Year to date, in addition to achieving the expected growth in sales and sales orders in the China market, Hanwei has RMB 20 million ($2.8 million) in confirmed sales orders from Kazakhstan for delivery in 2007 and an additional RMB 24.8 million ($3.5 million) in expressions of interest for delivery in 2007 and 2008, for a total of RMB 44.8 million ($6.3 million) in confirmed orders and expressions of interest from Kazakhstan.
Over 80% of the sales orders and expressions of interest from Kazakhstan were pursuant to the Exclusive Cooperation Agreement ("ECA"), dated January 2007, that Daqing Harvest Longwall High Pressure Pipe Co. Ltd. ("Harvest"), Hanwei's 91.075% owned subsidiary (see Annual Information Form, filed on SEDAR, under the "The Company" for disclosure regarding Hanwei's equity interest in Harvest), signed with China Petroleum Technology and Development Corporation ("CPTDC"), a wholly owned subsidiary of China National Petroleum Corp. ("CNPC"), a state-owned entity and the parent company of (i) Daqing Oil Management Bureau which owns Daqing Changyuan Investment Co. Ltd. (Harvest's joint venture partner) and (ii) Petrochina Co., Ltd. a major Chinese oil and gas company listed on the New York Stock Exchange (NYSE: PTR). Under the ECA Harvest and CPTDC will cooperate to develop markets for Harvest's FRP products in Kazakhstan and other Commonwealth of Independent States (including: Azerbaijan, Armenia, Belarus, Georgia, Kyrgyzstan, Moldova, Russia, Tajikistan, Turkmenistan, Uzbekistan and Ukraine), and Indonesia, India, Saudi Arabia, Oman, and Peru for an initial period of two years.
The ECA with CPTDC has also facilitated progress in Russia and Indonesia, where potential customers, including a number of major oil companies have agreed to test the Hanwei's high pressure FRP oil pipe in 2007. Hanwei is also targeting markets in the Middle East and India with CPTDC and on its own.
"We are targeting oil producing regions where there is strong demand for oil pipe that is currently being served primarily by steel pipe. Kazakhstan's government has set a target to increase oil production from just over 1 million barrels a day in 2006 to over 3.5 million barrels a day within ten years, and is looking for solutions to corrosion, which represents a great opportunity for our oil transmission pipe from the well head," said Fulai Lang, President and CEO of Hanwei, "CNPC is a major customer in China and has validated the quality of our products since 2003, so its oil & gas services subsidiary, CPTDC is an effective partner since they understand the benefits of FRP pipe over steel, including longer life due to resistance to corrosion, lower installation cost and better flow efficiencies. Our manufacturing cost in China enables us to make healthy margins as an exporter to the targeted regions, however we are considering the potential to establish production facilities in regions where the demand is sufficient to support a manufacturing facility and there is limited or no local manufacturers of high pressure FRP oil pipe. Under these conditions, a local manufacturing facility will reduce transportation costs, enhance local technical and relationship support to our customers and establish competitive advantages."
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