Energy Pipe and Tube Market
No Upturn in Sight
 
By Myra Pinkham, Contributing Editor

No one knows for sure how far energy prices will continue to decline and when they will begin to recover,” says market watcher Paul Vivian, a partner with the Preston Pipe Report. Thus the energy-dependent markets for oil country tubular goods and small-diameter line pipe remain equally uncertain. The outlook for large-diameter line pipe is more positive, say the experts, with a number of new pipeline projects in the works.

The woes facing producers and distributors of OCTG and small-diameter (up to 16 inch OD) line pipe can all be traced back to the tumbling oil and gas prices. Last month, the West Texas Intermediate crude oil price fell below $30 per barrel for the first time in 12 years. Some analysts predict oil prices could remain in the $20s, or even dip into the teens, before inching back up late this year or early in 2017. At the same time, the Henry Hub natural gas price hovered around $2.35 per MMBtu, down from about $3.65 a year earlier.

A variety of other factors are contributing to the volatile energy prices, including weak global economic growth, especially in China, high storage levels, the strong U.S. dollar, relatively warm winter temperatures and overproduction by OPEC and other oil producing nations. Antidumping duties imposed by U.S. trade regulators have failed to stem the influx of low-priced imports, adding to the price pressure.

As recently as November, observers speculated that oil prices were near the bottom and were likely to rebound to as high as $50 per barrel this year. Now it appears they will languish in the $20s and $30s, if not lower, for some time to come, especially given recent political events in the Middle East. Iran has already begun exporting oil again, adding to the global oversupply, now that the U.S. has lifted its economic sanctions as part of the recent nuclear treaty. “No one can drill profitably at these levels,” says Bob Dvorak, president and chief executive officer of OCTG distributor Bourland & Leverich, Pampa, Texas.

Because of their dependence on drilling activity, the markets for both OCTG and smaller-diameter line pipe went through “a thrashing” last year and will continue to be challenged in 2016, says Kurt Minnich, president of Pipe Logix, Tulsa, Okla. Nearly all exploration and production companies are cutting their drilling budgets for both oil and natural gas wells in 2016, says Amanda Eglinto, senior economist with the pricing and purchasing service of IHS, Inc. She expects further declines in the U.S. rig count. Houston-based Baker Hughes, Inc., reports that the number of active U.S. drill rigs plummeted by over 61 percent last year, to only 650 from 1,676. The rig count—515 drilling for oil and 135 for natural gas—is down 66 percent from the peak of 1,931 rigs in September 2014.

Striking a positive note, Doug Polk, vice president of industry affairs for Vallourec USA Corp., observes that cutbacks by drilling companies will eventually help the market reach a better equilibrium. “They have been there before and they will continue to make multi-year decisions,” he says.

A measure in the massive spending bill passed by Congress in December lifted the 40-year ban on the exporting of oil from the United States, potentially adding to the world oversupply. U.S. oil export is likely to be “a zero sum game,” at least in the short term, says Polk. “Eventually, once the market firms, it could result in additional drilling, but currently it will only affect the amount of oil being placed into storage.” Over time, American exports may reduce or eliminate the spread between U.S.-based WTI and internationally based Brent oil pricing, notes analyst Christopher Plummer, managing director of Metal Strategies, Inc., West Chester, Pa.

Exports of liquefied natural gas represent “a light at the end of the tunnel,” says Dvorak, although not until 2017 or beyond. Currently, six LNG suppliers have permits to build export terminals in North America. An additional player has a permit, but has not yet begun construction, adds Kimberly Leppold, senior analyst with Metal Bulletin Research. These are multi-million dollar projects that take time to complete, and will also require additional infrastructure to transport the natural gas to the terminals, she notes.

The difficult market conditions have narrowed the gap between the U.S. price and the international price for natural gas, which has delayed some projects. For example, Cheniere Energy Partners’ Sabine Pass terminal in Louisiana was to be the first to export LNG, beginning in January. Instead, the company is holding off until late February or March.

Last year, the market malaise cut OCTG demand in half, to 3.96 million tons from 8.08 million tons in 2014, estimates Plummer. He forecasts another 36 percent decline in 2016, to 2.52 million tons. OCTG demand is likely to bounce along the bottom for a while, even after energy prices start to improve, he predicts.

