with Chen Liming, President, BP China
Mr. Chen, last year, you were quoted as stating, “China knows it can’t repeat the model that industrialized countries have gone through, with high energy consumption and environmental damage.” You said, “BP could be a strong supporter of the Chinese desire for transformation from today’s energy and pollution-intensive pattern of growth, to a cleaner and more sustainable future.” Can you begin by offering an overview of how you believe this company can compliment China’s reformation goals?
Let’s begin by first discussing China’s growth pattern. China has enjoyed very rapid development over the last thirty years, averaging GDP growth of around 10%. This advancement has, obviously, uplifted the living standards of Chinese people—including myself. Hundreds of millions of people have elevated from poverty. China’s growth has also benefitted not only its own people, but the rest of the world as well.
However, there is a price associated with this high rate of growth: in terms of the environment, climate change, and people’s health. A few years ago, the government began to recognize that speed is not everything. We need to look at the quality of growth; we need to ensure that there is a balance amongst economic development, energy consumption, and environmental concerns. The authorities have now decided to strategically shift priorities at the national level: quality first, speed second.
Can we, as a multinational company, play a role in this? Certainly we can. I believe that there are several areas where MNCs have and will contribute to China’s advancement. We can bring more than capital: we can bring management techniques and technology.
I recently had lunch with a friend of mine, and he asked me, “What is the value of multinational companies in this market?” I replied that if we measure the impact in numbers, then money is the only one indicator. However, if we measure things a bit differently, we obtain a value that is not calculable in terms of USD. We cannot underestimate the value of management, concept, and ideas, etc. MNCs have helped transform this country’s way of thinking. This is a very real benefit of our presence.
Mr. Hu Weiping, Deputy Director-general of the National Energy Administration’s Oil and Gas Department, has told us that it is not a matter of China not having the ability to become the architect of its own development in fields like management and technology. It is simply a fact that, when MNCs bring their already advanced capabilities to this market as partners, the length of time needed to advance the nation is significantly shortened.
Another element that we must never forget is talent. MNCs initially bring their own people to the local market, but then begin to localize the majority of key positions. Through this process, foreign companies identify, nurture, and develop talents. These capabilities remain in the country. My philosophy is that, even if an individual has left my company, I feel that we have at least contributed to the society at large because we helped develop this local professional.
Looking ahead, I think companies like BP can continue to play an important role. We can continue to bring management, new concepts, talent development, and technology. In recent years, Chinese technology has begun to emerge; however, in many areas, MNCs are still ahead: for instance, in niches such as deepwater, shale gas, and CBM.
Furthermore, BP is jointly developing technologies with Chinese institutions. For instance, we have a strong collaboration with the China Academy of Science. As part of our work, we formed a 50/50 joint venture in Shanghai called the Clean Energy Commercialization Center (CECC). The Chinese Academy of Science is very good at research and development; however, commercialization is equally important. The latter is the space where BP can play a role—to convert ideas into products and productivity. It is well known that between technological development and technological deployment, there is a huge gap.
China has a rich history in science dating back to ancient times, but its research capabilities have stagnated in the modern age; it has taken a backseat to the West as a manufacturing hub for Western ideas. You yourself have a scientific background that includes positions such as a senior research fellow at the Singapore Institute of Standards & Industrial Research. What fundamental issues must be addressed for China to regain its prowess in research?
My personal view is that the authorities must address a number of things: the first is education. The educational system in this country certainly focuses on science—there is no doubt about that. However, the more fundamental task is to call upon students’ creativity. Currently, there is too much emphasis placed on memorization and the calculation of equations. People can be very creative if the right environment is fostered—we must create this environment in the education system.
Intellectual property protection is also very important. In the past, this has been a highly criticized issue in China. The country has done quite a lot over the last several years to improve its systems of IP protection; however, this is a vast territory, and while we may have made a lot of progress, we are not quite there yet.
We also must see government policy encourage innovation. Officials should ensure that there is enough investment in this field. They should ensure that they support the peoples’ interest in producing innovation.
The still-precarious status of IP protection in this country has lead many Western companies to think twice about opening an R&D center here. Nonetheless, BP made the commitment. Is the company unconcerned about this issue?
