Despite recent moderation in crude oil and natural gas prices, sales of energy-related pipe and tube products remain strong. In fact, industry executives report, the large-diameter line pipe market is going gangbusters with lead times extending out at least a year.

Even oil country tubular goods and small-diameter line pipe, which experienced some downward price pressure in 2006, are expected to recover later this year. In the meantime, such softness is being offset by increased demand for higher margin premium products.

“2006 was a great year following a great 2005. It continues to be a wonderful time in the industry,” says Kurt Minnich, partner at Spears & Associates, the Tulsa, Okla., publisher of Pipe Logix.

Though demand has plateaued or is flattening for some energy products, “it is a plateau at a good level, in part due to the fact that equipment and personnel needed to ramp up further is somewhat limited now,” says Ken Hayes, director of standard line pipe for Red Man Pipe & Supply Co., Tulsa, Okla. “But I remain very bullish about the energy market and energy tubulars.”

There is no question that energy prices have come off of their highs, says Hugh Burnstad, steel energy marketing manager at The Timken Co., Canton, Ohio. The big question is if energy prices will continue to decline and how far they need to fall before affecting oil and gas exploration plans.

As of mid-January, the settlement price on the New York Mercantile Exchange for crude oil had fallen to just under $52 a barrel. The settlement price for natural gas had fallen to just under $7 per mcf.

The natural gas number is actually more significant, given that 85 percent of U.S. rigs today are drilling for natural gas, says Minnich.

“If natural gas prices stay under $7, especially if they stay close to $6, it could hurt exploration,” he adds.

It does not appear that has happened yet. According to Baker Hughes Inc., Houston, there were 1,745 drill rigs operating in the United States as of Jan. 19, up 18.5 percent from a year earlier and up 1.6 percent from the previous week. 

Actually, Minnich says, growth of the drill rig count has flattened a bit in the past month or two, “but the rig count is still at a level we haven’t seen since 1985. It is a pretty picture for pipe demand.”

Demand for energy—and therefore energy pipe and tube—should remain strong for some time, most experts agree. “Demand for oil and gas is expected to double in the next few years,” says Michael Phelan, president of American Piping Products in St. Louis. Oil and gas exploration is not the only driver of pipe and tube demand, adds Ronald Romanski, vice president of engineered products for Chicago Tube & Iron Company, Romeoville, Ill. Utilities are consuming more tubular products, such as pressure tubes used in power plant boilers, as they work to beef up the power grids across the country.

Globally, about 82 million barrels of oil are consumed each day, a figure expected to increase to 123 million barrels by 2030, partly due to the growing demand in China and India. “Any return to $20-a-barrel oil is not likely to be in the cards,” says Burnstad.

Natural gas supply is also under pressure, Burnstad says, because “at this point much of the low-hanging fruit has already been drilled, forcing energy exploration companies to go into more severe environments. They need to drill deeper to get natural gas.” 

The deeper the hole, the more pipe needed, which is a plus for pipe and tube producers, adds John Tulloch, executive vice president, steel, for IPSCO Inc., Lisle, Ill. Even if domestic rig counts soften, the deeper wells should sustain, or even increase, consumption.

Harsh environments call for the use of higher temperature, more corrosion-resistant steels, such as high-chrome alloys, adds Burnstad, noting they are higher-margin products for suppliers. “They are more challenging to make, but they are key for high-temperature, high-pressure applications at deep depths.”

Traditionally, these types of steel have been available mainly from overseas, says Shawn Seanor, director of steel marketing and business development at Timken. But now Timken and some other domestic mills are seeking to produce these steels here. “This is a good opportunity for us. A lot of our customers are supporting our entry into this business,” Seanor adds. Timken plans to produce 13 percent chrome and 9 percent chrome-1 percent molybdenum steels.

Domestic suppliers blame imports for some of the oversupply in the carbon OCTG and small-diameter line pipe market in recent months. “Imports have been coming in at a very high level, and they have to go somewhere, so they have been going into inventory,” Tulloch explains. “With demand slowing a little, that has had an impact. Prices have come off a little from prior levels.”

