OCTG markets show glimmers of recovery

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Published: Thursday, 11 March 2021

The international impacts of the Covid-19 global pandemic in 2020 were severe, but Fastmarkets’ tube and pipe research team* detect the early signs of market recovery during 2021 and forecast better years ahead.

Shutdowns in response to the global Covid-19 pandemic affected energy demand and oil and gas prices through much of 2020, weighing on drilling rates and OCTG demand in most regions. These effects are most likely to continue their impact well into 2021 and potentially longer. Globally, OCTG consumption declined nearly 25% year on year in 2020 from 2019. For 2021, the recovery will not be fully realized, but significant gains are expected, with year-on-year growth forecast to be 13% this year. 

Long climb for North America

The North American markets were the hardest hit in 2020 as drilling activity quickly responded to energy price cuts. Demand dropped by 3.2 Mt in one year – a 59% decline that came on the heels of a tough 2019 where investment cuts trimmed consumption for the year by more than 850 kt from 2018, culminating in an aggregated 4 Mt decline in demand in two years.

The recovery has already slowly started to take place as market participants noted that buyer inquiries started to pick up in the fourth quarter of 2020, following the low-point in sales in the third quarter of the year. North American OCTG consumption is predicted to increase by about 1.4 Mt in 2021 from 2020.

The US, which lost the most tonnage in consumption in the 2020 downturn, is on target to recover by 1.2 Mt over last year. US rig counts, which hit a low of 244 units in August 2020 after falling more than 69% since the start of the year, have incrementally recovered since that time to near 400 in February. Canada and Mexico, which normally consume far less OCTG tonnage per year that the US, will post more modest gains this year. After setting optimistic drilling goals at the start of 2020, the Mexican government has scaled back drilling plans for 2021. Canada’s oil and gas development has been hampered by bottlenecks in transportation capacity and the higher costs of extraction. 

There is muted optimism in the US market, however, with new capacity investment moving ahead in the region. US Steel completed the replacement of its Fairfield BF/BOF with a new EAF; the first heats were completed in the fourth quarter of 2020. Tex-Isle, a service center and distributor in the US shale region, announced in early 2021 their plans to build a new ERW OCTG and energy tubulars facility in Texas.

This optimism hinges on the support of higher energy prices from recovering demand. As long as WTI crude oil prices remain above break-even levels for most drillers in the shale basins, drilling rates will continue to grow and boost OCTG consumption. Nevertheless, Fastmarkets does not expect North American OCTG consumption to exceed 2019 tonnage until 2023. 

Other markets hit too
The regions outside of North America – China excluded – also experienced a steep decline in OCTG consumption in 2020, according to available data, as major projects were cancelled or delayed.
  
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South America struggles

OCTG demand from the main South American consuming countries was robust in 2019 from aggressive investment in offshore and onshore development projects. With the reduction in global energy demand and prices, many of these projects were delayed or cancelled altogether. Argentina’s shale gas development was the hardest hit and will take time to recover fully. A number of pipeline projects were also delayed or cancelled, which crimps the development potential of the natural gas reserves in the short term. 

Brazil and Guyana displayed the strongest potential to return to previous production and drilling plans with mainly offshore developments. Nevertheless, we expect a slow start for South American consumption in 2021, as the effects of the pandemic continue to shut down activities on the continent. As a result, we expect a modest decline in OCTG consumption this year and then a return to positive growth in the following years of the forecast. Average annual growth from a strong 2019 to 2025 will be under 0.7%. 

Middle East and African delays

Demand in the Middle East was slower to react to the pandemic than in North America, but it did eventually. While the number of active drilling rigs collapsed in spring last year in North America – and it did the same in Africa – it fell somewhat modestly in the Middle East. But towards the end of 2020, with North America already on a path to recovery, the rig count was still falling in the Middle East as old projects were completed and planned new projects had been delayed several times.

It was the presence of giant National Oil Companies (NOCs) in the Middle East that made a difference. They are slower to react to market signals and can better absorb short-term losses if these fit with their long-term strategy.

By the end of 2020, apparent OCTG consumption had fallen by 22% on the year to around 1.6 Mt in the Middle East and Africa. Demand in Saudi Arabia fell by 8% to around 240 kt, and much sharper declines were seen in Algeria, down by 45% to around 130 kt, and Egypt, down 39% to around 100 kt despite strong exploratory drilling.

This year of 2021 will be a year of two halves. While we have seen further delays recently, pipe tenders and deliveries for a number of large projects – such as Qatargas’ North Field Expansion, Adnoc’s Hail & Ghasha, and Aramco’s Marjan – will finally materialize later in the year.

We believe the net effect will be a modest 6% growth in OCTG demand, while a faster recovery to pre-pandemic levels is expected for 2022, and on average a growth of 8% per year is expected through 2025 as NOCs in the region are all planning to stick to their long-term plans.

Asian growth ex-China

For the Asia region outside China, the pandemic heavily impacted OCTG supply, demand and logistics, leading to a large decline in OCTG consumption in 2020 of more than 102 kt, from a total of 933 kt in 2019. Many countries like Japan, Malaysia, South Korea, Indonesia and India have been shut down for frequent and long periods, which affected international trade. Some large drilling plans in Australia have been postponed for 3-6 months. 

