Distributors report that the steel tubing bought by the oil and gas industry is one of the few truly busy steel markets this year. Reason: Record crude-oil prices are encouraging energy firms to probe deeper for reserves, increasing demand for oil country tubular goods, the steel tubing and casing products known in the market simply as OCTG. And there's no worry among suppliers that a recessionary economy or inflated steel prices will depress OCTG demand.

Crude oil and natural gas drill rigs are operating in the U.S. at the highest levels since 1985, guaranteeing another strong purchasing year. Also strong are purchases of line pipe, boosted by pipeline transmission projects in areas as far-flung as Texas, Florida, Colorado, Wyoming, northern Mexico and western Canada. T. Rowe Price analysts have written that global demand is likely to be quite strong over the coming years for the specialized, high-end pipe and tube for the oil-and-gas exploration and delivery industries.

Last year, buyers sourced 4.7 million tons of oil country tubulars but early forecasts suggest a sturdy 6.5% increase to a record 5 million tons in 2008. Even hotter is the demand for line pipe, which is seen rising dramatically to 4.6 million tons. So far this year, U.S. rigs in operation remain around the 2007 average of 1,768, which has led global supplier Tenaris (owner of Maverick Tube of St. Louis) to forecast "the maintenance of current levels of drilling activity in North America."

Major domestic supplier U.S. Steel also says first-quarter "shipments are expected to remain in line with the strong fourth-quarter activity." U.S. Steel became North America's largest maker of steel pipe for oil and gas drilling with the $2.1 billion acquisition of Lone Star Technologies last spring, increasing OCTG capacity to 2.8 million annual tons. However, most market analysts see the rig count increasing in the second half of the year, pushing tubular shipments even higher.

Drilling activities depend primarily on the demand for natural gas and oil, current prices and the expectation of future prices of these energy commodities. And just now, spot sales and future market prices of crude oil, downstream petroleum products and natural gas are setting records. A Merrill Lynch market review says "demand seems to be strong currently and the outlook for 2008, the best it has been for well over a year."

Natural gas accounts for about 80% of U.S. drilling activity and natural gas prices on the futures markets are approaching $10 per thousand cubic feet for springtime deliveries. Atop that, crude oil prices are around $100-plus a barrel already this year, and that price could very well expand offshore drilling in the Gulf of Mexico.

Demand for OCTG and line pipe depends on such factors as the number of oil and natural gas wells being drilled, completed and re-worked; the depth and drilling conditions of these wells and the drilling techniques utilized. Welded or seam-annealed and seamless pipe, tubing and casing comes in sizes from 1–16 inches and is used in all kinds of oilfield environments, from relatively shallow wells to deep, hostile offshore environments.

Purchasing is robust for all those energy-related tubular steel products; in fact, according to management of several OCTG and line-pipe makers, the order backlog for 2008 is firmer than in 2007. That's probably why leadtimes have increased by 30% over the past six months, according to Purchasingdata.com.

Demand for premium-grade tubing "looks set to continue rising over the next several years as global exploration and production activity seems set to continue to move towards less conventional drilling," says the Merrill Lynch report. Also, purchasing of large-diameter line pipe is especially strong because of several new transmission pipelines going from western Canada into the U.S. from exploration and refining activity at the three oil sands projects in northern Alberta.

There is also a push to move natural gas from Wyoming and the Rocky Mountains to the Midwest and eastern U.S. One such large pipeline project, the 1,663-mile Rocky Mountain Express, is being undertaken by Kinder Morgan Energy Partners, Sempra Energy and ConocoPhillips.

Despite the uncertain economic outlook in the U.S., the Merrill Lynch analysts continue to expect oil prices to remain at strong levels, which they believe should contribute to continued strong demand for OCTG pipes. While recessions can have a noticeable effect on oil demand, according to Francisco Blanch, the brokerage's commodities analyst, "this time around, any decline in oil demand should be moderate. In any event, the level of investment in oil exploration and development projects is likely to remain strong for the foreseeable future." Note that there has been a significant amount of PCT and line-pipe demand going toward maintenance and repair projects.

