Permian Basin oilmen are always watching the steel market because the oilfield is a steel-heavy scene with the strong, durable metal being used for production, shipping, distribution, external components, piping and other things.
The Texas Oil & Gas and Texas Independent Producers & Royalty Owners associations, who have hundreds of members working in the Basin, say the oil and natural gas companies get lots of steel here and around Texas, but the need is so great that they must also buy nationally and internationally.
TXOGA Chief Economist Dean Foreman said local suppliers only meet part of the Basin’s steel requirements because the demand often surpasses the region’s production capacity.
“Consequently steel may be sourced from the Midwest and Gulf Coast regions and international imports are sometimes necessary,” Foreman said from Austin. “This supply diversity enables access to sufficient quantities and specialized products that local suppliers may not offer and it provides flexibility based on market conditions, pricing and specific project needs.
“Much of the steel used in the Permian Basin has historically come from the Midwest. In recent years, however, steel has increasingly been sourced from other regions, particularly the southern U.S. and Gulf Coast, where some manufacturers are well positioned to serve the energy sector.”
For example, he said, Nucor, Steel Dynamics and ArcelorMittal operate large mills in the South and supply a significant portion of Permian Basin steel.
“Global manufacturers also play a role in filling gaps when domestic supply chains face disruptions or specific grades of steel are required,” Foreman said. “Consequently while the Midwest remains a vital supplier, other domestic and international manufacturers have contributed to the overall supply of steel in the Permian Basin.”
The economist said steel prices reached their lowest levels of the year during the summer of 2024, although they have since partially recovered, and as of late September prices remained historically low.
“For instance U.S. Midwest hot-rolled coil steel futures, a benchmark for oil country tubular goods, fell by as much as 40 percent year-to-date by mid-August and were still down by 33 percent as of Oct. 1, 2024, per the CME Group,” Foreman said. “This decline, while easing cost pressures for steel buyers, has also reflected broader market volatility.
“The relatively low prices have helped offset some costs for large-scale operations in the Permian Basin.”
TIPRO President Ed Longanecker said from Austin that his members procure steel from both domestic and international suppliers and maintaining the supply diversity is important to control costs and availability.
“Steel is also in the 8-10 percent range of operating costs for exploration and production companies, which can vary and change based on numerous factors including supply chain disruptions and policy decisions,” Longanecker said. “Oil country tubular goods (OCTG) on critical items, production casing, come from top-tier mills for some of our members, 50 percent domestic and 50 percent import, and may fluctuate by as much as 20 percent either way year to year.
“That depends on supply chain issues or other factors such as the best product available for the environment that the tubes will go into or who has the best product for the well conditions.”
Longanecker said OCTG on less critical strings, surface and intermediate casings, can be more import, sometimes 30 percent domestic and 70 import, and much of that import is from South Korea.
“U.S. steelmaking capacity for OCTG is being allocated mainly to producing the more critical and profitable items such as production casing and it is the biggest reason for the necessity of more import for surface and intermediate pipes,” he said. “Line pipe is much the same.
“Critical infrastructure can sometimes be reserved for the top tier domestic mills and when the capacity is exhausted the import material is subbed in.”
For one TIPRO member, he said, almost 100 percent of the critical infrastructure line pipe is domestic, keeping in mind that they are a small percentage of the overall consumer base in the Permian for many of these items.
“Less critical infrastructure can be sourced through imports and again mainly through the South Koreans,” he said. “Sucker rods for downhole rod pumps for some of our members are sourced 100 percent domestic and needs have been met with only a few times in the last two decades where supply was short; but once again some operators often buy long and are able to mitigate short-lived supply interruptions.”
Longanecker reported hearing from a number of TIPRO members over the years that tariffs on sourcing steel and aluminum could slow down E&P activity in the Permian Basin.
“This is relevant given the call for more tariffs during the current election cycle as well as the impact of the workers’ strike in key U.S. ports,” he said. “The U.S. is a major producer of steel and aluminum and Texas operators purchase a wide range of products from suppliers including but not limited to Baker Tubulars, Federal Steel Supply, American Piping Products and U.S. Steel Corp.
“Most material sourced domestically comes from Texas, Louisiana, Alabama, Arkansas, Missouri and Tennessee with some from Ohio and Pennsylvania.”
Longanecker said steel pricing has had short-lived periods of stability in the last two decades with manageable peaks and valleys in pricing.
“There have been three or four instances, 2022 being the most recent, where we saw extremes in pricing,” he said. “Volatility created from the war in Ukraine and the general unstable global geopolitical climate that we’ve experienced for 12 of the last 16 years has been one of the biggest problems in pricing steel and every other commodity on the market.
“Steel mills, especially import, are looking at three- to six-month lead times on their products and they struggle with pricing these products that far out due to volatility in the global markets. Especially, but not limited to, transportation costs as we are seeing them play out even today.”
