Honghua to target shale gas projects

PUBLISHED : Monday, 28 May, 2012, 12:00am
UPDATED : Monday, 28 May, 2012, 12:00am

Honghua Group, one of the world's largest producers of land-based oil and gas drilling rigs, plans to take minority stakes in shale gas exploration projects on the mainland in a bid to forge closer ties with its customers.

Honghua chairman Zhang Mi said that when private firms were given the green light to invest in shale gas projects it would take small stakes in them - possibly as a co-investor with state oil and gas producers - to try to facilitate sales of its drilling equipment and engineering services.

A sum of HK$592 million had been set aside from the proceeds of the group's stock market listing in 2008 to fund oil and gas exploration and the provision of related products and services, said Zhang. A new generation of drilling rigs that were more cost-effective and space-saving were being trialled on the market, he said.

The products use natural gas to generate power to drive the rigs instead of diesel, which makes drilling more cost-effective, since gas is cheaper than oil in China and the United States - countries that are among the world's richest sources of shale gas. And since shale gas production involves the drilling of many more wells compared to conventional gas, the new rigs will be deployed in large numbers, and will be powered by electricity produced by gas-fired generators and delivered through a local power grid.

The new rigs will also suit the more mountainous terrain in the Sichuan gas basin, where trial drilling is being carried out by state-backed and foreign oil and gas giants. This is because each rig will require one-third to half of the land needed by the older generation of rigs, Zhang said.

'Overall, savings on manpower and fuel will cut operating costs by over 10 per cent for our customers,' he said, adding that when product testing and quality certification is done, the company aimed to have the new products ready for mass commercialisation from next year.

After 15 years of experimenting, a technological breakthrough in the US has led to a rapid increase in shale gas production in the last few years, which resulted in oversupply, depressed gas prices, and dirtier coal-burning being replaced by gas.

The Ministry of Land and Resources is likely to auction shale gas exploration rights in 20 areas, the China Securities Journal reported in April. It will be the second round of bidding after rights to four areas were granted in mid-2010.

The ministry said this month that bidders in the second round must be mainland-registered firms with registered capital of at least 300 million yuan (HK$365.98 million) and 'good' financial records - effectively opening the door to non-state-owned mainland firms.

But they must also have gas exploration qualifications, or have co-operation relationships with firms that have them. Bidders must tender independently.

Zhang cautioned prospective bidders to consider the risk and return uncertainties involved in exploration, since the ministry had yet to auction projects with good exploration potential. 'They are only offering small pieces here and there,' he said.

China also lacks policies and incentives to drive investment and competition in shale gas exploration, he said. Last year, the US spent US$33.2 billion on shale gas development, slightly higher than the entire oil and gas exploration and production investment in China, a Sanford C. Bernstein research report said.

Honghua posted a net profit of 168 million yuan last year, after suffering a net loss of 184.2 million yuan in 2010 and a loss of 127.3 million yuan in 2009, when orders were cancelled or delayed after the global financial crisis made it difficult to get financing. Overseas sales accounted for 90 per cent of revenues last year.

The group is still in negotiations with Shanghai Zhenhua Heavy Industry, which makes offshore oil platforms, on the settlement of two billion yuan of orders Zhenhua placed in 2009 but failed to execute, since its Spanish customer could not find sufficient financing to pay for the rigs.