# Presentation: 027481

## Industrial Natural Gas Demand

**ASA Fall Meeting**
**October, 18, 2007**
**Washington, DC**
**Kobi Platt, Industry Economist**

- This is a working document prepared by the Energy Information Administration (EIA) in order to solicit advice and comment on statistical matters from the American Statistical Association Committee on Energy Statistics. This topic will be discussed at EIA's fall 2007 meeting with the Committee to be held October 18 and 19, 2007.

## The factors affecting EIA’s industrial natural gas consumption forecast

-   GDP;
-  Employment;
-   Prices;
-   Weather;
-   _*Natural gas-weighted industrial production index*_.
*EXAMPLE:*
*Food(0.1091) + Paper(0.0945) + ... + Fabricated Metal Products(0.0507)*
_**PROBLEM:**_ Industrial natural gas consumption has declined while all proxies for industrial production have increased.

**Notes:**
When coefficients in the natural gas-weighted industrial production index add to 1, and all industrial subgroups have increasing production indices, the index will be positive.  

Natural gas-weighted industrial production index—which combines production indices for key industrial subgroups with the associated share of industrial natural gas demand.

## Data Sources

-  U.S. Census Bureau.  *Current Industrial Reports*;
-  U.S. Census Bureau. *Annual Manufacturers Survey*;
-  U.S. Geological Service. *Minerals Commodity Statistics and Information*;
-   U.S. Bureau of Economic Analysis;
-  American Iron and Steel Institute (AISI);
-  EIA Natural Gas Monthly;
-  EIA Manufacturing Energy Consumption Survey (MECS);
-  EIA Petroleum Supply Annual;
-  EIA -820 Survey: Fuels Consumed at Refineries.

**Notes:**
When coefficients in the natural gas-weighted industrial production index add to 1, and all industrial subgroups have increasing production indices, the index will be positive.  

Natural gas-weighted industrial production index—which combines production indices for key industrial subgroups with the associated share of industrial natural gas demand.

## Overview: Natural Gas Consumption in the Industrial Sector

-   Industrial sector accounts for largest percentage of total U.S. natural gas consumption.
-   Business operations of industrial sector consumers are sensitive to large, sustained swings in the price of natural gas.
-   Annual average price to industrial consumers was $3.59/MMCF in 1997 and $7.88/MMCF in 2006 (nominal).

**U.S. Natural Gas Consumption by Sector, 2006**

## The Composition of Industrial Natural Gas Consumption: 2002 Manufacturing Energy Consumption Survey (MECS)

**Notes:**
EIA’s Manufacturing Energy Consumption Survey (MECS), which is completed every four years, examines the components of industrial natural gas consumption. EIA’s short-term industrial natural gas consumption forecast makes use of the MECS in order to identify key natural gas consuming industries as well as analyze changes within certain industrial subgroups.  

## 2002 Manufacturing Energy Consumption Survey (MECS)

| NAICS Code | 
Industry Subgroup | 1994
Natural Gas Consumption (Bcf) | 1998
Natural Gas Consumption (Bcf) | 2002
Natural Gas Consumption (Bcf) |
| --- | --- | --- | --- | --- |
| 311 | Food | 613 | 553 | 567 |
| 322 | Paper | 558 | 570 | 490 |
| 324 | Petroleum and Coal Products | 788 | 981 | 854 |
| 3251 | Basic Chemicals | 1037a | 1011 | 1084 |
| 3252 | Resins and Plastic Materials | 326 | 252c | 463 |
| 3253 | Agricultural Chemicals | 602 | 557 | 501 |
| 327 | Nonmetallic Mineral Products | 419b | 433 | 411 |
| 331 | Primary Metals | 787 | 908 | 686 |
| 332 | Fabricated Metal Products | 214 | 235 | 204 |
|  | Other | 1291 | 1731 | 1038 |
|  | TOTAL | 6,635 | 7,231 | 6,298 |

**Notes:**
Using the MECS, EIA has identified nine industrial subgroups that are critical to gauging natural gas consumption within the sector.  Some data in the table has been adapted or estimated due to the change from SIC classification to NAICS classification between 1994 and 1998.

In addition to the MECS, EIA has made use of industry production data, employment trends and other proxies for industrial activity (i.e. imports, exports) in order to better understand the changing energy requirements (and the role of natural gas) within these subgroups.

The category for “Other”, which makes up a significant portion of industrial natural gas consumption, is the summation of many smaller industrial subgroups that are difficult to disaggregate and analyze.  These subgroups include, but are not limited to:  Plastics and Rubber Products (NAICS 326) (125 Bcf in 2002) Transportation Equipment (NAICS 336) (198 Bcf in 2002) and other chemical subgroups not captured in those listed (approximately 202 Bcf in 2002) .

a Basic chemicals (NAICS 3251) in 1994 were adapted from SIC classification (SIC #2869 Industrial Organic Chemicals).  
b Nonmetallic mineral products (NAICS 327)in 1994 were adapted from SIC classification (SIC #32 Stone, Clay and Glass Products).
c Resins and Plastic Materials (NAICS 3252) in 1998 does not include Synthetic Rubber (NAICS 325212) due to data omission. 

