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Feb2013
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OCTG Market Lags High Expectations

The United States’ quest for energy independence should fuel the oil country tubular goods market for years to come, but 2013 faces some challenges.

By Myra Pinkham, Contributing Editor

Experts describe the current U.S. oil country tubular goods market as “somewhat lackluster,” with drilling activity moderating and no significant pickup expected until later this year. Industry executives hope fortunes will improve when distributors whittle down their pipe inventories, though the specter of increases in supply could continue to have a dampening effect on pricing.

“Domestic economic concerns impact energy demand and energy prices, and that can impact our customers’ drilling activity and demand for our products,” says Tigran Atayan, executive vice president of tubular products for Chicago-based Evraz North America. “However, we don’t see political uncertainty as a long-term concern for our business. We think the political desire for greater U.S. energy independence will continue, and with that will come increased demand for our products.”

“Fear of the fiscal cliff has mostly passed, although some uncertainty continues to exist about the debt ceiling and the overall economic climate. But world oil demand continues to be strong, with no significant slowdown in sight,” says Buddy Brewer, chief executive officer of Borusan Mannesmann Pipe Inc., The Woodlands, Texas. Borusan, a Turkish-owned pipe producer, is the latest foreign company planning to open a pipe mill in the United States. Brewer says that as long as oil and natural gas demand stay high, drilling will continue, and the drilling will consume pipe.

That demand includes both seamless and welded tubulars, Atayan adds, though Evraz has seen particular interest in heat-treated and premium threaded products (see sidebar below).

According to industry data, the U.S. OCTG market has grown at a double-digit pace for the past few years, totaling about 6.7 million short tons in 2012, up from about 6 million tons in 2011. MBR projects global OCTG consumption will increase about 4 percent per year from 2013 to 2017, taking it from a $31.6 billion market to a $39.8 billion market.

But demand for OCTG has been relatively lackluster since late last year, sources say. As of mid-January, 1,749 drill rigs were operating in the United States, down about 12 percent from the summer, reports Baker Hughes Inc. That doesn’t worry Gregg Eisenberg, president and CEO of Boomerang Tube LLC, Chesterton, Mo., who considers that a modest decline compared to past “wild and woolly” gyrations in the energy market.

This moderation is the net result of a dramatic decline in natural gas drilling activity and a similar increase in drilling for oil and natural gas liquids, says Paul Vivian, a partner with the Preston Pipe Report, Ballwin, Mo. It also came as no surprise to market analysts. With the U.S. economic recovery lagging behind most expectations, energy consumption—especially industrial energy consumption—has followed suit, he says.
Prices of natural gas fell as low as $2.50/MMBtu last summer, and have recovered to about $3.30/MMBtu. Still, they remain below what many energy companies consider to be a profitable breakeven point. Meanwhile, crude oil prices, fluctuating between $90 and $95 per barrel, are considered high enough to promote further drilling.

Eisenberg notes that many energy companies had already spent their entire exploration budgets before 2012 came to an end. “It isn’t unusual for companies to go through a destocking period at the end of the year.”

To further complicate matters, the controversy over hydraulic fracturing heated up in 2012. Environmental concerns over fracking, the technology used to more affordably extract oil and natural gas from the nation’s shale plays, continues to grow.

Kurt Minnich, a partner with Tulsa, Okla.-based Spear & Associates Inc., the publisher of Pipe Logix, says the roots of the anti-fracking movement trace to the 2010 documentary Gasland. More recently, the royal family of the oil-rich United Arab Emirates has partly funded the new anti-fracking feature film, Promised Land, while the long-awaited report by the U.S. Environmental Protection Agency on the possible correlation between water pollution and fracking won’t be released until 2014.

With energy demand below expectations, pipe distributors have been trying to work down their OCTG inventories, which reportedly have climbed about 20 percent to 5.2 months of supply on hand. “But that really isn’t all that high,” Eisenberg says. “Usually we don’t start to worry until they get over six months.”

OCTG prices, which are down about 20 percent year-on-year, appear to have hit bottom, says Kim Leppold, senior steel analyst for Metal Bulletin Research. “By the end of the year we could see a turnaround, but at least for the next few months it should be more of the same.” For pipe prices to improve there needs to be a stronger economic recovery to bring the natural gas storage levels down and to boost natural gas prices, she adds.

An influx of foreign product also has put pressure on prices. OCTG imports increased 26.5 percent in the first 11 months of 2012 vs. the same period in 2011, largely due to shipments from South Korea, reports the American Iron and Steel Institute, Washington, D.C. That hike followed a doubling of imports between 2009 and 2011.

While not quite as high as pre-crisis levels in 2008, OCTG imports have topped a 50 percent market share, even after declining a bit late last year. They haven’t retreated at the same rate as the rig count and will continue to be a significant factor this year, Minnich says. Industry followers speculate that an antidumping case could be filed against South Korea as early as mid-2013, which could ease imports later this year.