In 2006, 2.1 million tons of OCTG were imported, accounting for a 45 percent share of the total market, says Minnich. That compares with a 25 percent market share in 2003. Imports from China alone in 2006 totaled three-quarters of a million tons.

“There is really nothing out there barring continued entry of imports other than the threat of trade action,” says Hayes at Red Man Pipe & Supply. “Such a threat is causing some countries to take it upon themselves to exert some discipline. They don’t want to bring any attention to themselves that could lead to potential trade action. But there are also certain other countries that remain somewhat undisciplined.”

As a result of the influx of OCTG, prices have slipped since October and are down about 2 percent year on the year, says Minnich. “I expect they will dip a little further through the first quarter before recovering later in the year.” 

Much will depend on what happens with natural gas prices, Tulloch says. If gas prices pick up as the year progresses, as some analysts predict, then OCTG and small-diameter line pipe prices should follow suit. “A lot depends on the weather,” he adds, and demand for heating homes and businesses.

Energy prices are even more of a driving factor behind shallow well and coal-bed methane drilling applications, says John Mocker, vice president of Lally Pipe and Tube, Covington, Ky. “It requires a strong natural gas price because the gas produced in methane wells has more impurities than regular natural gas, requiring more refining before it is marketable.”

The story for large-diameter line pipe is much rosier. After several down years, “it was like someone flipped a switch,” says Hayes. “The market did a 180 last year.”

That is partly because of a change in the political attitude toward the energy infrastructure and a need for clean burning fuels, says Larry R. Lawrence, vice president of sales for tubular products at Oregon Steel Mills in Portland. “Due to certain blackouts and brownouts, we now have the attention of Washington. They brought the need for infrastructure development to the public eye.”

The shakeout among transmission companies, forcing them to get their balance sheets in line, and strong energy prices have also helped push line-pipe projects forward. “There are a lot of proven reserves that need to be redirected, going from existing trunk lines to new markets,” he adds.

Some of these new locations are in such states as Wyoming and Colorado, notes Ron Williamson, vice president of sales and logistics for Berg Steel Pipe Co., Panama City, Fla. “There has been a lot of new exploration there,” he says, though these pipeline projects are nowhere near the scale of the still-anticipated Alaska pipeline.

“There is also a lot of old pipeline infrastructure that isn’t meeting modern needs [and needs to be replaced]. This is particularly true in certain previously under-inhabited regions,” Lawrence says.

As a result, all the major large-diameter pipe mills are booked out through this year and are now taking orders for 2008. “I think that large-diameter pipe will remain reasonably strong through 2008, and probably through 2009 as well, although it is a little less certain starting in 2010,” Lawrence adds.

Due to the extended lead times for large-diameter products, some service centers are seeking alternative sources overseas. “Demand is not just strong in the United States, but throughout the world,” says Phelan at American Piping Products. “The only reason we are successful in meeting our customers’ demand is that we have been exploring Third World sourcing (from China, Russia and Ukraine) for about five years now.”

Dan O’Leary, chairman, president, and chief executive officer of Edgen Murray Plc, Baton Rouge, La., also attributes “some good decisions relating to supply in the last few years” for his company’s ability to get large-diameter line pipe. “We started working with our suppliers—both foreign and domestic—before the upturn, and we are now in their queues to get reserved space for supply. Anyone new coming in will get very long lead times.”

He adds that Edgen Murray is buying about the same blend of foreign and domestic product. “We have a sophisticated mix of products, much of which could only be sourced from overseas. Most of our carbon business, however, is sourced domestically.”

IPSCO’s Tulloch doesn’t believe availability is that serious an issue today. Though lead times are extended, customers are getting what they need, he says. “Most of our customers have adjusted to those lead times. People with projects are making sure they have commitments in place, that they have pipe in hand, to do what they have to do.”

Domestic producers are reacting to the tightness in the market and adding new capacity, especially spiral welding capabilities. IPSCO, for example, is proceeding with a $52.5 million expansion of its existing Regina, Saskatchewan, large-diameter pipe-making facility, including an additional pipe-forming mill and related finishing equipment. Together with its previously announced upgrade at Regina, IPSCO’s large-diameter spiral pipe capacity will be increased by two-thirds to 500,000 tons by early 2008.

