Oil Country Tubular Goods (OCTG) are a wide range of steel tubular products that are used in oil and gas exploration, development and production, in particular during drilling. OCTG can be seamless or welded (Electric Resistance Welding (ERW)) and come in various sizes and lengths. There are three main sub-groups of OCTG:
Production Tubing, and
Well Casing - is a pipe (of different sizes 4.5" to 36") that is inserted into the well bore, cemented and serves as a structural component of the well, providing hole integrity and preventing the well from collapsing while drilling. Well casing normally remains in place for the life of the well. 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, including preventing well collapse, isolating groundwater, and providing structural support for the well. Conductor can be installed either by drilling or hammering the conductor into the ground.
Surface Casing - Although varying in sizes depending on the application, a 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 the next casing string. 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 from abnormally pressured formations allowing heavier mud weights to control the lower formation.
Production Casing - Available in sizes between 4" and 9 5/8”, production casing is required to provide structural integrity and pressure control of the hydrocarbon-bearing sections, during production.
Production Liner is suspended from the production casing (or any other previous section) using a liner hanger system reducing cost significantly as the liner does not have to be run the full depth of the well. Liners may be pre-perforated to save time and money.
Production Tubing - is a pipe that is inserted inside the cased hole (well bore) through which hydrocarbons are transported (produced) to the surface. Production tubing comes in various sizes and varies between ¾” to 4 ½”. Production tubing also serves as a protection of the well casing against corrosive fluids, sand, paraffin and wear & tear. The production tubing is connected with other completion components collectively known as the production string. Production tubing may be easily replaced if damaged which is not the case for well casing.
Drill Pipe - is a heavy, seamless pipe that provides rotations for the down-hole assembly and circulates fluids. This type of pipe is used on drilling rigs only. Drill pipe comes in different sizes (normally less than 6”) in 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 directional drilling, all create a large amount of stress on the drill pipe.
API and ISO are generally the standards adopted by the oil and gas industry in the manufacture and selection of OCTG. These standard are:
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
These standards dictate the manufacturing methods, joints type and length range, wall thickness, weights, steel grade, connection, chemical properties, tensile properties and much more.
Steel Grades & Material Selection
Depending on the application, OCTG products can vary hugely in terms of properties. Based on API grade classifications, below is a rough guide to casing and tubing and drill pipe selection in different applications.
Casing & Tubing Guide
Drill Pipe Guide
Connections (threading at pipe's end) play a key role in safety and well integrity. Multiple connections types are available however they are broadly categorized in 3 groups: standard, semi-premium and premium. Moving from standard to premium connections the screwing properties of the connection improve to allow for use in more challenging environments where greater stresses are placed on the pipe and connections.
Supply & Demand Dynamics
Supply & Demand Dynamics
Demand for OCTG is directly influenced by the demand growth for oil and gas. In simple terms, the more wells drilled, the more OCTG required. With the absence of accurate global data on well lengths and/or OCTG procurement the best global demand indicator for OCTG is rig count. Global OCTG demand is expected to reach 17.7 million tonnes in 2025, according to Fastmarkets. This growth is likely to be led by Africa.
As of Q1 2021, the global demand for OCTG is on the rise, due to more drilling activities. This is evidenced by double-digit sequential growth in NOV Tuboscope's pipe inspection services around the world. When it comes to the US market demand, the outlook is a bit more gloomy with a very marginal annual growth in consumption - 0.67% from 2019 to 2025. this will have an impact on OCTG prices in the North American market.
- Chinese producers have been the largest supplier of standard connections, Group 1 and Group 2 OCTG for many years with more than 70% of the market share. Russian and Brazilian producers are the closest competitors.
- For premium connections and API Groups 3,4,5 and chrome OCTG, the market is dominated by Vallourec, Sumitomo and Tenaris, with Chinese competition in TPCO gaining ground in the premium connection segment.
- Mills can generally produce either seamless or welded products, but not both. Capital required to manufacture seamless OCTG is higher by up to 15x to manufacture welded products.
