Russian Pipe Mills Prosper in Sheltered Environment

   As one of the largest oil and gas producers and exporters in the world, Russia’s revenue from these products currently accounts for 17 percent of the country’s GDP. And despite the general slowdown of the economy, major projects are still going ahead and new, bigger ones being planned.

   The pivotal role of the energy sector in the Russian economy drives a substantial demand for pipe, including large-diameter pipe (LDP) for oil and gas transmission, and this is set to continue growing during the next decade.  

   This gives Russia’s four major pipe makers (see table) the confidence to continue with their capital investments, despite tight finances and the risk of overcapacity. And fierce competition for pipe contracts outside Russia along with more demanding operating environments at home is pushing producers to invest in quality as well as quantity.

   Last year’s financial crisis and economic slowdown altered the general picture for the Russian pipe industry. The extent of the downturn was particularly pronounced following a record-breaking year like 2007, when total pipe production was 9 million tons, according to the country’s non-profit Pipe Industry Development Fund (PIDF). Russian installed pipe making capacity that year was 12 million tons. In some segments 2008 saw falls of up to 45 percent in demand, the fund says.

   Although the decrease in consumption of steel products is tangible in all sectors, today pipe demand in general looks set for a full recovery. Demand for large diameter pipe (LDP) for the energy sector is also steadily increasing, and is forecast to rise to 2 million tons per year in 2009 against 1.4 million tons in 2008. This is largely due to the significant oil and gas projects currently under way.  

Oil and Gas Dominate

   The oil and gas industry remains the main consumer of Russian steel pipe, with an estimated 65-70 percent of annual output going into this sector.  

   The government, in its energy development strategy through to 2020, plans to increase gas exploration by 20 percent and oil exploration by almost 40 percent compared to 2000 levels. And the export of hydrocarbon products by 2020 will be 21 percent of total output for gas and 42 percent for oil, it says. All this is giving a major boost and steady support to the country’s LDP pipe sector.

   Having recently reinstated its efforts to create the Eastern Gas system, which will initially join the country’s Unified Gas Supply System – the largest gas transmission system in the world – state controlled gas supplier Gazprom is also working on the Sakhalin 2 project to take natural gas to Japan and China. The aim is to enter the energy markets of the Asia-Pacific region and North American west coast.

   An estimated 100,000 kilometers of pipeline, in addition to the existing 250,000 kilometers, will be created by these projects, according to Andrey Deineko, PIDF’s head. There will be a need for up to 30 million tons of drill pipe, casing and large diameter main line pipe for this expansion.  

   Other major gas transmission projects are Nord Stream to take natural gas into northern Europe, South Stream (across the Black Sea to eastern Europe and then on to Italy and Austria), Blue Stream-2 (Russian gas to Israel via Turkey) and plans to build the East Siberia-Pacific Ocean line.  

   Whilst these projects are joint ventures, Russia seldom has less than a 50 percent stake in any of them, and supplies an equivalent proportion of the pipe needed.  

   Nordstream’s requirement for large diameter pipe for its 1,220-kilometer route is put at 2.2 million tons, half of which is likely to be supplied by Russian producers.

   OMK’s Vyksa has already shipped 280,000 tons of LDP and the subsequent 830,000 tons are expected to be supplied by Vyksa, Volzhsky and Izhora pipe mills, says Gazprom.  

Actively Seeking Oil

   But in addition to numerous gas projects, oil activity is also moving on at a good pace. And staying true to their promises of several years ago, when the Russian large diameter pipe industry was in its infancy, Russian oil and gas companies say they will use Russian-made pipe whenever they can.

   In June 2009, the second stage of the Baltic mainline system connecting Unecha in Bryansk region to a terminal at Ust-Luga on the Baltic Sea was started up by Transneft, the state-owned company responsible for building oil pipelines. This 998-kilometer-long pipeline will eventually have an annual capacity of 50 million tons of oil when completed in 2011–2012.

   ChTPZ dispatched 29,000 tons of LDP pipe in Q2 and Q3 2009 for the project, with a further 47,500 tons to be supplied between now and April 2010, SBB Insight understands. The mill has also supplied LDP for another major project, East Siberia – Pacific Ocean (ESPO) pipeline this year.

   Rosneft’s Vankor oilfield project, which will eventually connect to ESPO, was officially opened for production in August. Oil from the field will be the main source of deliveries to China.

   This and other fields in Eastern Siberia are still under exploration and will eventually take an enormous amount of large diameter pipe, but already 148 kilometers of oilfield pipelines and 60 kilometers of gas pipelines have been built. All four Russian pipe makers are likely to be bidding for participation in the further development of the ESPO project.

Raising Quality

   As exploration of Russia’s vast energy resources take oil and gas companies off-shore and into sub-zero temperatures and areas with high seismic activity, so the quality of the pipe required is getting higher.

   Also, participation in international projects brings new demands on quality which were only dreamt of a few years ago. OMK’s Vyksa and Severstal’s Izhora pipe works already have the important Det Norske Veritas (DNV) quality accreditation – a requirement for the sub-sea section of Nord Stream, says Gazprom. The remaining Russian producers aimed to receive DNV approval by the end of 2009.
Today these two mills alone are capable of producing 2.6 million tons per year of LDP. By 2012, estimated joint capacity for LDP at the four Russian mills will be 5.86 million tons, according to PIDF.

