Drilling’s Up, But Line Pipe Lags OCTG
Oil and gas exploration is on the upswing, but future energy demand is clouded by economic and environmental concerns.
By Myra Pinkham, Contributing Editor
The market for energy pipe and tube products is exhibiting a split personality. While the oil country tubular goods segment clearly has been improving, with drilling activity up 90 percent from the depths of the recession, the large-diameter line pipe segment is not expected to see significant growth for at least another year.
Oil Spill Spells Disaster
for More than the Environment
As could be expected, the BP oil spill in the Gulf of Mexico has affected the oil country tubular goods market. In fact, the shockwaves that have hit the offshore drilling industry have been felt by onshore drillers as well.
“The disaster in the Gulf has been a killer for offshore suppliers,” says Gregg Eisenberg, chief executive officer of startup company Boomerang Tube LLC, Chesterfield, Mo. “We are hearing about some [business] shifting to shallow inland waters and certainly onshore.”
Baker Hughes Inc., a Houston-based energy services company, reports 20 drill rigs were operating in the Gulf as of late August, down about a third from a year earlier.
While there are considerably fewer offshore than onshore drilling rigs, the offshore rigs—especially the deepwater ones like BP’s Deepwater Horizon—consume 10 to 20 percent more tubulars than onshore rigs, says Shawn Seanor, vice president of oil and gas engineered steel solutions for The Timken Co., Canton, Ohio. “With the moratorium on new offshore drilling, it is very possible there will be more of a loss of offshore rigs. Once they are moved away, it will be a long time before they come back,” he says.
Paul Vivian, a partner at Preston Pipe Report, Ballwin, Mo., says the actual decline in OCTG demand, at least thus far, has been fairly slight. “But it has certainly painted the entire industry in a negative light and has resulted in more concern about onshore, as well as offshore, drilling environmental issues.”
Vicki Avril, president and chief executive officer of TMK IPSCO, Downers Grove, Ill., agrees. “There is always a bit of a panic effect when something like that happens.”
Other countries are also considering moratoriums on offshore drilling as a result of the disaster in the United States, notes Kim Leppold, a senior steel analyst with Metal Bulletin Research. “All of this raises the cost of production,” as well as limiting OCTG demand, she says.
In addition to the possibility the U.S. Senate will tackle drilling safety legislation this year, there have been some calls by local municipalities for increased environmental oversight, and possibly moratoriums, on drilling for natural gas in shale plays such as the Marcellus rock formation in New York and Pennsylvania.
“There is a fair amount of misleading information about fracturing of rock to get shale gas,” Avril says. “There needs to be adequate regulation of drilling, but that regulation should be based on facts, as opposed to someone’s perception of fact.”
Kurt Minnich, partner at Spears & Associates, Tulsa, Okla., the publisher of Pipe Logix, says this stems from a general lack of understanding of the “fracking” process and how it works. (Fracking is the process of pumping fluid, sand and chemicals into the earth to shatter shale deposits and release the gas within them.) As a result, drilling could be under a lot of scrutiny, and that will likely have some dampening effect on pipe and tube demand.
“We all want to be environmentally safe,” Seanor says, “but unfortunately one incident can be twisted to support certain political agendas.”
Even OCTG isn’t out of woods yet, says Paul Vivian, a partner at Preston Pipe Report, Ballwin, Mo. Recent increases in OCTG imports have raised inventory levels and, along with new domestic capacity coming on stream, could cause supply to outpace demand and add downward pressure on prices.
To no one’s surprise, the BP oil spill in the Gulf of Mexico and the resulting moratorium on offshore drilling has hurt sales of energy pipe and tube (see related story page 35), especially for higher grade seamless products, including those made from alloy and stainless steels.
Experts report that demand for OCTG products overall has been solid. “It clearly picked up in the first quarter and then pretty much leveled off, but it remains stable at a good level,” says Vicki Avril, president and chief executive officer of TMK IPSCO, Downers Grove, Ill.
The oil and natural gas market is the last to cycle down and the last to cycle up, says Shawn Seanor, vice president of oil and gas engineered steel solutions for The Timken Co., Canton, Ohio. Its strength carried into the first quarter of 2009, well after others had felt the economic decline, then dropped and did not begin picking back up until this year’s first quarter, well after most had already begun to recover.
The lull in OCTG demand in July and August was mainly due to seasonal factors, says Kim Leppold, a senior steel analyst for London-based Metal Bulletin Research. “It remains relatively good compared with other steel products.”
In fact, Christopher Plummer, managing director for Metal Strategies Inc., West Chester, Pa., predicts that this year’s domestic shipments of OCTG products will reach 1.145 million tons, a 75 percent improvement from last year, though still off nearly 47 percent from the 2.15 million in 2008.