Oregon Steel recently added two spiral weld mills at its Camrose Tubing operation in Alberta, says Lawrence. The first came on stream in November with the second following in January.

Among other spiral mill projects announced recently, Berg plans to build a 180,000-ton facility somewhere in the southern U.S. Williamson says there will likely be several more announcements for new tube-product manufacturing plants this year.

Meanwhile, the outlook is good for both tubular imports and exports. “There is no question that imports are more of a factor now,” Phelan says. “Five years ago, no one would use Chinese steel. Today, they are the largest steel and steel pipe producer in the world.”

Nevertheless, most end-users are coming to the United States for their pipe. “We are the superstore of the world for people who need it today. America’s business is being fueled largely by projects outside of the country,” he adds.

More M&A's in the Pipeline

Merger and acquisition activity among producers of pipe and tube products has been fast and furious in recent months. Further consolidation is likely to occur, experts say, though probably not at the same pace.

Late last year, two large mergers were consummated and a third followed last month. In December, IPSCO Inc., Lisle, Ill., completed its $1.46 billion acquisition of Newport, Ky.-based NS Group Inc. That followed a $3.19 billion acquisition of Maverick Tube Corp., St. Louis, by Tenaris SA of Luxembourg in October. In November, Russia’s Evraz Group SA announced that it was planning to acquire Portland-based Oregon Steel Mills Inc. for about $2.3 billion. That deal closed in January.

Such merger and acquisition activity is not surprising given the solid demand for the industry’s products, says Dan O’Leary, chairman, president and chief executive officer of Edgen Murray Plc., Baton Rouge, La., “This consolidation is between companies with clear marketing strategies and international companies that are looking to enter or increase their participation in the U.S. market, because it is so strong.”

“Companies can quicker reap investment through acquisitions than by building a new plant. They can acquire increased market share immediately,” says Kurt Minnich, publisher of Pipe Logix. This is particularly true of foreign companies, he adds. “The market has grown faster in the United States than in other parts of the world in the last few years, so many foreign companies are looking to get a piece.”

IPSCO’s acquisition of NS Group has definitely broadened its product portfolio, says John Tulloch, steel executive vice president. “That has been very attractive to us. It has allowed us to grow our position in the market, as well as add new products, including seamless pipe and high-performance thread connections.”

Paolo Rocca, Tenaris chairman and chief executive officer, called his company’s merger with Maverick “a major step” for Tenaris. “With Maverick, we will gain full access to the energy sector in the United States and Canada. We will be able to support the growing requirements for our customers in the full range of applications, from onshore shallow wells to extremely demanding deepwater wells in the Gulf of Mexico.”

Gaining a footprint in North America was the prime motivation for Evraz to acquire Oregon Steel. Alexander Frolov, its chairman, says this move will secure for the company “an important place in the attractive plate market and in the expanding pipe business in North America.”

Is this consolidation a good step for the industry as a whole? “Only time will tell,” says Michael Phelan, president of American Piping Products, St. Louis, who expressed concern that distributors could lose market share as a result. “Tenaris has taken distributors out of the mix in the past,” he says. “They want to go right to the end-user.”

Ken Hayes, director of standard and line pipe for Red Man Pipe & Supply Co., Tulsa, Okla., has a more positive point of view of industry consolidation. “With fewer players, it would support greater stability in the industry and could affect the bottom line in a positive way.”

By all indications, the consolidation will continue. “There are still a lot of disconnected companies serving the energy markets, many of which do not have full baskets of goods and services,” observes Larry R. Lawrence, vice president of sales for tubular products at Oregon Steel. “A number of assets have been competing with each other for a number of years. It might be better for them to join together.” While much of the major consolidation has already been done, he adds, “there are still certain entities in play.”

Minnich expects that any consolidation going forward is likely to be of an international nature. “That parallels trends in the rest of the industry,” he notes, “to get closer to the source in order to control manufacturing costs.”

“I think we need further consolidation of the market,” says Donald R. McNeeley, president and chief operating officer of Chicago Tube and Iron Co., Romeoville, Ill. “It won’t happen as fast as it has been occurring, but it will happen.”