Contributing to the market’s “disequilibrium” is the large volume of pipe and tube inventory in the supply chain, says Polk. “Once the inventories that built up last year are worked down, the basics of supply and demand will come back into play,” he maintains. The OCTG inventory overhang is estimated at between six and 10 months of supply—still a large number but a 20 percent improvement from the March 2015 peak of 3.19 million tons, Plummer says. Like shipments, the burn rate for inventories has slowed, says Minnich, making it more difficult for distributors to bring their inventories into balance.

The challenging conditions could change the way some companies go to market. Currently, 80-85 percent of all OCTG is sold through distribution. Tenaris SA, the Luxembourg-based pipe producer, says it may consider using the same direct sales model in the U.S. that it uses in other parts of the world. Not surprisingly, this move is not being well received by distributors, says Minnich, but it is piquing the interest of some exploration companies. “Mills would still need to offer the kinds of services that distributors now supply. It would be hard for them to do so and to remain profitable,” says one skeptical pipe distributor, who asked not to be identified.

Few mills would follow Tenaris’ lead, says Polk. “The ease of doing this has been grossly overestimated. It’s a complex system. Mills would need to make a lot of capital investments to provide the services offered by distributors. It’s important to recognize the difference between actual channel innovation and discounting tactics.”

All of this is happening as producers continue to add OCTG capacity, particularly seamless capacity, though not necessarily on their original timelines, Plummer says. Tenaris, which recently laid off 100 employees at its Blytheville, Ark., welded pipe mill, is pushing ahead with its new 600,000-ton-per-year Bay City, Texas, seamless mill, which will be delayed until 2017. TPCO America Corp.’s 550,000-ton seamless mill in Gregory, Texas, also is expected to come online next year, as is its 150,000-ton seamless pipe mill in Norfolk, Neb. A number of other mills have idled capacity or cut back production. Projects canceled include welded mills by Alamo Tube and Alita USA and seamless mills by Tejas Tubular and PTC Alliance.

Most mills have idled some capacity and nearly all OCTG producers are operating fewer shifts, says Vivian at Preston Pipe Report. “While mills haven’t stopped producing, they aren’t producing a lot,” he says, estimating their operating rates at just 30 to 40 percent.

Competition from imports, notably from South Korea, continues to impact domestic suppliers. The positive determination in the 2014 OCTG trade case did little to slow the import flow. “That hasn’t given producers the opportunity to recover,” says Tamara L. Browne, director of government affairs for the Committee on Pipe and Tube Imports. OCTG imports have declined, but generally in line with demand, she adds, thus OCTG import penetration remains around 55 to 57 percent.

Even though domestic OCTG producers have been disciplined about controlling their production levels, some are likely to change hands, declare bankruptcy or close in the face of the difficult market conditions, say observers. But it’s not all doom and gloom. “I’m optimistic about the long-term OCTG market,” says Polk. “We just need to deal with these short-term market conditions first. Vallourec is in this for the long haul.”

Shipments of small-diameter line pipe, used for gathering lines, have been just about as slow as OCTG, Plummer says. Overall demand for line pipe declined about 21 percent in 2015, with domestic shipments down 56 percent and imports down 16 percent. Further declines are likely this year.

Demand for large-diameter line pipe is a different story, analysts agree. Metal Strategies estimates that domestic shipments of large-diameter pipe used in transmission pipelines increased by nearly 65 percent last year and are forecast to grow another 9 percent this year. Imports also grew by about 54 percent in 2015, but are expected to decline by more than 30 percent in 2016.

Much of the activity is for natural gas pipelines in the Northeast and Southwest, Leppold says. The continued volatility in oil prices puts pipeline projects at risk, however, because transporting oil via rail tank car offers greater flexibility.

“Demand for large-diameter pipe should remain strong for some time as it takes awhile for new projects to be completed,” Vivian says. In fact, with several large pipeline projects awarded late in 2014, and some smaller ones announced last year, backlogs on pipe orders may extend into 2017.


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Monday, December 11, 2017