with Andy Benson, Managing Director, Core Laboratories China
Mr. Benson, after university, your very first professional assignment was to design the control and instrumentation system for a large-scale laboratory that was sold to PetroChina. In 1994, you traveled to China for the first time in order to install the relevant equipment and conduct training in its use. What have been some of the key market insights you have gathered over the ensuing years?
It is quite amazing how much China has changed over the last several years.
In the early 90s my mentor, Dr. Michael Conway—one of the world’s top experts in the field of hydraulic fracturing—was part of the United Nations Energy Forum. He had conducted several technological exchanges with the Research Institute of Petroleum Exploration and Development (RIPED) of the Chinese National Petroleum Company (CNPC), and from these exchanges StimLab (now a part of Core Lab) was commissioned to design and build some laboratory equipment. I joined the program in 1993, and my first visit to China was in 1994.
I was 25 at the time, and China was my first major international trip. I grew up in Duncan, Oklahoma, a small town of only 25,000 people, so it was a big cultural adjustment for me. For example, our first night in China we stayed in a hotel downtown on Chang’an Boulevard. I remember looking out the window and seeing a sea of bicycles. Everyone went to work on bicycles!
CNPC’s RIPED facility is located near Langfang. Today there is a nice expressway running from Beijing to Langfang, and it only takes an hour to get there. In 1994 there were no major highways, and for part of the journey we even drove down makeshift dirt paths to reach the research center. That first day the trip took over four hours.
Once we reached the research center it was quite developed, very similar to a college campus. We stayed almost exclusively at the Langfang campus for several weeks. It was difficult to even go sightseeing as we needed special permits to enter Beijing.
Working in Langfang I saw right away that the Chinese people were very interested in learning about new technology.
I was in charge of developing the automation system for the laboratory, and I remember at the time thinking “why do they need an automated lab? They have plenty of people!”
As we began working together I learned that the Chinese scientists were very specialized. Each staff member was a deep expert in a given niche: on one project there would be a fluids expert, a reservoir expert, a drilling expert, and so on. This was quite different from my experience with Stim-Lab – we were a small company where one person would often wear many hats. While the Chinese had some truly brilliant scientists I found that someone who is so finely focused often has difficulty seeing the big picture.
I also learned that many decisions are made by committee in China. This is often because no one wants to take sole responsibility for making the wrong assessment. One thing I stress to my own staff is that I do not care if they make a mistake, as long as they own up to it, and learn from it. This, however, is a very difficult concept for the Chinese to appreciate, because of the nature of their culture.
Core Lab, as a specialist in reservoir optimization, works in a highly advanced—and highly niche—field. Have you confronted much local competition in this market for your brand of services?
I would say that there is, and there is not, local competition—we find an interesting dichotomy. A majority of Core Lab’s global revenue comes from providing services to the operating companies. In China each oil field is like its own individual company. They each have their own drilling department, service department, reservoir department, and so on. This makes each oil field a potential customer, as well as a competitor. Since labor costs are so low in China they can often provide services at a much lower price then we can. We must convince them that our expertise and quality of work is worth a premium price.
The International Oil Companies (IOCs) have always appreciated what Core Lab has to offer, and we operated a core analysis lab in Shekou for twenty years servicing several of the IOCs working in the South China Sea. This lab was a joint venture between Core Lab and CNPC. While profitable, after splitting the profit with our joint venture partner the lab did not meet the level of profitability we see in other laboratories. It was decided to close this lab in 2005 and establish a representative office in Beijing. As more IOCs move into China and partner with the domestic oil companies I am certain we will be called upon to provide more services.
Core Lab’s China revenue is relatively quite small – around 2% of the total. A majority of our revenue in China is comes from the sale of laboratory and perforating equipment rather than providing services. We continue to offer some services in China, but a majority of the analysis takes place in one of our regional labs, like KL in Malaysia, or even Houston.
Our flagship laboratory in Houston is one of the top facilities in the world for evaluating unconventional and low permeability reservoirs. China is in the process of exploiting their unconventional reservoirs, and we are doing our best to help them. At the same time, local labs are buying up equipment and expertise so they too can be positioned to provide services on those unconventional fields.
