The Bakken’s oil and gas sector relies heavily on steel from overseas. It could thus be facing a significant bump in the cost of doing things, depending on how President Donald Trump’s steel tariffs play out, just as it is seeking to expand its oil gathering and transmission infrastructure.
Steel in the Bakken is used for drill pipe, casing, wilreline coil tubing, workover rigs, the big transmission lines like Dakota Access, and more, so an increase in costs will be felt industry wide.
The Association of Oil Pipelines commissioned a report during Trump’s campaign to evaluate the impact of a buy-American philosophy on pipeline costs. That report showed that a 25-percent increase in piping costs would translate to a $76 million increase to a 280-mile long project. Costs for a longer, cross-country project, meanwhile, would go up $300 million.
Pipeline Authority Justin Kringstad has said the state’s pipeline system will reach capacity again in 18 or so months. He estimates the state’s oil and gas industry needs an additional capacity of 300,000 to 700,000 barrels per day in the coming 10 to 15 years — another Dakota Access or more.
Dakota Access, the latest of large transmission lines for crude oil, is designed to carry, at maximum capacity, up to 570,000 barrels per day. It was built in an environment with no steel tariff at a cost of $3.8 billion. Its new price tag might thus be $4.1 billion — depending, of course, on the specifics of a given pipeline project and the type of steel involved.
In the meantime, uncertainty about the shape of the steel tariffs to come has caused widespread price volatility, leading to difficulty quoting steel pipes and valves for many projects already in the works.
Tim Miller is the Willistson branch manager for BPS, which sells pipelines, valves, and basically every steel product the industry uses, from wellhead to Dakota Access to refinery.
“Right now, from what I can see, plans in place still must go forward,” he said. “The difficulty is availability of product, however. There’s only so much tonnage out there. It’s going to be in short supply, unfortunately.”
Volatility, however, has sometimes meant quotation validity of an hour or less.
That has complicated matters for Clayton Carmack, with S&B Drilling. His company installs helical piers made of steel for energy, construction, commercial and residential sites.
“We are all having a hard time quoting our clients, because we don’t know what is happening,” he said. “Nothing is set in stone yet. Prices are all over the board.”
Carmack knows steel prices will go up in light of the tariff, but by how much? The tariff itself is 25 percent, but supply and demand will factor in as well.
“The U.S. isn’t manufacturing this product,” Miller said. “So you’ll take a product that’s readily available, with a six- to eight-week delivery time, and it could go to eight to 12 weeks instead or 12 to 24.”
Those supply shortages could lead to a jump in prices.
Carmack said he wants to give his customers the best, most competitive price he can for projects. A the same time, however, he can’t afford to eat a large loss on a ton of steel.
He’s been telling his customers that if the price of steel goes up dramatically, he will have to pass that cost along. That’s unusual, because increases in cost with the companies Carmack works for generally have to go through a long procurement process.
“Had this been a year ago, I don’t think clients would be as open to it,” he said. “Because things are going a bit better they understand the circumstances. I’ve got a certain profit margin I have to run, through. The clients we have talked to so far have been understanding.”
Some companies have been trying to stockpile casing ahead of the tariff going into effect, oilfield consultant Monte Besler said.
“People are trying to get lower prices now, while they can,” he said. “Suppliers are trying to get more in ahead of (the tariff), and (the oil and gas companies) are trying to tie up all the steel that’s already in and not subject to tariffs.”
Besler is hopeful that a tariff might ultimately help rejuvenate some of America’s steel-making capacity, which foundered in 1982 as the supply of easy-to-mine iron dwindled.
“Prices would still be higher, because it’s more expensive to make steel in the U.S., but people won’t be as concerned because it’s creating jobs,” he suggested. “The economy is improving.”
The problem with that line of thinking, however, Miller said, is that America will be competing with an overseas steel industry that has dramatically reduced the number of jobs it needs thanks to automation.
“Look at a pipe mill in other countries,” he said. “They’ll have 1/10th the workforce because of robotics than you had 10 years ago.”
Miller said he’s been through tariffs in the past, and, in his experience, they don’t always have the intended effect, even if justified.
The last steel tariff was implemented by President George W. Bush in 2002 in an effort to protect the U.S. steel industry. The tariffs ranged from 30 percent on sheets to 15 percent on bars and rods and were to be in effect for three years and one day.
Ultimately, U.S. steel manufacturers couldn’t meet the demand, however. Steel prices soared, and that had a ripple effect on the entire economy.
The result was a loss of 200,000 jobs from February to November of 2002, according to a Trade Partnership Worldwide analysis, from a variety of steel-consuming sectors. That was more than the entire steel industry at the time, and represented nearly $4 billion in lost wages.
The entire report is online at http://www.tradepartnership.com/pdf_files/2002jobstudy.pdf.
Every U.S. state suffered employment losses, the report said, with the highest in California at 19,392 and second highest in Texas, 15,826.
“While insufficient data exist at this time to measure the precise role steel tariffs played in causing such significant price increases, relative to the other factors, it is clear that the Section 201 tariffs played a leading role in pushing prices up,” the report said. “Steel tariffs caused shortages of imported product and put U.S. manufacturers of steel-containing products at a disadvantage relative to their foreign competitors.”
Miller has an even simpler analysis.
“The biggest difficulty is the U.S. just doesn’t have the capacity that matches demand,” he said.
That’s going to make it hard for them to deliver products in a timely fashion, and it will lead to increased costs. Still, he believes the market will ultimately weather the tariff storm — it’s the uncertainty getting there that is bothering him the most.
“You’ll have a slight hiccup and a price increase and markets will improve,” he said. “It’s the indecisiveness of the tariffs that causes a delay for the construction of projects. If he would just say, ‘We’re done, here’s the date, we’re going forward and here it is.’ Without having a decisive fact, you don’t know where you’re going.”