Different companies will of course have different approaches, based on differing viewpoints. My personal view is that eventually, China will put a framework in place to meet high international standards of protection. This is certain; it is only a matter of time. I believe, therefore, that IP is a concern, but should not be a worry. As BP, we have not encountered any major issues in this regard here in China—there have indeed been some minor cases throughout our history in the region, but they have been resolved.
We feel that bringing our modern technology to China and working with the Chinese to jointly develop ideas can help our company. It has certainly helped us already. There are also certain technological areas where China is itself quite strong. If we think about joint development, and participation in the early stages, then we can also participate in the introduction of these technologies to the world.
BP has an extensive downstream and marketing business in China, but it might be said that the true identity of this company is one that discovers new energy resources—BP has an estimated market share of around 3% of global oil & gas production. In China, BP’s upstream presence is certainly existent, but compared with the company’s other global markets, it is relatively small. How would you appraise the attractiveness of this region for upstream activities? Looking at things in a more elementary sense, should IOCs even expect China to play a major role in their E&P activities, or should China serve a broader strategic purpose?
I see two elements in considering this question. The first is that China is a huge market—the world well recognizes this fact. According to BP’s latest 2030 energy outlook, OECD crude oil consumption will decline by approximately 6 million barrels a day (Mn BPD) by 2030. China’s consumption, conversely, will grow by 8 Mn BPD. In other words, the decline in consumption in the OECD countries will be more than compensated for by the growth in China’s oil appetite. Yes, BP is an E&P company, but we are an integrated company, and we have a strong downstream presence as well. As such, this downstream market, as a region set to grow significantly, is very attractive for us.
On the other hand, China is also attractive from an upstream standpoint. Recently, China’s Ministry of Land and Resources made an announcement regarding China’s shale gas potential: the Ministry estimated that China has 31 trillion cubic metres (tcm) of ultimately recoverable shale gas resources, very close to 32 tcm of recoverable conventional gas resources. If we consider the major role that shale gas has played in recent years in the energy structure of the U.S., we hope that China can achieve the same by encouraging companies to explore this potential.
However, to develop this industry here will be challenging. We can think of coalbed methane (CBM) as an example. China essentially has tried to develop its CBM industry for the past 10-15 years—however, the country’s CBM production is still very small, it has developed this niche to produce only 1.5 billion cubic metres a year. We must look at what has happened in the CBM industry, and ask ourselves what we can do differently in shale gas.
Another E&P area where we see a lot of potential is in deepwater. BP is a global leading company in deepwater, and we are interested in developing this business in China.
Hence, to answer your question quite simply: we are interested in China as a consumer market, and we are also interested in its upstream resource potential.
On the subject of deepwater development, it perhaps remains difficult to avoid associating this with the events that unfolded in the Gulf of Mexico in 2010. How well do you believe the company has been able to recover from the ramifications of this incident, both globally and in the eyes of the industry here in China?
This incident is certainly something that the company greatly regrets—it cost 11 livesand it resulted in impacts to the environment and the Gulf Coast communities. However, when we discuss this incident, we must not forget BP’s response to the crisis. We mobilized 48,000 people, 6500 ships, and 120 aircraft to participate in the clean-up. It was an absolutely huge operation. The company set aside a significant amount of capital to fund both this operation and to help Gulf residents and businesses.
The incident certainly caused the company to suffer some reputational setbacks. However, in China, I must say that both our partners and the government recognize that this was an unfortunate event that resulted from the actions of multiple parties and multiple factors. They also recognize the efforts that BP made in response to the crisis, and they recognize that our company has truly learned from this incident.
As companies in this industry, we can all learn from the event in the Gulf. The same may be said for any aviation disaster: the aviation community learns, and takes steps to improve. Or, we may consider space exploration: there have been major accidents, such as the explosion of the Challenger. We must analyze what happened and work to incorporate those learnings. In this way, technology improves, and society itself continues to advance.
Since the crisis, we entered into two deepwater projects in China. The fact that we were able to do so is an indication of the trust between BP and our partners. Our relationship with them is something that we treasure and appreciate greatly.