In order to stimulate this industry and OCTG demand, the Indian and Australian governments each released more oil and gas exploration investments for the next 5 to 10 years. 

Also, while Japan is not a significant consumer of OCTG, but a producer for the main consuming markets, the country is looking to support its export economy. Indeed, the Japanese government announced several economic stimulus plans and its lockdown measures avoid affecting industrial output – including OCTG production – as well as transportation logistics as much as possible. 

Considering the current pandemic situation and the energy market outlook, Fastmarkets consequently expects that OCTG consumption in the region will return to the level of 2019 in 2023, and then gradually move up until 2025 with annual growth of 3.1% from 2019.

Surprising gains for China 

China surprisingly posted small pick-ups in 2020 consumption relative to 2019 due to a large infrastructure stimulus from the government. After steep shutdowns early in the year due to the coronavirus, the country was able to return to near-normal activity and resumed strong energy demand growth. This helped offset the decline in OCTG export demand through the year and into 2021. 

In September 2020, the establishment of PipeChina compelled CNPC and Sinopec to focus more on offshore drilling activities and international drilling tenders. The companies’ primary oilfield and pipeline sources on the mainland were transferred to PipeChina, thus opening opportunities to expand their energy reach. 

Also, the Chinese government has planned more exploration of shale gas and natural gas as part of its 14th Five-year Plan (2021-25). CNPC announced that the 2025 target for natural gas production in the southwest oil field, for example, will increase from 30 billion cubic meters in 2020 to 50 billion cubic meters in 2025, with an expected growth of 18% in 2021. This concentration on domestic oil and gas production is to support surging natural gas demand in the country, which is targeted to grow 11.1% annually during that time. As a result, Fastmarkets holds a bullish attitude towards future OCTG demand with 1.16% annual growth through 2025.

Norway to drive growth?

As the pandemic hit the global oil and gas markets, Norway responded with large tax breaks for oil and gas projects approved by the end of 2022. The outcome was quite impressive as oil and gas companies started prioritizing their Norwegian drilling assets within their portfolios. By the end of 2020, a total of 211 wells had been spud in oil and gas fields, down by 17% from 2019, which was a very good year, but largely in line with the 2016-18 average, according to data from the Norwegian Petroleum Directorate. 

By contrast, preliminary data from the UK’s Oil & Gas Authority suggest that the numbers of wells spud there fell by 53% to 74, which was the lowest figure since the 1970s.

The UK and Norway are by far the largest consumers of OCTG in Europe, and we expect the long wave of the tax breaks to lift Norwegian consumption through 2023-24. Counterintuitively, we expect OCTG apparent consumption, which does not keep inventory changes into account, to fall by 24% to around 265 kt in 2021 as there was a massive stock build in Norway last year, which inflated 2020 figures to a record high. Annual consumption will be upheld through 2025, with the exception of a small surge in 2022, as the end of the tax breaks in Norway will be offset by more drilling in the rest of the region as the global outlook for oil and gas improves.

Will demand pass past peaks?

Fastmarkets forecasts that, globally, 2020 will be the bottom of the downturn, with 2021 consumption expectations rising over 2020 as delayed projects begin to resume activities. From 2022, we expect modest annual growth through the forecast period of just under 1.8% through 2025 from 2019 levels. Consumption tonnage will not exceed 2019 levels until 2023, and global OCTG consumption is expected to reach over 17.7 Mt in 2025. This 2025 total global forecast may challenge the total from the peak year of 2014. 

In order to reach that peak again, growth will come from the usual sources like North America and Middle East, in terms of tonnage. China and CIS will also be significant contributors. 

Africa will contribute the largest annual growth, although these gains come from a low starting point. Other top gainers in terms of growth are predicted to be CIS, China and the rest of Asia.  Europe and South America may be hit hardest through the forecast period. Indeed, European consumption, despite the tax support from Norway, is expected to decline from 2019 in the long term as high costs and aging reserves weigh on drilling rates in other parts of the region. South America is expected to post only modest gains annually as optimistic plans for development will likely reach delays. Market participants here still hold high expectations for energy development growth and OCTG consumption, but this will probably be realized beyond the current five-year horizon. 

Some of the largest OCTG consumers in the Middle East and North America are still predicted to post positive gains in the latter part of the forecast, assuming oil prices and energy demand recover. Current crude oil price forecasts suggest that Brent and WTI crude prices will remain above average break-even levels through the period, barring any further unforeseen outside disruptions. 

In terms of pricing, the steep downturn in demand in 2020 did not result in steep drops in prices during the year. Prices corrected lower during the year, but then reversed course late in the fourth quarter in response to rising raw materials and steel prices. At the start of 2021, OCTG prices were already rising quickly with increases of more than $200/tonne in some markets. 

Fastmarkets expects OCTG prices to rise into the second quarter of 2020 and moderate through mid-year as costs correct lower. We expect prices will post gains late in the year as demand rebounds. Beyond 2021, prices are expected to rise more quickly in 2022 and then stabilize in the later years.

*Kim Leppold, Paolo Frediani and Una Yin