More than 30 years ago, Mitchell Energy (now part of Devon Energy Corp.) brought the C.W. Slay No. 1 well into production in Wise County, Texas, just north of Fort Worth. The well, considered the first production in the Barnett shale, marked the dawn of an unconventional era. The shale boom that the well heralded was made possible by technology in the form of three-dimensional seismic surveys, directional drilling and hydraulic fracturing--all of which, in turn, depended on high-performance steel.
The steelmaking industry is now reaping the benefits of what it helped sow in the hard, dry soil of north Texas. The shale boom has made natural gas--the cleanest-burning fossil fuel--significantly less expensive, and orders of magnitude more plentiful than at any time since the hydrocarbon era began. With expectations that natural gas will be readily available and at a less-volatile price than in the past, steelmakers are planning new facilities to use natural gas directly at the burner tips, to fire electric power generation, and even as a source of carbon in melt.
For example, Nucor Corp.s $750-million, 2.5-million-ton-per-year direct-reduced iron (DRI) plant nearing completion in St. James Parish, La., will convert natural gas and iron ore pellets into DRI to be used by Nucors steel mills, along with recycled scrap, to produce sheet, plate and special bar steel. The DRI facility is the first of a multiphase plan that may include additional DRI facilities, a coke plant, a blast furnace, a pellet plant and a steel mill. The Charlotte, N.C.-based steelmakers total investment at the site could reach $3 billion and create as many as 1,250 jobs.
The DRI facility was chosen for the first phase of our project, in place of a blast furnace and coke-making facility, because it offers a carbon footprint that is one-third of that for the coke oven/blast furnace route for the same volume of output but at less than half the capital cost, Nucor said when it announced the plant in 2010. While there is some loss or penalty in the value in use that will occur from DRI at the steel plant vs. pig iron usage, the technology improvements that we have introduced and proven at our Trinidad and Tobago DRI plant have significantly reduced that typical penalty. The long-term uncertainty that currently exists on the carbon tax issues in Washington makes this decision a lower-risk option.
Not surprisingly, gas producers are thrilled by the triple dip--fuel, power and carbon benefits--that steel is bringing to gas demand.
We are pleased to see the resurgence in the steel industry, and are proud of the role that natural gas has played in this resurgence, said Daniel Whitten, vice president of strategic communications at Americas Natural Gas Alliance (ANGA). The steel industry is closely tied with the game-changing abundance of North American natural gas, both as a supplier of products used in the production and transmission of natural gas, and as a beneficiary of the broad availability of natural gas at stable and affordable prices.
The Potential Gas Committee (PGC) 2011 estimate of the United States natural gas reserves indicated that the country had a total resource base of 1,898 trillion cubic feet at the end of 2010--the highest resource evaluation in the groups 46-year history. Most of the increase resulted from the re-evaluation of shale gas plays in the Gulf Coast, Mid-Continent and Rocky Mountain areas. At current consumption levels, those reserves represent a more-than-100-year supply, matching the century mark long held exclusively by coal.
Long-term estimates of robust natural gas supplies by the PGC, the U.S. Energy Information Administration, the National Petroleum Council and others, as well as price outlooks, suggest growing supplies of natural gas, with increasing demand and stable prices through 2035, based on assurances that utilities, steelmakers and other manufacturers are making long-term decisions to build new facilities.
An in-depth analysis of the new gas-fired economics in manufacturing--including steel--was released by PricewaterhouseCoopers LLP (PwC) in September. The findings might come short of a revelation to steelmakers. A lot of the stories in the steel industry to date have centered around labor costs, said Robert McCutcheon, U.S. industrial products leader at PwC, but labor may no longer be the controlling factor. Energy, transportation, access to talent, access to marketsÑthose all may be more important, along with regulation and taxation, of course. That is particularly true for heavy manufacturing, steel and chemicals, for example.
So steelmaking in North AmericaÑwith its ready access to talent, markets, economical energy and short supply chainsÑmight trump whatever labor, tax and regulatory advantages can be found in other global regions. This tsunami of shale gas has changed thinking about energy, manufacturing costs and logistics, McCutcheon said.
The first impulse of globalization might turn out to be wrong, or at least no longer valid, McCutcheon said. Chasing the lowest-cost supply chain has actually created risk. That is particularly true in North America, where energy is the No. 1 factor. By 2025, we found that North American industries, primarily metals and chemicals, can anticipate $11.5 billion in savings due to lower energy costs. That includes decreased volatility, not just low prices in absolute terms. Users of natural gas, either industrial or utilities, said they are not overly concerned about whether the price is $3, $4 or $6 per million British thermal units. What they need is consistency. The ability to control costs by securing either long-term contracts at fixed prices, or at least hedge supply costs within reasonable ranges, is far more important than a few dimes one way or the other on the absolute price.
And that might be the biggest structural change of the shale gas boom. Natural gas producers confirm that at $6 per million Btu, just about every gas field in the United States and most in Canada are profitable. That, in effect, has become the natural ceiling for gas prices in the foreseeable future--a soft ceiling, to be sure, and subject to extremes of weather and logistical problems. But the days of natural gas costing $3 per million Btu one day and $13 per million Btu six months later are thought to be a thing of the past.
As natural gas producers have concentrated on bringing vast new supplies to market, McCutcheon said, steelmakers have been diversifying their base manufacturing to take advantage of commodity cycles: ore, scrap, fuel and power. A blended portfolio, some blast furnace, some electric-arc furnace (EF) and some DRI, may turn out to be the most flexible and economical, he said. Local and regional variations will change that calculus, but the blended model is likely to become the ideal. It is fair to say that into the future, most market participants will have some blend.
Steelmakers themselves agree in general with the thrust of the natural gas emergence, but they have a slightly different perspective on the priorities.
My members see three advantages to cheap and plentiful natural gas, Steel Manufacturers Association president Thomas Danjczek said. First is the reduction in the direct cost to produce a ton of steel. Second is the overall capital costs, environmental and availability of power. Third is that we sell into the businessÑtubulars, of course, but many other forms as well.
Between an (electric-arc furnace) and reheat, steelmakers use about 3 million Btu per ton of steel. Even if gas is $5 per million Btu, as opposed to $10 per million Btu, as it has been in the past, that is a $15 per ton savings, Danjczek said. Sometimes our profit is not that good. That said, price is not the most important factor. It is the volatility. We dont do well with spikes.
What many people do not realize, Danjczek said, is that in the gas boom, steel in general and EF operators in particular dodged a bullet. We had been very concerned about the cost of an even availability of power. For arc-furnace operators, power is the second-greatest cost, after raw materials. Certainly the emergence of natural gas power plants has replaced the coal-fired units that have been shut down for environmental reasons. Now, power is readily available across the country. That is an absolute benefit of natural gas.