Insiders expect drill tube, line pipe mart to reenergize
By Tom Stundza -- Purchasing, 3/4/2004 2:00:00 AM
Winter natural gas shortages and elevated crude oil prices have raised North American drilling activity, which should boost purchasing this year of line pipe and oil country tubular goods (octg). "The U.S. and Canadian oil patches are fairly active; that is, going at a good pace," says David Britten, vice president and general manager of tubular products at Ipsco, Lisle, Ill. "There are a lot of folks out there who are doing a lot of work. And the prognosis going forward from our customers is pretty positive." In fact, a recent survey of independent drill rig operators indicates 2004 exploration and production activities will exceed 2003 levels by nearly 25%.
With energy prices rising almost monthly, oil and natural gas drilling increased a healthy 24% in 2003, evidenced by an average annual U.S. drill rig count of 1,032 compared to 830 in 2002. There was also an improvement in Canadian drilling, where the average drill rig count rose to 372 last year from 266 in 2002. As a result, regional OCTG consumption increased; in fact, U.S. shipments of drill pipe, tubing and casing used in on-land and in-water rotary drilling rigs increased 18% last year to 2.66 million tons.
Overall, octg prices increased slightly in the first half and then stayed pretty flat for the rest of 2003. For the year all told, octg pricing rose just 2%, according to Pipe Logix, a Santa Fe, N.M., information services firm, as the marketplace rejected a series of attempted hikes by various producers. That's probably because the majority of last year's oilfield activity was shallow drilling, which uses cheaper electric-resistance-welded, or ERW, grades, instead of deep-well drilling, which requires more expensive seamless grades. "The industry's decreases in both product sales and average selling prices were, in large part, due to a decrease in shipments of higher-priced pipe products," says Jim Declusin, president of Oregon Steel Mills in Portland.
Market prices for carbon seamless tubing began 2003 at $875/ton and ended the year at $885; carbon ERW tubing went from $771 to $799; alloy seamless tubing, from $1,067 to $1,081, and alloy ERW tubing, from $965 to $1,008. Meanwhile, carbon ERW casing went from $595/ton at the year's start to $618 at the end while carbon seamless casing dropped from $732 to $719; alloy ERW casing, from $758 to $775, and alloy seamless casing, from $797 to $791.
"We now expect a projected pickup in domestic drilling to generate increased demand for our oilfield products throughout 2004," says Rhys J. Best, chief executive of producer Lone Star Technologies in Dallas. Danny McNease, chief executive of Rowan Companies in Houston, agrees: "Our drilling operations finished 2003 strongly and we are optimistic that 2004 will continue this trend. Our optimism is supported by recent reports of declining domestic natural gas production and increased estimates of deep-shelf gas reserves. With continuing high oil and natural gas prices, drilling activity should increase."
In contrast, the line pipe business has been soft lately. This sector is dependent on the existence of large pipeline projects, which means the large diameter pipe business tends to experience periods of high activity and periods where there are no projects requiring large diameter pipe. Since 2001, there have been fewer and smaller U.S. projects requiring oil or gas transmission pipe. Consequently, U.S. use dropped from 2.41 million tons in 2001 to 1.66 million tons in 2003. Meantime, large pipeline activity in western Canada "rebounded nicely in 2003 and an order for 150,000 tons of large-diameter pipe ensures production at Ipsco's spiral mill through the first half of 2004," says David Sutherland, chief executive of the U.S.-Canadian pipe maker.
Because of all the market optimism, and the recent explosion in sheet steel prices, "the octg market should look for a dramatic price upswing this year," suggests Best at Lone Star Technologies. In fact, "tubular producers are making an effort to pass on significant increases in steel costs by raising prices," says analyst John Tasdemir at Raymond James & Associates in St. Petersburg, Fla.
"Surcharges have been imposed by steel producers who say unprecedented increases in the cost of raw materials (scrap, coke, iron ore, freight) can no longer be absorbed through normal price changes," he adds. "Given the strength in energy drilling markets, we believe it is likely that these costs will ultimately be passed through. However, it is possible that octg price increases could lag the increases in steel costs."
