4.6.Russian Pipe Market

In 2015, the Russian pipe market grew 1% year-on-year as lower shipments of seamless pipe were offset by a higher demand for LDP due to the launch of several major infrastructure projects.

We maintain leadership in the domestic pipe industry. As of 2015 year-end, our share of the Russian market was 25%, with TMK’s seamless line pipe accounting for 60%, seamless OCTG for 65%, and seamless industrial pipe for 41%.

In 2015, sales in the Russian market contributed 66% to the Company’s total revenue.

TMK’s share of the Russian pipe market in 2015 by product type, %

SEAMLESS

WELDED

Large diameter pipe

In 2015, the Russian LDP market grew more than 30% year-on-year due to a higher demand for LDP from Gazprom, which pursues a number of major oil and gas pipeline projects, and increased LDP shipments for infrastructure projects implemented under the national programme for the Development of the Russian Transportation System.

Gazprom and Transneft remained our largest LDP customers together accounting for over 80% of our LDP sales in 2015. Overall, our share in LDP shipments to the Russian market was 18% in 2015.

In 2015, TMK achieved record high LDP sales, posting a growth of 36% year-on-year, largely driven by seamless pipe shipments to Gazprom’s major infrastructure projects including

18%

TMK’s share in LDP shipments to the Russian market in 2015

• The Power of Siberia gas trunk pipeline, with a design capacity of 61 bcm per year for transporting gas from the Chayandinskoye and Kovytkinskoye fields to China. The project is expected to be commissioned between 2018 and 2020
• Gas trunk pipelines Bovanenkovo-Uhkta (design capacity: 140 bcm per year) and Ukhta-Torzhok (design capacity: 82 bcm per year), to transport gas from the Bovanenkovskoye field (scheduled to be commissioned in 2016)
• The Southern Corridor gas trunk pipeline to transport gas from Central Russia under the Black Sea to Turkey. The project was suspended in July 2015.

Although in 2015 some of the projects planned in the annual programme were postponed by Gazprom to future periods due to a challenging macroeconomic and geopolitical situation, the Company promptly refocused pipe shipments to other projects. As a result, our LDP shipments to Gazprom grew 62% from 2014.

In 2015, we were also actively involved in the programme for the Development of the Russian Transportation System by building up our LDP shipments to seaport facilities, specifically to seaport construction projects in Sabetta, Ust-Luga and Novorossiysk.

In early 2015, TMK and Gazprom signed an Addendum that refines the LDP pricing formula in line with existing trends and the situation in the Russian pipe market. The refined LDP pricing formula will factor in the costs of metal feedstock and materials, steel plate production and transportation costs, and LDP production cost. The formula also provides for price indexation to reflect inflation and foreign exchange rate fluctuations. The LDP price calculated according to the agreed formula will be determined on a quarterly basis.

Source: CDU TEK information, TMK estimates

Oil country tubular goods and premium products

In 2015, domestic consumption of seamless OCTG grew 3% year-on-year, driven by higher drilling volumes in Russia (up 12% y-o-y). In the reporting year, the rouble depreciation prompted a wider use of Russian products instead of imported tubular products, which drove the share of seamless OCTG imports down from 23% to 9%. As a result, we also increased our market share from 61% to 65%.

The share of high-tech horizontal drilling in Russia went up from 29% in 2014 to 33% in 2015. The higher volumes of this type of drilling were largely due to its efficiency in developing mature fields to maintain the existing production levels. Enhancing oil recovery at mature fields became particularly important for many Russian oil & gas companies in the context of dwindling development rates for new fields in Eastern Siberia and the Timan-Pechora region due to a challenging economic situation.

In 2015, the Russian premium OCTG market shrank by almost 2% year-on-year due to lower hydrocarbon prices and, consequently, lower investments in upstream projects by Russian oil & gas majors. With their capex reduced, they had to keep developing existing fields which do not require high-tech equipment, including OCTG with premium threaded connections. At the same time, most oil & gas companies had to postpone tapping new complicated fields, including in the Russian Arctic shelf, to later periods.