U.S. OCTG consumption—a good portion of which will likely be supplied by imports—could reach 4.0 million tons this year, up from about 3.5 million tons last year, but well below the 5.5 million tons in 2008, says Kurt Minnich, a partner at Spear & Associates, Tulsa, Okla., the publisher of Pipe Logix.
Actual OCTG growth depends on future energy demand, which remains uncertain as the economy continues to flounder, notes Leppold.
On the plus side, the U.S. drill rig count continues on the slow, steady growth path it began last year. According to oilfield service company Baker Hughes, 1,656 drill rigs were running in the United States as of Aug. 27, up 89 percent from early last year when the count fell to as low as 876 rigs.
The actual footage drilled, which is considered a more accurate measure of drilling activity, has increased 75 percent since last July, says Minnich at Pipe Logix.
The type of drilling activity has shifted from gas to oil, however, making pipe and tube buyers cautious. “Buyers don’t want to build inventories given they don’t know where prices are going. And due to the shift in drilling, people want to make sure they have the right product on hand,” says Avril at TMK IPSCO.
Traditionally, the U.S. market has been very natural gas driven—with 80 to 85 percent of the rigs drilling for natural gas. More recently, oil’s portion has topped 40 percent. According to Baker Hughes, the number of rigs drilling for oil in the United States rose 135 percent in the past year, while those drilling for natural gas only increased 39 percent.
The drilling mix is a function of energy prices, and oil currently offers a better return than gas, say the experts. “Natural gas prices are rather sluggish in the mid-$4 (per thousand cubic foot) range, while oil prices have stabilized at around $80 per barrel,” says Gregg Eisenberg, chief executive officer of Boomerang Tube LLC, Chesterfield, Mo.
“Companies are looking to get the best return for their investment and oil prices are currently better than natural gas prices,” adds Avril. In addition, energy companies have grown more proficient at extracting oil from shale plays such as the Bakken oil shale formation in Montana and North Dakota.
There is also the question of how much natural gas is actually required by homes and businesses today. “Reserves of natural gas are now slightly below the five-year average, which is a good indicator there is more supply than is needed,” says Timken’s Seanor.
“It is industry that uses the most natural gas, not residential consumers,” says David Delie, president and chief executive officer of Berg Steel Pipe Co., Panama City, Fla. “The big consumers are manufacturers, many of which idled plants in the downturn. Some have come back, but there is nowhere near the capacity there once was. Even if they are all restarted, that means consumption would just be stable. What we need is growth,” he adds.
If manufacturing picks up, it will create further demand for natural gas and, therefore, OCTG products, adds Avril. “But if it doesn’t, especially if there is a double dip recession, it will have a negative effect.”
Drilling in the shale plays also has caused a shift in the types of OCTG and other drilling equipment used, because much of the drilling, especially in natural gas shale plays such as the Marcellus formation in Pennsylvania and the Haynesville formation in Louisiana and Texas, is now horizontal and directional. Currently, about 68 percent of all rigs in the United States are drilling horizontal or directional wells, reports Baker Hughes.
Equipment for that type of drilling tends to be more tubing vs. bar based. “Historically, only about 5 percent of wells were drilled horizontally or directionally. I see a continued shift toward tube-based equipment,” says Timken’s Seanor.
While OCTG consumption is growing, so is supply. Not only have domestic producers increased their production levels, imports have also picked up faster than demand, Avril says.
In 2009, OCTG imports declined sharply, especially after China was taken out of contention by a successful antidumping trade case. Recently, a number of foreign suppliers have tried to claim the former Chinese share, including companies from South Korea, Canada, Mexico, Austria, Russia, Turkey and Japan, Leppold says.
Year to date through July, OCTG imports were off by 10.5 percent. However, July’s total of 266,913 tons was up 34 percent from the previous month and, on an annualized basis, would top 2009’s total by about the same percentage, reports the American Iron and Steel Institute, Washington, D.C.
Several suppliers have announced plans to add OCTG production capacity (see story below). “Certainly there is demand in the United States for the new OCTG capacity that is coming on stream,” says Avril. “The question is if the new capacity will be displacing imports or whether domestic producers will be fighting over orders. I think it will be a combination of the two.”
With supply increasing, so have OCTG inventories, jumping by 150,000 tons total in June and July, says Vivian. “It is a sign of weakness, much like getting the sniffles before you get real sick.”
Avril is also concerned about a possible oversupply. “We want to make sure that inventories don’t get out of balance. It is something we need to watch very carefully,” she agrees.
On balance, Eisenberg at Boomerang Tube is bullish on the OCTG market. “2010 has turned out to be a better year than anyone could have dreamed [for OCTG], probably 25 percent above the highest forecasts in the beginning of the year. I expect 2011 to just consolidate those gains and be a great year at the current activity level.”
