Gazprom Upsets Pipe Manufacturers’ Plans

05.07.2010 — Analysis

In July 2010, Chelyabinsky Truboprokatny Zavod (ChTPZ, Chelyabinsk Pipe Plant) is launching a new workshop for manufacturing large-diameter pipes. The managers affirm that the products will meet the highest international standards, thus, giving hopes that the plant will be able to put pressure on foreign pipe manufacturers competing for Gazprom transportation projects. In the meantime, experts anticipate that the Russian gas company will not be able to reach a substantial increase in its sales in the near future. As the observer of "RusBusinessNews" has found it out, market prices make gas production and transportation from new fields unprofitable. Gazprom will not deploy projects until it finds the customer - with all the consequences that pipe suppliers will have to face.

The production capacity of the new workshop in Chelyabinsk is 600 thousand tons a year. The ChTPZ Group has invested 21 billion rubles in it. The process equipment of the SMS MEER Company (Germany) will be used to manufacture single-joint welded pipes of different length and with the wall thickness ranging from 38 to 48 millimeters. The new "mill-5000" of the Magnitogorsk Iron and Steel Works will become a supplier of sheet (tube strip). Besides, approximately a third of tubing stock is expected to come from Europe, Japan and Korea.

The new production facility is expected to reach the design capacity in the second half of 2011. Evelina Grigorieva, PR Director of the ChTPZ Group CJSC, anticipates that 50 thousand tons of large-diameter pipes (LDPs) will have been shipped to oil and gas companies by the end of the current year. No contracts have been signed so far, but the managers are sure that Gazprom is looking forward to the new products.

The hopes that the pipe manufacturers cherish for future contracts are connected with transportation projects of the gas monopolist. At the recent shareholders' meeting, Alexey Miller, Chairman of the Management Board of the Corporation, announced that 600 out of 900 kilometers of the overland part of the Nord Stream gas pipeline has already been laid. The critical limit has been achieved to build the South Stream Pipeline, which will be completed in 2015. The head of Gazprom believes that the project will be successful, though in 2009 gas supplies to Europe decreased by 12%, due to which the transit system was short of 100 billion cubic meters and the production dropped by 16%. In the second quarter of 2010, the demand kept shrinking - gas cuts are mainly demonstrated by southern countries - Italy, Greece and Turkey are buying less fuel even compared to 2009.

The Gazprom top managers are sure that the situation will become better in three years. According to the forecast of Alexander Medvedev, Deputy Chairman of the Gazprom Management Board, in 2013 the company's sales will reach the before-crisis level. His expectations are based on the one-percent annual increase in gas consumption in Europe that is observed along with the decline in the European production. A. Medvedev thinks that Russia is the best country for the Old World to increase its import due to its new gas pipelines: all the existing projects, including Nabucco, will not be able to satisfy the additional demand for 210 billion cubic meters.

Gazprom will be able to take an advantage of the increased prices for shale gas that US producer companies are selling at the price that hardly covers the operating expenses; this situation cannot last long. The rising prices for loose-rock gas will improve the competitive position of Gazprom on the market: today's spot prices avert it from production and transportation of gas from its new fields. A.Medvedev suggests that the current prices will eventually result in the deficit and the subsequent spike in prices for natural gas.

Experts, however, do not share the optimism of the top managers of the oil and gas corporation. Alexey Belogoriev, head of the expert and analytical department for the fuel and energy complex at the Institute of Energy Strategy, is not sure in possibility of gas deficit. First, the demand will recover at much slower rates than those expected by A. Medvedev; second, there are quite a few producers in the world besides Gazprom. The Russian monopolist is losing the competition to suppliers of liquefied natural gas. It is liquefied natural gas that contributed to the surplus of natural gas existing on the market. The growing consumption in Europe should not be too encouraging for Russian gas suppliers: the demand may recover by 2013; however, the fact that Gazprom will reach the before-crisis sales is far from being certain. Europeans prefer to import gas from Africa and the Middle East, because the Russian delivery terms do not suit them.

However, just before the annual meeting of the Gazprom shareholders, A.Medvedev stated that there were no plans relating to any refusal from long-term contracts and pegging the cost of a gas cubic meter to the oil prices. The "take or pay" principle, certainly, does not help to increase sales, but the managers hope that they will be able to survive during the crisis years through offsetting the decreased revenue by reduced costs. According to Elena Karpel, head of the department of economic expert analysis and pricing at Gazprom OJSC, since 2008 the gas company has saved dozens of billions of rubles on purchases: during this period the pipe prices dropped by 22% and the prices for machinery products went down by 12%.

The pipe manufacturers suspend their comment on the Gazprom policy. However, in private conversations they remark that they cannot afford to sell pipes at markdown prices: metal accounts for the lion's share in the cost and its prices in some positions have gone up by 40%. The Press-Service of the ChTPZ Group asserts that new pipes will be sold in compliance with the price policy existing on the market. The market situation made the pipe manufacturers increase prices for their products by 10-15% in 2010. As a result, experts leave open possible problems with sales of the products manufactured at the new production facility.

The new production will boost the capacities of the ChTPZ Group in producing of large-diameter pipes to almost 3 million tons a year. However, during the before-crisis year of 2008, the market consumed only 1.4 million tons. It was expected that the construction of the Sakhalin - Khabarovsk - Vladivostok gas pipeline and Pochinki - Gryazovets - Vyborg gas pipeline as well as the oil pipelines to the Pacific Ocean (ESPO-2) and the Baltic Sea (BPS-2) would increase the demand for large-diameter pipes to 2.3 million tons; however, eventually, in 2009 the sales were even less than in 2008. According to the forecast prepared by the Marketing Department of the Trubnaya Metallurgicheskaya Kompaniya (the Pipe Metallurgical Company), the year of 2010 will not be better that the previous year. It is obvious that the capacities of all the Russian pipe manufacturing factories far exceed the demand of the domestic market.

The ChTPZ Group could offer its products to foreign companies, but there the positions of Russian companies are even shakier than at home. The world has enough companies that are able to produce pipes with 48-millimeter wall thickness and designed for pressure of 250 atmospheres: German Europipe, Japanese Nippon Steel, JFE, and Sumitomo, British Corus and Italian Ilva. The Russian factories have not been able to get ahead in the competition: the United Metallurgical Company will supply only 25% of the required quantity of large-diameter pipes for the second phase of the Nord Stream Pipeline.

According to Alexander Deyneko, Director of the Pipe Industry Development Fund, at the moment, the enterprises are operating at 45-50% of their production capacity and the situation can become worse, if pipe manufacturers do not receive new orders in the third quarter of 2010. However, if the present-day trend prevailing on the fuel market is going to retain, there is hardly any chance that new orders will appear: according to A.Medvedev, gas will not be produced until the customer willing to buy it shows up.

Vladimir Terletsky