## Natural gas-weighted Industrial Production Index results with various MECS demand shares

**Notes:**
EIA’s short-term industrial natural gas consumption forecast is based on industrial production indices for various industrial subgroups including:

Food (NAICS 311)
Paper (NAICS 322)
Petroleum and Coal Products (NAICS 324)
Chemicals (minus Pharm.)
Nonmetallic Mineral Products (NAICS 327)
Primary Metals (NAICS 331)

Production indices are provided by Global Insight and are based on the Federal Reserve’s Industrial Production Database. The share of natural gas use in each industrial subgroup is paired with the associated production index in order to generate a natural-gas weighted industrial production index. 

Different MECS shares (1994, 1998, 2002) are used in the graph above to show relative changes in the natural gas-weighted industrial production index.  Although small changes are apparent, the trend is relatively consistent.  For each index the natural gas shares are calibrated to ssum to 1.

## The Puzzle: Industrial Natural Gas Demand ≠ Industrial Production Index

**Notes:**
Using the natural gas consumption shares derived from the 2002 MECS, the graph above compares the natural gas-weighted industrial index with industrial natural gas demand.

Since 2002, the trend of industrial production derived from MECS-based demand shares and the associated production indices provided by Global Insight has been increasing.  However, over the same period, industrial natural gas consumption has been consistently declining.  

## 2002 Manufacturing Energy Consumption Survey (MECS)

| NAICS Code | 
Industry Subgroup | qsic*
Coefficient | qsic2
Coefficient | New qsic
Coefficient |
| --- | --- | --- | --- | --- |
| 311 | Food | 0.1091 | 0.1091 | 0.1083 |
| 322 | Paper | 0.0945 | 0.0945 | 0.0961 |
| 324 | Petroleum and Coal Products | 0.1646 | 0.1646 | 0.1539 |
| 325 | Chemicals | 0.4208 |  |  |
| 3251 | Basic Chemicals (minus Pharmaceuticals) |  | 0.4208 | 0.1904 |
| 3252 | Resins and Plastic Products  |  |  | 0.0918 |
| 3253 | Agricultural Chemicals |  |  | 0.0979 |
| 327 | Nonmetallic Mineral Products | 0.0791 | 0.0791 | 0.0836 |
| 331 | Primary Metals | 0.1320 | 0.1320 | 0.1270 |
| 332 | Fabricated Metal Products |  |  | 0.0507 |
|  |  | 1.00 | 1.00 | 1.00 |

**Standard Industrial Classification (SIC)*

**Notes:**
There have been three steps taken to improve EIA’s short-term forecast of industrial natural gas consumption.

STEP 1: Update and revise gas-weighted industrial production index based on changing composition of industrial natural gas use.  The number of industrial subgroups represented in the natural gas-weighted industrial production index has been expanded from six to nine.

sic: Standard Industrial Classification

qsic: Original natural gas-weighted production index shares.
qsic2: Same as original “qsic”, but with “Chemicals” share shifted to “Basic Chemicals (minus Pharm.)”.
Qsic_New: Expanded natural gas-weighted production index shares to include nine industrial subgroups (chemical industry break-out).

## Comparison of STEO Gas-weighted Production Indices

**Notes:**
STEP 2: Benchmark industrial natural gas demand to new gas-weighted industrial production index and forecast industrial gas consumption based on the changing parameters within the new gas-weighted index.

Both “qsic2” and “qsic_New” provide a significantly better representation of industrial natural gas demand prior to 2002.  However, despite the expanded version of EIA’s natural gas-weighted industrial production index, there is no significant change in the magnitude or the trend of the index post-2002.

Analyses of three prominent natural gas consuming industries—petroleum and coal products, agricultural chemicals, and primary metals—indicates that the associated production indices may no longer provide an accurate representation of natural gas use in that industry. Petroleum and Coal Products (NAICS 324), Agricultural Chemicals (NAICS 3253), and Primary Metals (NAICS 331) have recently exhibited significant fundamental shifts in natural gas consumption.  While these three subgroups accounted for about 32.4 percent of total industrial natural gas consumption, fuel substitution, off-shoring production processes and efficiency gains have dramatically effected the energy use in each of these subgroups.  

## Petroleum and Coal Products (NAICS 324)

-   Petroleum and coal products (NAICS 324) accounted for about 14 percent of total industrial natural gas demand (MECS, 2002).
-   Petroleum refineries (NAICS 324110) were responsible for 799 Bcf, or 94 percent, of natural gas consumption in this subgroup (MECS, 2002).
-   Natural gas consumption at petroleum refineries (NAICS 324110) declined more than 17 percent from 2000 to 2006.

