South America ripe for exploration

Shandong-based Kerui Petroleum finds a wealth of opportunities in South America

For many private-sector Chinese companies, South America offers a wealth of potential and a less competitive environment. Energy machinery producer Shandong Kerui Petroleum Equipment Co is among those companies.

Kerui Petroleum is contemplating the construction of a $500 million oil equipment plant on the continent in the next three years.

The Dongying-based company is one of China's largest private-sector oil and natural gas equipment and extraction service providers by sales.

It has 49 subsidiaries around the world and 10 global service centers in energy-rich nations such as Kazakhstan, Russia, India, Algeria and Indonesia, where it makes the equipment needed to extract oil and provide oilfield services.

It is expanding its footprint around South America, including Venezuela, Argentina, Brazil, Colombia and Ecuador.

Vice-Chairman Xia Tongmin said that because China is far from South America, only a few Chinese companies are able to operate in this emerging market.

"The continent has abundant crude oil and natural gas reserves that really can benefit local people through refining and processing these resources and selling them directly to the domestic and world markets, instead of shipping them to another country for refining or letting Western companies dominate the industrial chain," Xia said.

Latin American nations, including Venezuela, Argentina and Colombia, all want to raise their living standards, and one way they aim to do that is by upgrading their infrastructure and research facilities. Importing equipment can increase oil output and optimize the energy sector.

Bai Xuefeng, director of the trade department at the China Chamber of Commerce for Import and Export of Machinery and Electronic Products, said: "From a long-term perspective, Latin American governments can use the money generated by an independent and fast-growing energy industry in other sectors. Doing so will help create jobs and build an industry chain in a sustainable way."

In China's huge domestic market, three State-owned energy giants - China Petrochemical Corp (Sinopec), PetroChina Co Ltd and China National Offshore Oil Corp - use their dominant position to generate big profits. But so far, these organizations have shown scant interest in South America, although they have established operations in Africa, the Middle East and Central Asia.

By comparison, the nation's large private-sector energy companies such as Kerui, Shanghai-based Wison Engineering Services Co Ltd and Yantai Jereh Oilfield Services Group Co Ltd have shown strong interest in Latin America, said Bai.

The political situation in South America is stable, and most countries have friendly relations with China. The continent's ports and roads, credit ratings, government transparency levels and trade tariff rates are better than those of Africa or Southeast Asia, Bai added.

Bai said all these factors have helped Chinese private-sector companies gain market share in South America since 2010.

In addition, most South American countries lack the technology and capital to develop their own oil and gas industries. Cooperation with Chinese companies, which have no desire to control these nations' energy sectors but offer relatively cheap prices, has become a natural choice for many Latin American governments, he said.

These ties have "promoted our combined services to Latin American clients, including providing more design and logistics services and module fabrication. That has boosted exports of China's machinery, equipment and manufacturing materials", said Xia.

Venezuela is Kerui's biggest market in South America. The company has sold 45 land skid-mounted drilling rigs to Venezuelan clients such as PDVSA Petroleo SA, the Venezuelan state-owned oil and natural gas company. Kerui is also working with the China Development Bank to offer loans to the country to build more oil projects.

With economic and political mechanisms such as the Asia-Pacific Economic Cooperation, summits of the BRICS countries (Brazil, Russia, India, China and South Africa) and most-favored nation treatment, private-sector Chinese companies do not confront tariff burdens and intense competition in South America once they sort out the issues of logistics, localization, technical support and after-sales services.

Xia said it is difficult to build a brand image in these markets, where logistics issues such as timely delivery of spare parts and a limited number of after-sales facilities pose difficulties. In the early stages, Kerui shipped spare parts by air and invested heavily to establish regional service centers in major South American cities such as Bogota; Lima, Peru; Buenos Aires, Argentina; and Caracas, Venezuela.

It now sends products and project material via ports in Tianjin, Shanghai and Qinhuangdao to oilfields or oil exploration sites in South America.

Kerui has more than 1,000 employees, three global service centers and spare parts warehouses in South America, mainly providing technical and engineering solutions to different oilfields, selling oil-drilling and oilfield operation equipment and offering engineering, procurement and construction services.

More than half of its staff on the continent are South Americans, who play an important role in sales, after-sales services and developing customer relations. Xia said Kerui often brings its international staff to China for technical and commercial training.

Kerui has established a consulting team of international project management experts to provide guidance to its overseas team during all stages of a project, ranging from the initial price quote to project execution, with the aim of minimizing risk in its foreign markets.