Line pipe disappoints
“Large-diameter line pipe is definitely not as strong as OCTG,” says Leppold. “It is very competitive, with pricing strength in the hands of buyers.”
Line pipe is used for the transmission lines that carry oil and natural gas away from the wells. Because many of the multi-year pipeline projects begun prior to the economic downturn are now wrapping up, demand for line pipe is actually slowing, says Delie. “There was a big boom over the last few years, so a few projects are still going forward. And some companies are now looking at new projects, but they are still in the planning stages.”
Delie blames the uncertainty about future energy demand on the slow economic recovery, the tight credit conditions and lack of a comprehensive federal energy plan. “Even once things turn around, it will take projects six months to a year to get on line,” he adds.
New pipeline projects will also be inhibited by the government’s tougher environmental scrutiny and the public’s NIMBY (not in my backyard) attitude, as a lot of pipelines go through populated areas to bring the oil and natural gas closer to consumers, Vivian notes. Nevertheless, some new projects are in the works, he adds. “But they are shorter ones and not cross-country pipelines, which continue to be locked up in the boardrooms.”
Large-diameter line pipe shipments in June totaled 280,000 tons, nearly double the 147,000 tons in June 2009, but still nearly 15 percent below the peak of 329,000 tons in April 2010, Vivian adds.
Volatile steel prices have contributed to the uncertainty. Steel accounts for 75 percent or more of the cost of pipe. For long-term energy projects, pipe may not be delivered for a year or more after the contracts are signed with the steel suppliers. “Pipe mills aren’t big enough to absorb that risk,” Delie says. If prices continue to be so volatile, pipe mills, steelmakers and energy companies will need to come up with innovative solutions to spread the risk, he adds.
Line pipe mills are also struggling with oversupplies due to all the new spiral weld capacity that has come online in the past few years. Annual line pipe capacity almost doubled from late 2007 to its current level of 2.8 million tons with the addition of 1.3 million tons of production capacity, notes Plummer at Metal Strategies. “In 2007 and early 2008, there was a steady surge of projects, which is what prompted the investment in the spiral weld capacity,” he says. “Companies clearly felt there was demand and that the capacity was needed to shorten delivery times.”
“The new capacity can eventually be absorbed if it replaces imports,” Delie says, “but I’m not sure everyone can stay in business until things pick up.”
He estimates it could be late 2012 before the line pipe market fully recovers. On the plus side, it may recover with a vengeance, “like a dam breaking, with a number of major projects all coming at the same time.”
OCTG Expansions in the Works
The following new energy tubular mills or expansions are either under way or planned:
Boomerang Tube LLC
With industry veteran Gregg Eisenberg at its helm as chief executive officer, Boomerang Tube LLC, based in Chesterfield, Mo., is in the process of ramping up a 360,000-ton-a-year electric-resistance-welded oil country tubular goods and line pipe facility in Liberty, Texas. It has heat-treating capacity of 250,000 tons a year. Boomerang, which plans to ship its first commercial pipe later this month, will also be selling seamless pipe, reportedly from foreign sources.
Lakeside Steel Inc.
Lakeside Steel Inc., Welland, Ontario, has announced plans to build a 192,000-ton-a-year welded OCTG and line pipe facility in Thomasville, Ala., effectively doubling its output. It is expected to begin production in December 2011.
Tianjin Pipe (Group) Corp.
China’s Tianjin Pipe (Group) Corp. has recently received the necessary environmental permits for a 550,000-ton-a-year seamless OCTG mill that it plans to build near Corpus Christi, Texas. It expects to begin producing pipe in 2013.
V&M Star LP
Vallourec and Mannesmann’s V&M Star LP venture has broken ground for expansion of its Youngstown, Ohio, mill, which will add 350,000 tons a year of seamless OCTG capacity by late 2011 or early 2012.
The Timken Co.
The Timken Co. has announced an expansion of its steel operations in Canton, Ohio, including the installation of a new intermediate bar and tubing finishing line at its Gambrinus Steel Plant. It is to be fully operational by 2013.
U.S. Steel Corp.
Pittsburgh-based U.S. Steel Corp. is reportedly considering expanding tubular and flat-rolled capacity in its Lorain, Ohio, facility. According to an SEC filing, the company has applied for permits and has begun engineering work on heat-treat and finishing facilities there “to more efficiently serve our tubular products customers’ increased focus on North American shale resources.”
Northwest Pipe Co.
Northwest Pipe Co., Portland, Ore., had previously announced its intention to produce OCTG in Bossier City, La., but those plans were put on hold with the economic downturn. Industry observers say they are unlikely to revive them at this time.