Back in the flow
With demand for pipes rising, firms are hiring again.
“We melt, roll and treat our steel here in the U.S. We want to become as local as possible.” Nicolas de Coignac, Vallourec executive
TO rising oil prices, growing rig counts and increasing production numbers, add another indicator that an industry recovery is underway: pipe. Demand for the piping used in oil and gas wells has picked up significantly in recent months as energy companies return to the Permian Basin in West Texas and other U.S. shale fields, drilling longer horizontal wells to produce oil and gas more efficiently and generate profits with prices still at modest levels. In factories that make pipe, that has meant more work and more hiring.
In Houston, Vallourec, a Paris company with North American headquarters here, has added some 250 workers and counting at its U.S. plants since November — half of whom are in Houston — many called back after getting laid off during the oil bust. Vallourec now employs about 850 people in Houston.
“There’s booming demand,” said Nicolas de Coignac, Vallourec’s North American president. “It took us a couple of months to determine that activity was sustainable to justify rehiring — that it’s not a bubble.”
The rebound in the pipe business shows that the nascent oil recovery is beginning to spread to other sectors tied to the industry. Texas manufacturers, for example, slashed nearly 60,000 jobs during the two-year energy downturn, but they have boosted payrolls in each of the past four months, adding more than 7,000 jobs in January alone, according to the U.S. Labor Department.
More broadly, with the oil and gas industry stabilizing and its drag on the
economy diminishing, the state added more than 50,000 jobs in January, the biggest monthly gain since at least 1990. The fabricated metals sector, including piping, has added 1,700 jobs in the Houston area since September, University of Houston economist Bill Gilmer said.
“It looks like we’ve taken off in a normal recovery cycle,” Gilmer said, cautioning that oil prices have recently slumped and drillers might be too optimistic.
Vallourec has 20,000 employees in more than 20 countries, reporting 2016 revenue of $3.2 billion. Vallourec first opened a small Houston operation three decades ago and grew by acquiring the manufacturer Omsco in 2006 and units of Houston pipe maker Grant Prideco in 2008.
Vallourec established its North American headquarters in Houston in 2015, after buying big time into the U.S. shale boom by investing more than $1 billion to build an Ohio factory, which produces piping with “Made in USA” stamps that would make President Donald Trump proud.
The crash in oil prices, however, put a damper on Vallourec’s growth, leading the company to temporarily shutter the Ohio mill and cut more than 1,000 American jobs, including more than 400 positions at its five Houston facilities.
As prices have recovered to about $50 a barrel, and rigs have returned to the Permian and other parts of the U.S. oil patch, so has business at Vallourec and other pipe makers. In the earliest stages of the rebound, oil producers and services companies held out on buying piping as long as they could, using what they had stockpiled. When those inventories began running out, new orders quickly followed for manufacturers.
“It is now time for us to get the benefit from these huge investments in equipment and in people,” de Coignac said. “We melt, roll and treat our steel here in the U.S. We want to become as local as possible.”
The specialized steel piping for the oil and gas industry includes drill pipe used for drilling and creating wells; casing pipe that’s cemented into place to line the walls of the well and give it structural stability; and tubing pipe inserted into the well through which the oil and gas travels. Longer horizontal sections drilled in oil wells now easily exceed 10,000 feet — so-called “super laterals” — and they require a lot of pipe.
Global demand for well piping will grow by more than 6 percent a year through 2020, with North American shale drilling driving much of the growth in a global market worth more than $30 billion, according to Technavio, a London research firm.
Prices for piping have climbed about 10 percent from September, according to Ian Macpherson, an analyst at the investment bank Piper Jaffray & Co.
Vallourec and others making steel and employing workers in the U.S. are hoping to get a further boost from Trump’s “America first” policies. Over the past two decades, as the global steel industry consolidated, overseas steel makers grabbed bigger and bigger shares of the market. During the height of the shale oil boom, more than 50 percent of all well piping was imported from Asia and other parts of the world.
But foreign steel makers, like Vallourec, are investing and expanding here to serve the U.S. energy market. Tenaris, an Argentinian-Italian company that acquired Houston-based Hydril Co. in 2007, is building a massive steel mill southwest of Houston that will employ 600 when it is completed this fall.
The new Bay City mill is touted as the nation’s most technologically advanced, using robots to move steel, said Germán Curá, the North American president of Tenaris. Increased automation means the plant can operate with fewer people, making it more competitive with global manufacturers.
Tenaris and Vallourec also are banking on the U.S. Commerce Department increasing duties on cheap South Korean piping exported to the U.S., which could lift prices and further boost American-made piping. U.S. companies allege the Korean government is subsidizing its steel makers, which are dumping piping below cost in U.S. markets.
In the early years of the shale boom, China was also accused of dumping steel and pipe, but the Commerce Department slapped high tariffs on the Chinese exports. U.S. manufacturer hope similar actions will stop the alleged dumping by South Korea.
In the meantime, Vallourec and other companies are hiring cautiously, bringing back some workers, but also authorizing overtime to fill orders without adding even more employees.
The increasingly complicated wells are a challenge for piping manufacturers. Modern wells require more pipe, but each one is more bountiful, meaning fewer wells are needed to pump out the same amounts of crude.
De Coignac said he still likes his position. These more complex wells require stronger piping that fits Vallourec’s niche — higher grades of steel for seamless pipe and connections that work well in curves and horizontal wells.
“It’s less pipe overall, but more of the pipe we produce, so it remains favorable for us,” he said. “They’re capable of enduring. Well integrity is the name of the game.”