As the oil and gas industry grapples with tariffs on imported steel and a byzantine process for bypassing them, the Independent Petroleum Association of America (IPAA) urged the Trump administration to “understand and address” the unintended consequences of both actions, especially the increased burden on the industry’s small businesses.

In a four-page fact sheet updated last month, IPAA argued that the administration’s 25% tariff on steel imports, in effect since March, have caused prices for domestically produced oil country tubular goods (OCTG) and line pipe (LP) to increase. The trade association said its members reported seeing price increases of $50-130/ton, depending on the product, and that domestic steel prices in general are now 5-10% higher than imports, including the 25% tariff.

That poses a problem for producers, IPAA said, because the carbon and alloyed steel products found in OCTG and LP typically account for 10-20% of well development costs. And while domestic steel manufacturers have captured more than 50% of the OCTG and LP market, imports have historically provided 35-55% of OCTG, “and many of the alloyed steel products are not produced in the United States and must be imported,” the trade association said.

Adding to the confusion are White House’s policies on country exemptions and product exclusions.

While Australia, Argentina, Brazil and South Korea have since forged bilateral agreements with the United States and are not subject to the tariff, other key OCTG producers including Japan, which IPAA said “is the only source of many critical alloyed steel products,” have not. Consequently, the trade group recommended that the White House “recognize the limits of domestic steel production capacity” while negotiating bilateral trade agreements.

Meanwhile, producers must request a tariff exemption with the Commerce Department’s Bureau of Industry and Security (BIS) for each specialty steel product needed. The process, unveiled by Commerce last March, raised the ire of the American Petroleum Institute this summer.

“The complexity of the process raises significant potential challenges for small businesses,” IPAA said. “It would seem appropriate that, once BIS approves and sustains a determination that a specific product should be granted an exclusion, the exclusion should be available for all users without each needing to apply.

“However, neither BIS nor Commerce has indicated it would adopt this approach. While Commerce has indicated that rebates would be made for products where the tariff is paid and an exclusion is subsequently granted, this position has not been codified.” IPAA added that the product exclusion process “is not working well” because BIS has received more than 20,000 applications but has completed less than 10% of them.

As a remedy, the trade group recommended that the administration revise the quota structure “to assure that it does not apply to OCTG and LP steel products that are not available in the United States and would qualify for a product exclusion under the tariff,” as well as structure “a product exclusion process that is straightforward, that allows for easy submission and protects confidential business information, and that includes blanket exclusions for everyone once a product qualifies.”

IPAA was also critical of the bilateral agreement with South Korea, which had been the largest exporter of OCTG and LP to the United States. The country voluntarily agreed to cap steel product exports to the United States at 70% of the average tonnage of exports made between 2015 and 2017, effectively creating a quota of 460,711 tons.

The problem, according to IPAA, is that OCTG and LP imports were significantly lower in 2015 and 2016, when commodity prices were low. The imports totaled 618,404 tons in 2015 and 310,715 tons in 2016. By comparison, the United States imported 1.44 million tons in 2014 and 1.05 million tons in 2017 — two years that saw robust domestic oil and gas production.

“While some of this lost volume can be replaced with domestic carbon steel OCTG products, domestic production of high alloyed specialty steel products is much more limited,” IPAA said. The group recommended that the administration “[revise] the quota structure to address the adverse consequences on OCTG and LP steel products because of the 2015-2017 baseline.”

White House Issues Proclamation

The White House appears to have taken notice. It issued a proclamation Wednesday authorizing Commerce “to provide relief from the quantitative limitations applicable to steel articles…determined not to be produced in the United States in a sufficient and reasonably available amount or of a satisfactory quality…”

Texas Independent Producers & Royalty Owners Association (TIPRO) President Ed Longanecker said Thursday producers were concerned that an “excessively complicated and invasive product exclusion process for imported steel” would remain in place.

“TIPRO maintains that Commerce should immediately consider granting categorical exclusions for products that are not readily available in the U.S. or whose supply is not sufficient enough to meet current and future demand,” he said. “The U.S. needs a clear country exemption structure and product exclusion process that is straightforward and includes blanket exclusions for everyone once a product qualifies.

“TIPRO also requests that no import quotas for oil and natural gas steel goods be considered and that relief is granted for purchases made before tariffs were announced.”