American Oil and Gas Reporter - September 2018 - 60

SpecialReport: Tubulars Technology
OCTG Fundamentals
The recovery in U.S. upstream activity that began in the
second half of 2016 is well under way, and as of mid-August,
oil and natural gas prices were at levels that support growth, but
largely prevent pushing activity into overdrive. Fundamentals
are good:
* Global crude oil inventories are generally in balance;
* Crude oil, natural gas, natural gas liquids and liquefied
natural gas exports all are growing;
* The global economy is pushing energy demand upward;
* The Organization of Petroleum Exporting Countries is
keeping the market in balance; and
* U.S. exploration and production companies have done a
good job squeezing more barrels of oil equivalent out of each
investment dollar.
Demand for OCTG products is driven by the rig count,
which depends on oil and gas supply and demand. While some
say the rig count is no longer a good barometer, that simply
relates to rig efficiency strides and footage. It is true that the relationship between the rig count and OCTG consumption has
changed significantly, yet for a short-term, period-to-period
comparison, it works pretty well.
Good-but not tremendous-fundamentals, combined with a
take-away bottleneck in the Permian Basin, resulted in a
relatively flat U.S. rig count through mid-August (see Figure
1). Analysts at Simmons & Company International® | Energy
Specialists of Piper Jaffray® division, expect the rig count to
grow moderately for the balance of the year for a 2018 average
of 1,032. We generally concur with that view.
However, we digress. The point is that based on the forecast
noted, OCTG demand, while strong, is expected to be relatively
flat for the balance of the year.
Piper Jaffray is projecting measured growth again next
year, with an average rig count of 1,092. So much for nearterm demand.
OCTG Imports
On the supply side, we will address imports first, since they are
the subject of the Section 232 ruling. Since the recession in 2009,
OCTG imports in good years and bad ones have provided more
than half of new OCTG supply six times out of nine. In the other
three years, the proportion was not much below half (Figure 2).
Countries that now are subject to quotas accounted for a sig-

nificant percentage of those imports (Figure 3). Since 2010,
countries now subject to quotas accounted for 37 percent of
import supply. If we assume from Figure 2 that 50 percent is
the average import share of OCTG supply, then 18 percent is
subject to quotas.
Still, the quotas are not zero. In fact, for all but Korea, the
quotas are not restrictive of supply when compared with 2017.
Korea, however, which accounted for 34 percent of import
supply in 2017 (17 percent of total supply) is limited by quotas
to about half of last year's volume. Given that, it is not surprising
that some are concerned about supply.
We noted previously that another source of supply-inventory
across the industry-was at a comfortable level. While subscribers
to the Preston Pipe & Tube Report will note that in terms of
months of supply, our inventory figure is on the low end of historical values, there are fewer product variations being consumed
today as compared with the past.
This makes inventory more effective. If the grocery store
carried only five breakfast cereal options instead of the 25,
grocers would have to carry far fewer boxes of cereal in
inventory to satisfy their customers. The same principle applies
to OCTG. But in this case, comfortable inventories now may
contribute to problems down the road.
Domestic Capacity
Since 2010, the expansion of drilling activity, combined
with aggressive enforcement of trade laws, facilitated conditions
that resulted in significant domestic OCTG capacity growth.
Among U.S. companies adding capacity were Axis Pipe,
Benteler, Boomerang, Borusan, Centric Pipe, OMK (now SeAH),
Tenaris, TPCO, Vallourec and Welded Tube. While TPCO is
not yet producing pipe, the total name-plate capacity additions
not including TPCO amount to almost 3 million tons.
The effective capacity from those additions is something
less than that and has to do with product mix and other factors.
Throughout this year, we have seen shipments increase from
seamless producers, while welded producer shipments have
been relatively flat. In fact, total domestic shipments-comparing
January through July 2018 with July through December 2017-
increased an average of 20,000 tons a month, which was predominantly from seamless producers.
To understand why, we must look back. There are three
FIGURE 2
Import Share of Supply

FIGURE 1
U.S. Rig Count

60%
50%

1,100
1,000

40%

900
800

30%

700
20%

600
500

10%

400
7

Source: BakerHughes

60 THE AMERICAN OIL & GAS REPORTER

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300
0%
2010

2011

2012

2013

2014

2015

2016

Source: U.S. Census Bureau, Preston Publishing

2017

2018

American Oil and Gas Reporter - September 2018

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