Industrial Demand Hit By Lower O&G Activity?

March 22nd, 2016 |

The process of oil and gas exploration and production touches many parts of the US economy. The slowdown has not only impacted those directly involved, but it has started showing up in sectors that use natural gas to empower US shale extraction.  Recently, Evraz Rocky Mountain Steel in Pueblo, Colorado announced plans to temporarily idle production on its’s steelmaking and rail mill operations lines. While the company does not expect the reduction in production to be permanent, this lower output comes on the heels of previous production cuts that affected the seamless pipe unit, a subset of industrial manufacturing that supplies the oil and gas industry. Everaz has noted in the past that slowdowns were the result of the downturn in the commodities markets, and that downturn has rippled into natural gas demand.

In January of 2015, the plant announced it was laying off 200 workers due to waning demand for pipes used in oil and gas drilling and production. Natural gas flow data to the Evraz plant in Pueblo shows that the facility has consistently received less gas since the start of 2015. From 2010 through early 2013, deliveries were pretty consistent at 13.5 MMcf/d. Flows decreased to 10.5 MMcf/d from May 2013 to December of 2014 and have since declined to 8 MMcf/d (black line, right axis on graph below). Flows to all US steel and iron end users in pipeline flow data have also noted declines in recent years (blue bars, left hand axis on graph below), with the annual average in 2015 declining by 15% compared to the previous 5 year average.

 

Steel Slides

While a warm winter in 2015 was partially to blame for industrial demand coming in lower than it did in 2014, the above shows that there are other factors at play in the market. Industrial demand declined 0.7 Bcf/d in 2015 compared to 2014, equating to 105 Bcf over the course of this past winter. While industrial demand alone would not have solved the current over supply situation, it could have helped burn a little more of the excess gas in storage. As we mentioned in our previous post The Industrial Revolution Stalls?, more demand is on the way, but as the Evraz layoffs show, growth can be derailed by changing economic conditions.

For more information on how North American supply and demand fundamentals are effecting prices, production and inter-regional flows, please request a sample of our Northeast Gas Quarterly which includes a supply / demand projection over the next 5 years.