Upcoming projects underline pipe demand growth

Vallourec’s senior vice president for Middle East and Asia, Edouard Guinotte, speaks with Pipeline Magazine’s Nadia Saleem about pipe demand and the company’s business serving the oil and gas industry

Vallourec is one of the world leaders in premium tubular solutions for energy markets and challenging industrial applications.

For the oil and gas industry, Vallourec designs and develops a comprehensive range of products including seamless pipe and premium connections (oil country tubular goods, OCTG), which is casing and tubing for oil and gas wells, onshore and offshore line pipe and welding solutions for line pipe projects, process pipes for the petrochemical industry and a wide array of accessories for oil and gas operators and oilfield service companies. Additionally, the group provides a large portfolio of services to support offshore and onshore operations - supply chain management, rig site running supervision, technical support, licensee network etc. 

We’re seeing a steady flow of upstream and downstream projects in the region. What is your business outlook for Middle East pipes demand?

In terms of E&P drilling activity, pipe demand in the Middle East has been pretty steady and we expect this to continue. Our evaluation is that the drilling CAPEX should increase by a cumulative average growth rate of 6 per cent in the next two years - that’s very encouraging for us.

On top of that, we see numerous petrochemical projects - refineries in the greater GCC area. We expect all of our prospective markets to be positively oriented for the next two years.

How do you see Vallourec benefiting from this market trend?

Vallourec has undertaken a significant transformation plan over the past few years to reduce costs and improve profitability. This has involved restructuring our industrial footprint to offer competitive supply from China and Brazil while maintaining premium capacity from Europe. In 2016, we finalised the acquisition of a rolling mill in China, now called Vallourec Tianda, and we are progressively integrating this new capacity into our network. Vallourec Tianda is qualified by most of the main actors in the oil and gas industry, National Oil Companies (NOCs), Majors and Independent Oil Companies (IOCs) to supply competitive pipe, to Vallourec standards for local and export markets in the Middle East and Asia. In Brazil, we rationalised our assets to supply tubes at competitive costs to local and export markets as well. 

 We are now well positioned with a competitive footprint to benefit from the continuous activity in our main markets like Middle East, South East Asia, China, North Africa and even South America - whenever it makes sense from a commercial standpoint.

What differentiating factors are you faced with when it comes to Middle East demand and what challenges do you encounter here?

Middle East is the most important region when it comes to pipe consumption due to the sheer size of its oil and gas industry. It is also different because we are mostly dealing with national oil and gas companies, which may have different business focus than international oil companies.

Another specific feature is the growing reference to local content under the framework of IKTVA (in-Kingdom Total Value Add Programme) in Saudi Arabia or ICV (In Country Value) programmes in the UAE and in other GCC countries. All of them are geared towards making sure these countries take advantage of their oil and gas resources, to develop local industries and diversify revenues for the long term to benefit the population.

In principle, one can only support these drives. The challenge for both customers and Vallourec is to find the right economic balance. We have to make sure whatever we develop locally has the critical mass and makes sense from an industrial standpoint. Our industry has huge fixed costs and therefore you need minimum volumes to make it sustainable. So we have to adapt the amount of local content to the accessible market.

For instance, we took the decision in 2011 - much before the IKTVA program started - to set up a finishing mill in Dammam, Saudi Arabia, called Vallourec Saudi Arabia.  Today, our heat treatment and premium threading facility has 200 employees allowing us to supply most of Saudi Aramco’s premium OCTG needs. We could only do this because the requirements from the local operator were large enough to justify the investment. That’s not necessarily the case in all the countries where local authorities develop local content programs - so there are discussions with NOCs to see what makes sense.

The UAE is still a question mark because although the needs are significant, what will be accessible to us, may not warrant the same size of investment as Saudi Arabia.

Currently, there is a mega tender released by ADNOC with significant requirement for ICV - for which we have an ICV development plan but the depth of this plan will depend on the volume we secure from the tender. The good thing here is that five years gives us visibility.

Another specificity emerging in Middle East is the appetite for added value services. Historically, we used to supply the customers with all the required inventories to be stored at the customer’s facilities. Now, we are talking about managing the supply to relieve customers from the burden of storing pipes. Over the last few years, NOCs realised the huge amount of capital locked in the inventories. So managing supply is an emerging trend in the region, which will require more integrated collaboration between drilling or completing operations and our internal planning.

As NOCs revisit cost efficiency, how is this affecting the supply chain? How you see digitalisation playing a role in this?

NOCs used to buy huge quantities of supplies, but changes in designs have led to important write offs. By having a tight supply chain, this issue is eliminated and the risk is controlled.

Digital tools are making it easier to elaborate this real time status of inventories, as well as helping in the design phase, in pipe-laying and optimising pipe use. With this in mind, we created a new service offer, called Vallourec.Smart, which combines both digital and physical services to accompany our customers and cater to their service needs across the entire value chain. This includes modules and packages designed to reduce our customer’s costs by using digital data technologies. With Vallourec.Smart, we are offering our customers a range of digital solutions from well design, sourcing solutions, tubular management, installation and asset management. For example, we are developing a digital tracking tool which can help distributors to manage their pipe inventories.

We see the technical means of solving our customers issues in a sustainable way to create value for them and monetisation for us.

How is Vallourec tackling Middle East competition?

The Middle East market is wide open to competition from everywhere so to maintain a leading role in the region, you have to be on top of your game, be it from a product and service standpoint and cost competitiveness, which remains critical. This is why we had to go through the painful process of restructuration, but we are now coming to the end of it and we are quite confident that we are in a good position to face off competition and meet our customer needs with a competitive offer and added value services. 

What is your market outlook for other markets in Asia?

In China, we have production operations and sell to the Chinese NOCs. The government has ambitious plans to boost oil and gas production to rely less on imports. We evaluate the drilling activity growth in North East Asia of around 4-5 per cent per year for the next two years.

Meanwhile, South East Asia was the most affected from the crisis with a 25 per cent drop in drilling activity and we can see today that the market is progressively recovering. We have good opportunities there as well.