According to a Lehman Brothers analysis, gas demand hit a 10-year low in 2003 primarily because of the impact of high gas prices on price sensitive end users, such as chemical production companies.

This is one area in which Lehman Brothers and the federal government nearly agree. The U.S. Energy Information Administration shows that gas demand last year fell 5.3% to 21.78 Tcf, which was the lowest demand level since 1994 when 21.24 Tcf of gas was consumed domestically. Gas demand peaked in 2000 at 23.47 Tcf, according to EIA.

“Natural gas has enjoyed increased demand from some sectors as a result of clean burning properties and the near total reliance on natural gas for new power plant capacity,” noted Lehman Brothers analyst Thomas Driscoll. “However falling overall supply has resulted in decreased demand by more price sensitive customers.”

Natural gas and natural gas liquids play an important role as a feedstock for the production of many chemicals, such as methanol, ammonia and ethylene, he noted. But high gas prices have made it difficult for producers of those chemicals to compete with imports from overseas. Feedstock costs today can equal more than 80% of the total production cost of a some fertilizer products putting U.S. fertilizer producers at a serious disadvantage to imports.

Two weeks ago, the gas industry was hit with more permanent demand destruction as a result of high gas prices. Terra Industries and Mississippi Chemical Corp. announced ammonia and urea plant closures that result in the loss of at least 80 MMcf/d of gas demand (29.2 Bcf/year) (see Daily GPI, April 2).

Lehman Brothers estimates that since 2000, the gas industry has lost 1 Bcf/d of demand because of reduced feedstock consumption by ammonia, methanol and ethylene producers. And three new ammonia plants in Trinidad, Qatar and Venezuela will give U.S. fertilizer producers added competition this year, possibly meaning even more plant shutdowns and greater gas demand losses.

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