Cold Snap to Heat Up Energy Tubulars Market?
Record cold temperatures in North America will goose demand for oil and gas, but an upcoming trade case ruling may prove to be an even bigger event for steel pipe and tube suppliers.
By Dan Markham, Senior Editor
In early January, much of North America was gripped by the polar vortex, a weather event that produced record-low temperatures across the continent. The winter of 2014 is going down as one of the worst on record, freezing out more than $5 billion in economic activity, by some estimates. For the oil and gas industry, however, the bone-chilling temperatures have had a heartwarming effect on demand for energy. To what degree demand for oil country tubular goods will follow remains to be seen.
The propane sector was one of the first to feel the effects. As a result of the bitter temperatures, supplies of propane, a byproduct of natural gas processing and crude oil refining, dipped more than 40 percent, while prices climbed more than 50 percent.
In mid-January, the Department of Energy reported inventories of commercial crude oil had fallen by 7.7 million barrels from the previous week. Commercial petroleum inventories declined 10.3 million barrels over the course of a week. The West Texas Intermediate price for crude oil was $92.39 per barrel in mid-January, up $1.20 from the same month in 2013.
Strong demand for fuels of all kinds is good news for the energy industry, which otherwise watched pricing erode over
the course of 2013.
“The higher the price for oil and natural gas, the more people are willing to drill,” says Al Rheinnecker, chief executive officer for American Piping Products, Chesterfield, Mo. “Anything that causes energy to be consumed is going to have a direct correlation on drilling. And one cold winter could do that.”
Such a boost to drilling activity would be welcomed by an industry that has been mostly holding steady. According
to oilfield resources company Baker Hughes, the active rig count in the United States was 1,774 in mid-January, up 28 rigs from the same time last year. On the other hand, the Canadian count was down 36 rigs to 565. The U.S. onshore well count for the fourth quarter count was up 5 percent over 2013 to 9,056.
Drilling activity is only one part of the equation. There are some mid- and downstream concerns about how effectively the products will get to market. “Could there be a chance we out-produce our refining capacity?” asks Mark Brozek, vice president of Kelly OCTG, Corona Del Mar, Calif.
For the most part, executives see no reason to expect any major swings in the price of petroleum products this year, despite the difficult winter. “You can read five articles and come up with five different estimates,” says Jeff Hanley, vice president of energy products at Welded Tube of Canada, Concord, Ontario. “I think it’s going to go up, but it won’t blow the doors off anybody.”
The relatively flat drilling activity and tempered pricing has made the pipe and tube supply chain somewhat skittish. Adding to that sense of unease was anxiety over a mid-February ruling from the U.S. International Trade Commission on imports of oil country tubular goods. In July 2013, U.S. OCTG producers Boomerang Tube, Energex Tube, Maverick Tube Corp., Northwest Pipe Co., Tejas Tubular Products, TMK IPSCO, United States Steel Corp., Vallourec Star LP, and Welded Tube USA, Inc., filed the action, claiming that a 111 percent increase in OCTG imports violated fair-trade rules. The ITC may apply antidumping and countervailing duties on product from India, the Philippines, Saudi Arabia, South Korea, Taiwan, Turkey, Ukraine and Vietnam. Or not.
“We're all anticipating what might be coming out of the trade case in the United States,” says Hanley. “I think the market is tentative right now, waiting on what that result will be.”
If significant tariffs are placed on the foreign producers, many of them will likely back off the North American OCTG market, clearing the way for domestic mills to regain a stronger foothold. A smaller tariff, or none at all, will likely keep the foreign product flowing into the attractive U.S. market.
Even if the ITC rules against the foreign producers, those offshore manufacturers are not likely to simply fade away, but find another North American outlet for their material. “There is some concern that if you press down on oil country goods, it will show up in line pipe,” says Brozek.
The filing of the trade case has slowed some import activity, but it hasn’t put the brakes on completely. According to the American Iron and Steel Institute, the U.S. imported 3.3 million tons of OCTG products in 2013, plus another 2.4 million tons of line pipe. The figures were down 9.1 percent and 14.7 percent, respectively, compared to 2012, but remain two of the most common finished steel products entering the U.S. market annually.
If the ITC cracks down on the foreign product, domestic mills should have no problem picking up the slack, experts say. The U.S. is in the middle of a major build in production capacity. An additional 4.1 million tons of capacity, including both OCTG products and line pipe, was scheduled to come on line from 2011 to 2015.
Some of it is already in production. In 2013, Welded Tube opened its new mill in Lackawanna, N.Y., where it is producing steel casing from 4 ½ to 9 5/8 inches. The company may follow up with a second round of investment at the Lackawanna facility in the coming years.
Russian producer OMK and France’s V&M also opened OCTG facilities in the U.S. in 2013. More than 2.9 million tons of capacity is in various stages of development, most of it bound for Texas and neighboring states.
To Dolty Cheramie, president of Pipe Exchange Ltd. in Houston, these new mills are not what the industry needs. He says overcapacity is the biggest threat facing the OCTG market, and he hopes some of the companies reconsider their expansion plans. Much depends on the performance of the market this year, he adds.
“I think 2014 will be kind of pivotal. If the business does pick up, that means they’ll all come, which will make the market crash. Projects will be delayed or canceled if the business is bad, but that’s not good either. It’s kind of a no-win deal,” says Cheramie, who also serves as president of the Victoria, Texas-based National Association of Steel Pipe Distributors.
Such is the paradox of the energy business. When demand outpaces supply—such as during a severe winter—oil and gas prices rise, prompting more drilling. The increased drilling activity eventually causes an excess supply, driving prices down again. Drilling becomes less profitable and rigs are idled. Pipe and tube suppliers are the helpless victims of this rubber-band cycle.
Cheramie says the push to add OCTG production to take advantage of the anticipated oil and gas boom is similar to the charge several years ago to build spiral weld mills. In that case, the U.S. was not expected to be able to produce enough natural gas to meet its needs, and thus would be importing LNG. Today, the U.S. is actually a net exporter of energy products. “The bubble popped. All of these mills came to town because of the infrastructure that was going to be built. They all got here and now they’re starving to death,” says Cheramie, who believes the quarter-to-quarter mindset that drives the publicly traded companies is the cause of such short-sighted decisions.
Despite these hiccups, the long-range outlook for the energy sector, and the pipe and tube industry that supplies it, remains solid. A growing manufacturing base, and facilities such as Nucor’s just-opened DRI plant, will guarantee a healthy demand for natural gas products.
“Energy production is a bright spot in this country. I think that’s going to continue. Even both parties recognize it’s a positive event,” says Rheinnecker.