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Energy industry warns steel tariff, exiting NAFTA could hinder business growth

The energy industry is growing increasingly concerned that recently announced steel tariffs and a U.S. exit from the North American Free Trade Agreement could deliver a big blow to the steel-reliant energy industry and that the oilfield services sector could be among the hardest hit.

President Donald Trump on March 8 signed orders that will levy tariffs of 25% on imported steel and 10% on aluminum, thus igniting concerns from the energy industry, which relies on global steel imports for drilling, pipelines, LNG terminals, onshore and offshore production facilities, refineries and petrochemical plants. The tariffs go into effect March 23; however, a temporary exemption will be given to Canada and Mexico.

Leaders across the energy sector are asking for Trump's careful consideration of the impact that such tariffs would have for an industry still in recovery after years of struggle.

In a March 16 letter to Trump, Chairman of The Texas Alliance of Energy Producers Bob Osborne asked the Administration to "address the various steel-related trade imbalances in targeted fashion to the maximum extent possible, in ways that will minimally impact our domestic oil and gas industry."

While the impact of the steel tariffs would be felt across the industry, the oilfield services sector, which is responsible for supplying operators the tools and equipment necessary for the production process, would be among the hardest hit by the tariffs.

Drilling has picked up dramatically since the oil price crash of 2014, and output is at an all-time high. But while exploration and production companies have realized earnings improvements as crude oil prices moved back above $60 a barrel, under the same scenario, oilfield service companies are just beginning to come back from a two-year downturn that drove many out of business. Tightened capital expenditure budgets have forced service companies to hold rates steady in order to stay afloat and OFS firms have only recently started to inch prices higher amid a growing demand for drilling and completions.

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SNL Image

While the energy industry uses as much domestically produced steel as it can, there is not enough high-grade steel in the U.S. to meet demand, and any increase in the cost for steel could reverse the sector's growth opportunities. "Steel inputs easily account for 10% or more of the upstream industry cost structure from drilling rigs to 'oil country tubular goods' (OCTG) — drill pipe, downhole tubing, line pipe, etc., as well as other oilfield equipment," Osborn said.

Canary LLC, one of the largest private oilfield service companies in the U.S., with operations in every major shale basin, is among the myriad of oilfield service companies that could see growth stifled by steel tariffs.

"We – like the majority of the U.S. oil and natural gas industry – rely on imported steel at our Shawnee, Oklahoma manufacturing facility and across our operations, including drilling and production of our wellheads, pressure control equipment, and specialty parts," Canary's CEO Dan K. Eberhart said in a March 5 letter to Trump. "The proposed punitive tariffs would harm our business and slow or even reverse the expansion boom underway in America's energy sector," he said.

Canary spends more than $10 million a year directly or indirectly on imported steel, and tariffs will add $2.5 million to the company's costs, Eberhart said. As a result, the company would have to purchase more finished products from abroad and do less manufacturing at U.S. facilities. Higher costs for materials will also mean less revenue available to expand its activities and less money for wages and other employee benefits for its U.S. workforce.

In a March 19 statement, American Petroleum Institute President and CEO Jack Gerard said that the trade group expects the U.S. Commerce Department "will acknowledge various market realities and take into consideration the complex supply chains of the U.S. oil and natural gas industry and the need for specialty steel not available domestically for many of its projects."

The threat of a U.S. exit from NAFTA drives additional concern for the industry. "NAFTA has played a critical role in facilitating North American energy integration, which enhances U.S. energy security, supports millions of American jobs in the oil and natural gas industry, and helps make energy more affordable," Gerard said in a statement published in January.