Despite the shrinking Russian premium OCTG market, TMK’s share of the market grew 11% due to lower imports of premium products and the rouble depreciation against other currencies.

We are consistently working towards supplying top-quality high-tech and reliable tubular products to oil & gas companies to meet our consumers’ needs and help them produce hydrocarbons in adverse climate and geological conditions, including Far North locations and offshore.

2015 saw a milestone event as TMK and Gazprom signed a long-term agreement on integrated shipments of premium tubular products with TMK UP threaded connections. The agreement, valid until 2023, provides for a total amount of 101 thousand tonnes and for design, rollout, manufacturing, delivery and maintenance of premium tubular products. Shipments under the agreement include high-strength and special pipes with TMK UP premium threaded connections from carbon steel and alloyed steel and special alloys for operation in challenging climatic conditions and aggressive environments. The products will be designed and shipped to Gazprom’s specifications for existing and promising fields, including Astrakhanskoye, Urengoyskoye, Chayandinskoye, Kovytkinskoye, and for offshore projects.

Source: CDU TEK information, TMK estimates

In 2015, TMK won a number of Gazprom’s tenders drawing on the unique properties of its products. The products to be shipped include casing pipe with TMK UP premium threaded connections. As part of these tenders, we delivered first supplies of T95SS-grade corrosion-proof casing pipe and C90SS-grade corrosion-proof tubing pipe. Gazprom’s orders were fulfilled using our production facilities at TAGMET, the Volzhsky Pipe Plant, Sinarsky Pipe Plant, Seversky Tube Works and Orsky Machine Building Plant from TMK’s Russian division.

The confidence in our products is demonstrated by a strategic agreement signed with Gazprom Burenie in 2015, under which TMK is to become the major supplier of the entire range of drill pipes to the company. Our products will be used at production sites of Gazprom Burenie across Russia for project that require enhanced wear-proof pipe: in Western and Eastern Siberia, the Far East, Northern Caucasus, the Orenburg and Astrakhan Regions, the Republic of Komi, and the Yamal Peninsula. Technology-wise, TMK’s drill pipes are adapted to operation in challenging climatic conditions to reduce opex, improve the production process, and enhance performance.

Priority projects in 2015 included continued shipments of H2S-resistant casing and tubing pipe for the Astrakhanskoye gas condensate field operated by Gazprom and casing pipe for the Ashalchinskoye and Yuzhno-Ashalchinskoye super-viscous oil fields of Tatneft. All products to be shipped feature TMK UP threaded connections.

TMK was one of the first Russian companies to launch production of Cr13 (super chrome) pipe compliant with thermal treatment that provides resistance to highly corrosive environments. In 2015, the Company significantly consolidated its position by increasing its share in the Russian market for these products. Large batches of casing and tubing pipe with TMK UP premium threaded connections were shipped to projects developed by Gazprom, Rosneft, Achimgaz, and others.

In particular, in the reporting year, we continued our relationship with Rospan International, a subsidiary of Rosneft operating the Vostochno-Urengoyskoye and Novo-Urengoyskoye gas condensate fields in the Yamal Peninsula, making shipments of high-tech premium Cr13 pipe. A large batch of Cr13 steel tubing with TMK UP premium threaded connections was shipped to the company. The products comply with PSL-2, which sets additional, higher quality requirements to inner surface of pipe, and threaded connections, and for non-destructive testing. Tubing for Rospan International was manufactured in a collaboration project between the Sinarsky Pipe Plant and Volzhsky Pipe Plant: the Volzhsky Pipe Plant produced green tube and coupling stock by using hot extrusion, while the Sinarsky Pipe Plant performed the subsequent finishing operations.

In 2015, the Volzhsky Pipe Plant launched the production of enhanced corrosion and cold-resistant 325 mm pipe with a wall thickness of 32 mm from 13KhFA-grade steel to be used at the Novoportovskoye field operated by Gazprom Neft, one of the largest fields in the Yamal-Ne­nets Autonomous Area, located in the severe climate of the Far North. TMK’s entities had never before produced highly corrosion-resistant pipes with such wall thickness.

