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Oil, Gas Industry Discouraged by Tariffs, May Seek Exemptions

In the wake of President Trump enacting tariffs on steel and aluminum imports, an industry expert said the oil and gas industry should pursue an exemption for specialty steel products, while an energy trade group said the products, which are used in pipeline construction, meet the criteria for the exemption.

Meanwhile, analysts worried that the tariffs would leave U.S. chemical manufacturers open to retaliation in the international marketplace.

On Thursday, Trump followed through with his proposal to levy a 25% tariff on steel imports and a 10% tariff on aluminum. Canada and Mexico would be excluded, at least for now. Most of the steel imported into the United States is from Canada.

According to the proclamation signed by the president, a country that has a “security relationship" with the United States "is welcome to discuss with the United States alternative ways to address the threatened impairment of the national security” caused by steel imports.

The proclamation also stated that Commerce Secretary Wilbur Ross be authorized "to exclude from any adopted import restrictions those steel articles for which the secretary determines there is a lack of sufficient U.S. production capacity of comparable products, or to exclude steel articles from such restrictions for specific national security-based considerations."

Although Trump said he concurred with Ross' findings and has "considered his recommendations," the proclamation didn't offer any additional details over how an exemption for specialty steel products would be made. The tariffs are scheduled to go into effect in two weeks.

No Harm in Asking?

Petroleum economist Karr Ingham of the the Texas Alliance of Energy Producers (TEAP), told NGI that his organization has not yet acted on such an exemption, nor could he suggest that such a move was forthcoming by TEAP, which has about 2,600 members, or any other energy industry group.

"However, what would be the harm in asking for those exemptions?" Ingham said Friday. "If there's any possibility at all that those carve-outs could be put into place by requesting those exemptions and making a solid case for them, I'm not sure what you have to lose by asking for that.

"If in fact that turns out to be the case, then that would blunt the impact of those tariffs. Clearly, anything that lessens the cost impact of the imposition of those tariffs is a desired outcome for our members and for oil and gas producers in Texas and elsewhere."

On Friday, the Interstate Natural Gas Association of America (INGAA) repeated its call for the Trump administration to consider exemptions for specialty steel products.

"We believe the steel products used to build interstate pipeline infrastructure meet the two, independent criteria on which the president directed the Commerce Secretary to make exemptions: lack of sufficient U.S. production capacity and national security-based considerations," said INGAA CEO Don Santa.

According to Santa, the large-diameter, thick-walled steel used to construct natural gas transmission pipelines "is a niche product with unique technical specifications and limited domestic manufacturing capacity. Federal safety requirements and industry standards require steel specifications beyond those commonly used in markets such as automobiles or building materials.

"Pipelines require specialty steel products not always available in sufficient quantities and specifications from domestic manufacturers. For certain steel products used in pipelines, there is zero domestic availability today."

Santa said about 65% of high-strength plate/coil imports and large-diameter line pipe imports is from NATO countries. That figure jumps to 80% when treaty nations, including Japan and South Korea, are included.

'Nothing Positive' From Tariffs

The potential impact the tariffs could have on the oil and gas industry should not be understated, said Ingham.

"In the oil and gas business -- upstream, midstream, downstream -- there is nothing positive that comes from the imposition of these tariffs," he said. "Unless you believe that there's some mythical, magical pool of excess capital in profit laying somewhere that's available to be dipped into by the imposition of these excess costs, then mathematically something has to give somewhere."

By Ingham's calculations, there are about 140,000 primary steel and aluminum production jobs in the United States. By comparison, he said Texas alone has 225,000 jobs in the upstream. Nationally the upstream, midstream and downstream industries employ about 640,000 people.

"I guess I would like for someone to ask the question: 'Why is it OK to save a steel job somewhere, but then lose an oil and gas job somewhere else?' And it probably amounts to the loss of more than one oil and gas job. I suspect it's at least a one-to-one ratio."

Ingham conceded that it "would have been worse" had Canada and Mexico not been exempted from the tariffs.

"We'll see how that plays out," he said. "Those are temporary exclusions, but for now it's certainly better than the alternative. There will still be some cost impact, and it will be significant enough.

"Not every piece of steel consumed by the industry comes from one of those two countries. But even if it did, just the imposition of the tariffs alone is going to raise costs because it creates a new level of relative scarcity of steel. And so the cost of steel input to the oil and gas industry is going to go up by some measure. And as it does, then it cuts into oil and gas company revenue. That revenue is spent on the development of new projects, paying drilling companies and service companies to carry out their work, paying employees, and so on and so forth."

Chemical Producers Possibly Vulnerable

ClearView Energy Partners LLC said Thursday the tariffs "could further worsen trade relations" with China and the European Union. "At this juncture, we see little risk of explicit energy-based retaliation against the U.S. by either country,” because they are net oil and gas importers.

However, should the tariffs “lead to an escalating trade war -- and Trump administration nationalists appear to have taken up a battle stance -- we would not rule out a paring back of U.S. energy purchases by America's trade partners,” said the ClearView team.

Analysts with Tudor, Pickering, Holt & Co. (TPH) said they "continue to be dismayed" by the administration's protectionism and worry that domestic chemical producers would be vulnerable to international retaliation.

"First, many U.S. chemical companies are in expansion mode, and although imports only account for 27% of total U.S. steel consumption, we see the 25% steel tariff as likely to push up prices across the board and lead to higher build costs," TPH analysts said Friday. Chemical giants DowDuPont Inc. and LyondellBasell Industries NV "have estimated that about 20% of the cost for their ongoing growth projects is for steel."

TPH also warned that countries around the world "are already talking about retaliatory tariffs" in response to Trump's decision, adding that the U.S. trade surplus in chemicals "would be a natural target.

Last year the United States “was a major exporter” of polyethylene and other chemical products. “Although this is a headwind for the entire industry, we see LyondellBasell and Westlake Chemical Corp. with more exposure than average."

Gas Exports Impacted Too

Executive Director Charlie Riedl of the Center for Liquefied Natural Gas said the steel tariff could impact U.S. liquefied natural gas (LNG) exports, which the Trump administration had sought to expand.

"Unfortunately, these cost increases may erode the current competitive advantage held by the U.S. in the global LNG market, as well as the willingness of buyers to sign the contracts that underpin financing of multi-billion-dollar LNG facilities," Riedl said. "When imposed, these tariffs will place over $100 billion dollars of investment in U.S. LNG in jeopardy, kill jobs and damage valuable trade relationships with allies."

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