Category description

As the name suggests, Oil Country Tubular Goods (OCTG) is a wide range of steel tubular products that are used in Oil & Gas exploration and production, in particular drilling operations. Tubular can be seamless and welded pipes (electric resistance welding (EWR) and come in various sizes and length. OCTG is comprised of: 

  1. Well Casing 
  2. Production Tubing
  3. Drill Pipe

Well Casing - is a pipe (of different sizes 4.5" to 36") that is inserted into the wellbore, cemented, and serves as a structural component of the well, providing hole integrity and keeps the well from collapsing while drilling.  Well casing normally serves the well's life. Generally, well casing is divided into: 

  • Conductor Casing - Available in sizes between 18" to 36", conductor casing is the first interface between surface and subsurface. It serves many purposes, such as prevent well collapse, protection against shallow gas pockets, fluid circulation and general support for drilling a well. Conductor could be installed either by drilling or using a hammer to hammer the conductor to the soil. 
  • Surface Casing - Although varying in sizes depending on application, the common size of surface casing is 13⅜”. Surface casing is used mainly for environmental and safety reasons, such as isolating freshwater zones, blowout protection, supporting a wellhead and blow out prevention (BOP) equipment. It is also required to case off unconsolidated formations and serves as a support for next casing strings.  Surface casing is always subject to extremely high safety standards and regulations. 
  • Intermediate Casing (not always required) - Available in sizes between 13 3/8” and 16”, Intermediate casing is placed between surface and the production casing / liner. In general, intermediate casing is run in deeper wells to provide isolation of abnormally pressured formations, potential lost circulation area and unstable shale sections. These risk mitigation factors,  also allow drilling the well to a planned depth with required mud weights. 
  • Production Casing - Normally coming in sizes between 4" and 9 5/8”, production casing is required to provide a structural integrity and pressure control of the hydrocarbon bearing sections, during production. Perfect cementing job is critical when setting the production casing. 
  • Production Liner - is suspended inside of the production casing (or any other previous section) using a liner hanger system. Major benefit using the liner is cost saving, as it is not run to the full depth of the well. Liners could be pre-perforated so save time and money and mainly used in slim holes or sidetracking inside the reservoir section.

Production Tubing - is a pipe that is inserted into a cased hole (wellbore), through which hydrocarbons are transported (produced) to the surface. Production tubing comes in various sizes and varies between ¾” to 4 ½” and normally 30ft long.  Production tubing also serves as a protection of the well casing against corrosive fluids, sand, paraffin and wear & tear. Together with other completion components, it is also called Production String.  If production tubing is damaged, it can easily be replaced, which is not the case with the well casing. 

Drill Pipe - is heavy and seamless pipe that provides rotations for the down-hole assembly and circulates fluids. Drill pipe's both ends are threaded and called tool joints and normally a bigger diameter than the pipe itself.  This type of pipe is used on drilling rigs only. Drill pipe comes in different sizes, but normally less than 6”, with various grades of strength, weight and length. High torque requirements when rotating the down-hole assembly, drilling fluid pressure inside the drill pipe and bending loads when used in directional drilling, all create a massive amount of stress on the drill pipe. Hence, quality and the right selection of the drill pipe for a particular application is crucial. Too big, will not allow to flow the cutting smoothly, too small - not enough fluids going down the well. 

All OCTG are produced in a different grades, different connection types, with various pressure and temperature rating, material requirements and many more characteristics. One of the key characteristics though, is corrosion resistance and strength. API and ISO standards govern the industry, with a lot of manufacturers coding and grading conventions. Although no standard can be the only source of decision making when it comes to selection of OCTG, the following standards generally govern the OCTG industry. 

Worldwide Standards:

  • API 5CT - Specification for Casing and Tubing 
  • API 5DP - Specification for Drill Pipe
  • ISO 11960:2004-Petroleum and natural gas industries-Steel pipes for use as casing  tubing for wells 

The standards above govern the characteristics of OCTG when it comes to 

  • Manufacturing methods
  • Joints type and Length Range
  • Wall thickness
  • Casing Weights 
  • Steel Grades
  • Connection 
  • Chemical Properties 
  • Tensile Properties 

Steel Grades & Material Selection 

Depending on the application, OCTG products could be of various steel grades and material composition. Both are affected by the following attributes and requirements:

  • High Collapse
  • Corrosion Resistant and Sour Services
  • Pressure Resistant 
  • Deep Wells 
  • High Collapse & Sour Service
  • Highly deviated wells 
  • Extended Reach Wells 
  • High Torque 

Based on API grades classification, below is a ballpark application guide for OCTG. There are many more proprietary grades from OCTG manufacturers, but API is the core.

