TMK operates 27 production sites in Russia, the USA, Canada, Romania, Oman, Kazakhstan, and two R&D centres in Russia and the USA.
TMK is a vertically integrated steel pipe manufacturer.
TMK is self-sufficient in steel billets. Three of the Company’s four Russian pipe plants have their own steelmaking facilities and manufacture steel billets for seamless pipe, Sinarsky Pipe Plant however does not have steelmaking capacity. The plant benefits instead from close proximity to Seversky Pipe Plant, which fully covers its steel billet needs. We also have steel billet production capacity in the USA and Europe: the Koppel plant in Pennsylvania (USA), and TMK-RESITA (Romania). Almost all steel billets produced by these plants are consumed by the Ambridge plant (USA) and TMK-ARTROM (Romania) respectively, both located in close proximity to the steelmaking facilities.
With its own steel billet production capacity and supply arrangements in place, TMK is less reliant on third-party suppliers, and is better positioned to control the costs of finished products and ensure due quality control of steel used to manufacture its tubular products.
TMK purchases scrap and HBI for steelmaking facilities from TMK CHERMET and Metalloinvest. We purchase most scrap on the spot market, while for HBI we signed an annually renewed contract with Metalloinvest in 2016, with a formula-based pricing and monthly price reviews. The contract aids TMK to diversify its feedstock sources and reduce the risks associated with the scrap market volatility.
Currently, TMK has the following mid-term contracts for the supply of semi-finished products used in welded pipe production: steel plate – MMK, Severstal, Metalloinvest, Metinvest, and Nippon Steel; hot rolled coil – Mechel, MMK, Metinvest, NLMK, and ArcelorMittal-Temirtau. In 2017, some supplier contracts were based on formula pricing that factored in the costs of base materials, production costs, inflation rate, and fluctuations in the Rouble exchange rate. The price could be reviewed on a monthly or quarterly basis subject to the specific contract terms.
In September 2017, TMK’s Board of Directors approved the Company’s new Strategy to 2027.
TMK will expand its presence in the Russian and US OCTG and in oil and gas line pipe markets through leveraging existing or newly commissioned capacities, or possible alliances.
The Company is focused on enhancing its vertical integration, which will further reduce costs and improve margins, while also allowing it to further develop and enhance its ranges of products and services. This will include the development of comprehensive engineering solutions for customers with cutting-edge digital technology which utilizes TMK’s high-tech products.
TMK will work to develop sales by leveraging its global scale and divisional structure and taking full advantage of TMK’s e-commerce platform. TMK eTrade, launched in 2017 as Russia’s first tubular goods online shop.
The Company will continue to form strategic partnerships with major global oil and gas companies, including Gazprom and Rosneft, and to collaborate with global customers within programs for the development of cutting-edge technology and services. The Company plans to finish formation of its R&D cluster by opening in 2018 a leading new research and development centre in Skolkovo Technopark, Moscow.
TMK’s longer-term geographic expansion will be achieved through further development of partnerships with key customers in order to jointly enter into new oil and gas regions. The Company also plans to participate in the consolidation of the global pipe industry.
TMK has made innovations and digitalization a priority for the next ten years, to ensure improved product quality and to cut costs.
To support a stable financial position, the Company plans to maximize operating cash flow and further reduce its leverage to a net debt/EBITDA ratio of 3.0x in FY2019, and 2.5x in FY2021.
Our geographically diversified assets and sales help us to mitigate risks and uncertainties while taking advantage of the opportunities offered by each market.
Key drivers behind the increase in global steel pipe production include global economic growth by 3.7% year-on-year, global trade growth, a significant increase in investment activity in the energy sector (especially in the NAFTA region) due to hydrocarbon price recovery and increased budgets of oil and gas companies due to higher hydrocarbons sales.
When describing the industry’s condition, it is important to note that the medium-term outlook for the global pipe market is quite positive. Investment climate in the energy sector is expected to normalise, triggering higher drilling activity, that will in turn lead to a recovery in demand for oil country tubular goods (OCTG). Subject to sustained levels and further increases in global hydrocarbon prices and drilling activity, and implementation of planned pipeline projects, in 2018 the global steel pipe market may grow 1% to 3% year-on-year.
