Energy Tubulars Almost There
OCTG and line pipe rebound from three-year downturn
By Myra Pinkham
on Feb 1, 2018
Recent activity in energy tubulars offers a little bit of everything. Demand for both oil country tubular goods and small diameter line pipe saw a dramatic upturn in 2017 and is likely to see further improvement this year. At the same time, the large diameter line pipe market, which is dependent upon transmission pipeline construction activity, has been struggling, with no immediate end in sight to that condition.
Hanging over all of these domestic segments is the uncertain state of the import market. The energy sector is awaiting action from President Donald Trump on the Section 232 report delivered to him last month. His determination must be made by mid-April.
While the effect of the Section 232 case remains unknown, there have been some positive signs. Luca Zanotti, vice president of Tenaris’s U.S. operations, says ongoing enforcement of existing trade laws and recent actions, including a preliminary determination indicating the Commerce Department will increase tariffs against South Korean OCTG imports, reinforce the Trump administration’s claims it will support an environment of fair competition.
Those actions are already paying some dividends for U.S. producers, with OCTG imports easing. Additionally, in mid-January the American Line Pipe Producers Association filed an antidumping trade case against the imports of welded carbon and alloy steel large diameter line pipe (16 inches in diameter and larger) from six countries – China, Canada, South Korea, India, Turkey and Greece. Speculation about such a trade case escalated last fall after it had been reported that U.S. line pipe imports reached 250,803 tons in September 2017 – more than four times the volumes seen a year earlier. Some industry observers say the line pipe trade case was filed as a defense against Section 232 quotas and/or duties being watered down, an increasingly common prediction.
Phil Tucker, vice president of strategic sourcing for Edgen Murray Corp., Baton Rouge, La., believes the line pipe trade case has a good chance of being successful, given the track record of antidumping and countervailing duty cases filed since the new administration took over. He is, however, less optimistic about the potential success of the administration’s America First efforts. “It is difficult to regulate private companies to fully use content made in America for their pipelines,” he says.
At least the glut of imports is moving into a stronger market. “After two years of deep depression, U.S. OCTG apparent consumption rebounded strongly in 2017,” notes Becky E. Hites, president of Steel-Insights LLC. Total OCTG consumption has been estimated at about 5.5 million tons in 2017, up approximately 162 percent from only 2.1 million tons in 2016, a year when very few wells were drilled.
Despite the improvement in drilling activity last year, OCTG consumption remains about 30 percent lower than it was three years earlier, says Kurt Minnich, president of Pipe Logix LLC, Tulsa, Okla. The number of rigs peaked at 1,930 in September 2014 before plummeting to just 407 by May 2016.
More recently, drilling activity topped out at 960 rigs in July 2017 before backing up to about 900 by November, according to Kim Leppold, senior analyst for Metal Bulletin Research’s tube and pipe group. She says the surge of OCTG imports in June could actually be seen as positive, given the rapid recovery of the market. “That extra supply coming in actually stabilized the market.
That stability may be short-lived, as further domestic OCTG supply is now coming online. For example, Tenaris’s new 600,000-ton seamless OCTG and line pipe mill in Bay City, Texas, started up in November and continues to ramp up its production. Also, Minnich notes, Tianjin Pipe Co. plans to bring online the second phase of its Corpus Christi, Texas, seamless mill later this year.
Still OCTG imports remain necessary, according to Jimmy Marrow, Sumitomo Corp. of Americas’ OCTG vice president. He says U.S. mill shipments are expected to be about 2.6 million tons this year, while domestic demand is expected to be more than double that.
Just how tight the OCTG market will be this year, however, depends on several factors, Minnich says, including oil prices, drilling activity and the outcome of Section 232 and whether there will be any other trade actions. While he believes that drilling activity could continue to rise in 2018, the rate of increase will be considerably slower than it had been last year. If energy prices remain in the current range, he believes the count could move from the 2017 average of 880 to about 1,010. The count was at 939 drill rigs in mid-January, according to oilfield services company Baker Hughes.
There’s no question what’s driving the energy market, says Mark Kays, senior vice president and head of OCTG at Sumitomo. “It is all about oil.” Slightly more than 80 percent of all the drilling in the United States is for oil.
