OCTG, RIG SUPPLY/DEMAND OUTLOOK STABILIZING IN U.S.

Jan. 21, 1991
Kent H. Wall Staff Writer As inventories of oil country tubular goods (OCTG) continue to shrink and supplies of used pipe dry up in 1991, operators and contractors may endure temporary shortages of some tubular products. The overall OCTG outlook, however, looks good for operators. Demand will remain well under mill capacity, and as a result prices will increase only slightly if at all.
Kent H. Wall
Staff Writer

As inventories of oil country tubular goods (OCTG) continue to shrink and supplies of used pipe dry up in 1991, operators and contractors may endure temporary shortages of some tubular products.

The overall OCTG outlook, however, looks good for operators. Demand will remain well under mill capacity, and as a result prices will increase only slightly if at all.

Highly specialized materials, like corrosion resistant alloy (CRA) pipe and larger diameter casing, will be especially vulnerable to supply bottlenecks, mill officials, distributors, drilling contractors, and operators agree.

Most larger OCTG buyers will avoid or at least minimize, those bottlenecks through stocking contracts with distributors. Such agreements, in which distributors keep a specified percentage of a customer's needs in stock for short notice ordering, will play a greater role as operators and contractors continue to slash or even eliminate OCTG inventories.

Widespread OCTG shortages or tightness in rig supply could occur in the event of a U.S. drilling surge sparked by sustained long term oil price spikes stemming from conflict in the Persian Gulf.

However, that kind of scenario is not reflected in modest increases or declines in U.S. upstream spending plans by most oil and gas companies (see story, p. 24).

Instead, industry officials see the surplus of U.S. drilling rigs continuing through 1991. Virtually all rigs now being manufactured in the U.S. are either being installed on offshore platforms or shipped overseas.

Even in the bustling horizontal drilling and coalbed methane areas of the U.S., operators and contractors report few problems. Rig supply is meeting demand in some of the more active coalbed methane areas of Alabama and New Mexico, but there appears to be a shortage of qualified personnel.

RIG COUNT THE KEY

Supplies of drill pipe appear sufficient in the short term, although used pipe is less available. Some say the key to drill pipe availability may be the rig count.

If the number of rigs operating daily in the U.S. were to increase by about 300, that increased activity may put enough strain on current supplies to cause short term supply problems, industry officials say.

Although mill capacity still is underutilized, there would be a lag time for orders to be filled and pipe to be rolled and shipped with a big jump in the rig count.

A big increase in the rig count isn't likely, however.

Last October, Baker Hughes Inc. predicted the U.S. average count of active rotary rigs will increase to 1,160 in 1991 from an estimated 1,011 in 1990 (OGJ, Oct. 29, 1990, p. 17).

Baker Hughes also expects there will be 35,800 well completions this year, an increase of 17.5% from 1990.

Seamless casing may also see some 1-2 month shortages if the rig count abruptly rises.

There is still sizable surplus capacity at U.S. mills that produce electric resistance welded (ERW) pipe, although most mills expect an increase in orders as pipeyard supplies dwindle.

Casing supply should be adequate and prices flat, with exceptions for some larger diameter pipe.

The situation with CRA is more delicate. Few if any U.S. mills make the more expensive and specialized chrome or nickel alloy tubing, with most of those supplies coming from Japan or Germany.

As deep drilling through highly corrosive formations becomes more common, however, worldwide demand for CRA could outstrip supply. In such a case, contractors can expect higher prices and longer waits, in addition to already high shipping costs.

INVENTORIES CUT

OCTG inventories are "critically low," and only aggressive pricing by mills has kept prices fairly low, says Douglas Yadon, publisher of Preston Pipe Report, Tulsa.

"The interesting thing is that in 1990, our pipe and tube inventories dropped, our demand was up, our supply was up, and our prices were down. This is because of the competition between the domestic mills.

"The critical point is that the inventories are the lowest they have been since 1977. So any inventory move by the industry will run us into a shortage situation."

Yadon estimates the industry presently has less than 9 months of inventory on hand. "But with the big product spread that we have, this would be 9 months if everything were the right size, weight, and grade, and it's not.

DRILL PIPE

A drilling surge in 1991 would cause "some definite shortages" in drill pipe, says Gary Holley, vice-president of U.S. operations for Parker Drilling Co., Tulsa.

"There just haven't been any big orders for drill pipe made over the last few years," Holley said. "There's some pipe available on the ground, but as far as any excess, if you put 300 or 400 rigs back to work, there would not be enough drill pipe to go around."

Although there are still brokers and other people with used OCTG to sell, Holley said, most of what Parker orders will have to be rolled.

"What the problem is, is that there was so much drill pipe available back in 1980-82. The mills were running wide open. Then the oil fields shut down overnight, and there was a lot of surplus pipe."

In recent years, however, excess pipe has all but disappeared.