TMK Group’s sales of steel pipe in 2017 were 3.8 million tonnes, up 9% year-on-year, driven mostly due to a recovery in the North American pipe market. In 2017, TMK retained its leading position among global steel pipe producers in terms of pipe sales.
In 2017, nearly 77% of TMK’s tubular products were sold to consumers in the oil and gas industry.
We supply a considerable portion of our product to market leading Russian oil and gas companies such as Gazprom, Gazprom Neft, LUKOIL, Rosneft, and Surgutneftegaz. In 2017, our top five Russian customers accounted for 35% of TMK’s total sales.
We supply our products to customers in over 80 countries across the world, taking advantage of our geographically diversified network of dealers and formal representative offices around the globe.
In 2017, the Russian market accounted for 61% of our total revenue, the American market for 26%, and the European market for 7%. The Middle East, Central and South East Asia accounted for 6% of our total revenue.
Our revenue share in the American market increased significantly year-on-year following a recovery in drilling activity and due to an increase in demand for pipe by oil and gas companies and improved pricing environment. Our geographically diversified assets and sales help TMK to mitigate risks and uncertainties, while taking advantage of the opportunities offered by each market.
TMK maintained leadership in the domestic pipe industry in 2017.
ТMK’s share of the Russian pipe market
in 2017 by product type, %
High-margin proprietary products for connecting OCTG in offshore drilling, low temperature, high pressure, and other difficult conditions
The Russian large diameter pipe (LDP) market shrank by 26% year-on-year in 2017 following the completion of shipments to Gazprom’s Ukhta–Torzhok 2 gas pipeline project and due to lower consumption of LDP for Gazprom’s and Transneft’s repair and maintenance needs.
TMK’s share of LDP supply to the Russian market totalled 16% for 2017.
In 2017, TMK was actively involved in shipping pipe to meet the repair and maintenance needs of subsidiaries of Gazprom and Transneft.
The R&D cooperation program with Gazprom was also continued. New technical specifications were developed for deep-water pipeline pipes to meet Gazprom’s updated requirements.
Russia’s crude oil production was almost flat year-on-year at 547 million tonnes in 2017. In late 2016, Russia agreed with OPEC to cut output by 300 thousand barrels per day over the first six months of 2017. The agreement was extended into late 2017 through to the end of 2018. We estimate, however, that this will not cause any material drop in drilling as the expected production cuts will be largely driven by the depletion of existing fields.
While existing fields in Western and Eastern Siberia gradually deplete, conventional oil and gas production methods are not achieving the performance and hydrocarbon production targets. To support the current output levels, Russian companies will need to apply technologies that involve horizontal drilling, which requires more pipe. As a result, the share of high-tech horizontal drilling in Russia jumped from 10% in 2010 to 41% in 2017.
During 2017, the Russian OCTG market grew by almost 13% year-on-year due to higher investments in upstream projects by Russian oil and gas majors. Rosneft was the most active player in the drilling market in 2017, having increased its drilling for 2017 by 25% year-on-year.
TMK has been the dominant player in the Russian seamless OCTG market for years, with its share of the market at 64% in 2017.
TMK is consistently working towards supplying top-quality, high-tech and reliable tubular products to oil and gas companies to meet its consumers’ needs and help them produce hydrocarbons in adverse climate and geological conditions, including Far North locations and offshore.
In June 2017, TMK and Rosneft signed long-term contracts for the supply of casing and tubing pipe for over five years, based on a price-formula. Tubular product supplies to Rosneft under the new contracts started in 2H 2017. During the contract term, TMK’s products will account for an estimated 50% of Rosneft’s total casing and tubing pipe purchases.