Casing & Tubing ballpark application guide


Drill Pipe application guide 

Materials Selection 
Material selection process is extremely complex and requires a mixture of skills in chemistry, metallurgy, drilling and engineering.  

Connections

Connection (threading on pipe's end) play one of the key roles in safety and well integrity. There are multiple connections in the market and all of them are divided into 3 distinct categories, as shown below. Standard connection is used in less complex applications, whereas Premium connection is used in more complex applications, where gas-tight sealing is required. The applications include Gas wells, Sour services, Horizontal wells, High pressure (above 5,000 psi), High temperature (above 250F) and high pressure gas lift wells. There are numerous proprietary names of premium connections as below. The 1-8 are the most widely used and belong to long-established manufacturers.


  • CONNECTIONS
    • Standard
      • STC (short round thread casing)
      • LTC (long round thread casing)
      • BTC (buttress thread casing)
      • XC (Extreme-Line Casing)
    • Semi Premium
    • Premium / Proprietary
      • VAM (and its series)
      • FOX
      • JFEBEAR
      • HYDRILL (and its series)
      • BLUE
      • VAGT
      • TMK
      • TG-QMI
      • TP- (and its series)
      • USS (and its series)
      • BAOSTEEL 


Risks & Opportunities

Material selection can result in a price increase of as much as 5x. Hence it is important to ensure that OCTG specifications fit for the purpose. There is a very extensive list of factors that need to be considered, which in turn may result in faster delivery and lower price of OCTG. 

Metallurgy specialist - Generally, OCTG selection is done by a drilling engineer, who normally would have less knowledge of metallurgy and metal / steel chemistry than a dedicate metallurgy specialist. Hence, having an in-house Metallurgy specialist may bring a significant value and cost reduction opportunities, whereby the fit-for-purpose material is selected.  

Supply & Demand Dynamics

Demand
Demand for OCTG is directly influenced by the demand growth for fossil fuels. In simple terms, the more wells drilled, the more OCTG is required. In the short term, oil price volatility affects the demand for OCTG, as fewer wells are drilled during the industry downturn. Deep, horizontal, sour gas and offshore wells are the key drivers for OCTG demand. Since those types of wells require a higher grade of OCTG, the growth of OCTG demand will be around higher grades, premium connection and sour services products. With the absence of global data on wells length, the closest demand indicator for OCTG is the drilling rig utilization.

Over the last several years up until early 2015, the global market for OCTG was growing by around 5% annually. However, OCTG market is going through unprecedented cycle, which is probably the most challenging in the last 30 years. Demand for OCTG has been slowing down in 2015 and contracted by around 38% (from 17.7m tonnes to 11m tonnes) and expected to slide further by 20% in 2016. Reduced drilling activity and de-stocking of existing OCTG inventory are the key direct drivers that lower the demand. Just think of it - 50% drop in OCTG demand in 2 years.  

Approximate worldwide demand / consumption of OCTG is illustrated below.



Key insights into worldwide demand:

  • China and USA are the tops markets and would be the key market drivers 
  • With deep-water projects, West Africa, Brazil and Gulf of Mexico are largest segments for higher steel grades 
  • Middle East is the largest premium connection market due to 1) sour gas 2) Longer expected well life 3) Risk averseness 
  • Over the last 6 years, demand has been growing steadily with biggest gains in CIS, Middle East and China 
  • Asia (except China), Middle East and North America are mainly using heat treated and alloy steel, due to offshore drilling, sour application and shale gas. CIS, China and Africa historically have been consuming lower grades commodity products 
  • Global distribution between heated-treated and non-heated-treated products is becoming almost equal. More harsh drilling environment, such as sour services, shale gas, ultra deepwater and horizontal / directional drilling require more of heat-treated products  
  • Consumption of seamless OCTG is significantly larger than welded OCTG
  • Demand for premium connection is growing at around 1-2% per year, taking away the share from API connections  
  • De-stocking of existing OCTG and operators attempts to be more efficient with OCTG inventory and reducing safety buffers, will affect the demand in the short term.