A Protected Industry

   With the development of the large diameter pipe sector in Russia, which began almost ten years ago, the dependence on expensive Japanese and German imports has diminished. The oil and gas sector was also importing from the Ukraine’s Khartsyzsk pipe works, the only mill in the former Soviet Union capable of producing large diameter pipes.

   Following a three-year campaign by Russian pipe producers, in December 2006 the government put an 8-percent import duty on pipes over 508-milimiter diameter to protect the fledgling pipe industry. Today, as the duty is about to expire, SBB Insight understands it will be prolonged for a further period (in late December 2009 it was prolonged for one year – OGE).

   Proclaimed as “strategic” by the politicians, the large diameter pipe industry is supported by the Russian government every step of the way – from zero import duty both on flat rolled steel for the production of pipes and on scrap, to furnishing billion-dollar credit lines from state-controlled banks to support pipe making projects.

New Projects

   Russian pipe producers have new objectives, and although somewhat delayed, new projects are forging ahead, and not only in ensuring Russian sources of supply of every size and quality of pipe needed for oil and gas transportation and exploration, but also in securing the feed for its rolling mills.

   TMK's Volzhsky Pipe Plant has recently completed construction of its second large diameter pipe mill. The new longitudinal welded line can produce 530-1,420-millimeter diameter pipe with a wall thickness of up to 42 millimeters for use in overland and underwater oil and gas lines, and for power station applications. It has a nominal capacity of 750,000 tons per year, raising the company’s overall capacity to 1.3 million tons per year.

   Another major project is ChTPZ’s second large diameter pipe mill. Commissioning is now set for 2010, having been postponed by one year (see table).

   This new 600,000 tons per year facility will produce longitudinally welded pipe up to 1,420 millimeters dia with wall thicknesses up to 48 millimeters. There will be two lines: one producing pipe up to 18 meters long with wall thicknesses up to 38 millimeters, and the second making pipe up to 12 meters long with a maximum wall thickness of 48 millimeters. Germany’s SMS MEER is supplying the equipment in a contract worth $600,000, and on completion of this project ChTPZ’s total LDP capacity will be 1.1 million tons per year.

Steelmaker Support

   The developing relationship between oil and gas companies and large diameter pipe mills has attracted the attention of steelmakers not engaged in pipe production. This year saw the start up of Magnitogorsk Iron and Steel Works’ (MMK) new 5,000-millimeter wide plate mill. This is capable of producing 1.5 million tons per year of heavy plate of up to X120 grade.

   This mill is claimed to be unique in Russia in terms of its scope and technical capacity, and MMK says it has signed preliminary contracts for supplying major pipe and heavy machinery makers. The importance of the project was underlined by having Russia’s Prime Minister Vladimir Putin conduct the opening ceremony.

   Meanwhile, as part of its modernisation programme initiated in 2007, OMK has plans to construct a 1.2 million tons per year wide plate mill for making heavy plate up to 5,000-millimeter wide for the production of large diameter pipe. The new mill will supply plate for OMK’s own large dia pipe mill (1,210-1,420 millimeters), and is due on stream in 2011 at an estimated cost of around $1 billion, experts say.

   OMK used to import large quantities of wide plate from Japan and Germany, import duty for which was annulled last year, as well as buying from Severstal and MMK. Recently it has been buying more from MMK as that producer has increased its capacity – as indicated above. OMK says its total LDP capacity is 2 million tons, and just over 700,000 tons has been produced so far this year.

Overcapacity Threatens

   Whilst Gazprom and its oil counterparts repeatedly claim their demand for large diameter pipe will grow in the coming years, pipe makers are aware that they will be hit by overcapacity if this doesn’t happen.

   The total production in this sector, which hovers around 3.5 million tons per year, is already higher than Gazprom and Russian oil companies’ consumption of 1.5-2 million tons of LDP per year, OMK has warned.

   Yet as industry observers note, exports of LDP are a feasible option for the mills. As quality has improved, Russian pipe makers have been able to compete with more established producers in world markets. For example, OMK signed an agreement earlier this year to supply 25,000 tons of 1,067-millimeter diameter X65 pipe to Nigeria. One of ChTPZ’s long-term export buyers is KazTransOil (Kazakhstan), while OMK, Vyksa, has started production of large diameter pipe for the Chigil-Nishan project in Uzbekistan.

   If all the major projects that are now being planned in Russia come to fruition, there will be enough orders to keep local pipe makers busy, observers note. But the “if” factor appears to be quite strong right now, especially as criticism is mounting over Gazprom’s tactics in gathering participants for the South Stream project.  

“Big Pipe Dream”

   Aptly coined “a big pipe dream” by its critics, the line’s credibility is claimed as doubtful, with reportedly insufficient gas reserves to justify the project and no feasibility studies to support it. The only real thing behind it seems to be Kremlin-controlled Gazprom’s desire to dominate the European gas market.

   Seen as a rival to the Nabucco gas line connecting the Caspian region, Middle East and Egypt via Turkey, Bulgaria, Romania and Hungary, and on to Austria and other Central and Western European gas markets, South Stream has still to prove its credibility, critics say, although the majority of market observers express confidence in the Russian project and note that there is space and a market for both.   

*This article first appeared on Nov. 9, 2009 in Issue #109 of SBB Insight, which is published by Steel Business Briefing. It is reprinted courtesy of the publisher.