In 2017, TMK was the first Russian company to start producing casing pipes from the TMK-C corrosion-resistant chromium-nickel alloy. It was developed to manufacture pipes used in well construction at oil and gas fields producing hydrocarbons with particularly high hydrogen sulfide (H2S) and carbon dioxide (CO2) content and partial pressure. Previously, pipes from this type of alloy had only been produced abroad. The first batches of 110 grade TMK-C pipe with TMK UP PF highly gas-tight premium threaded connections were shipped to LUKOIL as part of the import substitution program.
TMK started shipments of a new premium product, Vacuum Insulated Tubing (VIT) Light, in 2017. VIT Light is a complex assembly: a smaller diameter tube is enclosed within a larger diameter tube. The space in between them is filled with inorganic fibre to reduce heat loss. The product is used as tubing pipe for oil as well as construction in the permafrost.
In 2017, TMK launched production of vacuum insulated tubing (VIT) with an 89-mm external tube, 48-mm internal tube, and triangular threaded connection designed to GOST 633 standard. The first batch of the new product produced at Sinarsky Pipe Plant was shipped to Udmurtneft, Rosneft’s subsidiary. The pipes were made to order. They are used in thermal oil recovery involving steam injection into a reservoir at temperatures of up to 220°C. To launch the production, new equipment for VIT internal heating was developed and manufactured at Sinarsky Pipe Plant in cooperation with the Russian Research Institute for the Tube and Pipe Industries (RosNITI), and Sinara Repair and Support Center.
TMK works with Russia’s oil and gas majors as part of R&D cooperation programs, including import substitution programs.
Gazprom–TMK R&D cooperation program is aimed at meeting the company’s future demand for tubular products. The program covers cooperation between Gazprom and TMK in welded large diameter pipe, seamless line pipe, casing, tubing, and drill pipe, best practice sharing, and joint research. Under the cooperative agreement, TMK is to launch 34 new high-tech tubular products until 2020.
In 2017, TMK’s facilities successfully qualified for Gazprom’s new INTERGAZCERT voluntary certification system, confirming the compliance of their quality assurance systems and products with the requirements set out in Gazprom’s internal regulations, which allows Gazprom to view TMK as a comprehensive supplier for a number of major projects.
In 2017, The Company and Rosneft signed a technology partnership program for 2017–2020, under which roadmaps were drafted for cooperation in pipeline transport, drilling, completions, and tubing pipes.
The 2017 results were announced and the award ceremony was held as part of the 12th Offshore Oil and Gas Contracts (Neftegazshelf–2018) annual conference. TMK took first place in the Tubular Goods category, outscoring its main Russian rivals.
The ranking has been compiled since 2013 to support import substitution in offshore developments, enhance information support for the market, and foster its transparency and openness. Companies are rated through an annual survey of oil and gas companies focused on offshore development projects.
In 2017, the Russian seamless and welded industrial pipe market grew by 8% and 16% year-on-year respectively. The growth resulted from increased demand for pipe in engineering industry, utilities sector, and construction. Although TMK mainly focuses on OCTG production, we continuously develop new products used in the construction and utilities sectors, as well as in the engineering and nuclear industries.
TMK’s 2017 highlights in seamless industrial pipe include pipe shipments to SIBUR’s project for the construction of ZapSibNeftekhim petrochemical complex in Tobolsk; shipments to Krasny Kotelshchik Taganrog Boiler-Making Works for the production of equipment for Long Phu 1 thermal power plant currently under construction in Vietnam; and shipments of products for Gazprom Neft’s Moscow Refinery renovation and for the construction of Yamal LNG natural gas liquefaction plant.
According to Baker Hughes, the average rig count in the United States increased by 72% to 876 rigs in 2017 up from 508 rigs in 2016.
A recovery in hydrocarbon prices in North America led to a significant increase in oil and gas companies’ upstream CAPEX – by 35% year-on-year, resulting in increased drilling activity and higher volumes of welded and seamless OCTG consumption. Welded and seamless OCTG consumption in the USA increased by 86% year-on-year in 2017. OCTG inventories decreased to an average 4 months in 2017 compared to 8.2 months in 2016.
