On Wednesday March 20 and Thursday March 21, Fastmarkets AMM hosted its 12th Steel Tube & Pipe Conference in Houston. Our reporters summarize six key takeaways from the event.
1. DUCs crowd the pond.
A much-discussed concern on the minds of the 200-plus conference attendees was the uncertain impact of the soaring number of drilled-but-uncompleted (DUC) wells in the Permian Basin - and the point at which the accumulation becomes excessive.
Steel market participants anticipate an inflection point after which that trend will reverse, with oil-and-gas producers preferring to complete wells rather than drilling new ones. The trouble is, nobody is really sure when that will happen.
From the standpoint of oil country tubular goods (OCTG) providers, the thirst for drilling has been bullish for casing demand in 2018-19. When the pendulum swings toward completions, OCTG demand shifts to tubing. Texas distributors said tubing inventories were starting to pile up in anticipation of that shift. Indeed, with each successive conference session and coffee-break conversation, distributors seemed to adjust their industry-wide OCTG inventory estimates from two to three months up to more like three to six months.
Fastmarkets AMM's pricing assessment for US domestic welded high-collapse P110 casing stands at $1,325-1,395 per short ton fob mill. The midpoint of that range was $1,650 per ton as recently as July 2018.
The total number of DUCs in the United States continues to set new record highs each month, according to the US Energy Information Administration survey. In February, there were 8,576 DUCs, up by 93 from January's tally. And the total number of Permian Basin DUCs now exceeds 4,000 for the first time.
Drillers have been content to continue drilling in anticipation of additional pipeline capacity from the Permian to feed growing demand from coastal refineries and an export boom.
Presenter Tyler Webb, an analyst at Westwood Global Energy, predicted that the DUC inflection point will finally come in the fourth quarter of this year. By then, the Permian "takeaway bottleneck" will be resolved, and completions will overtake new drilling in 2020. By 2023, the DUC total will be cut in half, Webb said.
2. The OCTG consumption rate will climb again.
The movement toward more horizontal drilling and longer string designs means that more and more OCTG tonnage is consumed on a per-rig basis. Measured in tons per rig per month, the consumption rate more than doubled between 2005 and 2015, Adam Tesanovich, chief commercial officer at Eagle Pipe, a Texas distributor, said during a panel.
But that rate has plateaued recently, according to Tesanovich.
"We've seen that go from 200 [tons per rig per month] in, let's say, the pre-shale period, and now we're capped out at maybe 480-490 tons per rig per month," he said. "We're seeing that maybe flatten out a little bit. With retrofitted rigs, we'll see that pick up."
And analyst Webb noted that "multi-pod drilling is growing in multiple basins," with depths and lateral lengths still growing.
Demonstrating the steel consumption trend in the Permian Basin, Webb said that while there was a 23% increase in the number of wells drilled from 2017 to 2018, there was a 26% increase in OCTG tonnage used.
3. Section 232 remains a point of contention...
The conference kicked off with a fiery debate from three industry trade lawyers on the merits of the Section 232 trade measures.
President Donald Trump and his appointed Secretary of Commerce Wilbur Ross “sold out” the US economy for special interests in steel, according to Donald Cameron, a partner at Morris, Manning and Martin LLP.
“What we’re in now is a trade war,” he said, noting that the Section 201 measures imposed from March 2002 to December 2003 followed international protocols set by the World Trade Organization, unlike the current Section 232 actions. “After Section 201, who retaliated against the United States? Nobody… they didn’t retaliate because it was legal, because it followed the law. In this case, the Secretary of Commerce made a unilateral decision directed by the president.”
“Section 232 was absolutely necessary,” Christopher Cloutier, a partner at Schagrin Associates, countered. “We’ve been talking about overcapacity for 30 years, and for 30 years nothing has happened… Section 232 was legal; the law is called Section 232.”
4. ...but may have been a public-relations ploy.
Speaking during the same panel, Samir Kapadia, principal and chief operating officer of the Vogel Group, boiled down the Trump administration’s motivations for implementing Section 232 to optics.
First, the president is trying to keep his promise to rebuild the US manufacturing base by adding jobs; and second, Trump is trying to keep the public’s focus on his opponents abroad, not his opponents at home, Kapadia argued.
“If no one is lobbying on this… then it’s not going to move anywhere,” he said, echoing other conference panelists’ predictions that Section 232 is likely to stay in place for the remainder of Trump’s tenure.
5. Many companies are caught up somewhere in the middle of 232.
Benteler, a German-owned company that produces seamless goods from its US mill in Shreveport, Louisiana, relies on US suppliers such as Nucor for its hot-rolled coil feedstock, according to Dean Rougas, executive vice president of Houston-based Benteler Steel & Tube. In some cases, however, the company needs to supplement that domestic supply with its own proprietary grades to meet certain specifications, he said.
Section 232 is a “double-edged sword” for Benteler, according to Rougas.
“We operate a domestic operation in Shreveport so we’re a domestic producer, and in many instances that works very well for us - particularly line pipe applications where users required ‘melted and made in the US,’” he said. “But some of the proprietary grades where we import our own grades, we are subject to that tariff.”
Rougas noted during the same session that he does not expect US prices for seamless OCTG and line pipe to rise until at least the second half of 2019.
“It’s been an interesting situation,” he added.
6. New combatants are joining the fight against fossil fuels.
While the Trump administration has sought to encourage domestic oil and gas production, grassroots and activist forces that oppose fossil fuels are becoming more aggressive and sophisticated in their campaigns to thwart such developments.
Well-organized and -bankrolled opponents have created new barriers to keep long-distance pipelines out of their backyards, according to Matt Beckmann, managing director of Ascent Consultants.
Residents along pipeline rights-of-way are using their states' regulatory frameworks, ballot initiatives and legal challenges in an attempt to stop the installation of new pipelines and to reduce the overall use of oil and gas.
Those new tactics can be costly for the producers and transmission companies to challenge. And even if those companies ultimately win their cases, they are left to contend with uncertainty and delays surrounding their projects.
Providers of steel energy tubulars need to monitor these proceedings and help their customers to engage with the public, Beckmann said.
"At the county level and in the courts, you're going to see opposition grow," he said.
In 2018, a ballot initiative in Colorado would have limited new oil and gas exploration by requiring a 2,500-foot setback from occupied structures, water sources and so-called "vulnerable" land - such as playgrounds and public parks. That ballot question was narrowly defeated. One Michigan initiative that eventually would have required the state's utilities to obtain 30% of their energy from renewable sources was withdrawn after large utilities promised to work toward 25% renewable electricity.
Beckmann pointed to billionaire environmentalist Tom Steyer, a prominent opponent of the Keystone XL pipeline, as exerting out-sized pressure on the oil and gas industry by funding voter initiative campaigns and other protests throughout the nation.
"I cannot think of an instance in which one man had so much influence by writing checks in various states," Beckmann said.
Grace Asenov in Houston contributed to this report.