Tasdemir says that "while the primary driver of the recent rebound in drilling activity has been higher oil and gas prices, and while we believe that the supply/demand fundamentals for both oil and U.S. natural gas suggest a sustained period of higher prices, producers and distributors have to remember that oil and natural gas tend to be very volatile commodities." That's why "a sustained downturn in either U.S. natural gas prices or worldwide oil prices would undoubtedly lead to lower levels of oilfield activity," he says, putting a needle in the octg shipments balloon.
Line pipe is a whole other arena
As expected, demand for line pipe dropped 15-20% in 2003. And, while early 2004 line pipe sales continue to be slow, insiders insist demand may be near a turning point. The optimistic forecasts are bolstered by firmer natural gas prices and possible shortages of natural gas in storage, the aging pipeline infrastructure, and hopes that large transmission companies will soon regain their financial health.
"Line pipe demand had been going strong a few years ago, but the collapse of Enron and other energy transmission companies sucked the wind right out of the market," says Donald R. McNeeley, chief operating officer of Chicago Tube and Iron Co. Doug Yadon, publisher of the Preston Pipe Report, Galveston, Texas, agrees that after Enron's failure, energy firms found themselves under scrutiny by major financial houses. With their shares downgraded because of high debt levels, the energy companies concentrated on staving off bankruptcy, and had little capital to invest in pipeline projects.
The energy market scandals could not have come at a worse time, McNeeley says, noting that capital for energy projects began drying up just as the U.S. manufacturing sector began to plummet in 2000. So, along with the recessionary decline in oil and gas prices, the decade's drill rig count fell, causing the line pipe business to decline substantially from an average annual use of 2.14 million tons at peak in 1998-99 to just 1.66 million tons in 2003. Domestic steel plate shipments to the large-diameter line pipe market dropped from 688,000 tons in 1999 to about 200,000 tons in 2000 and have remained at that depressed level ever since.
In recent months, though, line pipe optimists such as Gregg Eisenberg, chief executive officer of Maverick Tube in St. Louis, have become more vocal in their views of imminent recovery. "There should be a distinct improvement in the 2004 line pipe business, and a bigger increase in 2005," he says, assuming the prices of oil and gas stay high and drilling improves.
The Interstate Natural Gas Association of America projects that an additional 74,000 miles of natural gas transmission lines and a $68 billion investment in pipelines and storage capacity will soon be needed in the U.S. and Canada as domestic natural gas consumption is expected to rise from 22 trillion cubic feet in 2003 to 30 trillion in 2015. So, "some backburner projects are moving to the front as the energy industry is starting to realize we need more pipelines to transport natural gas and oil," according to a spokesman for Berg Steel Pipe Corp. in Houston. He cites Dominion Transmission's Greenbrier project in West Virginia; Columbia Gas Transmission's Millennium pipeline, to be laid from Dawn, Ontario, to New York City; and El Paso Energy Corp.'s 380-mile Cheyenne Plains pipeline in the Rocky Mountains. There is the MidAmerican Energy Holdings' proposed 745-mile, $6.3 billion pipeline to transport Alaskan natural gas from the North Slope area near Prudhoe Bay southward to the Alaska-Yukon border near Beaver Creek. And then there is the "mother of all pipeline projects" the proposed $20 billion, 3,400-mile-long natural gas line being considered by oil companies that would run parallel with the trans-Alaska oil pipeline from Prudhoe Bay to Fairbanks, Alaska, and then veer off to follow the Alaska Highway down through Alberta, Canada, to end in Chicago. The administration of Alaskan Gov. Frank Murkowski is working to attract independent oil and gas companies to invest in the project.
"We need a lot more pipeline systems, both new and in replacement of older equipment," agrees Yadon of the Preston Pipe Report. "A lot of pipelines in service are 50 years old." The Pipeline Safety Act of 2002 mandates that all interstate and intrastate energy pipelines must be inspected for safety and all unsafe pipe replaced. Some line pipe market insiders reckon this law could promote significant growth in sales as early as the first half of this year.
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