The significant increase in rig count was accompanied by a growth in pipe consumption per rig – from 5,106 tonnes per rig in 2016 to 6,177 tonnes per rig in 2017, mostly due to a growing share of horizontal and directional drilling, which demonstrate higher pipe consumption.
The combined rig count in horizontal and directional drilling went to 92% in 2017 from 79% in 2016.
The higher rig count and increased demand for OCTG resulted in a considerably better pricing environment in the US pipe market in 2017. Average composite OCTG seamless and welded pipe prices increased 22% and 30% year-on-year respectively (Pipe Logix).
The American division benefited from the recovery in the North American market, demonstrating significant improvements in operating and financial performance. During 2017, we resumed operations at the sites where production had been suspended in the previous years due to an adverse market environment. As at the end of 2017, all production assets of TMK IPSCO maintained normal business operations.
During 2017, the American division increased its sales of tubular products 2.4 times year-on-year to 671 thousand tonnes, while OCTG sales grew 2.3-fold year-on-year to 481 thousand tonnes. Full-year EBITDA was $111 million compared to negative EBITDA of $72 million in 2016.
TMK IPSCO’s product offering includes 28 types of threaded connections for OCTG, some of which are market leaders, and a number of connections meeting or exceeding API standards. TMK IPSCO also manufactures line pipes for transporting crude oil and natural gas from fields to processing facilities and refineries, as well as standard, mechanical, and industrial pipes for agriculture, construction, and automotive industry. TMK IPSCO also successfully develops a number of proprietary steel grades for OCTG, as well as various corrosion-resistant grades for OCTG and line pipes.
More difficult drilling conditions and growing footage of horizontal and vertical drilling in the USA, which involve more advanced technology solutions, contributed to higher sales of seamless OCTG with TMK UP premium threaded connections in 2017. Premium connection pipe sales almost doubled to 178 thousand tonnes. During 2017, TMK IPSCO launched two new premium TMK UP connections with improved torque performance, TMK UP ULTRA QX TORQ and TMK UP ULTRA SF.
In 2017, TMK IPSCO grew its consumer base, selling products to approximately 160 different customers compared to 130 in 2016. The largest customer’s share in the revenue of the division was below 8%.
During 2017, the European steel pipe market grew by 4% year-on-year due primarily to a higher welded pipe consumption by US and European companies on the back of increased upstream CAPEX and recovering demand from engineering and construction industries, as well as demand from a number of pipeline projects.
The high demand gave European pipe manufacturers the confidence to load their capacities for several months upfront and improved the pricing environment. Higher prices for end products allowed European producers to offset the growing prices of raw materials (scrap metal) and graphite electrodes.
In 2017, the Company maintained a stable position in the European seamless pipe market with a market share of about 8%. Total sales by the European division for 2017 were 186 thousand tonnes of pipe, up 6% year-on-year. EBITDA was up 17% year-on-year to $28 million.
Over 2017, TMK-ARTROM was installing heat treatment facility equipment as part of its project to install a new 165 ktpa integrated heat treatment line for seamless pipes. The heat treatment facility officially came online in February 2018. The facility will offer the entire range of heat-treatment services: quenching and tempering, normalization, soft annealing, and hot straightening. The uninterrupted transportation of treated pipes with minimum handling will allow a throughput of up to 120 tubular product units per hour.
The high-tech equipment enables precise control of the heat treatment process and monitoring of individual pipe treatment parameters. As a result, the new facility will provide heat treatment for 60 mm–273 mm pipes with 5 mm–60 mm walls, enabling more efficient and cost-effective production of popular premium products. The heat treatment facility will also significantly reduce natural gas consumption and environmental impact, as well as nitrogen oxide and carbon dioxide emissions.
To maintain and cement its market position and enter new target markets, the European division implemented in 2017 a range of initiatives to launch new products, targeting mostly the automotive and energy sectors.
In 2017, TMK-ARTROM continued to enhance its partnership with Dacia (part of Renault Group), acting as a supplier, including for the new Dacia Duster 2017 project launched in 1H 2017, and started supplies of more complex, higher-margin products.
