Although some analysts believe the gas industry still hasn’t seen the worst of the demand destruction due to high gas prices, consultants at Energy and Environmental Analysis Inc. (EEA) predict that gas consumption from the industrial sector will remain flat at current levels “for the foreseeable future.”

“Most of the readjustment to gas prices in the $4 to $5/MMBtu range has already occurred in industries where natural gas is a high fraction of the input cost,” EEA said in its Monthly Gas Update. “Unlike other forecasters, we believe that significant additional demand destruction in the industrial sector is unlikely.”

EEA noted that the nitrogen fertilizer (particularly ammonia) and petrochemical industries have been hit particularly hard by high gas prices. About 68% of the value of ammonia is the cost of natural gas.

However, ammonia producers have the advantage of being in close proximity to the market, and imports of ammonia are constrained due to infrastructure limitations. Domestic ammonia producers also already have adopted several strategies for dealing with high gas prices. As long as gas prices remain at $4/MMBtu or less and ammonia prices remain at $150 per ton, most domestic ammonia producers will remain competitive. But in order to deal with gas prices higher than $4, they have had to make some significant changes over the last few years, including plant closings, passing on production costs to consumers, hedging risks through long term gas contracts and building new plants that run on other fuels with more stable pricing, such as coal.

“At the projected $4-5 natural gas prices, industries with high natural gas costs per value added, such as ammonia and petrochemicals, will remain at risk of permanent loss of productive capacity,” said EEA. “However a complete loss of these industries to other countries (through imports) is not likely since domestic consumers are still their largest market and current infrastructure accommodates domestic supply more efficiently.”

EEA predicts that most of the other industries will continue to be able to manage high gas prices through fuel switching, passing cost through to consumers or absorbing the costs.

“As the economy tries to recover, albeit slowly, these industries are expected to increase production and thus increase their gas demand.” EEA forecasts that industrial production will grow at 1.5% per year in 2003 and 2.5% per year thereafter. The firm expects gas prices to average $5.15 at the Henry Hub this winter, $4.70 over next year’s storage injection season (April through October), $4.90 for all of 2004 and $5.60 in 2005.

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