After Macondo, BP was in very bad shape, and there was talk of a possible PetroChina buyout of this company. Of course, these were just rumors, but they seemed to make people in the U.S. very nervous. How do you believe the West should understand the growth of Chinese NOCs, and the synergies created between them and companies like BP?
I would like to make it clear that I have no knowledge of plans PetroChina may or may not have towards BP in this sense. However, on the point of their growth, and our partnership, I believe that a very interesting story is emerging. Under the NOCs’ globalization initiatives, I see that the boundaries between IOCs and NOCs are becoming blurred. If we consider, especially, a number of NOCs in other countries, they are perhaps already quite indistinguishable from their private-sector counterparts.
Although Chinese companies are still in the early stages of this move, they are going through the same process. They will play an increasingly important international role. They will also go through some learning curves, just as any other individuals or companies might do as they have their initial international experiences. I am sure that they will learn quickly.
Something that people often underestimate is the challenge in the culture area. Both sides—West and East— need to respect and learn from each other. For instance, as BP entered the Chinese market years ago, we went through a long learning period because of the difference in culture. The Chinese companies will face the same challenges in other countries.
Culture is particularly important because on commercial points, and on technology, we can always negotiate—culture, on the other hand, is not something that can be negotiated. We must find points of conciliation, to not have the temptation for one culture to dominate the other: somehow, convergence is needed. By converging good elements of different cultures, we form a new one that really works. Otherwise, we will fail.
A company like BP has a few initiatives in place to align itself with our partners. First of all, we place great emphasis on understanding the country. We know that we must be an integral part of the country, rather than an observer or passenger. We came to China almost 40 years ago, and we always like to say that we have truly witnessed China’s development. However, we were not only witnesses: we were also contributors. We are part of China’s growth, its economy, and its local communities. We know that we must position ourselves this way, or face continuous challenges.
If you look at our employee structure, most of our senior positions are localized. Localization is extremely important to us. At the same time, I do not subscribe to the strategy of blindly localizing every position. That kind of approach is wrong. I believe that a balance must be maintained between expats and local employees. The reason is that we must maintain some foreign ambassadors within our local subsidiary: they may work in China for some time, and then return to their home countries—perhaps back to BP headquarters. Such staff, having spent time with us, act as ambassadors and advocates for our market. This can be a beautiful thing. If everyone is localized, the opportunity to nurture ambassadors is lost! Furthermore, maintaining an expatriate-local balance allows us to continue to enhance the exchange of ideas, technology, and management amongst our region, HQ, and BP’s other regions.
We know, also, that we must be good corporate citizens. We must play our role within society; we are here not only for financial gain, but to return something to the people of this country.
When we came to China, we knew that, in addition to our other efforts, the best, and easiest, way to assimilate into the market was to form a partnership. Therefore, we have partnerships with the three major NOCs in China, as well as with other local companies. In any case, while in some areas—such as lubricants—we are able to have our own wholly owned companies, in other areas, due to government restrictions, we would not be able to operate without partners in the first place. These areas include E&P, certain aspects of the petrochemicals segment, etc.
Our partnership with the major three NOCs also extends overseas, as well. For instance, in Rumaila, the major Iraqi field, we have a partnership with CNPC; in Angola, we have a partnership with Sinopec; in Argentina, Indonesia, and Australia, we have a partnership with CNOOC. For each of these collaborations, I would say that the driving force is slightly different. However, we are equally happy about the opportunity to work with each partner. Each project is different, but the strengths that our partners bring to the joint work are enormous.
It is very interesting to think that 40 years ago, major Western oil companies like BP controlled 60% of world oil reserves. Thanks to waves of nationalizations and the depletion of oil fields in the West, states and state-owned businesses now control the bulk of that oil. With few exceptions, the only way to make an impact in such places—whether Venezuela, Russia, or Abu Dhabi—is through partnerships with national oil companies. China has the largest such companies in the world. What kind of future does BP expect from its relationship with these companies? How will the collaboration further develop as the NOCs further mature?
This is a very good, but also very challenging, question. I think multinational companies can still play a role in China. Chinese companies are growing very fast, not only in terms of size but also capabilities: I am speaking of human capability, technology, and so forth. But do they still need multinational companies? My answer is yes. They need us in the areas we have discussed: deepwater, shale gas, CBM, and etc.
