August 8, 2008 / 5:41 PM / 11 years ago

Tight pipe supplies bedevil U.S. energy companies

HOUSTON (Reuters) - A shortage of steel pipes could disrupt the boom in U.S. natural gas drilling for the energy companies that rely on the tubes to drill and line their wells.

Seamless steel pipes, known as tubular goods in the oil patch, are in short supply after an unexpected resurgence in the North American onshore drilling market.

“The tubular situation is about as tight as we’ve seen it in the last 20 or 30 years,” Mark Papa, the chief executive officer of EOG Resources Inc (EOG.N) recently told investors.

The jump in natural gas prices earlier this year and the move to tap shale rock formations that were once seen as untenable have triggered a rush to secure tubular supplies, surprising the industry.

“Certainly, at the beginning of the year, North America was considered dead money,” said Jeff Spittel, oilfield services analyst with Natixis Bleichroeder. “I imagine that people who didn’t recognize the reversal right away may have been caught short.”

Demand for oilfield pipe is up sharply as exploration and production companies roll out aggressive plans to increase drilling, especially in areas like the Haynesville shale in northern Louisiana.

For example, Tenaris SA (TENR.MI) (TS.N) TENA.BA, a global producer of seamless steel pipes based in Luxembourg, said its North American tube sales soared 42 percent in the second quarter to $986.5 million.

But U.S. pipe stocks are very low following a slowdown in drilling in the United States and Canada in 2007.

Tenaris told investors on its second-quarter conference call that it has only 3.7 months of inventory on hand in the United States, the lowest level in six years. The company said that situation is not likely to improve in the coming months.

EOG’s Papa said many of the company’s wells are experiencing a kind of “just in time delivery” where they received the pipe “literally hours before we have to run it in the well.”

Papa said he could not predict whether the supply situation would slow drilling if its worsens, but does expect the situation to remain tight.

Larger companies have better access to supply and will likely see fewer disruptions, analysts said.

“It’s something that would be more of a problem for the smaller producer,” Mike Breard, senior energy analyst with Hodges Capital Management, said. “But I haven’t heard of anyone who has postponed a well because they couldn’t get drill pipe.”

John Richels, president of Devon Energy Corp (DVN.N), recently told Reuters it had become more difficult to secure tubulars and noted the situation was particularly acute for special-use pipe, like those used in corrosive environments.

By contrast, Chesapeake Energy Corp (CHK.N) Aubrey McClendon, which runs one of the most aggressive drilling programs in the United States, told investors that while supplies are tight, he did not expect any problems.

“We have been the number one consumer of oilfield tubulars for years and years, so we will get our share, McClendon said on the company’s quarterly conference call. “They will be more expensive, but we will not be running out of tubulars.”

Reporting by Anna Driver, editing by Leslie Gevirtz

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