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
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
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