Moreover, when the NOCs go out of the country, they are still on a learning curve. The MNCs, on the other hand, have a wealth of international history. BP, for instance, has 103 years of experience in foreign countries. From day one, we were an international company—our first drilling operation was in Middle East. Partnership with an international company such as ours will hence be beneficial to Chinese players. In any case, BP needs a partner for many of our E&P activities. We are very happy to work with other strong companies, for mutual benefits, but also share risks.
But what kind of longevity do you foresee for such partnerships? What will happen when Chinese companies develop each of the capabilities in question—deepwater, shale, and the like; when they develop the experience to confidently enter foreign markets on their own?
If we look at the evolution of international investment into China, we see that the driving force has changed. In the early days, the pivotal force was money; later, management; later still, technology. The reality has continuously evolved—history has shown that it has evolved quite dramatically.
In the same way, while one reason for partnership may phase out, another reason will emerge. We cannot say what will emerge in the future, but we are confident that good reasons will continue to incentivize IOCs and China’s state-owned companies to work together.
It is well know that Shell has a very extensive commitment in China, but Mr. Lim Haw Kuang, the company’s chairman in this region, was once quoted as saying, “The $4 billion we have invested in China is a drop in the ocean. We are one of the world’s top energy companies, and we are not doing enough.” And BP? Is BP ‘doing enough?’
BP has approximately $4.8Bn invested in China, and I agree with Mr. Lim—this is a drop in the ocean, if we consider BP’s total portfolio. Therefore, we are committed to continued investment and continued growth in this country. I can highlight several of our initiatives.
Firstly, we wish to continue to play a role in gas supply in China. We want to look for unconventional gas, and deepwater gas. We want to continue to bring in gas from abroad, in the form of LNG—we were the first foreign company to invest in an LNG terminal in China. We will strengthen our position in this sphere, and we hope that some of our future projects around the world can also produce gas for this market. We want to produce gas both within China, and outside of China for China.
In terms of oil supply, I mentioned our major projects in Iraq with CNPC, and in Angola with Sinopec. We want to continue to strengthen our oil production partnerships with the NOCs. This oil can either be shipped back to China or sold in global markets. We are always on the lookout for an opportunity to exploit oil assets within China itself.
We want to continue to expand our petrochemical business in China. We have a very strong base in this industry already, and have several major facilities around the country. Petrochemicals is one of the most significant pillars that we have identified for our growth.
Another direction is lubricants. We will continue to grow our premium lubricants business in this country. This business has been quite successful for us, and we want to build upon this success.
Gas, oil, petrochemicals, and lubricants: these are our major business focuses. Furthermore—and we touched upon this subject already—we want to continue to build our relationship with our Chinese partners overseas. We feel that this is also very important.
A story in BP Magazine in 2011 described your ascent from impoverished conditions to the head of a multi-billion dollar business. The article noted that there are millions like you—people have “raised themselves out of poverty, as China has transformed.” How do you believe energy issues will intertwine with the growth and betterment of Chinese people’s lives as China continues to grow and to change?
Energy alone is a very limited industry if we compare it with the whole economy here in China— if we only talk about how many people we can hire as energy companies, we play a limited role. However, energy is too important to be ignored, and economic activity cannot exist without energy. Therefore, if we look at energy as fuel for the economy, then it becomes extremely vital.
Economic growth, in turn, is the engine that brings people out of poverty. When I was interviewed by BP Magazine, I related my own such experience. I was born in a very remote area in Xinjiang, and I would have never dreamed that I would today be sitting in this office, speaking with the international media. The reason that I am able to do so is the development of my country. We all benefitted from our economic growth; indeed, the world at large has benefitted from China’s economic growth.
I remember a publication from the World Economic Forum stated that a significant economic slowdown in China would be a major crisis for the world. This is a clear indication of how intertwined the world is becoming. Nations are becoming interdependent: if one country suffers, others will suffer too.
What is your final message to the international readers of Oil & Gas Financial Journal?
We enjoy our partnership with Chinese National Oil Companies, and we look forward to continuing to work with them both in China and outside China. By doing so, we want to create material, valuable growth for our shareholders.