Industrial demand, particularly for those industries where fuel is an important cost component, is the “wild card” in the natural gas demand picture, according to Energy and Environmental Analysis (EEA), which points out that given the variety of industries using natural gas for different purposes, their reaction to high prices is difficult to summarize. Especially now, when high natural gas prices could prevail for several years, industrial strategy during short-term price spikes in the past may not apply.

EEA pinpoints heavy gas use industries with the highest risk of load loss from high prices as ammonia, petrochemicals, steel and alumina. These are the industries that cannot switch fuels or easily pass on increased production costs to customers and which compete in a global market, where overseas competitors may have access to cheaper gas. EEA also puts in the high risk area such items as dairy production, which is subject to regulatory price controls.

“An initital estimate of the loads with the highest risk is almost 50% of total industrial non-lease and plant natural gas consumption,” the Arlington, VA research group said in its Monthly Gas Update.

Overall, industrials are the largest consumer segment for natural gas, using about 10 Tcf a year. Fuel cost is a small factor for industries such as electronics and vehicles, but, a large element for the food, paper, refining, stone, clay and glass industries, in addition to those mentioned above. Together these industries represent 80% of industrial gas use, EEA said.

The food, chemical, alumina and aluminum, and petroleum refining operations use gas for process heating and are more limited in their ability to switch fuels, which makes it more likely they will try to pass costs on to customers — or where there is cheaper global competition, shut down.

Looking back two years ago when gas prices also were rising, EEA noted the wide-ranging impact among industrials. Ammonia and methanol producers shut down, as did foundries operating at the margin. Some steel mills switched to fuel oil in their blast furnaces or shut down. Some factories calculated they could make more money by shutting down and selling their fuel supply. Refiners’ substitution of the propane they produced for higher-priced gas caused propane shortages in the residential market.

That price spike turned out to be short-lived, but based on current projections of diminished natural gas supplies available to the U.S. market, industrials may have to do some long-term strategizing. The possibility is very real. EEA currently is estimating average gas prices at the Henry Hub will be $5.37/MMBtu in 2003 and $5.35/MMBtu in 2004. This is up from the group’s December 2002 estimate of an average $4.94 in 2003 and $5.10 in 2004 (see Daily GPI, Dec. 11, 2002).

Going forward, EEA suggests industries facing these prices will be encouraged to revamp and improve their operations through fuel switching, increased energy management activities, and installation of more efficient equipment. It also is possible that where companies have installed cogeneration capacity, they will be better able to weather the higher prices because of the greater efficiencies. And the analyst group suggests that high prices will provide the push for increased installation of cogeneration facilities.

©Copyright 2003 Intelligence Press Inc. All rights reserved. The preceding news report may not be republished or redistributed, in whole or in part, in any form, without prior written consent of Intelligence Press, Inc.