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mitry Pumpyansky, President of Pipe Metallurgical Company (PMC):
- The tube-and-pipe sector has an important position in the Russian economy. In 2003 6.1 Mt of steel tubes and pipes for US$3,800m were made, that is 9.5% of total products of the national steel industry and over 20 % of domestic steel market. It is significant to note that today the Russian tube-and-pipe sector is 80-% oriented to national consumers.
Starting from the large-scale development of new oil and gas fields in West Siberia in the 1970s, import supplies of steel pipes to Russia exceeded exports consistently. However two years ago the situation changed and tube-and-pipe exports from Russia exceeded imports for the first time. Larger export is the ground for step-by-step integration into the world market which is a strategic target for any Russian tube and pipe plant. In 2003 the Russian export of steel tubes and pipes increased 26 % reaching 1,014,000 t. PMC is the leader in this field.
After some decline in 2002, the world production of steel tubes and pipes increased in 2003, amounting to 69 or 73 Mt, according to different estimates. Here China continues to be the leading nation which produced about 15 Mt of tubes and pipes last year. Russia made 9.5 % of total world tonnage and 13 % in seamless tubes sector.
Oil and gas pricing, both current and predicted for two years ahead, provides for adequate money inflows to oil and gas companies. It permitted to begin an active development of oil and gas fields difficult of access, like Russian Arctic Region, Canadian North, the continental shelf of the Caspian Sea and Sakhalin, the deep-sea shelf of West Africa and many other areas whose reserves had not been developed before. This situation ensures a stable demand for tubes and pipes, for the most part, oil and gas country seamless tubular goods as well as large-diameter welded pipes for trunk pipelines for the next two or three years.
Moreover, merger and formation of big oil and gas corporations make it possible to implement medium- and long-term projects regardless of world price variations. It in turn decreases market situation fluctuations and favors stable world market of seamless oil and gas tubes/pipes as well as welded pipes for trunk pipelines.
The fact that for the last decade drilling and production conditions became almost three times heavier along with a required set-up of proper pipeline infrastructure involved toughening of requirements to tube/pipe performance with an aim to increase long-term efficiency. The customer calculates the efficiency as an aggregation of quality-price-life-service and maintenance costs parameters. An additional factor to ensure a continuous growth of demand for seamless tubes is a limitation of potential use of welded pipes under heavy service conditions.
During the last five years, opposite to other steel products, the world market of steel tubes and pipes did not show substantial variations and a certain marketing order (together with some regional competition) has been developed in this market. Tenaris, V&M Star and Sumitomo account for 45% of world trade in seamless tubes and pipes, with PMC having around 5.4%.
In our estimation, over three to five years Russia’s share will be about 12 % in the world tube and pipe production with around 16 % in seamless tube and pipe sector as a result of the integration of the national tube and pipe industry into the world economy provided export supplies are built up. PMC believes that its share in the world trade in seamless tubes and pipes whose sector is not so closely connected with geography and has lower transport costs (in comparison with welded tubes and pipes sector) will raise to 10 %, above all, due to stronger positions of high-end products – tubes and pipes for oil-and-gas sector.


Anatoly Sedykh, President of United Metallurgical Company:
- In Russia the length of the trunk pipelines is 217,000 km with 151,000 km of gas, over 46,000 km of oil and more than 19,000 km of oil products pipelines. One hundred percent of gas, 99 % of oil and over 50 % of oil products output are conveyed via the pipelines.
Sizeable structural changes have taken place in the world economy. Growth of prices for energy carriers is only an effect of more fundamental processes. In our view, the world structure of energy carriers consumption developed over years undergoes changes: USA, West Europe, Japan are being headlong caught up with by new national economies of South-East Asia, India, China.
Another vivid trend is that some regional leaders of gas and oil output are gradually quitting the stage. The big hydrocarbon fields in the North Sea, Mexico Gulf, Alaska are being depleted. On the contrary, several countries of West Africa, Caspian area and, of course, Russia show a considerable growth of production.
Russia can become the basic component of the new world oil market infrastructure. But in order to play such a radically important role, several large national pipelines must be constructed in the near future. It would be a mistake to miss this unique chance.
We are of the opinion that unfortunately Russia lacks a clear state policy in the development of the oil-and-gas sector. Let me cite one example regarding the plans to construct an oil pipeline from East Siberia. Initially an Angarsk-Nakhodka pipeline was intended. Then two more variants – Taishet-Perevoznaya and Nizhnyaya Poima-Nakhodka – appeared. So, if earlier the Nakhodka pipeline competed with the Datsin pipeline now a competition between the two new variants of the route to the Pacific Ocean was brought out. One variant is offered by Transneft and the other by the Government of Yakitia. This reshuffle holds in the development of the pipeline system. The implementation schedule for the biggest Russian oil-and-gas and pipeline projects is recorded in the official federal documents but is not observed and the route varies depending on lobbying potentials of the parties.