That activity is supported by recent recovery of oil prices, which had swung dramatically over the past three-plus years. Christopher Plummer, managing director of Metal Strategies Inc., notes that after peaking at $106 per barrel in June 2014, the West Texas Intermediate crude oil price bottomed out at $28 per barrel in February 2016. By mid-January it had moved back up to about $63 per barrel. While there are some who fear that it could slip down from this level, it is generally believed that it will remain in the $50-$60 per barrel range it has been trading in since last fall, Leppold says.
With the moves taken during the downturn to cut costs and to increase efficiency – including re-evaluating operations, laying off workers and selling off properties – many exploration and production companies are now able to turn a profit at lower levels, particularly the larger, more stable enterprises. These producers can be profitable at not just current oil prices, but even when the price dips as low as $40 to $45 per barrel.
Also, while natural gas prices remain low – sitting at just slightly more than $300 per MMBtu as of mid-January – they have potential to move up given recent frigid weather and the potential of increased demand as more liquefied natural gas export terminals come online. The new LNG terminals, plus increased demand to transport natural gas to Mexico as the country seeks to get electricity to a larger percent of its population, will have a positive impact on line pipe demand, says Paul Vivian, a partner with the Preston Pipe Report.
On the other hand, some recent administration actions are not likely to do much in the short term, Vivian says. The opening of drilling in the Arctic National Wildlife Reserve in Alaska as provided in the recently passed tax reform bill, the executive action allowing more drilling offshore or the shrinking of certain parklands or monuments are not likely to have much of an effect, as drilling there would not be profitable at current prices. “I don’t believe companies will be rushing in to drill there,” he says.
Though the prices have not reached the 2014 highs, the fact that there’s been some moderation has been a positive for the industry, Vivian says. “These more consistent prices have created an opportunity for companies to be more active in the market.”
Plummer says there has been more to the recent OCTG recovery than simple price gains. The U.S. became a swing producer when OPEC nations followed through on the promised 5 percent oil production cutback. Also, with the increased use of pad drilling, greater volumes of OCTG are being consumed per well. He says about 70 percent of drilling is being done at pad sites, each of which tend to include five to six wells.
Overall, line pipe saw a nice recovery last year with apparent consumption moving to about 3.6 million tons, up 29 percent from 2.8 million tons in 2016, Hites says. But much of that was met by imports with domestic shipments only increasing about 20 percent to 1.5 million tons, while imports increased more than 200 percent to 2.3 million tons. The market dynamics, however, were very different for small diameter and large diameter pipe.
The same trends affecting OCTG are in play for small diameter line pipe (24-inch and below line pipe) which is generally used for oil and natural gas gathering after drilling. Plummer says the U.S. consumption of small diameter line pipe increased 31 percent through October. But much of that increase came from imports, which increased 61 percent through the first 10 months. U.S. shipments were only up 3 percent.
Greg Baker, president of Edgen Murray’s Americas division, expects quite a lot of new pipe will be produced domestically this year. That will include at least 1 million tons of 20- to 24-inch diameter ERW pipe to be used to bring oil to refineries. Leppold also believes pipe that size will see some increased demand in 2018, largely to transport natural gas to Mexico and to LNG export terminals.
In contrast, Vivian expects consumption of large diameter line pipe will only be up “a smidgen” this year, as projects struggle to go through the approval process. Plummer agrees, forecasting a 0.7 percent increase following a 0.4 percent decline in 2017.
Market observers say that is partly because of the nature of the process, partly because of public protest and partly because the agency responsible for such approvals – the Federal Energy Regulatory Commission – wasn’t able to achieve a quorum. Recent Trump administration executive orders, however, are expected to at least make the regulatory process a little easier.
Most of this consumption is expected to be for maintenance projects, as well as some smaller pipelines. Edgen Murray’s Tucker says this comes as numerous pipeline projects approved several years ago are now largely completed and very few large projects are expected to begin this year. There will likely be some projects coming online in 2019 and beyond, including the Keystone XL pipeline.
While that project is an oil pipeline, Leppold says most other projects – many in the Northeast and several others in Louisiana and Texas – will be transporting natural gas.
There isn’t necessarily a one-to-one correlation between the construction of pipeline projects and large diameter line pipe production.
Leppold says in many cases, the pipe for larger, planned pipelines have already been produced. “That is not just the case for the Keystone XL. For a number of the planned pipelines, pipe was made when the mills were slow.”