"So if you go out and you need a string of high tensile 5 in. or something like that, chances are it's not going to be available. You'll have to go to a mill and it will be a new roll," Holley said.

"That's why it would be so expensive. It's new and it hasn't been in the ground, it hasn't been written off, it didn't belong to a contractor that went broke."

PESA VIEW

The drill pipe market is in an anomalous situation because of circumstances in the drilling rig market, said Gary D. Nicholson, chairman of the Petroleum Equipment Suppliers Association and president and chief executive officer of LTV Energy Products Co., Garland, Tex.

He contends the practice of cannibalizing idle drilling rigs is rapidly coming to an end due to dwindling supplies.

"The problem is, at the current rates that the drilling contractors are getting for their rigs--because there are still more rigs out there than there is work to do, particularly with the land fleet--they have not been able to generate enough working capital to order new drill pipe," Nicholson said.

"What that has done is cut down the orders for new drill pipe, and that has caused distributors such as us to reduce their inventories. It has also caused the mills to reduce their inventories and their production of drill pipe."

If oil prices remain at $30/bbl or higher, rig counts may rise correspondingly, putting a short term crunch on drill pipe supplies.

"What we suspect is going to happen is that when the contractors start to try to buy drill pipe, they're not going to find sufficient stock in the supply network," Nicholson said. "And when the supply network tries to go to the mills to get it, the mills will not have it in stock.

"It will have to be produced. And there will be a 'perceived shortage,' since there won't be any inventory anywhere. You'll have the lead time that it takes for the mills to get what they call a 'booking sufficient to make a complete rolling."'

Operators should allow for this lag time, even though most U.S. mills still have excess drill pipe production capacity, Nicholson said.

"They (mills) will have to accumulate those orders until they decide they've got enough for one rolling. What that will do is send the signal back to the industry that there is a shortage, and there really won't be. It will just be that the inventory has been run down, and there are not enough orders on a steady basis to keep the mills running for drill pipe. So it'll be that manufacturer's lead time to get the mill back up running to make that new rolling."

Although there will still be no capacity shortage, there will be an inventory and supply crunch resulting from this time lag.

"There's plenty of capacity to produce it, but if there's not any orders for it, you lay your people off and shut your operation down," Nicholson said. "Then all of a sudden when you start getting orders, you've got to hire your people back and get the mill back running again. So you're just in kind of a vicious circle."

COUPLINGS LAG

Contractors may expect to wait 1-2 months for drill pipe, but it will likely take them a month longer to get couplings on, Yadon said.

"There is more than adequate capacity to take care of demand. On normal pipe supply, you order it now and you're going to get your tubing within 60 days," Yadon said.

"It will probably take you more than 90 days to get tool joints put on, because we don't have that many people who are in the business anymore, and they are pretty doggone busy. There has just been attrition throughout the industry."

"You can, of course, buy pipe already tool jointed from overseas suppliers, and this will alleviate some of the problem."

Yadon said production capacity of seamless drill pipe is another aspect of the market that has withered.

"A lot of the seamless mills no longer make drill pipe and have indicated no willingness to make drill pipe.

"Of all the seamless OCTG producers that are out there, probably less than 25% will make drill pipe. This is not to say these people can't make drill pipe, but the demand and the price would have to be such to make it worthwhile."

SEAMLESS SITUATION

The supply of seamless tubing and casing is expected to remain stable in 1991, with prices about the same or slightly higher than in 1990. Most contractors have most of their needs already locked in with suppliers.

"We don't see any problems with supply, and we don't see prices really getting out of line from where they are today," said David Sims director of tubulars procurement for Oryx Energy Co., Dallas. "I think it will pretty much run like it did last year."

As with drill pipe, however, any surge in oil prices could produce some spot shortages.

"I think domestic capacity is such that any shortages that crop up, the mills are situated where they can react to the market. You may have 30 days or so where supply might be tight, but I think they can react and recover in that amount of time," Sims said.

Jim Dionisio, manager of tubular products for CF&I Steel Corp., Pueblo, Colo., says inventories have been shrinking in the past 1-2 years and will likely stay that course. CF&I fabricates only 5-10 3/4 in. seamless tubing.

"We are at a fairly reduced inventory level today as compared with the last 5-10 years. It has come down significantly from say, 2 years ago," Dionisio said.

"Last year we reduced inventories by probably 300,000-500,000 tons. I think we are kind of looking next year at a year that will be much the same as 1990, maybe a little bit better as far as shipments are concerned." Prices are the "dim spot" for OCTG suppliers in the U.S., Dionisio agrees. He expects prices to remain flat or rise slightly.

"In the last 12 months, prices might have picked up just a little bit, but it's hardly measurable. Maybe 2% or something like that, but not a big jump at all."

The upstream purchasing manager for a major oil company also sees supplies of seamless tubing and casing plentiful and prices somewhat stable.

"We haven't seen any shortages of tubing," he said. "We've seen some price increases which people could probably say go along with reduced inventories. It hasn't affected us yet."