We strive to expand our footprint in major oil and gas regions, including the Middle East. Recovery in oil prices had a positive effect on OCTG consumption in the region due to low production costs in most Middle Eastern markets. Since many countries in the region benefit from cost leadership in crude production, local oil production companies can still have positive margins even with oil prices at record lows.
The Company’s operation in the Middle East market is under heavy pricing pressure from Chinese steel pipe producers. In 2017, TMK’s sales in the region were up 50% year-on-year.
Our main goal in 2017 was to retain presence in the strategically important markets in a highly competitive market environment, expand the range of products we can ship to public and private companies as a qualified supplier, and ensure on-time, flawless delivery of shipments and related services under the existing contracts.
The Company secured a new order from Saudi Aramco in 2017 for the supply of steel seamless line pipe for an ultra-deep water pipeline (with installation depth of approximately 1,500 m) in Egypt, and its first trial order for VIT in India. Line pipe was shipped in 2017 to three offshore projects operated by Oil and Natural Gas Corporation (ONGC). Following successful qualification in 2011, TMK maintains a leading position in supplies of seamless pipes to ONGC, having participated in ten out of the 14 projects announced by ONGC since then.
In 2017, the Company continued to invest in new products: TMK GIPI installed own line to apply internal powder epoxy coating to 6'' pipes produced for PDO’s projects. Over 14 thousand tonnes of coated pipe was shipped to end customers in 2017.
TMK is one of the world’s largest premium connections producers and the leader in the Russian premium connections market.
Pipe with premium threaded connections is used for oil and gas wells operating in adverse climatic and geological conditions, including offshore, deep-water and Far North projects, horizontal and directional wells, and hard-to-reach hydrocarbon (shale gas and oil; oil sand) field development. These connections offer high strength and tightness, along with enhanced resistance to high torsional, bending, and tensile stresses.
TMK was able to maintain its leadership in the Russian market for tubular products with premium threaded connections by growing its share from 78% in 2016 to 79% in 2017. This growth was driven, among other factors, by declining imports of premium tubular products by many oil and gas companies as they shifted to sourcing from local suppliers.
Backed by many years of experience in premium product shipments, TMK is always ready to offer its customers unique engineering capabilities and highly efficient pipe solutions delivered to all expectations.
In 2017, TMK continued to develop and launch new premium connections. It was also the first Russian company to start producing casing pipes with unique TMK UP CENTUM premium threaded connections which are the latest generation of gas-tight premium threaded connections for casing pipe featuring innovative design. The connection is certified to ISO 13679 CAL IV, the highest international industry standard for premium threaded connections, and demonstrates 100% tension and compression efficiency. The first batch of pipes with TMK UP CENTUM connections was shipped to NOVATEK’s Arctic LNG 2 project and the first casing was sunk in 2017. The pipes were successfully sunk at the Salmanovskoye (Utrenneye) oil and gas condensate field with the involvement of TMK supervisors.
TMK was also the first Russian company to start producing, in 2017, casing pipes with unique TMK UP ULTRA GX threaded connections. The TMK UP ULTRA GX connection uses an optimised seal design that enables it to withstand excessive deformation while still maintaining sealability for the pressures present in thermal wells. The new connections were shipped to Rosneft in 2017.
During 2017, TMK also started shipments of drill pipe with TMK UP EXD second-gen double-shoulder premium tool joint connections. TMK UP EXD tool joints are capable of withstanding higher torque loads as compared with TMK UP TDS joints (ca. 20% improvement in performance). The modified profile of the thread crest provides for improved performance versus the standard design, in particular, significantly reducing thread galling on the faces of the pin and the coupling when assembling or disassembling drill strings. Another benefit of TMK UP EXD connection is reduction in assembly times, enabling time and cost savings in well drilling operations.
