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Weak Gas Prices Force Nucor, Encana to Temporarily Suspend Drilling

Steel manufacturer Nucor Corp. and its drilling partner, Encana Corp., have agreed to temporarily suspend drilling new natural gas wells, citing weak gas prices.

Charlotte, NC-based Nucor also said it expects lower earnings in 4Q2013 compared to the preceding quarter and the previous fourth quarter. Earnings were affected by several factors, including the collapse of a dome used to store iron ore pellets in September.

"This joint decision is being made due to the current weak natural gas pricing environment," Nucor said. "This pause demonstrates the flexibility of our partnership with Encana to react to market conditions to the mutual benefit of both parties while still allowing us to better manage our exposure to natural gas pricing volatility at our operating divisions that consume natural gas."

Nucor added that the cessation of drilling will reduce Nucor's capital expenditures (capex) for 2014 by approximately $400 million.

Nucor said in July it would spend more than $700 million over a two-year period on gas drilling in order to meet its contractual obligations with Encana for a supply of low-cost natural gas (see Shale Daily, July 22). Nucor plans to use gas from Encana wells, and others, to supply its $750 million direct reduced iron plant in St. James Parish, LA, which was the scene of the September dome collapse.

In November 2012, Nucor agreed to take a half-stake in some of Encana's U.S. natural gas wells to guard against an expected increase in U.S. gas prices (see Shale Daily, Dec. 17, 2012). The agreement built on an earlier and smaller onshore gas drilling agreement with Encana that was reached in 2010 by increasing the number of gas wells. It also offered Nucor more protection against volatile gas prices, which are among its biggest operational costs.

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