He added that most of his tubing is bought through vendor contracts. "We try to do most of our business by contracts, so we are not dependent on the spot market."

Although his company has OCTG and wellhead equipment inventories, the purchasing manager said they are joining the trend to reduce those supplies. This will likely be a long term policy.

"We have been reducing that inventory because we ended up with quite a bit after 1982. We are trying to employ the philosophy of, in effect, getting out of inventory ownership ourselves and relying on distributors.

Because of depressed prices, however, much of the firm's tubing supplies--what distributors cannot fill--still come from direct mill orders. "In the current market, distributors are not making enough money to invest much in inventory, so their inventory is not yet adequate."

ERW

An official with Lone Star Steel Co., Dallas, which makes only ERW pipe, says they have seen slow, steady growth in sales recently.

Lone Star expects the market to continue improving, partly because of the reluctance of contractors and distributors to maintain inventories.

"There has been an excess supply of tubulars for some time out in the field, already owned by the end users or distributors," the Lone Star official said.

"That supply is pretty well gone now, so demand currently and in the future will be met by new production rather than existing inventories."

If the rig count hovers around 1,000-1,100 through 1991, however, Nicholson believes mill capacity will be more than adequate and prices will stay soft.

"At the level of rig activity that we experienced in 1990, there is an adequate mill capacity to produce the requirements for seamless and ERW tubular goods," he said. "If you combine the domestic sources and the international sources, the mills are still underutilized.

"That excess capacity for the year 1990, plus the overhang in inventory, has caused prices to decline in 1990 from 1989. So pricing is still real soft in the tubular market, and highly competitive both at the distributor level as well as the mill."

Sims says Oryx actually saw a slight decrease in its 1991 ERW requirements compared with what it paid in 1990, although some prices held steady.

"Right now, probably ERW is more competitive in the marketplace than what seamless tubing probably is. (Prices) are about 5-6% softer on some items."

CASING

The supply and price situation with casing is similar to tubing, except that larger outside diameter casing, 11 in. and wider, is much less competitive. There are four mills that roll seamless casing to 10 3/4 in., says the purchasing manager, but only U.S. Steel makes 11 in. and larger. That means plentiful supply of seamless casing less than 11 in. but a tighter market for 11 in. and larger casing.

"U.S. Steel announced a price increase a few months ago, and in the general market that's probably starting to have some effect. If drilling activity and demand increase, I wouldn't say there would be a shortage but larger size casing would probably be one of the first products to see price increases."

Sims has seen prices rise 1-2% on large diameter casing mainly because of lack of competition and tightening supply/demand.

"Domestically, once you get over 13%, you're pretty much restricted to who can supply that type of material."

CRA CRUNCH

Supplies of most types of corrosion resistant pipe are adequate to meet limited demand, says Yadon.

For wells requiring true corrosion resistant alloys such as chrome or nickel, however, such as those in Alaska, there may be major supply problems awaiting the industry. "We are definitely teetering on a worldwide shortage. Right now, most of the mills that produce 9% or 13% chrome are pretty well booked up for 1991," Yadon said.

"If you're talking about just something like hydrogen sulfide that you can get to by having a restricted yield on a quench and temper item, there is no problem with those items. It's only with the extreme cases where you require the major additives that we have difficulty."

There are no major U.S. manufacturers of 9%, 13% or 20% chrome casing, he said. "So for some of the stuff that's used in Alaska, for example, there is no U.S. supplier that I am aware of."

There is a plentiful supply of drilling rigs in the U.S., Nicholson noted. Most of those made by LTV's Houston division are sold to overseas buyers, although a few are for the Gulf Coast market.

"We are going to deliver one to Shell for an offshore platform in the Gulf of Mexico."

COALBED METHANE FIELDS

OCTG and rig supplies have also stabilized in areas of heavy coalbed methane drilling, such as Alabama's Black Warrior basin and New Mexico's San Juan basin.

Dennis Latham, executive director of the Coalbed Methane Association of Alabama, said he expects more activity this year from well completions. "The general feeling in Alabama is that drilling activity will fall off as people concentrate on completing the wells they drilled in 1990, bringing them on line," he said.

There may be another surge in drilling, however, as people look at another deadline in the federal tax credit for coal seam gas wells, Latham said. "I think you'll see a bigger focus this year on completing wells and bringing them onto production."

The main difficulty in New Mexico is the added equipment expense from drilling on the western slope of the Rocky Mountains, where well site consultant Vernon Duke says pipe is $4-5/ft more expensive. His firm, Duke Consulting, does much of its work in San Juan basin.

"You can get pipe on the east side of the mountains a lot cheaper than you can get it on the west side because of transportation costs," Duke said. A shortage of qualified help is of greater concern in New Mexico than the supply of rigs, he said. "There's plenty of rigs available right now. Your biggest problem is your hands."

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