Market fluctuations are driving OCTG (Oil Country Tubular Goods) companies to diversify.
By Paul Wiseman
The Oil Patch roller coaster is real for the entire sector; but for companies that rely on steel as a raw material, global politics adds a whole new layer of variables. Such is the case for oil country tubular goods (OCTG) businesses like Eagle Pipe and Tenaris.
For Houston-based Eagle Pipe, LLC, the decision to expand from OCTGs to midstream pipeline products seemed logical; pipelines are basically just much bigger versions of what they were already supplying, said company co-founder and CEO Brandon Dewan.
“What we analyzed is that in the 2014 going into 2015 time frame, when the market started to soften, we knew that the rig count was about to fall hard,” he said. Looking to evolve the company into a position of greater strength, they considered entry into additional, related markets to survive that downturn and future iterations that were sure to come.
Right before that bust, he noted, the U.S. rig count numbered 1,900. By mid-2017 the number had cliff-dived to just over 400. The upstream demand for pipe had evaporated.
They needed a market that would allow Eagle to stay profitable and to prepare them for the inevitable price rebound.
So, “The midstream was where we came,” he said. “Although the downturn came, we knew that there was going to have to be a large infrastructure buildout to accommodate all those wells and all the activity that” had preceded the downturn.
Smoothing the process was the fact that several upstream clients were also in the midstream sector. “We started leveraging our upstream clients who also bought midstream material,” he recalled. “They saw it as a win because we created essentially a one-stop shop so they could get all their needs from one place.”
Because many of the same mills that make OCTGs also make midstream pipe, Eagle was able to leverage their volume in one area to create good pricing in the other. “It was a good design—it’s really worked out well,” Dewan said.
It continues to work out well. Permian drilling activity is slowing somewhat in 2019 due to a shortage of pipeline capacity. So the very issue that is reducing the need for OCTGs is creating a huge demand for midstream pipe. With significant midstream projects scheduled out as far as 2022 and beyond, that demand could continue well after the expected rise in drilling activity.
“With the confinement, right now, of takeaway capacity, we’ve seen that halt growth in the region—so until that is resolved, that’s going to [continue to] be the case. It’s one thing to be able to drill a whole bunch of wells and to produce a lot, but if you can’t get it out to market, then that’s actually a problem.”
Even with the offtake constraints, the Permian remains the biggest market for Eagle Pipe. “Everything else is second to the Permian,” he said. “The Permian is definitely the predominant force in the domestic oil and gas business.” At this time, the Permian accounts for 41 percent of the company’s business.
The wells that are still being drilled in the Permian and elsewhere involve longer and longer laterals, which has created a need for stronger connectors. “We’ve seen some high-torque connections, being able to rotate the casing as you’re drilling to get it to the bottom.” These are some of the new technologies entering the pipe sector.
Lurking in the background are geopolitical forces involving oil and gas exports, but for pipe and other steel-dependent markets, Section 232 steel tariffs are another concern—but less so for Eagle than for some others.
“We’re predominantly a domestic supply company,” Dewan reported. “But at the end of the day, yes, the tariffs have swayed that percentage even further over to the domestic side.” This is, after all, one of the goals of the tariff.
“When you consider that a place like South Korea, for example, that has the capacity to bring in about 1.6 million tons—which they did in 2016—is only able to bring in 508,000 tons under the current quota—that’s a major difference.”
Some industry experts have voiced concern that there are certain pipe products that are easier to get from overseas. Dewan says that’s not an issue for Eagle because of their preference for domestic pipe, but it has affected the larger market to the point that prices have gone up even for domestic supplies. Historically, the import-export ratio has hovered around 50-50, but he expects that to tilt toward domestic pipe as 2019 progresses.
For products that are indeed harder to find in domestic markets, exclusions have been granted. “Some of the materials, like chrome, for example—for chrome tubing, that is not really produced in the United States—they’re getting exclusions granted,” he said. So far, about 5,000 exclusions have been granted, with as many as 20,000 more having been submitted for consideration.
Barring any changes in Section 232 and assuming a rise in production with the addition of takeaway capacity in the Permian, Dewan expects pipe prices to slowly rise through the rest of 2019. “We think ’19 is going to be a relatively flat year overall, where we saw two big spikes in 2017-18. For example, in 2017 the market price increased 34 percent, and in ’18 it increased 19 percent.
“In ’17, it increased that quickly and that much because the rig count being added back into the market was happening very quickly after the downturn,” so the demand for new product was greater than manufacturing could keep up with, he said. The price jump in 2018 revolved around the import restrictions in Section 232 tariffs.
