Strong pricing environment has the energy pipe and tube market looking healthy through 2023.In years past, when consumers were raging at the skyrocketing prices at the gas pumps, members of the extensive energy supply chain were silently thanking the petroleum gods for their good fortune. Record-high prices to fill up the tank were a recipe for robust activity in North America’s Exploration and Production community.
And yes, the most recent run-up in pricing for crude oil – a push that began almost immediately after the bottom fell out of the market in the early days of the pandemic – has resulted in steadily more activity levels for OCTG, line pipe and other metals used in the energy space. But that run-up has been rather muted compared to the previous boom-and-bust cycles that have characterized the energy industry in the past decades.
Rather, it’s been a slow climb, most noticeable in the Baker Hughes Rig Count, the standard for measuring the state of the drilling industry.
Since crashing in early 2020, when active rig counts fell to just over 200, the count has risen almost without fail to mid-August, when the count was 763 in the United States and another 201 in Canada. The gains were incremental, moving up about a half-dozen each week to the present point.
But looked at over the larger term, the counts remain below historical levels. The count level still has not hit the pre-pandemic highs of more than 1,000 active rigs in 2019.
Rick Preckel, principal for Preston Publishing Co., says two main factors have held back the mad dash that would likely have followed such high crude oil prices in the past. One is by choice.
Over the past 12 months, the E&P community has demonstrated uncharacteristic restraint. The major players have made a commitment to use the recent profits to reward shareholders rather than plow the money back into exploration. “We’re seeing that discipline continue and, as a result, you have private drillers who have been making most of the gains in rig counts. That’s been the difference between this and previous cycles,” says Preckel, whose organization is putting on its sixth annual OCTG/LP Summit Oct. 6 at the Hyatt Regency in Houston.
In other ways, however, that discipline is being forced on them by matters outside their control. The supply chain issues that have been felt by virtually every industrial sector have not spared the energy space.
“We have the same supply chain constraints everybody else has. Labor and frack sand have been issues. Pipe has been an issue,” says Preckel.
To Kevin Beckmann, owner of Trident Steel Corp., St. Louis, one of those factors is really suppressing the ability of the industry to ramp up production. “I don’t see any major uptick in supply or demand because of labor issues. Two of my good processors, say, ‘we’re working six days a week. We can’t increase output, we can’t bring people on.’”
Of course, that discipline, forced or otherwise, carries some positives. “Labor problems are going to continue to be something of a hedge against oversupply,” Beckmann says.
Moreover, by not rushing in to take advantage of the rising price of crude oil, the good times may last a little longer for the supply chain. Most experts anticipate strong conditions for both OCTG and line pipe all the way through the end of next year.
“Our expectation is that the market, with rig count improving week in, week out, the mills will continue to be fairly busy with OCTG products, which influences what we carry which is line pipe,” says Steve Danis, CEO of American Piping Products, a St. Louis-based distributor. “Based on cap ex projections I’ve seen in analyst reports from some of the majors, we expect demand for energy products to continue to be fairly robust through 2023.”
That market optimism is behind the rather aggressive actions taken by Tenaris, which has ramped up production of rolled and welded pipe and taken other growth steps in the past year. “We expect the demand in the United States will continue to grow, and it will be important to expand our industrial base, not only in terms of pure volume but also in terms of products. In this sense, the acquisition of Benteler assets will help us complementing our overall production system in the United States,” said Tenaris CEO Paulo Rocco at the company’s recent conference call.
At the moment, the greater strength in the energy pipe and tube segment seems to be on the oil country tubular goods side. And the greatest area of strength is in the Permian Basin.
“West Texas is still really good, there’s no doubt about it. Most of the pipe is going out there,” says Narayan Bhargava, president of the SDB Group, Houston.
Even the growth there hasn’t been as robust as it could have been. “I think there was a reckoning when a lot of folks wanted to put some rigs on board and they realized they could put as many rigs up as they want, but they couldn’t get the pipe for it,” Bhargava says.
“We’ve seen growth in line pipe demand, but it lags and is not necessarily directly proportional to growth in drilling,” says Preckel. “I would say it’s in the early stages of growth vs. OCTG, which is a little further along.”
Danis would agree with that assessment. “Line pipe feels like a secondary product in a lot of cases to the mills behind OCTG. Because of demand on OCTG is keeping line pipe constrained, as are trade cases as well.”
OCTG products have their own supply issues, says Bhargava. “The OCTG market is still pretty strong. There’s little to no tons available in the market through the rest of this year. Right now, we’re looking at booking Q1 at the moment, and that’s turned into a strong order book.”
One particular area of concern, he says, is surface casing, where material is limited from major suppliers and the market is relying on second and third tier producers.
There are some dark clouds on the horizon, however. While pricing in the OCTG world has held up well throughout the run-up, the overall decline in steel pricing is leaving some consumers worried that a reckoning could be coming to the segment. “You are seeing some tentativeness from some of the end users. There are a lot of rumblings about steel prices going down, which they have,” says Bhargava, who also serves as president of the National Association of Steel Pipe Distributors.
Pricing concerns are about the only thing that could deter the strong environment over the next 18 months. “The industry likes stability in pricing. We always talk about the fact drilling is a product of current and anticipated oil and natural gas prices,” Preckel says.
While steel pricing is a concern, pricing for crude and natural gas is expected to remain at elevated levels. The Dallas Fed’s most recent oil and gas survey forecast
year-end prices for both West Texas Intermediate oil and Henry Hub natural gas to come off just a little from their mid-year highs.
These projections give E&P companies the confidence needed to invest in the kind of multi-year projects that drive activity in the sector. “Uncertainty hurts when you have long lead-time projects such as downstream and midstream projects that consume line pipe or seamless steel pipe,” Danis says.
Buoying pricing is a supply situation that remains pressured. The Russian-Ukraine war, involving two countries that are major producers of both steel and petroleum, will likely help prices stay high and keep North American
producers busy.
The import market remains challenged, both by existing Section 232 duties and ongoing trade cases. “The Koreans have opened up their order books for Q1, and for all intents and purposes I’d say those orders books have already been filled,” Bhargava says. On the line pipe side, mill shutdowns from some of the higher-quality suppliers, such as U.S. Steel Lorain and some overseas Vallourec plants, have limited access to universally acceptable products.
“From offshore, we’re seeing an exceptionally nominal price reduction but still limited tons. It’s going to take two or three months to develop,” says Beckmann.
However, in some ways the supply constraints may end up being the industry’s saving grace. Preckel believes there will be much greater insight into the market at the end of the year – where the Russian-Ukraine conflict stands, whether the U.S. (and the world) stays out of recession, where inflation and interest rates stand – at which point many of the supply issues will be resolved.
“The industry is mindful of the moving parts its subject to right now and is keeping a watchful eye on them. We don’t want to be in that situation where we repeat the same old, fun too fast, produce too much and end up shooting ourselves in the foot. I don’t think that’s an issue in the near term. By the time the industry is in position to ramp up substantially, we’ll have much more visibility,” Preckel says.
Caption: The market for energy pipe and tube products remains on the rebound.
(MCN File Photo)