Even if imports moderate, as much as 3 million tons of new domestic production capacity could come on line in the next few years, says Vivian at Preston Pipe Report, raising the question of whether supply will outstrip demand. Among the anticipated projects, Borusan Mannesmann is considering a Baytown, Texas, site or an Oklahoma site for its new 300,000-ton-per-year energy tubulars mill, expected to start up early next year. Brewer says opening a facility in America’s South makes sense for the company, which currently sends about 40 percent of its exports from Turkey to the United States. “Favorable changes to the energy policies in the United States, as well as the advancements in the shale gas technology, were factors that hastened our investment decision,” he adds.

“In the short term, the new capacity will struggle until demand increases,” says MBR’s Leppold. While their goal may be to displace imports, the new entrants also could end up displacing some older, less-efficient capacity in the U.S. “Also, those close to ports could export pipe,” she adds.

Minnich sees the OCTG market continuing to struggle at least through the first quarter of 2013, “but there could be some light at the end of the tunnel starting in the second quarter,” he says. Leppold agrees, noting that while the market “won’t go like gangbusters,” OCTG producers could see increased shipments for 2013 as a whole, especially if U.S. GDP growth picks up in the second half of the year.
 
Premium Connections…Premium Opportunity

Even with the overall oil country tubular goods market seeing its growth rates slow, demand for the premium and semi-premium joints used in more challenging drilling environments is expected to accelerate.

“As the development of both oil and natural gas resources has risen, particularly with regard to the shale plays, there has been increased demand for heat-treated tubular products, as well as semi-premium and premium connections, and we expect that trend to continue,” says Douglas R. Matthews, senior vice president of tubular operations for Pittsburgh-based United States Steel Corp.

According to a recent Metal Bulletin Research report on the OCTG heat-treatment, threading, coupling and premium connections markets, this growth trend will likely occur at a much faster rate than that for green OCTG pipe, both globally and domestically. Roman Kucinskij, the MBR consultant who authored the report, attributes this to the increase in drilling in more difficult environments, such as offshore wells and horizontally in unconventional natural gas and oil shale plays. The semi-premium and premium connections provide an “absolute seal” on the connections between pipes, driving their use in these harsh conditions, he says. MBR estimates over 300 companies worldwide—about a third of them in the United States—thread pipe to produce OCTG, with a combined nominal threading capacity of almost 43 million tons per year.

It is difficult to determine what proportion of the threading capacity is for conventional API joints and what will produce semi-premium and premium connections, notes Kurt Minnich, publisher of Pipe Logix. Offshore drilling has always been a premium connections market given the harsh drilling environment and the difficulty and expense of making repairs to offshore drill rigs.

On the offshore drilling front, activity tends to ebb and flow depending on several market-related and political factors. For example, Minnich says, drilling in the Gulf of Mexico had been in a decline for the last decade and was plunged into the abyss by the disastrous BP Deepwater Horizon oil spill in 2010. It is only now starting to rebound, especially in the deeper areas of the Gulf.
 
“In the United States, over the last several years, we have seen increased demand in premium tubulars to overcome the challenges of drilling in shale and tight formations,” Matthews says. “We have also seen increased demand for semi-premium and premium connections to meet those challenges.”

Rick Preckel, a partner at Preston Pipe Report, Ballwin, Mo., attributes some of this increased demand, especially for semi-premium connections, to increases in horizontal drilling. Baker Hughes reports 1,127 rigs engaged in horizontal drilling in the United States as of mid-January, or 64 percent of all U.S. drill rigs. That compares with 1,183 rigs, or 59 percent of the total, a year earlier.

Chicago-based Evraz North America believes the increase in unconventional oil and gas drilling in North America will continue, bringing with it an increase in demand for premium connections. In response, Evraz is doubling the capacity of the premium threading line at its facility in Red Deer, Alberta, a company spokesman says.
This expectation for increased demand was behind U.S. Steel’s decision to establish its Patriot Premium Services joint venture with Butch Gilliam Enterprises LLC, which will include a new facility in Midland, Texas, in the Permian Basin.

A number of other seamless OCTG producers are also beefing up their semi-premium and premium connections footprints, including Vallourec’s VAM USA, which is doubling the research and development capacity at its VAM Connection Technology Center in Houston. TMK IPSCO also is boosting its premium connections output in Odessa, Texas, as well as starting up a new threading plant in Edmonton, Alberta.

Other companies planning changes include Tenaris, which is adding a new seamless pipe mill, including heat treatment and premium threading capacity, at a yet undecided site in the United States; TPCO America Corp, which plans to bring on connections capacity at its new seamless pipe mill in Gregory, Texas, late this year; and Nippon Steel & Sumitomo Metals Corp., which plans to make capital investments at the Houston OCTG mill it recently acquired from China’s WSP.

 


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