However, "over the past few months there has been a rapid increase in the cost of steel sheet and plate, creating a challenge to pass on these increases to customers," says Brian W. Dunham, CEO of welded steel pipe maker Northwest Pipe Co. in Portland, Ore. This is more than idle chatter since seamless OCTG already retails for about $1,500/ton, plus a $150 surcharge from several producers to offset raw materials and freight costs.

In a regulatory filing, Dunham says he believes "the market dynamics are strong enough to absorb expected tubular increases" and points out that pipe and tube price increases on various grades were implemented by eight North American producers on December shipments—with further increases being implemented this quarter.

However, some analysts believe that the dramatic run-up in sheet and plate prices this year eventually will become a cost problem for pipe and tube mills. "Higher input costs, combined with pipe producers' inability to achieve the price increases they are hoping for, should eventually lead to a margin squeeze in 2008," Societe Générale analysts write in a note to clients. And there have been some candid conversations lately between mill executives and analysts acknowledging that any inability to raise prices to cover the cost of steel and raw materials on products for the energy industry "would be difficult."

There appears to be more supply than needed for OCTG, says the Merrill Lynch analysis. The commentary continues: "The substantial growth in pipe making capacity in China and India has moved the world market from tightness to oversupply. Sometimes the price differential between established mills and new producers is so significant that oil and gas companies simply have no option other than to try out the new suppliers," one mill comments. This is less the case in high-end products, but in the mainstream grades a major operator can save a lot of money, the mill says.

So, even in 2007 when imports dropped overall by 27%, Chinese-made OCTG shipments increased. "In North America, low-cost Chinese players, which sell at a 25% discount to traditional players, now feed around 30% of the energy pipe consumption," says the Societe Générale report.

To counter this trend in the future, domestic mills have been expanding capacity, especially of spiral-weld pipe. A new factory is being built in Pittsburg, Calif., where steel sheet will be rolled and welded into corrosion-resistant spiral-weld pipe for energy pipelines. The new $136 million factory will be operated by United Spiral Pipe, a three-way joint venture involving United States Steel Corp. and two South Korean steel-makers, POSCO and SeAH. The new plant is expected to be ready for operation by about April 2009, located adjacent to the USS Posco Industries plant that manufactures sheet metal products. U.S. Steel CEO John Surma says the surge in the construction of natural gas and oil transmission lines had boosted demand for these huge steel pipes that can be up to 80 feet long, 64 inches in diameter and with an outer skin up to an inch thick and weighing 25 tons.

Meanwhile, the Lisle, Ill.-based IPSCO division of SSAB is commissioning a two-thirds capacity upgrade at its Regina, Saskatchewan, spiral-weld mill, which will have an annual capability of 500,000 tons. IPSCO—which earlier absorbed NS Group of Kentucky—already has opened a $40 million plant to produce heat-treated OCTG in 2 3/8 inches through 5½ inches diameters at the firm's Blytheville pipe mill in Arkansas. The firm now has boosted heat-treated OCTG production by 100,000 tons/year to 575,000 tons.

In the second half of this year, Berg Spiral Pipe Corp. will open in Mobile, Ala., says Dave Delie, CEO of Panama City, Fla.-based Berg Steel Pipe, the parent. The new 180,000 ton/year plant, will produce large-diameter steel pipe, known as spiral pipe, used by the oil and gas industry. U.S. Steel's Lone Star Technologies unit in Texas has formed a joint venture with India's Welspun group to construct a mill that will produce 300,000 tons/year.

And, PSL-NA, a joint venture of India's PSL Ltd. and local business partners in Hancock County, Miss., is building a 300,000 ton/year spiral-weld pipe mill near Bay St. Louis in the Port Bienville Industrial Park. The production ramp-up is scheduled for the end of 2008. In second-quarter 2009, the Stupp Corp. division of St. Louis-based Stupp Brothers is planning to start producing pipe up to 60 inches in diameter at its new 150,000- to 180,000-ton spiral-weld pipe mill in Baton Rouge, La.