May 8, 2001
of Brian T. Petty
Senior Vice President - Government Affairs
International Association of Drilling Contractors
Reviews of Oil Country Tubular Goods from
Argentina, Italy, Japan, Korea and Mexico
International Trade Commission
My name is Brian T. Petty, and I am the Senior Vice President of Government Affairs for the International Association of Drilling Contractors (IADC), the sole organization representing virtually the entire global drilling industry, the most substantial percentage of which is comprised of US companies.
It is not widely understood that oil and gas companies almost never own the equipment used in the exploration for new sources of hydrocarbons. That specialized task is provided by drilling contractors who conduct the exploratory work on land and offshore at the direction of their customers, the oil companies. If reservoirs of hydrocarbons are discovered, the drilling contractor typically has no ownership interest in the found reserves. Rather, the drilling contractor furnishing his services to the oil company is more akin to a building contractor, who on completion of the client's assigned task of erecting a building to a specific design, moves on with his equipment to another job. Simply put, drilling contractors build boreholes.
The machinery involved in a drilling rig is diverse and exceedingly expensive. And, above all, it is subject to the most extraordinary wear and tear as it employs vast amounts of power to chew through rock into deep zones of intense pressure and heat to seek out geological traps holding oil and/or natural gas.
As the drilling rig placed on a potential well site operates, it drives a bit at the end of an ever-lengthening string of pipe into the earth's crust. That pipe must have tensile characteristics to twist, bend and support a great column of weight, in addition to withstanding the intense pressure and heat associated with drilling depths. That pipe necessarily wears out, and must be replaced.
Drill pipe accounts for less than one percent of the total tonnage for OCTG. The drilling industry consumes drill pipe, and must replace that pipe on a routine basis. There are but two companies that process steel components, much of which is imported, to fabricate 80% of finished drillpipe in the US. Given the relatively insignificant component of OCTG that drill pipe represents, and this country's need for finding additional hydrocarbons, it is time for the federal government to let anti-dumping penalties on non-US drill pipe lapse.
IADC's member companies have for nearly 15 years struggled with shortages in finished drill pipe. As far back as the mid-1980's, US drilling contractors encountered severe shortages in drill pipe inventories, largely precipitated by the effects of the voluntary restraint agreements (VRAs) on steel. IADC and other steel-consuming industries were successful in 1989 in achieving legislation to relieve these shortages via a "short supply" mechanism efficiently administered by the US Department of Commerce. The short-supply program enabled drilling contractors and importers of non-US drill pipe to make the case that domestic supplies were often inadequate, and permitted limited and temporary imports of non-US finished drill pipe otherwise subject to the VRAs. With the expiration of the VRAs in 1992, the market for drill pipe was restored, but only briefly.
In 1994, the Congress considered enacting legislation for the Uruguay Round of the GATT. Under intense pressure from the domestic steel lobby, that legislation preserved US anti-dumping and countervailing duty laws as the price for US accession to the WTO. IADC's then-chairman warned that the cash-starved drilling industry needed to replace 1.5 million feet of drill pipe in each of the years 1995, 1996 and 1997 at an aggregate cost of $120 million.
Having won the GATT legislative battle, the domestic OCTG producers immediately filed cases against foreign producers. And the domestic petitioners were successful, effectively excluding non-US products. The impact on the consuming US drilling industry was immediate and severe.
The authoritative "The Land Rig Newsletter" reported in a March 1995 industry survey that "the percentage of contractors reporting tight and/or scarce supplies of drill pipe increased materially." By April 1996, drilling contractors were reporting lags in delivery of two years after placing orders with the two dominant US drill pipe fabricators, one of which accounts for over 70% of the market. Without finished drill pipe, drilling rigs remain idle. And idle drilling rigs mean new sources of badly needed oil and gas are left undeveloped.
Early 1997 saw a collapse in oil prices, and with that a related fall-off in US drilling activity. The supply-demand ratio for drill pipe eased, but that market anomaly created by Saudi Arabia punishing Venezuela for overproducing its OPEC quota was short-lived. Since then, drilling activity has picked up and has continued strongly. Last month's active rig count for the US was 1217; at the same time last year it stood at 833 - essentially a 50% increase. In the April 2001 issue of "The Land Rig Newsletter", domestic drill pipe fabricators predicted that drill pipe prices will likely be up 70% by year-end over last year. That's a pretty reliable indication of sharply increased demand, which will inevitably overtax domestic drill pipe fabricators' capacity, just as occurred in 1996. And the number of domestic fabricators hasn't changed since then.
What has changed is the forecast for US oil and gas demand, especially natural gas, that suggests the nation is facing an extended period of fuel shortfalls, including that required to generate electricity. Nearly 92% of new electric-generating plants in the US will be designed to burn natural gas. But in its landmark December 1999 study of US natural gas supply and demand, the National Petroleum Council advised the Secretary of Energy that "the US drilling fleet must expand to undertake the dramatic increase in activity that will be required to produce the additional gas supplies anticipated in this study. The number of wells drilled annually is projected to more than double, from roughly 24,000 in 1998 to over 48,000 by 2015. Approximately 150 million feet were drilled in 1997. By the year 2010, this figure is expected to be 215 million feet and by 2015 nearly 270 million feet. Even taking into account anticipated improvements in drilling efficiencies of between 1.25% and 1.50% per year, approximately 2,300 active rigs (over 2,100 land rigs and 180 offshore) would be needed to achieve the projected level of drilling. This represents a 60% increase over the 1,250 average rig count estimated for 1999." This stunning projection suggests a corresponding increase in US demand for drill pipe. And the increase in North American drilling activity isn't limited to the US. Drilling Contractor magazine in its latest issue reports: "The average number of active land rigs in the US jumped by 52% last year over 1999 as total rig activity in the US climbed 46%. Canadian drilling activity jumped by 42% in 2000."
IADC appreciates the opportunity to appear in this proceeding. But we are dismayed that existing law gives us no opportunity to participate meaningfully when anti-dumping cases are brought by domestic petitioners. We have no standing under current law; we are not privy to the proprietary information ventured by domestic producers in making their case, and we are severely disadvantaged in being denied the opportunity to assert the public interest in related investigations, which is standard among most of our trading partners in similar proceedings.
With the lights now flickering in California, soon to be followed in the Northeast this summer, the public interest will be poorly served if the duties at issue are extended with predictable continued damage to and constraints on the US energy industry.