Essential to every aspect of drilling oil and gas, pipe is much like the vertebrae of the oil and gas industry.
By Shanti Terry
If you stop and think about it, the business of pipe can be best described as the skeleton of the oil and gas industry. In the human body you need blood, muscles, tendons, skin, and many other things to form a complete being, but all those things are for naught without a skeleton in place to hold everything up. From drilling to completion to production, the pipe business is what makes the process of retrieving oil and gas possible.
But what happens to a skeleton when the rest of the body becomes unstable? And concerning oil and gas, what happens to the skeleton of the industry when the market becomes unstable and prices drop? We spoke with four pipe industry experts to find out how things are going so far this year. After speaking with them, we found that just as the human body can continue on for some time even in an unhealthy, unexercised state, so it goes in the oil and gas industry. Like bones, the pipe industry can endure for quite some time in dire circumstances, but eventually problems can present themselves and cause breakage or loss.
Current Conditions for Pipe
As market prices remain low, those in the business of pipe experience a wide variety of pros and cons. Depending on how many pots the company has cooking on the stove, one area of business can burn while another simmers nicely.
One area that seems to be burning in a hurry is new pipe sales. New pipe is a lavish expense that many companies just can’t afford if they want to drill cheaper when the market goes down. As a result, companies selling brand new pipe generally see a rapid decline in sales. Those who sell used and surplus pipe can expect, not a rapid rise, but at least a bit of stability despite market conditions. Two such companies that are experiencing this situation at the moment are DGM Supply Inc. and Petro Smith.
Michael “Rooster” McConaughey, owner of DGM Supply Inc. in Midland, Texas, explained to us that his pipe yard, where he sells and services surplus pipe, is doing just fine at the moment. “We’re doing all right,” said McConaughey. “We don’t sell high dollar pipe.”
He quipped: “I’m getting my respect back now. When everything was up, everyone was buying expensive, brand new pipe. Now companies are wanting to cut costs and they’re wanting to buy my pipe.”
At Petro Smith of Abilene, Texas, CEO and part owner Cliff Smith had similar words to share. He said that while some sectors of the company, like the tank and vessels and pipe coating have declined, the company’s used pipe sales are another story. “Pipe has been the more steady side of our business right now. The used pipe is selling as people are looking to save a little more money. Before prices dropped, they’d likely have bought new pipe. So, we’re doing fair in that business. ”
The stability of the used pipe sales is possibly a by-product of customer-to-client relational issues that arise in hard times. Loyalty can sometimes be in short supply when things go south in the market. Smith said, “Relationships go out the window. We feel like we are still providing quality products with timely service, but right now people are buying for cost, which can make it difficult. It benefits the customer, as companies are lowering prices to try to get their business.”
McConaughey showed he concurred with Smith’s opinion when he remarked, “It’s interesting how companies buy my pipe when oil’s below $65 a barrel. They wanted nothing to do with it when oil was at or over $100 a barrel, but it’s been the same quality the whole time.”
Some areas of the pipe business that are simmering nicely are NDT, inspection, reclamation, repair, and maintenance work for pipe. Companies that specialize in these services can also expect some form of stability despite market conditions.
Smith shared with us that companies who do a lot of maintenance on pipe are really helping Petro Smith along. “We can do anything to used pipe that is possible: clean, inspect, test, straighten, re-line it and more.” Smith went on to say that companies doing a lot of CO2 flooding provide Petro Smith with a good bit of maintenance that can be done on pipe. “That keeps us going right now.”
Desert NDT of ShawCor Ltd. and Tuboscope of National Oilwell Varco are two more examples of how servicing pipe can see companies through hard times.
When asked about how business was going for Desert NDT in Odessa, Texas, Kendall McClendon had only positives to share. McClendon, an Industrial Radiographer, has been with the company since 2011. “Work is going well for us,” said McClendon. “When things drop, we don’t have a dramatic decline in work like others. There’s always maintenance to be done on pipelines, gas plants, tank batteries, and refineries. Because of that, we will have work the majority of the time.”
Gary Fritz, regional sales manager at Tuboscope, is in his 35th year with the company. He said that Tuboscope is doing well, as pipe inspection is a large contributor to the company’s revenue base.
“We actually introduced pipe inspection to the oil and gas industry in the 1930s. Since that time, we’ve been the leader in inspection technology. Overall, we are doing pretty well.
“Many of our segments are maintaining a high level of activity and utilization such as pipe/rod reclamation, field production related services, machining, and corrosion products. In particular, our pipeline ZapLoc mechanical interference connection system has been very active as pipelines are still being laid throughout the Permian Basin.”
Fritz went on to say that while some Tuboscope company locations, such as the large pipe facilities in Houston, might see downturns, locations like the Permian Basin are different. “The Permian basin has such a large number of rod pump wells that will have ongoing maintenance required. For us, inspection on used material, as customers want to use existing assets, can actually pick up during this time. We can actually see some mini-booms at our reclamation facilities as people use their own materials instead of buying new.”
