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Fuel rewards

Feb 17, 2017 | 01:26 PM | David Roknic

Tags  Energy, steel, oil, gas, wind, solar, OCTG, tubulars line pipe

With some headwinds to begin a new year and hopes for industry recovery, prospects remain quietly rosy for natural gas, wind and solar power expansion, and pipemakers face another potential sales opportunities as large-scale municipal water projects also begin a renewed ramp up.

A variety of sectors in the energy industry are all showing optimistic outlooks for near-term growth, providing opportunities that could help power steel producers.

Although President Trump’s executive actions on stalled oil pipelines and rules for their manufacture have captured headlines, prospects remain quietly rosy for natural gas, wind and solar power expansion. And, pipemakers face another potential sales opportunities as large-scale municipal water projects ramp up in the Southwest.

The U.S. Energy Information Administration’s (EIA’s) short-term energy outlook released Feb. 7 forecasts 2017 U.S. crude oil production to grow to 9 million barrels per day, up from an estimated 8.9 million in 2016, and reaching 9.5 million barrels per day in 2018. The EIA forecasts U.S. dry natural gas production to average 73.7 billion cubic feet per day in 2017, up 1.3 billion cubic feet per day from the 2016 level.

Wind energy capacity at the end of 2016 was 81 gigawatts, the EIA report said, predicting wind capacity to reach 94 gigawatts by the end of 2018.

On the solar generation front, the EIA’s short-term outlook forecasts a 36.7-percent production increase to 134,000 megawatt hours per day in 2017, climbing to 157,000 megawatts per day in 2018.

“While 2016 was record-breaking in virtually every sense—due to the successful extension of the solar investment tax credit (ITC), project developers were given a bit more breathing room, leading to what we’re expecting to be a multi-gigawatt spillover of installations into 2017,” Dan Whitten, Washington-based Solar Energy Industries Association vice president of communications, said in an email.

Part of solar’s growth is attributed to electric utilities investing in large solar fields. “Solar’s growth is mainly driven by its increased cost-competitiveness. In some states, solar has become the most affordable option, providing it with an economically winning hand,” Whitten said. “Texas is on track to become the fastest-growing utility-scale market within the next five years. Also an area with a lot of room to grow is the Midwest, where we expect the market to grow many times over in the next five years.

“The utility-scale solar segment is experiencing record-setting growth and accounts for the lion’s share of new capacity.”

Max Johnson, a business development associate at New York-based GameChange Solar, said solar farms require large amounts of galvanized steel for frames and support posts to hold solar panels. He cited strong existing markets in regions like North and South Carolina and New England, with anticipated growth in California and Texas.

He said GameChange has “at least $80 million of steel queued up” for 2017 projects.

According to the Washington-based Solar Foundation’s annual jobs census, solar employment increased by over 51,000 workers in 2016, a 25-percent increase over 2015. “Overall, the Solar Jobs Census found there were 260,077 solar workers in 2016,” the Foundation said in a statement.

Favorable tax incentives also contribute to growth. “The solar investment tax credit has been a tremendous success and is doing exactly what Congress intended it to do when it reformed it in 2015,” Whitten said. “By 2020, solar installations are projected to more than double and, as a result, solar is estimated to employ more than 360,000 Americans with well-paying jobs. There is support on both sides of the aisle for the ITC and the policy stability it lends.”

Not to be underestimated, the American Wind Energy Association in a Feb. 9 blog post touts U.S. wind energy as “now the country’s largest renewable resource by installed generating capacity.”

“Wind now ... generates about 5.5 percent of America’s electricity, enough to power 24 million homes, and about five times more than solar,” the association says. “Wind energy is on track to supply 20 percent of the country’s electricity by 2030, and at that level, could support 380,000 U.S. jobs according to the Department of Energy.”

Government and industry sources back those claims. According to the Department of Energy’s 2017 U.S. Energy and Employment Report, the wind industry added 25,000 new jobs in 2016 alone to bring the total to 102,000.

General Electric Co. subsidiary GE Renewable Energy announced in a Feb. 7 news release that it had secured over 7 gigawatts in international onshore wind orders in 2016. “The company had previously announced that GE’s Onshore Wind business booked over $3 billion of orders in the fourth quarter alone, partly thanks to a strong market in the U.S.,” the release said.

Third-quarter results reported Oct. 27 by Dallas-based industrial equipment manufacturer Trinity Industries Inc. also showed spark in the wind sector. Trinity’s Energy Equipment Group reported that lower overall revenues in the third quarter were “partially offset by higher delivery volumes in the wind towers business.”

