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International drilling drives OCTG demand

Keywords: Tags  OCTG market, drill rig count, shale plays, offshore drilling, Charles Bradford, Michael Cowden


A slow and steady climb in the international drill rig count is driving consumption of oil country tubular goods (OCTG), especially for premium grades used in offshore drilling.

Some OCTG experts are even predicting a possible surge in drilling activity abroad thanks to deep offshore plays and the development of shale gas reserves. Drilling is picking up in places as diverse as Poland and Argentina. China is looking to get in on the action, too, with a story from China’s official Xinhua News Agency boasting that the country has as much shale gas as the United States, albeit “largely undeveloped”—at least for now.

Still, the international scene continues to be driven primarily by high oil prices and offshore plays, OCTG experts said. 

The international rig count stood at 1,180 in December, up 62 rigs (5.5 percent) from a year earlier, according to data from Houston-based oilfield services firm Baker Hughes Inc., while the U.S. rig count ended the year at 2,007, up 313 rigs (18.5 percent) from December 2010. But don’t let the smaller gain on the international front fool you. OCTG demand may be booming on plays such as the Bakken shale in the United States, but energy tubulars also are being gobbled up at a rapid clip abroad.

“Certainly there are some areas that have the potential to explode,” said Kurt Minnich, editor of Tulsa, Okla.-based Pipe Logix, pegging the value of the worldwide OCTG market at roughly $20 billion.

Poland, for example, has typically seen only a handful of wells drilled but could see that number jump to triple digits, most devoted to recovering shale gas, Minnich said. In Argentina, too, onshore shale drilling has the potential to surge thanks to a government that has demonstrated support for shale drilling and big investments from energy firms that think the nation’s shale reserves hold great potential. There were 11 drill rigs running in Poland in December, all of them onshore, according to Baker Hughes, while Argentina had 64 rigs—also all onshore—in the same period. 

In contrast, Brazil had only 37 land rigs running in December but 49 offshore rigs. Although far fewer rigs may be running offshore in Brazil than on shale plays in the United States, Brazil’s offshore rigs are far more expensive, drilling deeper and using more OCTG than an onshore rig in the United States or even a shallow rig in the Gulf of Mexico, Minnich said. A shallow well in the Gulf of Mexico may cost only a few million dollars, while an offshore well in Brazil costs an average of $22 million and can go as high as $100 million for “subsalt” plays.

Energy firms in Brazil are looking to recover energy reserves from below a level of salt deep underwater and beneath the seafloor—sometimes more than 10,000 feet, Minnich said. The layer of salt makes seismic studies of such plays difficult, but the potential for premium OCTG suppliers is great, given that large-diameter OCTG with high-alloy content, thick walls and premium connections are necessary to operate in such high pressures and corrosive environments, he said.

The push to explore deep offshore in Brazil also has validated Vallourec & Sumitomo Tubos do Brasil Ltda., a new $1.6-billion joint venture between France’s Vallourec SA and Japan’s Sumitomo Metals Industries Ltd. (AMM, Nov. 10, 2011).

But Minnich cautioned against an overly bullish outlook for 2012, especially given uncertainty about the extent of the sovereign debt crisis in Europe and the potential of a “hard landing” for the Chinese economy, as well as the uncertainty associated with the U.S. presidential election. “Any one of those things has the potential to pull the rug out from under us,” he said.

Paul Vivian, principal of tubular market research company Preston Publishing Co., Ballwin, Mo., said South America, the Middle East and North Africa were probably some of the hottest areas for OCTG outside of the United States. “We’re seeing not only drilling activity but they’re also building some new mills,” he said. 

ArcelorMittal signed a joint-venture agreement in 2007 with Bin Jarallah Group to build a seamless tube mill in Jubail, Saudi Arabia. The mill is expected to have a capacity of 600,000 tons per year, with two-thirds of that production devoted to OCTG and the rest for line pipe, according to the steelmaker’s Web site.

Unlike in the U.S. market, however, much business on the international OCTG scene is conducted directly between end users and mills, Vivian said. Most U.S. mills don’t see much demand from the tepid export market, due in large part to top OCTG mills’ global presence. That means they can service North America largely from their North American production assets and service customers in other areas from mills closer to them, he said.

Export data from the U.S. Commerce Department suggest as much. The United States exported just 34,107 tonnes of OCTG in October 2011. That means that OCTG, one of the top finished steel product imports in the United States by tonnage, is also one the country’s smallest steel product exports. And of the OCTG the United States did export in October, 20,115 tonnes—or nearly 59 percent—were shipped to Canada and another 1,981 tonnes to Mexico.

“Internationally, we haven’t seen anywhere near the increase—the explosion, really—which is what happened in the U.S. (with OCTG demand),” Vivian said.

For decades, the United States has been worried about energy reserves within reach of its national boundaries, Vivian said. “That has now been turned upside down because of the shales. And not long ago, we were talking about how there was a limit on the amount of oil in the world. We’re not hearing that now, either.”

Vivian reasoned that shale drilling would eventually pick up abroad as well, even in countries such as France that currently don’t allow it. Exactly when is uncertain, and the pace likely will be slower and the industry more regulated than it is in the United States, he predicted.

Still, Vivian said he retains a positive outlook for the international rig count, although he suggested the increase would be driven in the near term by consistent or ramped-up activity in the Middle East, North Africa and South America largely as a result of consistently high oil prices, which gives energy firms the confidence they need to invest in big drilling programs.

It also doesn’t hurt that the international rig count is more heavily weighted to offshore than the U.S. rig count. Offshore wells probably use approximately four to five times as much OCTG as land rigs, Vivian said, and offshore rigs also use a “monstrous” amount of tubing just to run electrical or monitoring equipment for the air cylinders used to balance the rigs.

In fact, international OCTG demand roughly rivals that of the United States or is perhaps slightly more, Vivian said. True, there may be more rigs running in the United States than are running abroad, but international rigs generally use more tons of OCTG per rig, he said.

Charles Bradford, president of Bradford Research Inc., New York, said that China has the potential to become an important player on the shale gas scene. “They think they have more shale gas than we have,” Bradford said, noting that Chinese firms also have invested heavily in shale plays in the United States. “They are trying to get the technological expertise (on shale gas drilling) because they believe they have a lot (of shale gas).”

Bradford also pointed out that while some OCTG mills in China make “questionable” product, others are entirely capable of making “excellent material” and China also has made big investments in “high-end” seamless pipe mills.

Additionally, it’s also in China’s interest to develop its shale gas reserves in order to reduce the country’s dependence on imported oil as well as on domestically produced coal, which emits more pollution than natural gas, Bradford said. “What better way to (reduce pollution) than develop shale gas,” he added, although he questioned how long it might take China to ramp up to U.S. shale gas production levels.


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