The Middle East OCTG market share is around 12% of the global consumption and expected to grow by more than 60% by 2020 ( Source: Mordor Intelligence). Around 90% of the OCTG products used in the Middle East are seamless and circa 40% is premium connection. Although over the last several years domestic production capacity has been growing, OCTG imports in the Middle East are still more than 70% of the total consumption. China, Japan and EU are the largest exporters of OCTG to the Middle East region, with China dominating the API (non-premium) connection segment. The premium connection segment is led by Vallourec, Tenaris and Sumitomo.

API Groups 1 and 2 represent more than 80% of the Middle East market. However, API Group 5, mills' proprietary grades, CRA / chrome OCTG are picking up significantly. Saudi Arabia, UAE and Iran are the dominant markets and together constitute around 50% of the market in the Middle East.  The demand pattern for OCTG in the Middle East is shifting towards higher grades and more premium connection as a direct result of new developments that are:

  • Sour gas fields 
  • Extended reach wells 
  • Drilling deeper wells 


  • Supply

Chinese companies have been the largest supplies of API connection and Group 1 & Group 2 OCTG in the Middle East dominating it for many years with more than 70% of the market share. Russian and Brazilian companies are the closest competitor for Chinese companies due to: 1) Availability of all raw materials, 2) Cheap energy and 3) Competitive manpower costs. 

For premium connection segment and API Groups 3,4,5 and chrome OCTG, the market is heavily controlled by Vallourec, Sumitomo and Tenaris, with a recent successful debut of Chinese TPCO to the premium connection segment. It shall be noted that while Sumitomo is a fully integrated OCTG producer with an annual capacity to produce around 24,000 ton of chrome OCTG, Vallourec and Tenaris have agreements with diversified steel producers, such as Sandvik and Tubacex, each having an annual production capacity of around 6,000 ton of chrome OCTG Under those arrangements, Sandvik and Tubacex would supply tubulars to Vallourec and Tenaris for further threading and finishing.

Overall, utilization of production capacities of OCTG mills have always been below the 80% mark, reaching 40 % in some instances. Shutting the mills down is very costly, OCTG manufacturers may choose to work at an acceptable loss level, than shut off the furnaces.

External Scanning

The balance of power clearly sits with the buyer, due to a number of factors. For certain applications the balance shifts more towards the middle, as suppliers have unique technologies that are critical to buyers. Overall, coupled with highly completive environment, very high fixed costs for suppliers and very high entry barriers for new players, the buyer is in a stronger position than seller, in particular in Group 1 and Group 2 OCTG.  

In other Groups, although competition is more limited when compared to Group 1 and Group2, the production capacity is a more significant factor that affects the balance of power, hence the power is more balanced, although still putting buyers in a stronger position.  

Mills can generally produce either seamless or welded products, but not both. Capital required to manufacture seamless OCTG is higher by up to 15x than a mill to manufacture welled products. Hence, entry barriers to the  seamless segment are very high. 



 
New Entrants is Low 
  • Barriers to enter are very high 
  • Some mills can refocus on Oil & Gas during high demand
     


 
Supplier power is Medium 
  • Some product differentiation 
  • Higher grades are limited to 2-4 suppliers 
  • Demand pattern shift towards higher grades & Premium connections

 


 


Competitive Rivalry
  • Highly competitive market for lower grades and API connection
  • Less competitive in higher grades and premium connection 


Buyer Power is High 
  • Buyer spend is very high 
  • Suppliers depend on buyers


 
Substitution 
  • Does not exist 
 

Portfolio Positioning

Portfolio positioning is essential in guiding strategy within the category. The category is positioned based upon three factors; 1) supply risk, 2) profit/value risk, and 3) power structure. Based upon a detailed analysis the sub-category is positioned as a Leverage (Group 1 and Group2) and Strategic (Other Groups)


Leverage (Group 1 and Group2)

  • Low to Medium Supply Risk is supported by:
    • Highly competitive market
    • Commodity products 
  • High profit/value risk is determined by
    • High levels of expenditure
  • Power balance favors Buyers 


Strategic (Other Group 3, 4, 5 and proprietary grades)

  • Medium to High Supply Risk is supported by:
    • Limited competition in high-tier segment
    • High entry barriers and R&D intensive 
    • Quality is vital 
  • High profit/value risk is determined by:
    • High levels of expenditure
    • Safety risk with knock-on liability effect 
  • Power balance favors Buyers, although at times may exhibits a power shift toward a balance between the parties.  