In 2015, TMK signed a partnership memorandum with Sakhalin Energy for tubular products with TMK UP premium threaded connections, which confirms TMK’s reputation as a reliable pipe supplier for complicated offshore fields. The memorandum provides for partnership and advanced collaboration between the two companies on qualification and certification of tubular products with premium threaded connections to be used at the Sakhalin-2 project. The memorandum also provides for qualification tests of TMK UP premium threaded connections for casing pipe from chrome, high-carbon and highly corrosion-resistant steel grades compliant with ISO 13679 CAL4 2014. Under the document, TMK’s entities are expected to undergo joint technical audits under Shell’s TAMAR pre-qualification system.

5-fold

growth in TMK sales of premium tubular products featuring the GreenWell technology

In 2015, TMK saw a five-fold growth in its sales of premium tubular products featuring the GreenWell dope-free technology. The technology requires no dope for the make-up of casing and tubing pipes, considerably reducing the running preparation time, and cutting overall production costs of oil & gas producers for field development while minimising the environmental impact. During the year, products were shipped to Russian oil & gas majors such as Rosneft, Bashneft, NOVATEK, Gazprom Neft and Lukoil. In 2015, TMK’s tubular products featuring GreenWell dope-free coating and TMK UP PF ET threaded connections were first used in an offshore well at the Korchagin oil & gas condensate field in the Caspian Sea developed by Lukoil.

According to a poll of oil & gas companies specialising in offshore development held during Neftegazshelf 2015, TMK once again ranked first among suppliers of tubular products for offshore drilling.

Among TMK’s successes in the CIS and non-CIS markets in 2015, we would highlight the qualification of TMK by a major Iraqi oil producer, Missan Oil Company (MOC) as approved supplier of OCTG and pipeline pipes, as well as shipment of tubing with TMK UP FMT premium threaded connections to LUKOIL Uzbekistan Operating Company for use at gas condensate fields of the Kandym Group in Uzbekistan.

Industrial pipe

1st place

in the ranking among suppliers of tubular products for offshore drilling

In 2015, the Russian seamless industrial pipe market declined by 6%, while the welded industrial pipe market grew by 14% year-on-year. This can be explained by the challenging economic situation and business slowdown in most Russian economic sectors. Our share in the welded pipe market marginally declined to 9%, while growing substantially for seamless pipe – from 33% in 2014 to 41% in 2015.

Although TMK mainly focuses on OCTG production, we continuously develop and launch new products used in the construction and utilities sector, as well as machine building and nuclear industries.

Starting from 2014, we produced of, and supplied large quantities of structural steel pipe for a number of stadium projects implemented as part of preparations for hosting the 2018 FIFA World Cup, in particular, impact resistant seamless pipe shipped for the construction of Zenit Arena stadium retractable roof in St Petersburg. We also produced and supplied structural steel pipe for the stadium roof in Samara and galvanised pipe for the outer steel frame of the Otkritie Arena stadium in Moscow. In 2015, TMK continued expansion into this segment and supplied a large batch of 1,600 tonnes structural steel pipe for of the Mordovia Arena.

In 2015, we also won a number of tenders for pipe shipments to energy and petrochemical businesses, including boiler long-length pipe for Taman TPP’s equipment.

by 14%

grew industrial pipe sales volumes in domestic market

We continue expanding and upgrading our production facilities to meet the needs of high-tech industries. Our TMK-INOX produces stainless pipe of 8–114 mm diameter, including specialised pipe, used in nuclear, aircraft, automotive, aerospace and energy industries and manufactured in line with the world’s best practices as well as Russian and international standards. In 2015, the share of TMK-INOX of the stainless pipe market increased and accounted for 17% compared to 15% in 2014, with its domestic sales volumes up 14%. This growth was mostly due to an increased market share in hot-rolled seamless pipe, which grew significantly on the back of their declining imports.