The future of energy
Prior to stepping into the role of President and CEO of TMK IPSCO, the American Division of Russia-based OAO TMK, in June 2008, Vicki Avril served as Senior Vice President and General Manager of IPSCO’s Tubular businesses in both the US and Canada. Her substantial experience in the pipe and steel industry includes previously-held senior management positions with IPSCO Inc. and the former Inland Steel Industries, Inc.
TMK IPSCO operates in a number of market sectors: seamless/welded OCTG, line and standard pipe. What product do you see as the most profitable and in the highest demand going forward, and for what product do you see demand/profitability declining?
VA: Each type of pipe plays an important role in the marketplace. For example, as a drilling company plans a string design, they will want to optimize efficiency and quality of the string while not over investing in “premium” products where they serve no additional value. Each of the products that we make is important to our portfolio of products. While we do not disclose the profitability of individual products, it only goes to reason the products that are more exclusive and more difficult to manufacture will tend to be the most profitable. With increased drilling in the shale plays, we have experienced rapid growth in our TMK Premium business. Operators in these environments recognize the value that premium connections and premium pipe offer under these demanding drilling conditions.
At the AWMI conference in Tucson last year, you mentioned that alternative energy sources (i.e. solar power, wind power, etc.) will not be able to overtake traditional energy sources, and instead, you believe natural gas is a promising “transitional” source that can phase out coal and oil and work hand-in-hand with renewable energy. However, US rotary rigs drilling for oil recently surpassed rigs drilling for natural gas, and the number of natural gas rigs continue to decline on an almost week-on-week basis. Do you see this as an ongoing trend moving forward, or do you see a possible reversal looming?
VA: Today, our infrastructure in the US is very dependent on the consumption of oil. As there has been unrest in a number of oil producing regions it has pushed up the price of oil and natural gas liquids, incentivizing US drillers to convert from gas to oil drilling. Oil is simply a more profitable resource for producers to extract today, which explains the increasing number of oil versus gas rigs. However, from the consumer side of the equation, as the price of oil goes up and gas remains low, it will incentivize consumers to convert to gas consumption. This will not happen overnight, but as investments are made and the infrastructure is changed I still believe that gas will be the fuel of choice. Drilling technology has evolved in such a way that natural gas has become very economic to extract, and combined with the abundance of natural gas in the US, it makes an ideal “transitional” source of energy.
There has been talk recently that with all of the new capacity that is being currently added—particularly for OCTG—the US energy pipe market may be nearing levels of overcapacity and/or overproduction. What are your thoughts on this sentiment? Do you think overproduction will be a real obstacle for the energy pipe industry in the near future, or do you think demand will be strong enough to sustain the added production?
VA: Today the market is served by both domestic production and imports. As we add more capacity in the US, some of this new capacity will be supported by growth in drilling levels and other products will displace existing supply. There is always the risk that the addition of new pipe production could result in overcapacity. However, drilling techniques have gone through a step change with new technology. Pipe manufacturing has not fully kept up with these new changes. As oil and gas operators increasingly move into harsher and non-traditional environments and use drilling techniques that put more demand on pipe products, demand for high-performance, premium tubular products will increase. This is the segment that TMK IPSCO will continue to focus on.
OCTG and line pipe are consistently two of the US’ most imported steel products, but it often appears that the US domestic energy pipe market operates entirely separate from the import market, specifically in terms of demand and price. Do you agree with this assessment? If so, why do you think this division exists?
VA: I disagree with this assessment. Oil and gas pipe consumers in the US evaluate both domestic and imported product for their drilling needs. They will select product based on suitability of application, quality, service and price. Every producing mill, whether domestic or international, may have product with different characteristics and quality. Imported product will have longer lead times compared to domestic product due to the extended transportation. Therefore, consumers of imported product must either be able to operate with these longer lead times or purchase product that has been imported without orders against it, which will tend to be more generic product.
Canada is usually the second largest source of imported OCTG products to the US, right behind Korea. However, the US exports more OCTG to Canada than any other foreign country (although imports to the US are generally double the tonnage of exports to Canada). Do you think this can be explained by product specifications (different sizes/types available in different countries), or are there other dynamics in play?
VA: Canada and the US share a lot of similar market characteristics, so there is quite a bit of overlap in terms of which products are in demand and produced in both countries. However, there are also differences. Canada has unique projects like the bituminous sands in Alberta, and the US has a high concentration of shale projects. So yes, it is partially a question of different product types and specifications. However, other factors to take into consideration include the ease of doing business across the US-Canada border and the exchange rate between the US and Canadian dollars.
In March, TMK IPSCO announced investments and upgrades to its Wilder, Kentucky facility and commissioned a second thread line in Brookfield, Ohio. Does TMK IPSCO have any further plans for expansions, upgrades and/or possible acquisitions in the next couple years?
VA: Wilder and Brookfield are located in close proximity to the Marcellus shale, so it’s only natural that we would invest in those facilities. (We are improving our ULTRA facility in Odessa). We will continue to invest and grow with the market; for example, we are in the process of building a research center in Houston which is a major commitment to focusing our products and services to the changing demands and growing market.
On May 1, TMK IPSCO announced that it has broken ground on the new Research and Development facility in Houston, Texas, and cited that the new facility will serve as the “heart of the company’s innovation initiatives – new product design and development, experimental and validation testing, and advanced metallurgical research.” Can you elaborate on any “new product design and development” plans that TMK IPSCO currently has in the works, or which product sector the facility will serve?
VA: The R&D center will be set up to serve the entire TMK Group, which means that our Russian and Romanian colleagues will play an important role alongside our own specialists. As for specific work, connections testing and metallurgical research will be two main areas of focus. Concerning the former, we will be able to accomplish a lot of testing work internally, allowing us to accelerate our TMK Premium Connection programs. Regarding metallurgy, having our own dedicated research facility will allow us to develop proprietary steel products that enhance today’s pipe making technology to better meet the increasing performance requirements from customers.
As a subsidiary of OAO TMK, one of the world’s largest pipe producers, how autonomous is TMK IPSCO from its parent company? Aside from geographical location, how does TMK IPSCO differ from other OAO TMK subsidiaries?
VA: TMK IPSCO is proud to be part of the TMK family, and we interact with our Russian colleagues on a daily basis. We have kept a lot of the traditions and practices that existed prior to the acquisition, but on a daily basis look for the best practices between our portfolio of companies. In some areas, such as operations and quality, it makes sense to develop a company-wide approach in order to address the common challenges we face, especially since we have a global line of products and our customers expect consistency in our products. But in other areas, such as sales, it often makes more sense to maintain different approaches that are appropriate for a particular region.
As for how TMK IPSCO differs from other TMK subsidiaries, I would say that the biggest difference is that TMK IPSCO itself is made up of facilities with vastly different histories and traditions. TMK IPSCO has 11 production facilities, some of which have been in operation for several decades or longer and some of which have only been around for a couple of years. TMK’s subsidiaries in Russia and Romania, by contrast, are single facilities, although they each have their own unique history and traditions as well.
Prior to TMK’s acquisition in 2008, you served as Senior Vice President and General Manager of IPSCO’s tubular businesses in the US and Canada. In your opinion, what has been the most substantial benefit resulting from the acquisition? What has been the most significant challenge?
VA: Adjusting to different business styles has been a challenge for colleagues on both sides of the Atlantic. We are making progress in working through these different styles and the language barrier. These challenges are far surpassed by the benefits of becoming a truly global company with a broad array of products and expertise to serve our global customers.