From natural gas to renewable sources, metals companies are finding growth opportunities in the energy market
December 2011 - The state of North Dakota sits on part of the vast Bakken formation. As shale gas drilling technologies have evolved, the state’s economy has exploded. Its 3.5 percent unemployment rate currently is the lowest in the United States, and it isn’t the only state benefiting from the energy boom. French company Vallourec is building a $650 million, state-of-the-art seamless pipe mill in Youngstown, Ohio, to meet growing demand from the Marcellus and Utica shale formations.
David Hackworth, manager of corporate strategy for Consol Energy, Pittsburgh, Pa., spoke at the CRU 5th North American Steel Conference, held Oct. 24-26 in Chicago. He pointed out in his presentation the first horizontal shale well was drilled in the Barnett shale formation in Texas in 2003. Today, shale plays provide approximately 20 percent of U.S. gas production. In addition, he noted, according to the Energy Information Administration, from 2001 to 2010, natural gas consumption increased by 0.77 percent CAGR in the United States, with the vast majority of that growth coming from the electric generation sector (3.65 percent CAGR).
He also said of the approximately 460 gigawatts of natural gas generation capacity in the United States, more than half was installed between 1995 and 2004.
“By 2030, natural gas is expected to compete with coal as the world’s leading fuel for producing electricity, and it will likely be second only to oil as the world’s leading energy source overall,” said Andrew P. Swiger, senior vice president, Exxon Mobil Corp., who spoke at the 32nd Oil & Money Conference in London, Oct. 10-12.
Swiger characterized the impact of innovations in shale gas drilling as “dramatic” and “largely unexpected. Within the past few years, it has become apparent that, with the addition of newly recoverable shale gas, we could potentially unlock enough natural gas to meet U.S. demand at current levels for more than 100 years,” he said. “The potential development of the United States’ shale gas resources not only provides a new source of domestic supply, it also provides a source of jobs, economic growth and government revenues. A recent economic impact study found the U.S. natural gas industry as a whole accounts for 2.8 million jobs and contributed more than $380 billion to the U.S. economy in a single year. Recent shale gas development is a growing driver behind these numbers.”
Strength in numbers
In addition to the optimistic outlook for natural gas, growth in other energy markets is contributing to the sector’s overall performance. “Renewables, such as wind, solar, nuclear and other forms of energy production continue to develop,” says Jeff Moskaluk, chief commercial officer, SSAB Americas, Lisle, Ill. “However, despite the recent growth in these areas, the main focus and overwhelming majority of market activity continues to be in fossil fuel energy sources.”
“The energy market’s current strength is being driven by oil prices,” adds Scott Barnes, TMK IPSCO’s chief commercial officer. “Oil prices are at a level that continues to provide the economic incentive for companies to invest and drill. The rig count, a barometer of drilling activity, has shifted the mix to rigs drilling for oil. Advancements in technology and drilling efficiencies have lowered costs, allowing energy companies to achieve the investment returns necessary to drill for natural gas, even at the current lower prices in some of the shale basins. However, the drilling taking place today to hold leases is coming to an end, and the economics will decide in the future the level of drilling for natural gas.”
“The oil and gas sector is providing sound investment activity globally because of continued high oil prices,” says Poul-Erik Arnvig, vice president of market development for Outokumpu, Espoo, Finland. “General interest in new green energy (renewable energy like wind and solar as well as alternative energy like geothermal and biodiesel) continues to generate new and interesting applications for stainless steel. Although the total amount of stainless steel used in green energy presently is moderate, we expect this to grow long term.”
Theresa Wilson, solutions manager for Direct Energy, points out renewable energy technologies are growing “faster than many realize.” She says two factors are driving growth—renewable portfolio standards and tax/tariff incentives.
“These two factors are effectively shifting the demand and supply curves for renewable technologies to produce a cost for energy comparable to traditional energy sources,” she says. “In the near term, while the rate of change may fluctuate, continued growth is expected. A notable factor is the drastic expansion of shale gas production throughout the U.S. and its impact on near-term and possibly long-term electricity prices. If we are reading the trends correctly, the continuation of low power prices could make it more challenging for renewable technologies to compete on an economic basis, especially for onsite or distributed generation.”
However, Wilson says, “renewable technologies on the whole remain more expensive relative to traditional energy sources. That being said, we can’t lose sight of the significant cost decrease in recent years and the potential that currently evolving technology innovations have towards driving the costs towards parity with traditional energy sources within the next decade or so. As renewable energy technologies become an increasing portion of the generation mix, we will need to rethink our infrastructure and market operations in the context of the unique characteristics of these technologies.”
More expansion, more metal
New discoveries across the spectrum of energy technologies are creating demand for metal products.