Globally, Core Lab has been performing quite strongly, raising its quarterly dividend by 12% in January, and reporting quarterly earnings gains of 12%, 27%, 27% again, and 30% in 2011. You mentioned that China makes up just 2% of company revenues—what, then, would you say is the role of this subsidiary for the Core Lab group?
First and foremost, everyone in the industry distinctly realizes that China is important. Our individual business units have been operating here for a number of years, but we did not take a consolidated approach until we established our representative office.
As you mentioned, the company is doing quite well globally. And while China is not yet a major revenue driver, Asia Pacific is a significant region for us, making up around 2-5% of our revenue. This includes SEA and Australia.
Our Beijing office is quite unique for Core Lab because we represent each of the company’s divisions: 7 different divisions under our roof. This enables us to truly take a comprehensive approach to reservoir optimization. We start working with the customer during the drilling process by conducting reservoir rock and fluid analysis. This is the traditional Core Lab service for which we developed such a strong reputation. When it is time to complete the well our Owen Oil Tool division supplies perforating tools and charges to get the best connection between the tubing and the reservoir. Most wells these days require stimulation, and our ProTechnics division has a wide range of Fracture Diagnostic services to ensure the best stimulation possible. After the well is on production our PROMORE division provides gauges that can monitor the bottom hole pressure to optimize production rates.
Our office integrates these products and services together to assist our customers throughout the lifecycle of a well. This has been a successful approach, and we anticipate our market will continue to grow in China.
Natural gas is the future of our industry. China is working hard to replicate the successes of the North American natural gas drive. The oil & gas industry often gets berated from an environmental standpoint; however, natural gas is truly a very clean-burning fuel. China has a wealth of coal resources, and it is difficult for China to diversify away from this form of energy. As the Chinese bring their unconventional gas reservoirs online they will be able to take advantage of this clean burning fuel for their power generation. This gas is cheap, clean and plentiful. Exploiting this resource will have a huge positive impact on both on the Chinese economy as well as the environment.
Some are not convinced that hydraulic fracturing in shale gas plays is exactly ‘environmentally friendly.’
Hydraulic fracturing has received quite a bit of negative press. Of course, I may be biased as a lifetime member of the industry, but in my view, there is very little actual evidence that suggests that this technique has negative environmental consequences. Like anything else, the process must be executed correctly, with full regard for HSE standards.
In 2010, Core Lab established a branch office in Chengdu to take advantage of the unconventional reservoirs in the Sichuan area. Do you see this niche as becoming a primary growth driver for your business from this point forward?
The IOCs first entered the Chinese petroleum market via the South China Sea. Next they moved into the Bohai Bay area. Now everyone is interested in the unconventional gas reservoirs in Sichuan. These new reservoirs are challenging —deep, with low permeability and porosity. We have seen huge strides made in the development of such reservoirs in the US, and now the IOCs want to bring this technology to China.
Domestic oil companies have been working in these reservoirs for several years, but they have encountered some difficulty. Some of the reservoirs have a high Hydrogen Sulfide (H2S) content. This gas can be very corrosive, leading to surface equipment failure. Several accidents a few years ago slowed down the development of these fields. The IOCs have experience dealing with such issues, and have developed comprehensive safety plans for handling accidents. They are now working with the domestic oil companies to safely develop these fields.
Who do you see as the principal clients propelling your business in the coming years? You mentioned that you would now begin to focus more on international companies.
Indeed, we are beginning to really focus on the IOCs working in China. They are already familiar with Core Labs reputation for quality, and they are beginning to partner with the domestic Chinese oil companies to explore onshore. Many of these partnerships are for unconventional gas reservoirs, and Core Labs has more unconventional reservoir data than just about anyone.
One of Core Lab’s major product lines is our reservoir studies. These studies are very popular with the IOCs – every major company participates in at least one, if not all, of our large studies. It is difficult to sell these studies to the domestic oil companies. I have found that in general, the Chinese do not wish to buy “data”. They would rather buy the lab equipment required to generate the data. We try our best to stress that our studies are not simply data sets, but include how to interpret the data and relate it back to the real world. We hope to do a better job of marketing these studies to the Chinese oil companies by explaining the true value of the study.