## Petroleum and Coal Products: Petroleum Refineries

**Notes:**
Despite the recent decline in natural gas consumption at U.S. refineries, crude runs and total fuel consumption have remained relatively unchanged.  While the drop in natural gas use seems to understate activity at U.S. refineries, the Global Insight production index for Petroleum and Coal Products (NAICS 324)—the balance of which is accounted for by petroleum refineries (NAICS 324110)—seems to overstate refinery activity in the U.S.

## 16 Refineries Account for Large Portion of Decline in Fuel Consumption

## Agricultural Chemicals       (NAICS 3253)

-   Agricultural chemicals* (NAICS 3253) accounted for roughly 8 percent of total industrial natural gas (MECS, 2002).
-   22 percent of the natural gas consumed in the chemicals (NAICS 325) subsector (MECS, 2002).
-   Nitrogenous fertilizers make up 94 percent of gas consumption within the agricultural chemicals sector (MECS, 2002).
-   About 90 percent of U.S. ammonia production in 2006 was dedicated to manufacturing nitrogenous fertilizers (U.S. Census).
**Agricultural chemicals require the dual use of natural gas as a fuel and feedstock.*

## Agricultural Chemicals: U.S. Ammonia Production

## Agricultural Chemicals: Ammonia Imports

**Source:** U.S. Census Bureau.  Current Industrial Reports: *Fertilizers and Related Chemicals.*

## Primary Metals (NAICS 331): Iron and Steel Mills

-   Primary metals (NAICS 331) accounted for roughly 11 percent of total industrial natural gas (MECS, 2002).
-   58 percent of the natural gas consumption for primary metals was  by iron and steel mills (NAICS 3311).
-   Natural gas consumption for iron and steel production declined more than 8 percent from 1998 to 2005 (American Iron and Steel Institute).

## Primary Metals (NAICS 331): Iron and Steel Mills

**Notes:**
The consumption trend from 1996 to 2002 was fairly consistent, with the exception of 1999 when natural gas consumption at blast furnaces increased more than 50 percent from the previous year according to AISI data.  The increase in 1999 consumption was followed by a corresponding decline in 2000 of roughly the same amount. 

Over the period from 1998 to 2005, Global Insight’s industrial production dropped about 6 percent for primary metals and about 1 percent for iron and steel mills.  Aside from the 1999 consumption spike, Global Insight’s production index for primary metals corresponds reasonably well with the natural gas consumption index for iron and steel mills derived from statistics provided by AISI. 

## Comparison of STEO Gas-weighted Production Indices

**Notes:**
From 2002 through the forecast period (which runs through 2008) the production index for each industrial subgroups (in addition to those examined here) is increasing.  However, as displayed earlier, total industrial natural gas consumption over this period is declining.  As long as the coefficients in EIA’s natural gas-weighted industrial production index sum to 1, and the associated production indices used in the equation remain positive, then the resulting industrial production index will provide support for rising natural gas use.

In order to more accurately represent industrial natural gas consumption, two alternatives may be used.

1.) Alter industrial production indices to reflect changes in actual production data (red line in graph above).
2.) Alter the share of natural gas use so coefficients in equation sum to <1.

A third option might be to use another measure of industrial output (e.g. employment, value-added, etc.), but so far none of these has given a better or more credible result than the production indices.

## Adjusted Production Index: Petroleum and Coal Products (NAICS 324)

**Notes:**
The adjustment to the production series for Petroleum and Coal Products (NAICS 324) utilizes data from EIA’s 820 Survey on natural gas production and combines it with the growth trend in the Global Insight production series for the forecasted years.

## Adjusted Production Index: Agricultural Chemicals (NAICS 3253)

**Notes:**
The adjustment to the production series for Agricultural Chemicals (NAICS 3253) utilizes data on U.S. ammonia production from the U.S. Census Bureau and combines it with the growth trend in the Global Insight production series for the forecasted years.

## Adjusted Production Index: Primary Metals (NAICS 331)

**Notes:**
The adjustment to the production series for Primary Metals (NAICS 331) utilizes data on natural gas consumption for iron and steel manufacturing from the American Institute of Iron and Steel and combines it with the growth trend in the Global Insight production series for the forecasted years.

## Next Steps: STEO Gas-weighted Industrial Production Index

- Is there a better metric or proxy for industrial energy (natural gas) consumption?
- Based on the changing composition of industrial natural gas consumption, how should the coefficients of the various subgroups be treated?
- Have the prominent industrial sub-sectors been identified?
- How can revisions to this index improve the efficiency and effectiveness of EIA’s short-term forecasting?

**Notes:**
Questions?