“For wind power, there are applications for steel in turbine tower, electrical, with the average tower weighing 162 tons,” said David Seeger, president of the JMC Steel Group, Chicago, who spoke at the CRU 5th North American Steel Conference. “For nuclear, there are approximately 120,000 tons of steel per plant, with applications ranging from structural, pipe, electrical, perimeter security, etc. There are 20 new reactor designs under review by the NRC, with an estimated four to six new reactors built by 2020.
“For natural gas, steel applications include casings, line pipe [and] rig structures. An additional 2.5 trillion cubic feet of natural gas are forecast to come online by 2020,” he continued.
Seeger also noted 1 megawatt of solar energy equals 100 tons to 200 tons of steel products, mainly in support structures, and 885.8 megawatts of utility/commercial scale photovoltaic solar power were installed in 2010.
“The ongoing development of shale resources for both oil and gas, as well as the recovery for offshore drilling, provide excellent long-term opportunities for our tubular operations,” said John Surma, U.S. Steel’s chairman and CEO, in the company’s third-quarter results conference call. “We are the only fully integrated domestic tubular producer and the only domestic producer offering a full range of products and services. We are the leading supplier of energy tubular product to the domestic market and have been focused on expanding our capabilities to provide the products and services our customers need for the increasingly demanding and complex drilling requirements in these growing markets.”
Complex requirements often pose a challenge for the entire supply chain. Moskaluk says companies that participate in the energy market are “supplying to some very sophisticated specifications and into applications where the machinery and equipment work in some of the most severe applications possible.”
“The oil and gas industry is well developed in their scope of alloy selection and material specifications,” Arnvig says. “For producers, the key is to become recognized/approved as a supplier, which includes being able to document the metals according to the customers’ specifications. Although many applications look similar, each oil and gas company has their own specifications.”
As a result, Arnvig says Outokumpu’s market-development efforts are robust. “We are members of and collaborate with several professional organizations, including the American Society for Testing and Materials, the American Petroleum Institute and the Petroleum Equipment Institute, many of which are responsible for establishing industry standards. Getting specific grades accepted into an industry standard can take some time. Outokumpu has made tremendous investments to demonstrate through laboratory and field testing that a grade is suitable for an industry application.”
“New products are needed to meet the needs of unconventional drilling,” Barnes says. “New steel grades that allow high-pressure fracturing, rotation and bending at depths miles beneath the earth are being developed. Innovation will differentiate the more successful companies.”
According to Barnes, TMK IPSCO is building a research and development facility in Houston to focus on customer needs. “The energy market is evolving and going through change as customers continue to apply new technology to lower their costs,” Barnes says. “TMK IPSCO works with our customers through our technical sales group to offer ideas and solutions and will design products to meet customer specifications and any applicable regulatory requirements.”
Moskaluk also says SSAB continues to expand its product offering, developing steels that are “well suited for the applications and working environments in and around the energy sector,” Moskaluk says. “Most often, the steel is ordered to a governing specification that is suitable for the energy-related end-use application. A rigorous quality-assurance program with regular internal and external audits is helpful in maintaining quality standards and compliance to the specifications required.”
Fewer blips in the future
The combination of growing energy consumption with increased prices and “an increased effort to develop a strategy for energy self-sufficiency are contributing to more investment in energy exploration throughout the Americas,” Moskaluk says.
However, there is uncertainty in the marketplace regarding the future of funding energy technologies, Barnes says. “The economy, public policy and relative cost of energy sources could all impact investment decisions in energy technologies, making a technology more or less attractive. A shift in any of these variables will have differing effects on the various technologies as some are more dependent than others on these variables. For instance, while solar growth has been driven in part by tax incentives and feed-in tariffs, as the technology matures, it will become less dependent and therefore less sensitive to changes in these tax incentives and feed-in tariffs.”
“Most renewable energy technologies as well as cleaning technologies for exhaust gases are all dependent on legislative mandates,” Arnvig says. “The recent swings in the U.S. political climate clearly introduce an uncertainty in the market. For example, suppliers wonder if there will be a delay in investments in the new technology areas associated with renewable energy as well as cleaning technologies for traditional energy sources.”
Because energy-related projects are capital-intensive investments, “any financial or political uncertainty can influence the investment climate for projects of this size,” Moskaluk says. “In the case of some of the alternative-energy sources, there are often tax credits and investment credits that are designed to encourage investment in these alternative technologies. The viability of some of these alternative energies will be impacted if the legislation is allowed to expire or is changed significantly.”
The outlook for 2012 is positive, Barnes notes, with the caveat that no one can predict the future. “Our customers are currently telling us that they are preparing their 2012 capital spending budgets and expect they will be at least as active next year as they have been in 2011,” he continues. “The futures market for commodities gives us a good indication of what expectations are for oil and natural gas prices, the economic incentives that drive the decision whether to drill a well or not. So far, the forward commodities futures market is favorable. There are some clouds on the horizon coming from Europe, which could dampen the global outlook, but we are optimistic about 2012.” MM
Interested in purchasing reprints of this article? Click here