Sterlington, LA; and IMC Global in Faustina, LA.


Impact On Specific Industries: Primary Metals

The Primary Metals Sector Also Has Been Impacted Severely By High Gas Prices The U.S. aluminum industry has become the swing producer for the world

because of its high costs Particularly its high power costs with gas-fired generation in most instances setting

the marginal power prices.

This has caused eight U.S. facilities to idle capacity and it is questionable if these idled plants will ever reopen1

It is doubtful if there will ever be another greenfield aluminum plant built in the U.S.

At present there are only two plants operating in the Pacific Northwest, which is the heart of the U.S. aluminum industry, and one of these is at 20% capacity

1 Currently idled aluminum plants include Alcan’s West Virginia plant, the Mead, Tacoma and Trentwood, WA plants for bankrupt Kaiser, Alcoa’s Troutdale, OR and Rockdale, TX plants, and the bankrupt Longview, WA plant and the Goldendale plant. These eight plants may never reopen. At present in the Pacific Northwest only two plants are operating (i.e., Glencore’s Columbia Falls in Kalispell, MT at 20% capacity and Alcoa’s Ferdnale plant in Bellingham, WA)


Impact On Specific Industries: Other Industries

Other Industries Have Been Adversely Affected By High Gas Prices. Specific Examples Included the Following: Sugar or Sweetener Industry1

High fuel costs (e.g., elevated gas prices) have been a critical factor in the closing of a number of sugar beet factories and sugar cane processing mills.2

A recent example is the closure of the Western Sugar Cooperative facility in Greely, Colorado.

Sugar beet growers also have been impacted by high gas prices. Natural gas is the primary fuel used to operate irrigation pumps and is a major

cost for the sugar beet growers.

1 The sugar beet, sugar cane and corn sweetener industry accounts for $21 billion in economic activity in 42 states. Sugar beets, in specific, are grown in 12 states with 27 sugar beet factories and account for 88,200 full time direct and indirect jobs.

2 Since 1996 19 plants, or 25 percent of all U.S. sugar processing facilities, have been shut down.


Impact On Specific Industries: Other Industries Agriculture industry has been impacted adversely by high gas prices

Corn growers, in particular, are heavily dependent on ammonium fertilizers in order to maintain yields.

High gas prices have caused fertilizer prices to increase.

Corn growers also are incurring higher fuel costs (i.e., natural gas) to run their irrigation pumps.

There are indications that corn growers will reduce fertilizer usage and as a result sacrifice yields.

Estimated impact of these phenomenon is that corn yields could be reduced one bushel per pound of fertilizer.1

1 Wall Street Journal, “Natural- Gas Prices may affect plantings of Corn and Soybeans,” March 10, 2003, p.c-11

natural gas’ impact on the industrial sector: not the industry’s … · 2012-03-27 · energy...

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