A sixty-foot section of pipe is lowered into a trench during construction of the Gulf Coast Project pipeline in Prague, Oklahoma, U.S., on Monday, March 11, 2013. The Gulf Coast Project, a 485-mile crude oil pipeline being constructed by TransCanada Corp., is part of the Keystone XL Pipeline Project and will run from Cushing, Oklahoma to Nederland, Texas. Photographer: Daniel Acker/Bloomberg via Getty Images
Tenaris is an international supplier of steel tubes such as pipe, sucker rods, and other supplies. Their U.S. headquarters is in Houston. They opened a Midland pipe yard in 2016.
In an email interview, Tenaris’s U.S. President, Luca Zanotti, said the Permian is their strongest area of U.S. activity in spite of the pipeline glut. “When you consider its sheer size and the active number of participants, the Permian represents a large portion of our business. While there has been some softening of activity, the shale basin continues to be resilient and has not decreased, proportionally, when compared to other plays such as the Mid-Con and Rockies.”
The strength of existing production in the Permian gives Tenaris a big opportunity for sales of sucker rods and other non-tubulars. “The volume of wells operating in the basin presents an excellent opportunity for our sucker rods with a high number of those wells in the life cycle stage for this product. When considering new drills and DUCs, as well as the opening of additional pipeline capacity, it will create the conditions conducive to future growth in this product segment,” Zanotti said.
From the establishment of the Midland yard in 2016, the company has expanded its equipment and infrastructure on-site. This includes the addition of a “dedicated industrial service center for sucker rods as well as the integration of coiled tubing.”
As an international company with domestic plants, including a seamless facility in Bay City, Texas, Tenaris is in a unique situation regarding tariffs. All their welded production uses domestic steel. But some of their precursor products—steel billets—are imported and do come under the tariff guidelines.
Zanotti explained, “In March, the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) granted Tenaris a partial exclusion for Tenaris-produced steel billets. The steel bars used for the production of our seamless pipes require tight specifications, and in the domestic market today, there is insufficient capacity for these steel billets. As one of the largest domestic players in the tubular space, Tenaris supports local industry. Where/when possible, and considering our product quality requirements, we will work with domestic producers to establish a local source of supply.”
Like most companies, Tenaris is using technology to become more efficient. Their Pipe Tracer technology allows for tracking each pipe through the entire process—and once at a yard, a customer can scan the barcode and determine the characteristics like OD, length, and other information.
Tenaris sees a future of growth, not just in the Permian but in the United States as a whole, according to Zanotti. “The United States is redefining its role in the energy industry—a top producer among Saudi and Russia. It also remains the top market for OCTG.
“There is an enormous amount of growth potential in the States but also an equal amount of uncertainty that will guide how the second half of 2019 will look like in terms of drilling activity. Tenaris has reach in the market and flexibility in our industrial and service operations, and is taking important steps to further solidify our long-term strategy in the United States.”
Permian Enterprises
For companies that coat pipe to protect it from corrosion and abrasion, the pipeline issues have not been an issue. Chris Holcomb, western region sales representative, says many of their clients are drilling to maintain lease agreements.
“If it got to the point where they couldn’t move the oil along, they would have to shut them in, but I don’t see that happening,” Holcomb said.
What is definitely moving along is the development of new coatings to accommodate new scenarios in drilling and production, especially with long laterals in shale plays. “There are so many different well conditions out there, that more and more options have become available over the last 15 years or so, to get companies something that’s more specific to their issues.”
Abrasion is one example. “Abrasion is any kind of mechanical wear situation—like sand and things that rub against the sides of the tubing under pressure of the fluids moving through them. If you have a high abrasion rate then there are options of a tougher coating or a liner,” Holcomb said.
There are also varying coatings for H2S, each designed for a certain concentration of this very corrosive gas.
Another factor in choosing a coating or a liner is the volume of liquid being pumped through the pipe to be protected. “The coatings that we put on there are very thin,” he said. Thin coatings do not reduce the inside diameter as much as liners do, so coatings allow a higher flow rate. “Thermoplastic coatings are 10-15 thousandths (of an inch) thick, whereas liners are 50 thousandths.” In situations where flow rates are high but pipe sizes are restricted, every tenth of an inch matters, and the choice of pipe protection becomes important down to those minute measurements.
Longer laterals also change the scenario. In many cases the pipe strong enough to extend out through mile-long laterals may have the drawback of being more subject to corrosion. Coating decisions must weigh all variables in these situations as well—and there are more options now available to solve these issues.
Conclusion
With the United States now importing and exporting in levels that are more and more balanced, geopolitical forces and world markets make planning a greater challenge in any basin, including the Permian. This is true for suppliers and service companies as well as for producers.
It is no wonder, then, that OCTG companies are seeking various ways to expand their markets and reduce their risk to any one area.
Paul Wiseman is a freelance writer in Midland.