Oil and gas market looking up, but profits hard to come by

WASHINGTON—This year will be better than 2016 for the oil and gas industry and the rubber and polymer product manufacturers that supply them, according to industry officials and experts.

Even so, oil and gas prices are not so high as to guarantee profits, said Neil Mendes, CEO of Alpine Polytech, a Texas-based high-tech company specializing in polymer technologies for the energy industry.

Despite a recent downtick, oil prices have fallen into a per-barrel price range of $50 to $60. Although better than last year, this still doesn't match the levels of a few years ago, Mendes said.

"At $75 a barrel, anyone can make money," he said. "At $50 to $60 a barrel, you have to know what you're doing."

Michael L. Peterman, president and CEO of Whittier, Calif.-based Santa Fe Rubber Products Inc., said his company's outlook for the oil and gas market is much better this year than last.

"Most of it is tied to the per-barrel price of oil," Peterman said. "When the price is under $40, everybody shuts their rigs off."

Much of what Santa Fe supplies to the oil and gas industry is "down-hole" products such as pipe protectors, which goes to customers in the North Sea, Saudi Arabia and Brazil, Peterman said. The company also does good business with natural gas producers in Colorado and the Dakotas, he said.

"When we get a lot of orders for four-inch pipe, we know those wells are being turned on," he said.

Things are going so well at Santa Fe that the company has brought back 10 old jobs, adding them at two or three per shift, Peterman said.

Bill Hyde, senior director, olefins and elastomers for Houston-based IHS Markit, said oil prices are likely to remain relatively flat in the near future, because of contradictory forces in the market.

"OPEC has moved to restrict production in an effort to bring prices up, and they're doing a better job of that than in the past," Hyde said.

Both OPEC and non-OPEC countries have held fairly well to the new restrictions, according to Hyde. But oil production from unconventional sources, such as shale, largely has neutralized OPEC's efforts, he said.

Some oil-producing countries are struggling more than others. Mendes said Venezuela is a tragic case in point.

"Venezuela is in deep trouble," he said. "It is dependent entirely on oil, and between that and an oppressive government, there's no money even to buy food."

While Norway-based Trelleborg Offshore has experienced the same oil price-based challenges as other rubber product suppliers to the oil and gas industry, the company has implemented several initiatives to be more cost-efficient, according to Managing Director Hans Leo Hals.

Material development within thermal solution and fire protection are two of the main areas for Trelleborg's offshore operation in Norway, making the company a one-stop shop for these services, Hals said.

"Our third focus is mobility of services, utilizing a Mobile Production Unit to maximize our local presence globally," he said.

The Mobile Production Unit, Hals said, is a portable facility that allows onsite coating of thermal insulation for passive fire and corrosion protection anywhere in the world.

"The ability to go to the customer's site increases project flexibility and reduces the costs as well as lead times associated with transporting parts to a specialist coating facility," he said.

Trelleborg recently completed a Next Level Report surveying rubber product manufacturers that supply the oil and gas industry. Most respondents said they believe operational efficiency within the industry is improving, Hals said.

"The report also revealed that respondents believed that suppliers have improved their negotiations on cost, availability of technologies and products, responsiveness, and alternative solutions," he said. "We see this as a positive because, as a supplier, our focus is always on putting our customers' needs first."

Trevor Clarke, marketing director of upstream oil and gas for James Walker Sealing Products & Services Ltd., said it's still a tough market and there has been considerable reorganization among the main OEM customer base.

"There's been a lot of cost-down initiatives," he said. "Obviously they're trying to remain profitable at the price of oil that's been around for some time now. Gone are the days of $100 a barrel, and they're looking for profitability around the mid-$40s. So they're looking at all of their supply chain."

While he doesn't believe the market is out of the woods yet, indicators are much more positive than they have been for the past couple of years.

And for the England-based firm, it is seeing some positive signs in the U.S. market as well.

"There are opportunities there, as a number of companies are looking to put a bigger spend with fewer suppliers, and looking at it from a strategic partner perspective," Clarke said.

While Trelleborg's data show that the number of operational oil rigs in Europe is down, North American figures show strong growth in the past year.

According to the weekly North American Rotary Rig Count from Baker-Hughes, the total number of operational rigs rose from 489 on March 4, 2016, to 756 on March 3, 2017.

While the number of rigs is growing quickly, it's still far from the 1,400 that operated in 2014, according to Mendes.

"It's obviously still a fraction of what it was at its very peak," he said. "It will never be 1,400 again, at least not in the foreseeable future."

However, U.S. oil fields are doing very well, according to Mendes. The Permian Basin, in Texas and New Mexico, is "doing fantastic," he said, and the Bakken Basin in North Dakota, though not quite as strong as the Permian Basin, has improved a lot.

Furthermore, shale extraction operations use a lot more rubber and plastics than conventional extraction, Mendes said.

For one thing, oil extraction from shale occurs at much lower temperatures than extraction through wells—about 200 to 250 degrees Fahrenheit—for anywhere from four to 24 hours, he said.

"Before, you had to have steel parts that were made to last for years," Mendes said. "With shale, you don't need steel."

Also, shale extraction has long wells requiring rubber or plastic plugs every 10 to 15 feet to block the oil and build pressure, Mendes said. "You might use 100 plugs or more in one well," he said.

Speaking of 2018 and beyond, Hyde said he expected more of the same for the oil and gas industry, with continuing friction between OPEC on one hand, and unconventional producers and their ability to bring on additional production volume on the other.

"OPEC has to make the decision: volume or price," he said. "They can't have it the way they used to."

Natural gas will continue to increase, supplanting much of the coal market, according to Daniel Hertz Jr., CEO of Red Bank, N.J.-based Seals Eastern Inc.

"Ten or 15 years ago, we thought we would be importing liquid natural gas to the U.S.," Hertz said. "Now, we're exporting it."

There is some hope that oil prices will reach the mid-60s again by the end of 2018, according to Diego Bolanos, North American sales manager for oil and gas at Brenham, Texas-based Precision Polymer Engineering.

"But in the long term, I don't see anything near where we were three years ago," he said.

There is one factor that is different from 2016: a new president. Donald Trump has signed executive orders, appointed officials and announced policies that portend an easier regulatory picture for the energy industry than under the Obama administration.

The interviewees were divided on how the Trump administration's policies are affecting the oil and gas market.

"Right now, I don't think it's having any significant effect," Hyde said. "Trump has signed an executive order on the Keystone pipeline, and has talked about how they will streamline the approval process for new drilling and pipeline permits. But they haven't really done anything yet."

However, others said they were already seeing positive effects, if only in industry morale. "There's a lot more optimism now than there was last year," Mendes said. "I flew in to speak at a meeting of the Petroleum Equipment Suppliers Association, and the response was very bullish. They are very optimistic about the future of North American oil and gas."

"With Trump, it's all positive," Hertz said. "Obama tried to close down federal lands for future energy exploration, and also to shut down offshore drilling. We had difficulty trying to figure out what he was trying to do."