Why Chinese oil drilling firms favour the Middle East for opportunities

PUBLISHED : Sunday, 11 June, 2017, 3:23pm
UPDATED : Sunday, 11 June, 2017, 10:24pm

The Middle East offers some of the best business opportunities for Chinese oil and gas drilling services providers among regions covered by Beijing’s new Silk Road project, according to the chairman of Petro-King Oilfield Services.

Chinese firms are increasingly favoured over their western rivals for their cost competitiveness amid the prolonged oil price slump that has forced producers to cut costs, Wang Jinlong said in an interview with the South China Morning Post.

“The Belt and Road Initiative has on the political level helped Chinese firms develop business overseas, and the international oil price slump has accentuated Chinese service providers’ cost competitiveness,” he said.

“We noticed that previously, only the top management of national oil firms in the oil and gas-rich Middle East nations can appreciate the cost-and-quality effectivenss of Chinese firms. Now even the middle management have this understanding.”

Wang said the Middle East and the United States are the only two major markets that have kept up their investment in oil and gas development given their fields’ cost competitiveness.

For Chinese firms, however, it is difficult to enter the US market which has already been dominated by large western rivals, he added.

The Hong Kong-listed firm has been struggling to make a profit and has turned its business development focus to the Middle East in the past two years after getting burnt in South America and Central Asia where some customers were unable to pay amid economic difficulties.

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In March it set up an office in Abu Dhabi, the United Arab Emirates, to facilitate business development in the region.

“We are in talks with potential new customers in the UAE, Kuwait and Saudi Arabia, where we are seeing rising interest for our services,” said chief executive Jim Zeng Weizhong.

“In China, the market is too price competitive and hard to make a profit. We have to be very selective and have rejected a fair number of contracts.”

Zeng joined the firm in December last year after three decades working for Chinese offshore oil major China National Offshore Oil and US-based Schlumberger, the world’s largest oil services provider, on projects in China, Australia, Egypt, India, the Middle East and Vietnam.

Petro-King has close to HK$700 million (US$89.7 million) worth of confirmed or preliminary orders, of which the majority are from the Middle East.

Zeng admitted that realisation of much of the orders is uncertain and subject to market conditions, and much of that may not be executed until next year.

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The firm is not the only Chinese firm chasing business in the Middle East. Beijing-based rival Anton Oilfield Services has also made a big push in the region in recent years after the domestic market shrunk substantially.

Wang said the Middle East market is tough to enter because for each project suppliers need to go through a stringent vetting process on the capability of their equipment and tools before they can be included in the vender list.

“But once you are qualified, the contracts are attractive as payment is not a problem and the profit margins are higher compared the China market,” he said.

“We already have a third of our equipment deployed in the Middle East. We hope to move even more there from China.”

Once you are qualified, the contracts are attractive as payment is not a problem and the profit margins are higher compared the China market
Wang Jinlong, Petro-King chairman

The firm has purchased drilling equipment worth around HK$1 billion after its initial public offering in 2013, including two dozen so-called fracking pumps that boosts oil and gas output by injecting water, sand and chemicals at high pressure to underground structures.

Hit by a drastic fall in work volume as oil producers cut spending on new projects and shut down high-cost ones, Petro-King posted a net loss of HK$474.1 million last year, widened from a loss of HK$444.5 million in 2015. Revenue slumped 37.8 per cent to HK$392.4 million.

The downturn also saw the firm, 30.5 per cent owned by Hong Kong-listed property developer Termbray Industries International and 28.3 per cent by Wang, book major impairments on trade receivables and goodwill from past acquisitions.

It wrote off all of the over HK$400 million in receivables owed by a major a state-backed oil producer in economic crisis-hit Venezuela, and has failed to collect debt owed by a customer in Kyrgyzstan, Central Asia. It has suspended services in both nations.

“The Russian rouble’s sharp depreciation has dealt an big economic blow to nations in Central Asia. We have sent a vice president there to reassess the viability of the market before we make a decision on doing more business there,” Wang said.

On Friday Petro-King shares closed 1.4 per cent lower at 36 HK cents. They have slumped 21 per cent from the start of the year, compared to a 18 per cent gain in the Hang Seng Index.