Having estimated the situation President Vladimir Putin demanded in his annual message that the Government should make a clear choice of new Russian oil export routes. We are directly interested in the settlement of this question: the earlier the Government discloses the plans the sooner the companies get down to the construction of the new gas-and-oil pipelines. Uncertainty causes not only a larger shortage of export capacity but also substantial investment risks in the implementation of modernization projects at the national tube plants.
According to the data of Transneft, in 2007-2008 the shortage of export capacity in oil transfer will be 80 to 120 Mt. Now it is estimated at 40 Mt. The shortage of Gazprom transport capacity in connection with growing gas supplies from the Arctic fields is predicted to be at a level of 60bn cu m per year in 2007 which is over 10 % of the national gas output.
This shortage must call for a considerable increase in construction of oil-and-gas transport systems. Among the projects very likely to be implemented is the development of the Baltic pipeline system up to 62 Mt of oil per year capacity, increase in the throughput capacity of the Caspian Pipeline Consortium to 67 Mt of oil per year, and the completion of the integration of the Druzhba and Adria pipelines. It is also planned to construct new oil pipelines in the sea shelves (the Sakhalin projects), in the Barents Sea shelf, within the frame of the development of the Stockman oil-and-gas field. In transportation of natural gas the main pipeline projects are associated with the construction of trunk gas pipelines like Yamal-Europe and North European. But the construction of the above pipelines remains undecided.
It is estimated that each year the investments in the construction of oil-and-gas equipment and in tubes and pipes must grow 5 to 10 % in accordance with an increase in output and export of hydrocarbons. But nothing similar happens in practice. We think that the Government must take a constructive stand and invite private capital if there is a lack of state funds.
In the case of any variant of developing the fuel-and-energy complex, the pipeline transport system must be safe and reliable in operation. In Russia 24 % of trunk gas pipelines have been in service from 20 to 30 years and 20 % over 30 years. Here an annual average renovation rate is 600 to 800 km at a calculated requirement of about 2,000,000 km. In the opinion of the specialists of the All-Russian Institute of Oil-and-Gas Equipment, the renovation at a rate of 0.5 % per year will not provide for the safe operation of the gas pipelines. An actual necessary requirement is 2.5 % of the total length per year. None the less, Gazprom decreased its estimation of tube and pipe requirement more than twice for the last five years whereas the actual purchases were frequently even lower.
In order to extend the service life of the pipelines large-scale investments are required not only in tube and pipe making but also in steel production. Besides, facilities for active and passive protection of pipelines together with treatment of media to be handled are to be applied. In the tube and pipe industry more than US$700m will be input into reconstruction by producers in the next three years. But similar actions must be taken by steelmakers as well. It is no secret that Russian plate is much lower in quality than that of Japan, Germany and even Ukraine.
Today we cannot see clear prospects of expanding the production of plate with higher consumer properties, including plate made from higher-strength steel like X-80. Meanwhile the world industry already uses the X-100 steel, with even the X-120 steel produced. This year TransCanada announced a successful start of producing and testing the X-120 steel pipes for trunk pipelines. Their strength is 50 % higher that of the X-80 steel pipes, and their application considerably reduces pipeline construction costs and facilitates technological processes.
Our company implements a large investment project for construction of a 1420mm (one-seam) longitudinal-welded pipe line at the Vyksa Steel Works (such pipes have not been made in Russia before). The line capacity is more than 500,000 tpy of pipes, the first lot is to be made early in 2005. Severstal got down to the implementation of a similar project as well. EvrazHolding also claimed an intention to set up a large-diameter longitudinal-welded pipe plant. All this will sharpen competition because, in our estimation, the requirement of the oil-and-gas sector for 1420mm-dia. pipes is up to 700,000 t while the existing and planned facilities will be thrice more in capacity than the requirement. Due to the fact that large-diameter pipe plants are highly-competitive the tube and pipe industry needs more precise references to define requirements of gas-and-oil sector to tubular products.

Vitaly Sadykov, General Director of the Chelyabinsk Tube-Rolling Plant:
- The Russian tube & pipe market exceeded 6 Mt in 2003. The consumption of tubes and pipes, in total with the other CIS countries, was 8.3 Mt approaching 15 % of the world market. It testifies to the large capacity and attractiveness of the CIS tube and pipe market. For five years the Russian demand increased 1.7 time still retaining a positive growth trend.
