China & Asia Energy
According to a 2006 report entitled "International Energy Annual 2004" by the Energy Information Administration, or EIA, of the U.S. Department of Energy, China is the world's second largest consumer of energy. There is strong market demand and Chinese government support for the introduction of technology and products that will increase the efficiency of the energy industry and decrease the environmental damage caused by energy production and consumption.
Accordingly, Hanwei is looking to utilize its FRP material expertise to manufacture and sell pollution control systems for the coal industry, FRP blades (propellers) for the wind power industry and FRP pipes for the natural gas industry. The Company may also look for opportunities to accelerate the development of FRP products by pursuing licensing, joint venture or acquisition opportunities.
The Company's growth prospects are closely related to the world's energy market. According to the EIA, the world's oil consumption increased from 66.5 million barrels per day in 1990 to 79.8 million barrels per day in 2003, representing a compounded annual growth rate of 1.4%. The increase in consumption has been supported by an increase in oil and gas production and exploration activities - all of which require the use of pipes.
With China's economy growing rapidly, its energy demands have increased dramatically as well. In 2004, China was the world's second largest consumer of energy and oil and gas with 6.5 million barrels per day. According to the EIA, China's annual crude oil consumption increased from 3 million barrels per day in 1993 to 5.2 million barrels per day in 2002, or a compounded annual growth rate of 6.3%. The EIA forecasts that daily consumption of crude oil in China will grow at 3.5% per annum and reach 12.8 million barrels by 2025.
In the next 20 years, demand for energy will continue to put pressure on global oil and gas supply. Prevailing high crude oil prices have allowed oil producers to use more advanced technologies to increase oil extraction in existing wells. The use of such technology, which includes injecting corrosive gas into the well to increase pressure that forces oil up the well, requires a new generation of pipes to handle the corrosiveness of the injected materials and the increased oil pressure.
According to the Eleventh Five-Year Plan (2006-2010), there are currently 180,000 km of oil pipelines in China, with an increase of 40,000 km planned over the next five years. Of the 220,000 km of pipelines expected to be in place by 2010, Company management estimates that roughly 70% of such pipes could be FRP pipes. (It is estimated that 80% of pipes currently in North America are FRP pipes.) Accordingly, the market potential in the oil pipeline alone, calculated using an average cost of C$14,250 per km, is roughly C$2.2 billion by 2010.
The Eleventh Five-Year Plan also indicated that there will be 180,000 oil wells in China by 2010 with each well averaging 2.5 km in depth. If roughly 50% of pipes will be FRP pipes, the market potential in the downhole pipeline segment, calculated using an average of C$22,000 per km, is roughly C$5.0 billion by 2010.
Kazakhstan
Kazakhstan sits near the northeast portion of the Caspian Sea and, according to United States Energy Information Adminstration (EIA), claims most of the Caspian Sea's biggest known oil fields. Kazakhstan's combined onshore and offshore proven hydrocarbon reserves have been estimated between 9 and 29 billion barrels.
According to EIA, Kazakhstan produced approximately 1.45 million barrels per day in 2007 and is expected to grow its production by over 9% annually for 2008 and 2009. Output from the country's three major fields, Tengiz, the offshore Kashagan, and onshore Karachaganak, is set to grow to 1.6 million barrels per day by 2010, and to 2.0 million barrels per day by 2015. The magnitude of the resource could result in Kazakhstan becoming one of the world's major energy exporters by the end of the decade. This jump in production is also stimulating planning for processing plants and pipelines to come on-line in time for the start of production.
The most significant opportunity for Daqing Harvest is the Kazakhstan-China pipeline, which will export Caspian oil to serve China's growing energy needs.
The Kazakhstan-China pipeline, when complete, will span almost 1,860 miles from its start in Atyrau to Alashankou in China. The Company is in an ideal situation to be able to supply quality pipes to the remaining phases of the Kazakhstan-China pipeline that will withstand the harshness of the environment.
Based on the planned increase in production in Kazakhstan, the Company estimates that there will be 40,000 new oil wells, 20,000 water injection wells, and 60,000 km in transmission pipe line in Kazakhstan over the next ten years. With an average of three kilometers of pipe in each new well, the potential market, assuming 50% of new pipes will be high-pressure FRP pipes, is roughly C$1.8 billion per year (240,000 km X C$15,00 per km X 50% FRP adoption rate.).