“During the second quarter, we announced the receipt of a $940-million wind tower order that delivers over a three-year period beginning in 2017,” according to Trinity’s senior vice president and group president, construction products, energy equipment and inland barge groups William A. McWhirter II, as stated in the firm’s third-quarter 8-K report to the Securities and Exchange Commission. “We also received a small order for wind towers during the third quarter. Continued growth in the wind tower industry is expected due to the production tax credit and improved wind power productivity.”

Although renewable energy is expanding at rapid rates, the legacy oil industry still drives the national conversation.

Executive actions taken by President Trump have breathed life into two major oil pipelines—the Dakota Access and the Keystone XL—and won praise from industry backers.

The Association of Oil Pipelines (AOPL) quickly praised the move, issuing a news release expressing “its gratitude on behalf of pipeline operators and the American people who will benefit from new pipeline infrastructure.”

“We thank President Trump for giving the American people the benefits of jobs and plentiful, affordable energy that pipelines will bring,” Andrew Black, president and chief executive officer of AOPL, said in the release.

Thomas J. Gibson, president and chief executive officer of the American Iron & Steel Institute, also applauded the executive actions. “The president’s actions recognize the essential nature of the domestic steel industry to producing American energy resources and getting them to customers,” he said in a statement. “They will expand markets for high-value steel products that are essential for oil, natural gas and electricity production and transmission. Exploring ways to reduce regulatory burdens for our manufacturing operations is sorely needed.

“The steel industry is grateful for the president’s commitment to enhancing American manufacturing and preserving steel industry jobs.”

Despite grabbing the spotlight, two pipelines don’t tell the whole story.

“I don’t really see those approvals of Keystone and Dakota Access to be indicative of tha administration’s stance on new pipelines,” Matt Beckmann, vice president at St. Louis-based Trident Steel Corp., said in an email. “Furthermore, the federal government is limited in its ability to regulate pipeline activity, as a great deal of that is vested in the state regulatory authorities.

“These are major projects in terms of scale, planning/permitting and project management. However, a significant amount of pipeline is consumed by smaller projects: well hook-ups, gathering systems and tie-in lines. All of these can certainly feed a large line such as Keystone, or Dakota Access; however, the U.S. pipeline system is far greater than just those pieces which make headlines.”

Noting that the majority of U.S. pipeline infrastructure dates back to the 1960s and before, Beckmann said, “That by itself creates a massive latent demand for line pipe. Updating out-of-date systems will require repair and replacement, and in some cases new lines to address the additional capacity needed to meet domestic energy demand.”

Beckmann also noted that despite a recent rocky oil market, demand for oil country tubular goods (OCTG) had started to pick up by late last summer, as “oil prices had stabilized for several months in the $40-50 price band. ... Further, the OPEC agreement in the fall of 2016 also allowed many producers to lock in valuable hedge contracts for 2017, which will insulate them against future oil price drops to some extent. This will continue to support demand for OCTG even in the face of additional oil price volatility.”

He predicts an “upward trend in OCTG pricing” largely because of reduced global capacity due to trade cases, which eliminated some mills and, “to a greater extent, the global layoffs due to the 2015-16 down cycle have reduced the available capacity at mills worldwide.”

He noted that “the ability to drill multiple lateral wells off of a single pad or wellbore” also will drive increased OCTG demand.

While Trump’s pipeline moves have drawn praise, steel industry participants have expressed caution about another action. Trump has given the Commerce Secretary 180 days to study an order ensure that line pipe be U.S.-made “to the maximum extent possible,” according to a presidential memorandum that accompanied the two pipeline-related executive orders Jan. 24. The Buy American policy would apply also to existing pipelines that are “refitted, repaired or expanded.”

“Produced in the United States” means that “all manufacturing processes for such iron and steel products, from the initial melting stage through the application of coatings, occurred in the United States,” Trump’s memo said.

Some market participants said Trump’s order is not feasible because it would narrow the supply-chain options for customers and harm certain American steel businesses—even domestic mills.

“They just can’t do that,” one trading source told AMM. “They might put some distributors out of business.”

“It’s not as simple as Trump thinks it is,” the trader continued. “It would be disruptive. The (pipe) mills have to order a mix of foreign coil and some domestic coil to spread their risk and ensure that they have enough supply.”

Trident’s Beckmann agreed the order carried complications.

“A ‘made-and-melted’ (M&M) requirement would certainly be a boon for the domestic raw steel producer (Nucor Corp., for example),” he said in an email. “However, for pipe and tube mills, it is not so clearly a benefit. Such a policy assumes that all domestic mills are using only U.S. made and melted substrates (HRC, billets, etc.), or are immediately capable of meeting that requirement. In reality though, that is not the case.