Do you believe that domestic clients do not see the value of your comprehensive service package? Is it a matter of you not doing enough to reach them?
The IOCs understand the value of our technology, and as they partner with the domestic oil companies we hope they will also begin to see the value. We provide quality product and services for a premium price. As an international company we have international prices. I often hear that if we can bring our price down 10-15%, we will have no shortage of orders. If we compromise price then it may be necessary to compromise quality to maintain profitability, and that is a slippery slope.
In addition, many of our domestic clients are research groups with limited budgets. They typically only have budget for small pilot projects. We like working with the research groups as they often become champions for our technology. We can then move from small scale pilot projects with the research departments to larger scale projects with the production departments.
Let’s consider the development of this subsidiary as an entity. You established Core Lab’s representative office in Beijing in 2005, growing it to a Wholly Foreign Owned Enterprise (WFOE) by 2008. Can you describe the challenges of growing a foreign business in this market?
One of the key mistakes made by companies doing business in China is allowing a high turnover of personnel. Everyone talks about the importance of ‘guanxi,’ in China. Simply put, ‘guanxi’ is an individual’s network of relationships. Any good salesman must establish and maintain a good network of customers, but in China maintaining such a personal and professional network is ingrained in their culture. If you are trying to establish a business, you must maintain a constant face. Once you get to know someone, the exchange of information between individuals becomes more open. When someone new enters the equation they must start all over again getting to know the company’s clients and partners, resetting the companies ‘guanxi’.
Some companies hire someone in China, pay them from the home office, and get right to work doing sales and marketing. They might even begin offering a service – teaching English comes to mind. Such individuals are not truly following the rules. The proper way for a company to conduct sales and marketing in China is by establishing a Representative Office (RO). The sole purpose of an RO in china is to conduct sales and marketing for their home office outside of China. There are many restrictions placed on an RO -for example they are not allowed to resell products, or provide any service. Basically they are not allowed to have any local revenue. They are taxed on the amount of money they spend, instead of how much they make. Some companies ignore the restrictions, offering services or acting as a reseller for their home office. It was for this reason that the Chinese government recently instituted changes to the RO structure, encouraging companies to move to a WFOE. Core Lab has done everything “by the book”, so once we saw the need to offer local services, the establishment of a WFOE was the next logical step. It took some time to work through the bureaucracy, but the end result was worth it.
Once we saw the market growing in Sichuan we felt a branch office in Chengdu would be beneficial. Again, we could have simply hired an employee there and had him work out of his apartment, but we took the approach of full compliance. I remember when we were establishing the branch office one day I had to get on a plane and fly down to Chengdu, go to a branch of the Bank of China in Chengdu, and show them my passport. It took all of 5 minutes. I could not fax a copy of my passport, or send my original passport with someone else. Nor could I go to a local Beijing branch of the Bank of China and show them my passport. When I asked why I was simply told “This is China!” By that time I was used to this level of bureaucracy, however it certainly was frustrating when I first arrived in China. The #1 key to doing business in China is patience.
Has it been worth it to not cut any corners?
Certainly. As the legal representative for Core Lab in China I never have to worry about the authorities knocking on my door and dragging me away!
While this approach might have been more costly, Core Lab is a strong company that places ethics above all else. It was for this reason that the organization was willing to give us the support we needed to do things right from the start. We of course remain conscious of the bottom line—but there is a difference between being conscientious and cutting corners. We have all seen the results of cutting corners.
After your years spent with Core Lab here in China, what would you say is your proudest moment?
I am proud of our continued growth in China, along with our ability to provide a complete reservoir optimization package to our customers. Core Lab has a reputation as a technical leader in China, and I think I have contributed to this reputation.
What is your final message to the international readers of Oil & Gas Financial Journal?
China is an exciting market, and is an important player in the international arena. It is important for companies wanting to take advantage of this market to get involved soon, and fully commit to the endeavor. As the east and west work together to develop the resources in China the whole world will benefit from the partnership.