U.S. steel and iron producer Nucor Corp. last week said it is taking a half-stake in some of Encana Corp.'s U.S. natural gas wells in Colorado to guard against an expected increase in U.S. gas prices.
The latest agreement builds on an earlier and smaller onshore gas drilling agreement with Encana that was clinched in 2010 by increasing the number of gas wells. It also offers the Charlotte, NC-based manufacturer more protection against volatile gas prices, which are among its biggest operational costs.
Drilling natural gas wells resulting from the two Encana agreements is expected to provide enough natural gas to equal Nucor's consumption at all of its steel mills in the United States, plus consumption for two direct reduced iron (DRI) facilities, or alternatively three DRI plants.
"We are always searching for ways to improve our competitive position and drive sustained value creation over cycles," said Nucor CEO Dan DiMicco. "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."
Nucor plans to invest about $542 million over the next three fiscal years and $3.64 billion over the estimated term of the agreement, which is 13-22 years. The agreement is for wells drilled on Colorado's West Slope, the companies said last week. Encana has an estimated 50,000-acre lease in Rio Blanco and Garfield counties and the agreement would enable the Canadian producer to drill up to 4,000 wells over 20 years, which would double its well count in the state.
Nucor's 200 operating facilities, including subsidiaries of Harris Steel and The David J. Joseph Co., produced more than 18 million tons of steel in 2010, making it the largest steel products manufacturer in North America. The company also is the largest recycler in the United States.
The transaction with Encana Oil & Gas USA Inc. is forecast to "ensure a reliable, low-cost supply of natural gas for our existing and expected future needs for more than 20 years," DiMicco said.
Nucor would pay its share of drilling costs, as well as pay an additional amount of carried interest as each well is drilled, subject to a cap on the carry paid for each well and a cap on total carried interest. Either party may suspend drilling if natural gas prices fall below a predetermined threshold. Encana would provide "expertise to drill, complete and operate the wells," according to Nucor. The agreement ensures "a sustainable competitive advantage in natural gas costs for Nucor's DRI facility now being built in Convent, LA, which is on track to start up in mid-2013."
The Convent facility "will significantly increase Nucor's usage of natural gas," DiMicco said. "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 6-7 million tons per year of low-cost, high-quality iron units to our steel mills." Additional DRI capacity is being considered for the Convent site, which would further boost gas use, he said.
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