  • LEVERAGE
  • STRATEGIC


High
Low
High

Cost & Price Analysis

Price Analysis

Globally, prices for OCTG have been driven purely by supply & demand factors and cyclical nature of the Oil & Gas Industry. Historical, prices for OCTG have been volatile reaching the top in 2008. The 2003-2008 periods showed the steepest increase, with some cases showing more than a 100% price escalation in a 4 year time period. Overall, prices for OCTG showed a decrease trend 2008 onwards, with even bigger pressure on OCTG suppliers in 2015 and 2016.

For majority of mills, the Middle East market is a high margin segment and one of the key for their businesses; price wars are evident, in particular at times of low demand elsewhere. Overall, prices for OCTG in the Middle East are competitive, with opportunities for more competitive pricing when excess OCTG supply becomes available elsewhere ( e.g. Brazil), due to seasonal factors that affect drilling activity.


Cost Analysis 
Key drivers affecting costs and driving prices are Materials Costs and Freight Costs for Group 1 and Group2 OCTG and QA/QC, Manufacturing Processes and Materials Costs for other Groups and proprietary grades. OCTG manufacturers are driven by supply and demand, so their margins get affected by 1) prices; 2) low utilization of production capacity resulting in high idle capacity and overheads, hence increasing production cost per unit.

OCTG prices are composed of the following major elements. The percentage variance may exist with 5-20% (+/-), and primarily driven by OCTG grade and materials selection. Higher grades tend to have more complicated and lengthy processes, whereas lower grade Group 1 and Group 2, or ERW OCTG, would require a less complicated manufacturing method, hence the portion of direct material cost would be significantly higher.



  • Direct manufacturing costs takes the biggest share, due to :
    • Processes involved in OCTG manufacturing are very long and costly. Those processes include heat treatment, casting, piercing & rolling, refining ( AOD & VOD) cold drawing, threading and inspection. In order to accommodate such a variety of processes, mills incur large fixed cost to maintain and operate such facilities. 
    • Long repetitive cycles of certain processes and highly prescriptive and diligent QA / QC processes in chrome casing 
    • Cyclical consumption of steel brings a lot of volatility into procurement of raw materials and energy. 
  • Direct input of raw materials is mainly steel and other required materials, such as Molybdenum (Mo), Chromium (Cr), Nickel (Ni), Silicon (Si) and Manganese (Mn). Some of these raw materials are produced in countries outside of common OCTG manufacturing areas. 
  • Overheads are based on industry analysis, average numbers and accounting principles. 
  • Profits - are based on industry analysis and an average of the last several years. There are companies working with less than 5% net profits, with some working with more than 10% net profits. 
  • Direct freight cost - based on the average sea freight cost of US$150-US$300 per ton from origins like EU, Japan and Brazil. While freight costs for higher grades OCTG would represent 1-2% and might be irrelevant, the Group 1 and Group 2 products would have freight costs of 6% to 12% of the price of products.

Total Cost of Ownership

  • OCTG have been priced differently and you can see the prices by footage, joint and metric ton. While there is a place for each of them, metric ton as a unit price, tend to be the most suitable when it comes for OCTG procurement that involves long transportation routes
  • Order size plays a major role on prices and leads times. With bigger orders, better prices and shorter lead times are obtained, as a result of priorities assigned by mills.
  • Effective Mill-to-well approach should be ebraced by ooerators t reduce invenotry and release cash

Strategy

Category objectives 

  • Timely availability of products and security of supply 
  • Access to expertise and high quality products in premium and sour services segments 
  • Shorter lead times 
  • Reduce inventory 

Procurement Strategy 
OCTG procurement has always been driven by fundamentals of supply & demand and capacity utilization. A number of other options could be explored.  Segregate by API group to ensure the most effective match to the supplier market. E.g. API 1 and API 2 groups are mainly commodity products with large amount of mills available. Higher API groups and proprietary OCTG, on the other hand, have very limited number of players. Strategies to consider:

 

Group 1 & Group 2

  • Maintain highly competitive environment 
  • Aggregate requirements across business units to leverage on larger spend
  • Qualify more suppliers 
  • Manage and monitor freight costs 


Group 3,4,5 & proprietary 

Although long term frame agreements might be in place, a further integration with a mill may be beneficial. Options to explore:

  • Reserve production capacity for certain type of OCTG
  • Aggregate requirements across business units to leverage on larger spend
  • Localize  manufacturing that would include a complete cycle, or majority of it 
  • Local finishing plant to include to heat treatment and threading for premium and sour services OCTG, if not for a larger capacity, then with the capacity that would be equivalent to the safety stock. 

Technical Insights

Full Production Cycles of Pipes 



Seamless Pipe Manufacturing Process