The energy pipe and tube arena is recovering somewhat, but it remains an uncertain, volatile market.
The beleaguered energy sector finally has some good news. The North American rig count, the bellwether for the state of the oil and gas sector, has been making a comeback, albeit at a slow and steady clip. Moreover, when the rig count drops, it does so in small increments.
Historically, the market experiences huge spikes and dramatic declines. But this is not the climate of the current energy industry, much to the amazement of Paul Vivian, partner of Preston Pipe Report, Ballwin, Mo. “What’s remarkable about the rig count – and people will say, ‘how can anything be remarkable; it’s been so boring’ – is that [its pace of growth] is very unlike the rig count,” he says. “It has a tendency to recover in big globs and fall in big globs.”
Bill Buckland, president of Mandal Pipe Company, Auburn, Ga., indicates that such dramatic ups and downs – “feast to famine,” as he puts it – hurts the energy industry.
Thus, he believes the gradual increase in drilling activity is a good sign. “It’s not meteoric; it’s just a few rigs every week and every month,” he says. “I think that’s a good way to ramp up. The industry is recovering as a whole. We’re basically coming back from zero,” he says.
Vivian points out that in May 2019 the average monthly U.S. rig count was 986, compared to May 2020, where it was only 348. While it reached a low of 250 in August 2020, by June 2021, it was 464. In August, it reached another threshold by cracking 500.
“It’s headed up. Certainly at this point in time we can say that 2021 will surely be a better year than last year – which isn’t really saying a whole lot,” says Vivian. He predicts the upward shipment curve will continue through the rest of 2021.
Yet pessimism about the rig count persists. One supplier noted it’s doubtful the rig count will get back to the 1,000 count of its better days, and thus will fall short of where it needs to be to keep the industry operating at full strength and employment.
Narayan Bhargava, president of Houston-based SDB Steel & Pipe, acknowledges that drilling in 2021 is down substantially compared to pre-pandemic activity, when “the rig count was around 770, so drilling operations are not nearly what they were,” he says. Moreover, the rig count is not increasing nearly as quickly as it initially dropped. SDB Steel & Pipe, a master distributor of OCTG casing and tubing, now also offers pipe, fittings and flanges for midstream energy, downstream and industrial-fabrication applications.
Bhargava is optimistic about recovery. He views 2021 as a rebound year and next year as a bumper year.
“We’re expecting 2022 to be a pretty big year for upstream oil and gas,” he says. “As a company that depends a lot on Korean production; we have to work with their quotas, and they have to fill their quotas. I think Q4 is going to be tight. The Koreans are able to sell up to 30 percent of their whole quota in one quarter. And so they have booked up most of their quota all through the third quarter, leaving only 10 percent to sell in the fourth quarter. I do expect there to be some loosening of that in the first quarter 2022 once the quotas are refreshed.” Compounding the issue is the fact domestic lead times are far out.
He is expecting to see more pipe being imported from Europe next year, as the U.S. and the European Union will have an agreement on the supply of steel into the U.S. without any tariffs.
Yet steel overcapacity poses a problem, according to a line pipe supplier. He notes the oil patch began to see some softening in the latter part of 2018. Therefore, even after the pandemic is fully behind us, the issues that predated the outbreak will remain. The U.S. and the world has excess tubular goods capacity, a problem that isn’t going away.
Bhargava concurs regarding capacity. He notes the U.S. is operating at some of the highest capacity utilization it’s ever seen for steel production, with no end in sight. “Unfortunately, I think a lot of it was initially driven by supply constraints in general. We’re still dealing with bottlenecks all along the supply chain, whether it’s at the raw steel level or freight.”
And while steel capacity is at its highest, some in the industry advise that energy tubulars are still behind the eight ball. One mill owner indicates, “Most steel products out there are having a robust, if not record year, but I wouldn’t say that’s the case for energy tubulars. Energy tubulars are behind the other industrial products in the market.”
OCTG shipments have been recovering since last year, although this product’s progress still remains volatile. “I don’t think it’s back to the heights [it had been]; the OCTG part of the business has always been a real wild roller coaster ride,” says Buckland.
The prediction for line pipe is somewhat ominous. “It’s not clear that the line pipe actually has hit bottom yet; the dark days for line pipe are not quite over,” says Vivian. “The large OD market now has to recover from the pandemic. All you have to do is look at the oil production numbers and see we’re not producing what we had produced at the peak in early 2020, so obviously those pipelines can’t be full.” And small OD line pipe shipments are also adversely affected by lack of drilling and are therefore not necessary to build gathering fields, according to Vivian, who adds small OD lines are not full either.
A mill owner agrees that line pipe’s recovery has been weaker than that of OCTG this year, thanks to high line pipe prices, resulting from high hot-roll coil prices. Such skyrocketing prices weigh heavily on industry professionals’ minds.The Pressure of Price
The energy industry feels trepidation, thanks to the huge increase in the price of hot-roll coil. “In early August 2020 we were somewhere between $450 to $500 a ton on domestic, hot-roll coil, and today we’re just shy of $1,900 a ton,” says Bhargava, “so that’s almost a four-time increase in just the steel input cost required to make welded pipe.”
“The biggest challenge we face as a stocking distributor is, is it the right time to buy? Because pricing keeps going up, and I’ve been asking myself this question for probably the last six months, and every time, I’ve been buying because if I don’t buy it, someone else will and I’ll be stuck without pipe. It’s a seller’s market right now, so everyone along the supply chain is pretty dependent on their suppliers.”
