Cactus II and Gulf Coast Express are feeling the winds of the U.S. steel tariffs squall

Inability to source specialty imported steel overseas for new Permian pipelines may delay two large takeaway projects, could negatively affect Midland price differential and result in oil companies delaying wells until takeaway is in place—will U.S. tariffs end up delaying revenue for E&Ps?

“You pull on one string in international trade and it unravels in ways you could not have predicted” – North Dakota Senator Heidi Heitkamp

From Reuters

HOUSTON – Major U.S. energy companies including Plains All American Pipeline, Hess Corp and Kinder Morgan Inc are among many seeking exemptions from steel-import tariffs as the United States ratchets up trade tensions with exporters including China, Canada and Mexico.

There have been nearly 21,000 requests overall for exclusions submitted to the U.S. Commerce Department since the Trump administration imposed levies this year. Of those, more than 500 petitions involve pipes and related materials.

Initial decisions are expected this month, offering the first clues as to how the administration will balance an agenda favoring oil and gas exports while also supporting the U.S. steel and aluminum industries.

For the energy industry, the potential for relief has taken on added importance after China surprised markets last week by proposing 25 percent levies on about $1 billion a month in U.S. oil imports in retaliation for U.S. tariffs.

77% of steel in U.S. pipelines is imported

The pipeline industry could face higher costs from tariffs as about 77 percent of the steel used in U.S. pipelines is imported, according to a 2017 study for the pipeline industry. Benchmark hot-rolled U.S. steel coil prices are up more than 50 percent from a year ago, according to S&P Global Platts.

Existing pipelines between Permian basin and Gulf Coast are almost full

Pipelines from the nation’s largest oilfield in west Texas to the Gulf Coast are nearly full, depressing crude prices as output is projected to rise by about 850,000 barrels per day this year, and significant projects are not expected to be completed until at least next year.

Plains sought a tariff exclusion for its 500-mile Cactus II oil pipeline, which will connect West Texas oil fields to export docks near Corpus Christi, Texas. This month, it expects to receive its first material from Corinth Pipeworks SA, a Greek manufacturer, according to a Commerce Department filing.

“We think tariffs would be unjust, but we can tolerate” them, Greg Armstrong, chief executive of Plains All American Pipeline, told investors this month, adding that tariffs and import quotas could hurt U.S. production growth.

Only three mills in the world make the pipe specified for PAA pipeline, none are in the U.S.

No U.S. mills can produce pipe with the specifications needed for Plains’ line. Only three mills in the world make such pipe, and delivery delays could exacerbate constraints, the company wrote in its petition, affecting the price of oil from the largest U.S. oilfield.

The 585,000-barrel per day line is due to start flowing next year, just as analysts warn a bottleneck of crude could force some producers to shut in production.

Total pipeline, rail and local refining capacity from the Permian Basin oilfield in March was 3.175 million barrels per day (bpd), according to energy intelligence service Genscape, just shy of the oilfield’s roughly 3.3 million bpd output in June.

Rival pipeline operator Kinder Morgan also wants an exclusion for its $1.75 billion Gulf Coast Express natural gas pipeline from West Texas to the U.S. Gulf Coast. It ordered 47 percent of specialized pipe needed for the project from Turkish steel maker Borusan Mannesmann.

Only one U.S. producer could meet Kinder Morgan’s needs, but it could not meet the volume required within the necessary timeline, Kinder said in a filing.

The United States is committed to acting on exclusion requests within 90 days of a petition being posted for comments, a Commerce Department spokesman said. The United States could offer refunds on tariffs paid since a petition became active.

For companies unwilling to take the risk of having a request denied, “it may mean cutting back or pushing the timeline out farther” for some projects, said Brigham McCown, former head of regulator U.S. Pipeline and Hazardous Materials Safety Administration.

Oil and gas producer Hess cited safety concerns in a request to use Japanese pipe for its Stampede offshore project in the U.S. Gulf of Mexico.

“Without the ability to use this product, we will not be able to guarantee corrosion resistance in deepwater operations using other currently available steel products – potentially compromising both safety and environmental protection,” the company wrote in its filing.

Between 2015 and 2016, the U.S. imported between about $5 billion and $8 billion in steel line pipe, valves and fittings for the pipeline industry, according to a study by consultancy ICF for the American Petroleum Institute.

“There’s lots of concern that the increased cost in pipe will increase the costs for our oil,” said North Dakota Senator Heidi Heitkamp, who wants Congress to vote on tariffs imposed under national security grounds. “You pull on one string in international trade and it unravels in ways you could not have predicted.”

From CBS News

The threat has already waylaid Boursan Mannesmann’s growth plans.

Just over 200 people work at the mill, which imports raw material from a facility in Turkey. But it could have more employees because the company has been planning a $75 million expansion that would have added 170 jobs. That investment has been put on hold in the wake of the steel tariffs, given that the cost of getting materials from abroad will increase and selling the more expensive finished products will likely get tougher.

Borusan Mannesmann administrators said the tariffs could create an added annual expense of more than $25 million for the relatively new company.

What could the effects be?

Tariffs on steel and aluminum imports to the U.S. can help local producers of the metals by making foreign products more expensive. But they can also increase costs more broadly for U.S. manufacturers that cannot source all their needs locally and have to import the materials. That hurts those companies and can lead to higher consumer prices, economists say.

Steel and aluminum production jobs represent a small segment of the U.S. economy — about 255,000 in steel and 61,000 in aluminum, according to Moody’s Investors Service.

Manufacturers and end users make up a much larger portion of the economy. That means tariffs on raw materials, combined with retaliation from upset trading partners, may end up causing more harm than good. An estimate from consulting firm Trade Partnership forecast about 179,000 U.S. jobs lost versus 33,000 created as a result of the metal tariffs.

BMP, the parent company that owns the mill in Baytown, has filed an exclusion request with the U.S. government asking for an two-year exemption on raw material imports produced at its facility in Turkey — which would otherwise be subject to a 25 percent tariff. The company argues in its request that the exclusion is necessary for its expansion and would “unlock” the investment the firm needs.

One of the projects Borusan Mannesman is contracted to supply is the GCX Pipeline, a roughly $1.8 billion, 514-mile project intended to transport natural gas from Texas’ Permian basin to the Gulf Coast. The pipeline’s owner, Kinder Morgan, also filed an  exclusion request, specifically for the specialized X70 pipe. The company argues the materials cannot be obtained from U.S. suppliers in time to meet the project’s October 2019 deadline.

Kinder Morgan (KMI) said the project “will directly support 2,500 well paying construction jobs during the eighteen months” required to complete it and that “steel pipe imports from Turkey are consistent with U.S. national security.”



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