Competing in a Saturated Market
Even with pipe sales and servicing doing well enough, there are other pitfalls lurking around every corner. With the market drenched in companies looking for work and profits, competition becomes fierce and companies have to go hard or go home. According to our experts, there are a variety of ways to avoid falling prey to poor conditions. Their methods include maintaining the company reputation, offering more services and new technology, and, of course, downsizing.
Maintaining a Solid Reputation
According to McConaughey, a good reputation is one way to ensure a company’s success. He said that he maintains his reputation by putting out quality products on a consistent basis. “I have a reputation for sending out quality pipe. My pipe is good. I hydro it, I re-inspect it, and everything. It can get the job done well—it just doesn’t have the paperwork to go with it that is wanted on high profile wells. It’s like having a mutt that could win the Westminster Kennel Show, but it doesn’t have its pedigree papers.” McConaughey’s attention to detail and striving to put out quality products has, in his opinion, clearly benefited his company. He said that, although he’s not making as much as he has in the past, he’s still steadily bringing in profits.
Another way McConaughey preserves his reputation is by staying away from trouble. “I don’t sell much pipe to be used for horizontal wells. I don’t feel that horizontal wells have been quite figured out yet. They’re pushing the pipe too much.” He explained that horizontal wells are something he tends to avoid in order to keep away from having to play the blame game when things go wrong. “Don’t put my straight pipe in your crooked well holes. It’s straight pipe, and it wasn’t designed to do that. That creates problems and people start pointing the finger, looking for someone to blame.”
Expansion of Services and Technology
In addition to a reputation for quality products, novelty for a company’s customer base can help tremendously when trying to stand out in a market full of competitors. Betting all your success on one particular service can work, but it’s more risky and can prove to be detrimental in some cases. To avoid that situation, Tuboscope, Petro Smith, and Desert NDT offer many different things that make up their operations so customers can have their fill of options.
Fritz told us that, at Tuboscope, expansion has always been a part of the NOV company strategy, and it’s served the company well. “Since the early days, we’ve expanded laterally into other products and services that complemented our inspection technology,” said Fritz. “So, we added things like corrosion control products, pipe repair, and maintenance and machine shops. We do a lot more than just pipe.” Fritz said that when things go down, expansion allows for a cushion as the company can put more weight on the areas that are thriving in order to survive. “We begin to lean more on our production/operating side of the business. There’s nothing that you can really do on the drilling side.”
For Petro Smith, Cliff Smith discussed the company’s expansion into tank and vessel, into reclamation, and into plugging rigs as a means of branching out the services the company could offer. “We went into the tank and vessel business as a means of expansion about 15 years ago. At that time there were only between 12 and 15 people in that business around the area. Like all things in the oilfield, when things get good and someone starts making some money, everybody else notices and decided they want to try doing that same business. So our tank and vessel side of the business has gotten really congested with all the new competitors.”
While every endeavor to expand hasn’t been a complete success, Smith went on to say that others have been of benefit to Petro Smith. “We run four plugging rigs every day. We plug for the industry and then bring the equipment into our facility and refurbish it here. So that business hasn’t slowed down.”
McClendon said that Desert NDT has many things to offer customers as technological advances and geographical expansion are part of being a division of ShawCor. “We here at Desert NDT offer Radiography, ultrasonic testing, and magnetic particle testing. I do radiography the conventional way, but now we also have technology called RTR (Real Time Radiography) that was developed by ShawCor. It allows for a live stream of pipe in real time.”
The one thing most people can agree on as a survival tactic for a market decline is downsizing. Budgets, prices, and staff have to be downsized. Although unpleasant, companies know that it’s often the best strategy for making it through difficult conditions.
Budgets & Staff
Smith described the situation of downsizing as “not fun,” but Petro Smith does it anyway. “You downsize your operation and hope that you can wait it out. We’ve had to lay off employees, mainly in our tank and vessel operations. Everyone has cut their budget. I don’t know anyone that hasn’t cut their budget by at least 60 percent.”
McConaughey’s thoughts on the matter of downsizing centered more so on pricing and cooperation between companies to make things work. “Everything and everyone has to come down in order to drill at the cheaper prices, especially when they know that on some of these wells they’re going to get most of their production in the beginning, with the flush. Everybody has had to come down on their prices a bit and make adjustments.”
Pipe Market Soft Spots
After gaining such insight into the conditions of the market as they affect the pipe industry specifically, the next question to arise is how the pipe market suffers during times best described as disadvantageous. The general consensus among our experts? Drilling and casing pipe. While McConaughey said he felt that all pipe markets would be affected, the others believed that drilling and casing receive the harshest blow.
Smith: “The drill pipe is probably the one I’ve seen fall off the most. You’ve got a lot of people chasing all these rental strings on these horizontal wells. Today the operator has to rent his drill string.”
Fritz: “Drill pipe is the softest market, with casing not far behind. We have half as many rigs working today as we did just a few months ago. Consequently, as rigs are going back into the yard, drill pipe is just going into the yards. There are plenty of materials available. Without new wells being drilled, there’s no need for casing. For a period of time, tubing will still be required and it will continue to move for a period of time. Flow lines and pipelines will continue to be installed until all the wells have been connected.”
