American Oil and Gas Reporter - September 2015 - 98

SpecialReport: Tubulars Technology
is represented by exports to Mexico, liquefied natural gas exports, industrial consumption, power generation consumption,
clean air directives, hydrogen fuel cell vehicles, etc. Over the past five years, as U.S.
drilling has shifted from gas- to oil-directed, natural gas demand has increased by
10 percent. Demand growth (Figure 4) has
been across the board, but has been
strongest in the power and industrial sectors. In addition, we are in the midst of a
growth curve of natural gas exports to
Mexico.
Starting in 2016, several LNG export
terminals will come on line. Despite this
growth, supply appears to be plentiful,
even though gas-directed drilling has
been declining since 2010. The natural gas
drilling count is becoming somewhat
meaningless, however. According to the
U.S. Energy Information Administration,
56 percent of all wells drilled in 2012 produced both natural gas and oil. In summary, despite the growth opportunities for natural gas, the consensus price forecast is,
again, slow growth.
Drilling activity has declined by more
than 50 percent from the peak reached in
November 2014, which is not surprising,
given the movement of oil prices since that
time. As in past industry cycles, the reaction by oil and gas companies is to cut expenses, restructure capital, meet supply
commitments, hold valuable lease positions with production, and try to determine
what things look like going forward. All
of the cycles in this industry look very similar. There is a period of rapid expansion
FIGURE 4

coming out of a trough, transitioning to
progressively slowing growth as time
goes by, followed by a flattening of rig
count activity-if commodity prices hold.
Next is a rig count decline as overproduction, which is typical in a commodity cycle, or weakening demand, drives
prices lower. During the rapid expansion
phase, growth is the focus, rather than efficiency. Steady or declining rig counts result in cost improvements as inefficiencies
are worked out of the system and service
costs go down. Drilling activity is related to the ability to achieve a rate of return
that is deemed acceptable by the exploration, drilling and production sector (or
their investors).
As noted, high investment levels and
the high level of activity since the recession of 2008-09, continued technical improvements, and the roller coaster ride that
has been the rig count since 2013 has provided very little opportunity for the sector to adjust. Oil and gas companies now
find themselves in that period of adjustment. Costs have fallen and likely will fall
further. Oil prices are yet to settle in. It is
not only the price of oil that will change
the activity level in U.S. oil fields, but the
combination of price and cost.
OCTG Demand
Moving from a high-level view of the
industry to the OCTG market in particular, the past several years have seen advancements in drilling techniques and
equipment that have affected dramatically the amount of pipe buried by a drilling
rig. The average amount of tubulars in a

U.S. Natural Gas Delivered to Consumers

30,000,000

Vehicle Fuel Consumption
Residential Consumption

25,000,000

Industrial Consumption

Commercial Consumers

Electric Power Consumers

MMcf

20,000,000
15,000,000
10,000,000
5,000,000
-

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Source: U.S. EIA

98 THE AMERICAN OIL & GAS REPORTER

well is approximately 205 tons, which is
up from 160 tons only a few years ago.
And these wells are being drilled more
quickly. In addition, the stresses of horizontal drilling and the pressure cycles of
multiple hydraulic fracturing stages in a
well have resulted in the need for highergrade, heavier-wall OCTG products.
In an effort to improve costs and production, operators are refining string designs to achieve the most efficient configuration. According to our internal projections, OCTG consumption this year will
be about 40 percent below last year's level, but is unlikely to bounce right back in
2016, as it did following the recession, because the industry is still in the adjustment
period.
Oil and gas companies are restructuring their capital, costs are being removed
from the system, inefficiencies that built
the past several years are being worked
through, service costs are coming down,
and sadly, many people have lost their
jobs, all in an effort to adjust to the new
reality of revenue per barrel. We would
venture a guess that even the operating
companies themselves do not know what
their drilling programs look like beyond
2015.
And then there are hedges. While the
industry-average realized prices are not
available, several oil and gas companies
have commented on hedging gains in their
earnings calls. Realized prices will decrease closer to the spot price the longer
prices remain low. We hesitate to attempt
to forecast OCTG demand with the market in the midst of adjusting to the new realties and no one knowing yet where it will
settle. That said, despite the significant
number of assumptions we are forced to
make, the recovery possibilities as we see
them can be summarized according to oil
price.
Should oil prices settle below $40 a barrel (but not a lot below), more oil rigs
would be laid down, but the market could
get some help from natural gas, resulting
in 2016 OCTG consumption between
3.0 million and 3.5 million tons. Oil
prices holding in the range of $40-$50 likely would result in OCTG consumption between 3.5 million and 4.0 million tons. An
average oil price in the mid- to upper $50s
would lead to 4.0 million-4.5 million
tons of OCTG consumption, while an average price in the mid-$60s would result
in OCTG consumption on the order of 4.5
million-5.0 million tons.
A significant recovery in consumption
would occur if oil moves above $75, but

American Oil and Gas Reporter - September 2015

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