In early 2018, TMK successfully completed testing the unique proprietary TMK UP KATRAN HD premium connection with the Gazprom Scientific and Research Institute of Natural Gases and Gas Technologies (Gazprom VNIIGAZ) program. The tests were conducted at the Krylov State Research Center. TМК UP KATRAN HD is a unique, quick-assembly high-torque connection that has been developed entirely by TMK and is the first 100% Russian product of its kind – previously this type of connections could only be purchased abroad. The KATRAN HD is the only connection that can be used in all Russian offshore projects at any depths and in the most challenging climatic conditions.
We continued partnerships with our major customers on premium tubular products in 2017. Specifically, in 2017, TMK supplied premium casing pipe from TMK-C alloy to LUKOIL subsidiaries as part of the import substitution program, and TMK’s supervisors oversaw successful running of casing pipe with TMK UP MAGNA premium threaded connections and GREENWELL lubricant-free coating into the well at the Yu. Kuvykin field in the Caspian Sea. In 2017, TMK shipped the first batch of tubing with TMK UP PF premium threaded connections to Surgutneftegas. The first batch of tubing was successfully sunk at the Dunayevskoye field with technical support from TMK NGS-Buzuluk specialists.
One of TMK’s business priorities is to deliver premium OCTG complete with related services. Our oilfield services include drill, tubing and casing pipe repairs, heat treatment, protective coating, production of a vast selection of pipe string components and downhole equipment, as well as pipe threading, pipe and pump rod service and repairs, etc.
The latter two are located at the heart of oil and gas regions and provide well construction, repair and completion services to both large- and mid-size oil and gas companies and oilfield service providers.
Orsky Machine Building Plant, TMK NGS-Buzuluk, and TMK NGS-Nizhnevartovsk, in cooperation with plants of TMK’s Russian division, manufactured and shipped over 83 thousand tonnes of casing and tubing pipe in 2017, including pipe with TMK UP threaded connections.
TMK-Neftegazoservice provided engineering support for running over 220 casing pipe strings into wells in Russia, the CIS, and countries outside the CIS in 2017. We continue providing engineering supervision services for tubular products used by Gazprom Geologorazvedka in the Sea of Okhotsk and in the Kara Sea.
New technologies and innovative products are the key competitive drivers in the global pipe market.
New technologies and innovative products are the key competitive drivers in the global pipe market. TMK’s research centres, the Russian Research Institute for the Tube and Pipe Industries (RosNITI) located in Chelyabinsk (Russia) and the Houston-based R&D centre (US), are engaged in extensive research, liaising with specialized R&D organizations and universities and coordinating research and technological collaboration with TMK’s major consumers. The two centres assist TMK’s enterprises in developing new facilities, technologies and products.
In 2017, we continued the construction of TMK’s R&D facility in Skolkovo that will become our third, and principal, research and development platform. The corporate R&D facility in Skolkovo will use unique research and testing equipment to develop comprehensive material, design, and connection solutions for the increasingly complicated hydrocarbon production conditions. In 2017, two benches for full-scale threaded connection testing were built, tested, and prepared for installation. This testing equipment will help the Company to significantly expand its range of connections up to 762 mm in diameter, and perform integrated tests of their performance under high temperatures, pressures, axial drag and bending stresses. TMK’s R&D facility in Skolkovo is scheduled to come online in 4Q 2018.
TMK increased its CAPEX by more than 35% to $236 million in 2017, mostly due to the construction of heat treatment facilities at TMK-ARTROM and Seversky Pipe Plant, and the R&D facility in Skolkovo, and also as a result of the Rouble appreciation against the U.S. dollar as Rouble CAPEX makes up around 60% of the Company’s total CAPEX.
We focus on projects that allow us to increase production of high value-added products and improve product quality.
Construction of the R&D facility building in Skolkovo continued in 2017, and equipment for two test benches was delivered.
The implementation of TMK’s Energy Efficiency Program initiatives reduced consumption of key energy resources, enabling cost savings of over RUB 148 million.
The environmental initiatives implemented by TMK Group’s entities as part of our investment strategy led to a reduction of gross pollutant emissions by 1.2% year-on-year, and wastewater discharges by 15% year-on-year. Our waste management activities helped reduce waste disposal by over 5,000 tonnes.