McClendon: “Casing Pipe. It’s what they use for the new rigs, and once the drilling starts going down, rigs go down, and once rigs go down there’s no need for casing. People will stop buying it. Unlike drilling pipe, casing is not reused.”
Sources and Surmises
To reflect over the conditions of the oil and gas pipe industry, both good and bad, bring us to two final questions: (1)Why do market drops keep happening, and (2)What does the future hold?
Sources: Reasons for Market Drops
Although it’s nothing to be proud of, it is natural human trait to look for something else to blame when things go wrong, to point the fingers at circumstances or individuals and shy away from taking responsibility. However, when it comes to oil and gas issues within our own borders, sometimes a true external scapegoat is nearly impossible to find. Due to that fact, it was not surprising to hear most of our experts placing the blame on internal issues within the oil and gas industry here at home.
“We shot ourselves in the foot, said McConaughey. “We’re producing too much oil. You can blame it on anyone you want, but we’ve done this to ourselves.”
While Smith did attribute some of the problem to OPEC raising their production to run prices down to keep their share of the market, his first reason offered was internally developed technology concerning frac’ing and horizontal drilling. “Horizontal drilling and frac’ing technology came into play and they had pros and cons. They basically enabled the Permian basin to be re-drilled, and they re-created a whole new environment that led to oversupply and production.”
Turning his attention to the pipe industry itself, Fritz talked about how the industry is in trouble because there’s a glut of materials on the market. “The supplies of casing, tubing, and drill pipe have built up over the last four or five years. People began building supply chains and so a lot of the yards are swelling with pipe. So, because of that, there’s an overstock for many items.”
Smith agreed with Fritz about materials being too plentiful at the moment, adding “There’s too many of everything out there in the market right now.” He added that the amount of materials available at the moment are part of the reason even companies auctioning off their equipment can’t make much. “I’ve seen three to four large auctions where drilling equipment was being sold for ten to 20 cents on the dollar of what it cost to build and put together.”
Surmising: What Lies Ahead?
Even though the future may look bleak to those unfamiliar with the oil and gas industry, those who have been along for the ride know that things will get better. The market will correct itself eventually. The hardest part for everyone comes when they have to slow down and wonder when it will happen. When asked about their forecasts for the future, all of our experts stated that they believed things would pick back up. Precisely when? Fritz and Smith shared their predictions with us.
Fritz told us that he believes lower prices may be in store this year. “I think right now, there’s a consensus that we may see some lower pricing later this year. However, prices will be expected to come back up. I think we see some stability now that’s beginning to build confidence in some of our customers. We’re seeing some projects that are going forward because they believe there’s a stable price in front of them right now. We will be watching the cost of new tubular products and inventories to identify trends. For the most part, we do not expect to see anything too dramatic.
Smith’s prediction came with a warning, as he said, “I feel like, towards then end of this year, we’ll have 70 to 80 dollar oil, which is comfortable for many companies to go back to work, but if we are not careful this will happen again. The same thing happened with the gas gluts.”
The business of pipe can have its ups and down, and it’s certainly not for the faint of heart. However, for those willing to go along for the ride, bumps and all, a career in pipe is very rewarding. According to our pipe professionals, there are many reasons to love the work.
McConaughey shared with us that he loves his work because he knows it very well, and he can help people. “I’ve been doing pipe since I was 16 years old. I know the business, and I put out a good product. I can save people money, and they can feel comfortable with it.”
Smith explained that he enjoys working with pipe because he knows it well, it helps to provide for others, and it provides opportunity. “It’s all I know, and it’s been good to me. I’ve utilized my service companies to get over into the oil and gas side of the industry and drill and produce my own wells. Through the years, I’ve always been able to do well with that. Our company also keeps a lot of people employed, and we work hard through the difficult times because they are depending on us for work.”
Over at Desert NDT, McClendon shared that his love for his work has much to do with the fact that travel is required. “I get to travel a lot. I like to go places and see everything. I’m never stuck sitting in the same spot. I constantly travel, and there aren’t supervisors just standing over you. There’s freedom.”
Fritz explained that he enjoys the way things rarely get boring, as there are always problems to be solved. “It’s the challenge of partnering with our customers to identify and solve issues with their pipe. It can be drill strings being pushed to the limit, tubing injection strings for CO2, or rod wear problems in production tubing or sucker rods. They all have unique environments that make it fun, and every day brings new challenges.”
It seems safe to say that the business of pipe, the skeleton of the industry, isn’t looking susceptible to arthritis or osteoporosis anytime soon. Those companies who have experience with the fickle tendencies of the market have prepped themselves for the best and worst of times. When the worst of times present themselves, they expand, they downsize, they adjust; doing what’s necessary to compete. The work can be challenging, but at the end of the day, those involved love it and they’re here to stay.
Shanti Terry has been a freelance writer/blogger since 2011. She can be reached via email at: firstname.lastname@example.org.