“Sudden, unforeseen changes which impact price, lead time and other underlying assumptions could impact whether those projects remain commercially viable.

“If an M&M requirement was instituted (whether on line pipe, OCTG, or both), there would need to be a grace period to allow for the consumption of foreign material (and domestic material produced from foreign substrate) already purchased for consumption in the U.S.”

While it doesn’t garner the attention of oil, natural gas is an unquestionable force in U.S. energy markets. The Energy Information Administration’s short-term energy outlook predicts increasing capacity for natural gas-fired electric generation, growing domestic natural gas consumption, and new export capabilities.

And like oil, pipeline expansion is anticipated. The Federal Energy Regulatory Commission (FERC) approved three new pipeline projects totaling 865 miles so far in 2017 before chairman Norman Bay resigned Feb. 3, leaving FERC without a quorum to approve projects.

“We’re very happy that (the approvals) happened,” Cathy Landry said, vice president, communications, for the Washington-based Interstate Natural Gas Association of America (INGAA), but no new projects can be approved until there is a quorum.

Staff paperwork and environmental assessments can continue, Landry said, but “the pipeline for approvals is now stopped.”

INGAA president and chief executive officer Don Santa urged Trump in a Jan. 27 letter to quickly appoint three members to FERC, stating, “It is important to note that these natural gas pipeline systems are financed with private capital. The most significant barrier to building this infrastructure is often the permitting and approval process, not a lack of financial resources. We must have a functioning FERC to move forward with building this critical energy infrastructure.”

Landry said as many as nine projects are ready and “ripe” for approval, and INGAA is hopeful FERC will have a quorum by late March or early April.

“The fundamentals for natural gas production remain strong,” Landry said, and demand is strong for cooking, heating, electricity generation and industrial uses.

In INGAA’s 2016 report, “North American Midstream Infrastructure Through 2035: Leaning into the Headwinds,” the association predicted a heavy stretch of pipeline construction that would slow by 2020, but realities spread that production out.

Landry said because of regulatory issues as well as protests and litigation “the timeline gets pushed out a little.” The growth is still on track, but what was expected in five years might take five to 12 years.

The Midstream Report estimates that by 2020, shale gas production is expected to account for about two-thirds of all U.S. and Canadian gas production, growing to nearly 75 percent of the total gas production by 2035.

Beckmann sees that as an opportunity. “For years, the U.S. has failed to take full advantage of the energy renaissance that horizontal drilling and multi-stage fracking created,” he said in an email. “The ‘Shale Revolution’ has unlocked domestic oil and natural gas to an unimaginable extent. Liquefied natural gas (LNG) export, and the lifting of the crude export ban are steps in the right direction.

“A continuing shift in the U.S. domestic energy policy toward natural gas would solve two problems: it would reduce the carbon emissions produced domestically, and it would allow for the utilization of cheap, abundant, domestically produced natural gas.”

One other resource that may drive demand for pipe is more basic: water.

After a slow period, demand for high-capacity water pipe is expected to be strong this year, according to John Byrum, vice president of water transmission for Houston-based Jindal Tubular USA LLC.

Byrum said pipe sales were about $340 million in 2015 and $390 to $400 million in 2016, but, “This year we anticipate to grow back to historical levels.” Large-diameter pipemakers like Jindal, Vancouver, Wash.-based Northwest Pipe Co. and Birmingham, Ala.-based U.S. Pipe will be competing for an estimated $500 million in business, he said.

Large projects include accessing new reservoirs to serve fast-growing Houston and San Antonio, as well as adding a new 72-inch parallel pipeline as a backup to an older service line to Oklahoma City.

Another untapped growth opportunity could come from the availability of as much as $1.02 billion in credit assistance under the Water Infrastructure Finance and Innovation Act, announced Jan. 20 by the Environmental Protection Agency. Loans will be available to state, local and tribal governments and private entities, the EPA said. A project totaling at least $20 million would be eligible.

The American Water Works Association applauded the new loans, stating that the funding is a good start to address “the nation’s trillion-dollar infrastructure challenge,” and encouraging utilities to submit a letter of interest with the EPA. The EPA estimates that the United States needs $660 billion for drinking water, wastewater and storm water infrastructure over the next 20 years.

Byrum said Jindal has advised potential customers of the loans’ availability, but that a variety of factors go into project funding. “Whether or not that leads to additional business, I don’t know.”


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