The Russian tube and pipe market has a large number of consumption niches differing in solvency, investment activity and growth rates. The program of social and economic development till 2010 envisages the following growth rates: over 10% in fuel-and-energy complex, 6 to 7 % in industry, 3 to 4 % in power industry, 4 to 5% in construction and housing-and-public utilities. It will have an effect on the nature and structure of demand for tubes and pipes. The above-mentioned peculiarity requires that in the process of implementing the development strategy the tubemakers must consistently assess risks and advantages of their activity in various sectors of consumption and penetrate new markets.
The tube and pipe market is under the pressure of the two most active Russian sectors acknowledged competitive in the world market – steel industry, a supplier of steel for pipe and tube production and fuel-and-energy complex, an end user. With a considerably higher supply than demand in the Russian market, the end user has an opportunity to minimize prices and have full control over structure, scope and time of delivery. The steel market where entry products are bought dictates price and quality of the goods. In so doing, it virtually totally generates tubemakers’ costs. The tube/pipe plants being between the beetle and the block have not only to agree to minimum profitability but also to dig up funds to keep competitiveness.
What does the knowledge of the specific peculiarities of the Russian market give us? On the one hand, it helps to assess its attractiveness. On the other hand, to reveal problems limiting an input of foreign investments into it.
The Russian market of tubular products has a substantial potential of growth due to an increasing demand for energy resources and the restructuring of the national economy which is inevitable but still uncompleted. The remedial work is large owing to great wear and obsolescence of pipeline stock, especially trunk gas and oil pipelines. Thus, an annual renovation is 1.8 % for oil pipelines and 0.8 % for gas pipelines; because of that now up to 25 % of totally worn-out pipelines are still in service and their condition continues to deteriorate. For the last decade the total lack of funds was estimated at US$5bn. At the same time it predetermines a long-term demand in the tube and pipe market which is attractive from the viewpoint of sales.
Bit why is the presence of foreign companies in the Russian tube and pipe market so small? There are several problems. No definiteness in implementation of big promising projects in time, investment scope and probability. Low profitability of tube and pipe market as compared with oil and steel one. No transparency and openness of tube and pipe companies for investors. And last but not least, absence of favorable investment climate – imperfect taxation, customs and price control and still high inflation rate.
There is another group of problems. One is governing: high competitiveness of domestic producers in the home market due to an attractive price-quality ratio. Foreign investors are also kept away by high transport charges on the delivery of tubular products to Russia and an imperfect system of purchases. However in order to preserve competitiveness in future the Russian tubemakers must raise the quality of their products to that of the world level as long as we have the advantage in the local market.
As the seamless tube production in Russia was set up together with the steel production complex up to now rolled tubes are made to a large extent from internal billets. But the tubemakers cannot be well-off for entry stock as yet while these production operations are of low interest for steel works. Under such circumstances tubemakers have to establish additional facilities to produce billets whose quality and volume will be under their control in this case.
The situation with the delivery of flat products for tubemaking is different. The Russian steelmaking facilities are of quite adequate capacity with a high utilization rate. The ways of Russian and foreign producers to meet growing requirements for quality of flat products differ. The foreigners reach their aim through improvement of production process. The Russians try to achieve the required quality by changing chemical composition. If the composition is improper in terms of impurities the steelmakers refine the quality with the help of, above all, alloying additives. Here the price for steel turns out to be so high that the finished product becomes unattractive not only to tubemakers but also to tube and pipe consumers.
We do not know as yet how to solve the above problems. But with such an approach, production of high-quality rolled steel will be delayed until the steelmakers and tubemakers find mutually advantageous cooperation forms, maybe, even a merger. Or the steelmakers will begin to set up welding mills. But if this problem (one of the main challenges) is not solved we shall certainly lose in front of our Western competitors if they chance to enter our market.
Problem 2 in tube/pipe quality is an establishment of state-of-the-art production technologies. The investment program claimed by the tubemakers for production of high-quality seamless and welded tubes/pipes comprises up-to-date technical and process solutions. But it settles only a part of available problems. At least three years and investments amounting to US$800m are required to implement the above. In order to ensure full modernization of seamless tube production it is necessary to set up own operations for making high-quality billets and install modern continuous mills. Up to now only the Volzhsky Pipe Plant can produce high-quality rolled tubes.
A transition to new methods of forming and welding is needed for updating the production of electric-welded pipes, for the most part, large-diameter ones. The total program for modernization of tubemaking operations will require 5 to 7 years and minimum US$3bn. Moreover, it is necessary to settle the tasks of establishing high-quality service operations and forming a sales system grounded on western standards of logistics. It must be noted that positive tendencies are vivid in this field.