And the sky-high cost of hot-roll steel keeps people from intentionally building inventory. “There isn’t anybody buying extra at this kind of price. They’ve got to have an order for it, or their customers are going to say, ‘We’re definitely going to use this in August or September or whenever,’” says Vivian. “It’s a different world when you have $1,750 hot-roll than when you had $750 hot-roll.”
He says the hot-roll supply and price result in a low market share for welded pipe producers. Recent months have witnessed welded producers coming “online a little bit more, with very measured increases, small increases in support of the market in terms of shipments. We expect that to continue,” he says. Vivian doesn’t believe hot-roll can maintain these pricing levels in the long term. When that happens, welded producers will be able to get back into the market.
“I think if you were to survey all the distributors and end users out there, they would say it’s a tougher job getting pipe today for their needs, but because the activity is slow, the increase in the rig counts is slow, there isn’t anybody that hasn’t been able to get pipe,” says Vivian. “This is a tough riddle because they would like to have more pipe as backup, but when you tell them how much that pipe costs, they say, ‘Well maybe I’m willing to take a little more risk and wait until I really need it.’”
Buckland believes many in the energy pipe and tube sector are wary because hot-roll coil is so expensive. “I think right now the prices are very near to peak, and there’s a lot of nervousness in the pipe and tube industry because the prices have risen so high, so fast, and it’s unprecedented,” he says. “I’ve never seen anything like this.” Energy industry professionals are building up inventory minimally because they don’t want to be holding high-priced stock.
“The pipe mills tell me there is business to be had but nobody’s buying. It’s basically a price-driven slowdown because the price gets up so high and these guys are buying a lot of steel, and they say, ‘You know, why don’t we just put this off for a few months and see what happens,’” says Buckland. He adds that as more production comes online, possibly toward the end of the year, hot-roll prices should drop, but nobody knows by how much. Environmental Challenges
To make matters more complex, the energy pipe and tube sector finds itself at odds with the Biden administration’s environmental and energy policies. Bhargava says the Biden administration has cancelled drilling on Bureau of Land Management areas. “A lot of folks who saw that writing on the wall decided to get their permits before the cancellation of the drilling on the Bureau of Land Management,” he says. “You’ll still see drilling, but no new permitting.”
Buckland criticizes the Biden administration for promoting the ideas of windmills and electric vehicles as a panacea for environmental problems. “If you start doing this on a municipal scale, it boggles the mind how you can sell this without producing the power. If you want everyone to drive around in an electric automobile, you’ve got to have power coming into your home to power your car. You have millions and millions of cars on the road, and for the power necessary just to keep them going, you’ve got to have a lot of gas-generated plants or nuclear power plants,” he says. “We’re heading into the least-efficient energy production methods known, yet it’s being sold to the public as the end-all.”
Vivian concurs. “We are putting charging stations out there that will only charge one kind of car, and the charging stations will eventually become scrap metal,” he says. “I’m not trying to throw electric vehicles under the bus; I just think that there are a lot of questions to be answered here, and the No. 1 question is, where are you going to get the power? We’re shutting down coal plants and not building replacements. That equation doesn’t work for long.”
The line pipe supplier agrees, adding that coal will still be used, even with electric vehicles. “We’re still using a massive amount of coal. You never eliminate the original source,” he says. “The overwhelming majority of the plants that make electricity are still run by coal.”
And the Biden administration and its supporters have come down hard on new and existing pipelines, according to energy pipe and tube experts. “The Biden energy policy has put new pipeline introductions – you can’t even say they’re on the back burner. They’re so far back that we can’t even see them,” says Vivian, adding that there are no announcements of any pipelines consisting of large OD line pipe.
And Vivian points out that some environmentalists are challenging established pipelines already in action. “Environmentalists are challenging that [the pipelines] weren’t approved in the right way, and it makes us sound like we’re against all these environmentalists. That’s not really the case. We would like our world to be clean and healthy, too,” he says. “But once you make a decision and you let somebody spend billions of dollars and then put a pipeline into action for three or four or five years, you can’t come back and say, ‘Oops.’”
Bhargava agrees that the Biden administration will not support new pipelines being built. “The current administration has made it pretty clear that there won’t be much support for pipeline construction,” he says. “It will still happen; I think a lot of the midstream industries are figuring out how to refocus towards ESG activity, mainly in the form of carbon capture.”
Carbon capture involves using technology to capture the carbon before it goes out into the atmosphere and instead storing it underground. “I think that’s the energy industry’s response to being more environmentally friendly,” says Bhargava. So agrees a mill owner. “There’s a lot of work in the industry on reducing the carbon footprint of fossil fuels like carbon capture,” he says. “There seems to be a lot of movement afoot there. That’s work that is feasible and realistic and can be done.” [Sidebar:]
Energy Pipe and Tube Summit
On Oct. 12, the 5th annual one-day OCTG & Line Pipe Forecasting Summit will be under way in Houston. The in-person event will feature experts such as Gary W. Hines, vice president of operations for Pipeline Research Council International. He will discuss the development of hydrogen pipelines.
The summit “will be about OCTG and line pipe, and it’ll be the only place in the world where you can get a three-year forecast of what’s going on in OCTG and line pipe in the U.S. and Canada, and we’ll have some really great speakers,” says Paul Vivian, partner of Preston Pipe Report, Ballwin, Mo. “We invite independent people to come on both OCTG and line pipe to tell you ‘this is what’s going on in this market,’ and ‘here’s where we believe the outlook is.’”
At the summit, Preston Pipe will turn the information gleaned from the experts into a multi-year OCTG and line pipe forecast designed to help those in the energy sector.
For more information and to register for the event, visit www.octgsummit.com.
Pipe and tube operators have been wary about building stocks given the high price of hot-rolled coil.
(Photo courtesy SDB Steel & Pipe)