Honghua to invest $16m in shale gas exploration

Honghua Group Ltd, China's largest exporter of oil-drilling equipment, plans to invest up to 100 million yuan ($16 million) by the end of the year in a project to explore for shale gas.

The company says the move will allow it to seize opportunities stemming from the fast development of the shale gas industry.

The investment will go to the manufacture of sample equipment and to system tests in both the United States and China.

Last year, the company had 3.49 billion yuan in revenue.

"The development of shale gas in the US will enter a boom period in two to three years, when our company will embrace a great sales opportunity," said Zhang Mi, chairman and president of Honghua Group.

"In the future, other countries, including China, India, Poland and Argentina, will develop shale gas markets on a large scale, which will also bring us business opportunities. We're just getting ready now."

Honghua is based in Chengdu, Sichuan province, which contains a rich supply of shale gas. For that reason, the company plans to form a team that will explore for the gas there.

When Honghua established its US subsidiary and opened two factories in Houston, Texas, it had already been doing business in the country since 2004.

"We had some good experiences in the US in 2005 and 2006, when we found the demand for drilling equipment was increasingly quickly," Zhang said. "That was the result of the development of shale gas."

Even so, Zhang said the company will not bid in the second round of an auction for the right to explore for shale gas being offered by the Ministry of Land and Resources on Thursday.

He said the company will consider participating in future auctions if more shale gas blocks are opened to investment by private capital.

"The development of shale gas in the US will bring greater profits to Honghua," said Liu Shaohua, senior vice-president of Reignwood Group, an investment firm that is a partner of Honghua's. "But it will be a different story with the Chinese market. It really depends on the central government's policies."

Paul Chung, financial controller for Honghua, said the demand for equipment used to drill for shale gas will support the production of about 1,000 drilling machines a year by the end of China's 12th Five-Year-Plan (2011-15), citing the central government's shale gas industry plan.

"By then, our company will have a 30 percent to 40 percent share of the market for the equipment used in the Chinese shale gas industry, which will be equal to about 24 billion yuan in sales," he said.

Offshore facilities

Honghua also plans to invest more in equipment used to drill for oil offshore.

Chung said Honghua's business structure will consist of its existing operations in onshore oil-drilling equipment, as well as offshore-drilling equipment and shale gas, each of them making up roughly a third of the total.

And as exploring for offshore oil becomes more important in China, equipment suppliers such as Honghua are beginning to pay more attention to opportunities in that line of business.

Zhang said about 60 percent of the company's investments will go into the offshore sector.

On Tuesday, Honghua Offshore Oil and Gas (Jiangsu) Equipment Co Ltd, which is owned by Honghua Group, began to build a mobile crane capable of lifting 22,000 metric tons in Qidong, Jiangsu province.

The first phase of the work has required a total investment of 1.98 billion yuan. Once complete, the project is expected to create between 4,000 and 6,000 jobs.