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Options for the oil and gas supply chain in uncertain times

Crude oil pipeline

Among the various industrial segments reeling from the COVID-19 crisis, oil and gas is one of the hardest-hit. The crude oil price went into negative territory for a short time earlier this year as the supply swamped demand. For tube and pipe fabricators in the oil and gas supply chain, now is a good time to prepare for the price rebound that will come eventually. Getty Images

We have all had to make adjustments in response to the global health crisis. Some companies have pivoted, changing their production capabilities to help during the pandemic by manufacturing personal protective equipment, for example. However, some entire industries are facing more damage than others and need help to prepare for the long haul. The oil and gas industry in particular has faced numerous setbacks, some of which predate COVID-19, and this has left many tube and pipe fabricators in a state of uncertainty.

The Oil and Gas Industry in Transition

A volume war between Saudi Arabia and Russia earlier in the year set the stage for tumbling oil and gas prices. The pandemic greatly exacerbated the situation, as travel practically ground to a halt and the price of crude plummeted to negative levels for the first time in history. Crude was being traded at $60 a barrel at the start the year, but by April the cost of crude had plummeted below $0. While that price mainly was due to storage and reserve issues and the inability to trade futures, it was a sobering indicator of the state of the industry. Oil now sits precariously at $40 a barrel.

The result has been widespread cost-cutting measures by the industry. Shell announced that its production was down by 7% year over year and 11% quarter over quarter. According to Baker Hughes, the rotary rig count in North America 12 months ago was approximately 1,000; by the end of July this year, the number had dropped dramatically to 251 rigs.

Employment in the industry has been slashed across the board but “support activities for oil and gas operations,” which includes tube and pipe fabricators, was a particularly hard-hit segment. It experienced a 20% reduction in employment from February to May, losing approximately 54,000 jobs.

There are signs the industry is slowly rebounding, however. Crude futures have jumped 118% to approximately $41 per barrel over the past few months, optimism that seems to be based on a quick rebound as the world’s economies start to rev back up. Rigs are being added for the first time since March, although at a very slow pace.

How the Tube and Pipe Industry Can Prepare for the Future

The supply chain of the oil and gas industry has proven to be extremely flexible over the past few decades, and its ability to adapt has been attributed to fueling booms in shale. After the 2014-2016 slump in oil, the supply chain was able to quickly adapt and capitalize as soon as the price for crude climbed higher than $50 per barrel.

Those that are making pipe, making tube, building hydraulic fracturing units, building or repairing rigs, and performing other activities for the oil and gas industry should start preparing now for the price to increase as the world’s economies gather momentum. These companies should be considering adaptations that make them more resilient to future disruptions. For instance, tube and pipe fabricators should be adopting increasing levels of automation in their plants.

Adding new equipment to increase efficiency of course comes at a cost. The various relief packages introduced by Congress have been focused mainly on short-term goals rather than long-term goals: keeping people employed, not helping businesses prepare for what comes next. For example, the Paycheck Protection Program (PPP) provides funds but designates how those funds should be spent.

For companies looking to take their fate into their own hands, relief provisions are already in place that are even more valuable than the PPP. The Section 41 Tax Credit in particular is the single biggest tax break available to tube and pipe fabricators. Section 41 allows for businesses to claim a significant wage-based credit for employing technical employees, such as engineers, programmers, or designers, who improve or create new products or processes.

Most fabricators engage in these types of qualifying activities on a daily basis, so many are already claiming this incentive. The funds from the credit can be used to hire more employees or invest in new equipment, and the good news is that there is no limitation on how a company can use the money. The value of the credit is also quite significant as the average value of Section 41 is more than five times the average PPP loan.

The credit, of course, does not only apply to tube and pipe manufacturers or fabricators in the oil and gas industry. Any companies that employ technical talent may be eligible to take advantage of this powerful credit, and they absolutely should, in that essentially every company is strapped for cash in the current climate. As businesses look for ways to stay competitive and prepare themselves for the upcoming hurdles, creating cash injections is a great way to build momentum for the next swing of the pendulum.

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