- Sumitomo is a fully integrated OCTG producer (i.e. raw material to finished product) whereas Vallourec and Tenaris have agreements with diversified steel producers, such as Sandvik and Tubacex to purchase tubular for finishing (threading etc.).
- In downturns, OCTG producers may run close to cost or even at a loss as utilization falls due to the huge expense associated with shutting the mill down.
It is typical to see spend within the OCTG category sit in the “Leverage” quadrant of the Kraljic Matrix (low supply risk, high value) especially with the API group 1 & 2 OCTG. When demand increases API groups 3, 4, and 5 may well become “Strategic” and it may be more beneficial to develop long term relationships and strategies early to mitigate this.
At present buyers are in a strong position across all API groups due to low demand, and high competition between the major producers.
Cost & Price Analysis
Cost & Price Analysis
Due to the increased cost of raw materials ( iron ore and nickel), the prices of OCTG witnessed a noticeable price increase in Q1 2021 and likely to maintain the higher prices for the next several months, in particular in the North American market, due to low demand. OCTG prices in the US increased significantly in April, reaching their highest level since September 2018. The midpoint of the monthly Platts domestic OCTG assessment was $1,400/st on 1st April 2021, which higher by $200 from March 2021 and up from the lowest of $775/st during the summer ( source).
Prices rise and fall with demand however the highly competitive nature of OCTG generally restrains the profit margins of the major producers. As would be expected commodity grades have lower margins than premium grades and lead time demands can push prices up significantly. Below are the trailing 12-month net margins of some of the main OCTG suppliers, as of Q1 2021.
|Net Margin (TTM)||-10.23%||-9.9%||-11.96%||N/A||8.8%|
The main cost components in OCTG pricing are:
1. Raw Materials - Represents circa 25% to 45%
Includes iron ore (Fe) and/or steel scrap (used in steelmaking) and other alloying metals such as Molybdenum (Mo), Chromium (Cr), Nickel (Ni), Silicon (Si) and Manganese (Mn).
Indices to follow: Scrap prices are typically a good leading indicator of OCTG prices as are hot-rolled coil prices in the ERW segment
2. Manufacturing - Represents circa 45% to 55%
Manufacturing is a long, repetitive, energy-intensive process requiring large quantities of electricity typically generated from natural gas.
Indices to follow: Natural Gas prices
3. Shipping - Represents circa 5% to 10%
Due to the volumes of both raw inputs and finished product shipping costs can place significant pressure on OCTG pricing.
Indices to follow: Dry Baltic Exchange is a useful indicator of shipping costs.
4. Overheads - Represents circa 8% to 20%
Overheads from the main OCTG suppliers can range between 8% to 20%.
5. Profits - Represents less than 5%
Total Cost of Ownership
Total Cost of Ownership
The table below shows the main direct and indirect costs associated with OCTG purchases:
|OCTG Purchase Price||Priced by ft, joint or ton|
|Freight||Priced by ft, joint or ton delivered|
|Taxes and Duty||Applied on purchase price plus freight & insurance|
|Inventory & Storage||Sq. M storage cost|
Know your Demand - Maintain a 12 to 18-month look-ahead of OCTG demand to ensure you can approach the market at the right time. Approaching the market with time and volume is the best way to ensure competitive pricing.
Competitive RFQ's - For most buyers (especially in downturns and those buying commodity grades), knowing your demand and approaching multiple suppliers with RFQ's will drive the most competitive prices and lead times. Buyers should also consider reverse auctions to drive down prices further.
Spec Review & Standardization - Challenge current specifications to ensure they remain fit for purpose and look for opportunities to standardize OCTG across the organization. Often this is best achieved via an independent consultant specializing in such reviews.
Build for Long Term - Where high or proprietary grade OCTG is required buyers should look to build long term relationships with a supplier to ensure the security of supply. This should include:
- Sharing of OCTG demand and manufacturing availability
- Transparent index-based pricing
- Commitment to drive costs lower collaboratively