The demand for oil country tubular goods (OCTG) products is poised to jump after Tracee Bentley, president, and chief executive officer of the Permian Strategic Partnership (PSP) announced an alliance of energy companies and state and local associations. The alliance plans to invest $844mn on roads, education, workforce development, housing, technology access, and healthcare in the region.
Like other steel products, prices for OCTG have risen over the past year. For example, the J55 ERW OCTG grade tubing was traded at about $990/mt fob mill in June 2020 when the US oil rig count was about 266. This product is quoted at about $1,980-2,090/mt fob mill at present. Such revenue opportunities could entice capacity utilization growth at active mills and restarts at those with idled capacities.
The Permian Basin (West Texas, New Mexico) produces more than a third of crude oil and about a tenth of natural gas in the US. The area has battled with infrastructure challenges for the past decade that came to a head when the industry contracted in H1 2020 due to COVID-19 lockdowns and a drop in oil prices.
Some steel mills closed down factories and many steel distributors were left with substantial OCTG steel inventories in 2020. With the US rig count almost doubling from 256 in August 2020 to 500 by August 13, 2021, of which 244 are in the Permian Basin according to Baker Hughes, OCTG inventories at service centers slowly began getting consumed in the market starting from Q4 2020. To put in perspective, the US rig count had reduced from 1,075 on January 4, 2019, to 969 by mid-June 2019 before dropping further in 2020.
The Texas Department of Transportation is providing $675mn or 80pc of the funds announced by PSP. New Mexico will contribute $13mn, while a consortium of energy companies in the area including Chevron, EOG Resources, Halliburton, and Royal Dutch Shell will pay $48.5mn.