with Jiang Junyan, Country Manager, Petrofac China
Petrofac has recently established a new joint venture with the CNPC engineering subsidiary CPECC, further cementing a relationship that has existed for seven years and includes successful collaborations on projects such as Iraq’s Rumaila field. Petrofac COO Maroun Semaan has called the venture a “milestone” for Petrofac, that will enable the group to “capitalize on the significant opportunities in China and internationally.” Why was it important for Petrofac to enter into this partnership, and what specific outcomes do you anticipate?
If you look at the recent investment trend of Chinese NOCs around the world, you can really note China’s hunger for energy. This country currently imports approximately 4 million barrels of oil per day. In order to secure the source of this oil, China must invest heavily abroad. Chinese NOCs have been investing directly, or acquiring companies, especially in the Middle East and Africa and even in the United States.
I am thinking of CNPC in particular. CNPC is the largest State Owned Company in China, and they have the strong backing of the Chinese government. Currently, CNPC has operations in more than 70 countries worldwide—this amounts to a lot of projects! As Petrofac, we are quite interested in that kind of opportunity.
In order to tap into this potential market, it is useful for us to partner with a Chinese engineering company—especially a subsidiary of CNPC. CPECC is the largest engineering company in China for the oil and gas industry. Its status as a CNPC affiliate puts Petrofac in a very strong position to target CNPC projects globally; and, of course, Sinopec and CNOOC projects as well.
CNPC has tended to rely on its own oilfield service subsidiaries as much as possible in developing its projects at home. Why do you believe they take on MNC partners in other markets?
It is very natural for CNPC to give business to their subsidiaries when they execute projects inside China. These projects are under Chinese standards, and use Chinese language. Their subsidiary companies are very capable of executing them. But when CNPC travels outside of China, all of the technical engineering documents will be in English. They will use international standards. CNPC engineering subsidiaries are lacking those capabilities and competencies. They are still not yet ready.
CNPC therefore chooses international partners on such projects. Furthermore, when their engineering subsidiary collaborates with an MNC, the subsidiary can learn. They learn, they grow, and become capable in the future. Partnering with international companies is an aspect of CNPC’s long-term planning.
Petrofac does not currently have any EPC projects underway in China. Yet it has an expected year-end global order backlog of $10.6Bn, most of it from national oil companies like Mexico’s Pemex. What is the challenge in China?
Petrofac now is quite large and has a significant number of orders, but just five years ago, we were relatively small. We set up an office in China in 2007. Our competitors, however, such as Fluor and Bechtel, have been doing business in China for 15 or 20 years.
A second reason is that Petrofac is more concerned with the upstream side of the industry, onshore. However, as we have discussed, inside China, most upstream projects owned by Sinopec or CNPC are handed to their local engineering subsidiaries and design institutes.
It is true that, for downstream and petrochemical projects—notably downstream LNG and unconventional projects—the local companies are not capable—yet. They rely on foreign technologies. That is why organizations like Fluor and Bechtel, and Technip, are able to have a range of projects in China. Petrofac, however, does not focus on downstream.
What is then the strategy behind Petrofac’s physical presence in China?
We see that there is room for us to pursue projects invested by Chinese NOCs abroad. This office has two functions: first, it is a local business development and support site for those international projects.
The second, and primary, function of this office is procurement. We are sourcing quite a bit of material and equipment from China. China is, of course, the world’s largest manufacturing hub. And today, if you look at API-certified manufacturers worldwide, China has the greatest number—exceeding even the U.S.
China is therefore strategically important, and integral for our global network. This is especially true after our joint venture with CPEEC. And ultimately, with the foundation of our JV, we are looking to one day provide service back into China—especially for CNPC projects and especially in terms of PMC and project management services.
We have heard a similar approach described by Mr. Willumsen from Statoil China. He remarked that Statoil uses this market mainly as a sourcing center for the global organization, while closely monitoring the environment to understand when they can conduct upstream operations.
It is a long-term view. Long-term presence in China is very important, because we are seeing truly tremendous investments by its domestic oil companies. China is a large market for energy! Look at the extensive way in which Chinese companies have become involved in LNG projects in Australia, for example. IOCs would be wise to stay in China and build strong relationships with Sinopec, CNPC, and CNOOC. In the case of the Australian LNG projects, we are speaking about a huge amount of necessary investment, and a need for buyers. Where is the buyer from? China, Japan or Korea. Where is the investment from? China again; it has huge foreign reserves. The NOCs are government owned, and if they seek to invest in any projects abroad, the government will back them.
Let’s look a bit more closely at procurement. For many years, China has had a reputation as a low-cost hub. However, the government has made it clear that they aim to increase the value of the “made in China” brand. Will the viability of procuring equipment from China decrease as its costs increase?
Labor costs are definitely on the rise. However, the average labor fee is still one tenth of what the average Western worker receives—so there is still room. Cost is still competitive. Petrofac purchases many valves, fittings, phalanges and pipes from China. Our cost is 40-50% cheaper than it would be in many other markets. We are an EPC lump-sum contractor, and anything we save in procurement contributes to our net margins.
In any case, the reason we buy from China is not just because of cost. The second factor is delivery. Because of the huge manufacturing base here, with factories working seven days a week, 24 hours a day, in three shifts, turnaround is very, very fast here. Phalanges normally take 6-8 weeks to deliver in China; in Italy or France, things take about 20 weeks.
What is your appraisal of Chinese quality? When we met Mr. Skidlo, head of Asia Pacific for Kvaerner, we discussed their recent JV with COOEC, which bares a strong resemblance to Petrofac’s collaboration with CPECC. Mr. Skidlo spoke about the challenge of proving to clients that a JV between a Norwegian company and a Chinese company would produce the level of quality and execution that Kvaerner’s clients expect. Is this a challenge that is on Petrofac’s mind as well?
20 years ago in China, there were many copies and fakes, and little consideration for ethical production. Now, however, things are different—and the perception is also changing. Today, there are many quality products that are produced in China: just look at the iPhone or iPad. Or look at pressure vessels and pipes. Many Chinese manufacturers import the latest manufacturing equipment from Germany—this is certainly true, for example, in the case of TPCO, which is the largest pipe manufacturer in China and the largest in the world in terms of capacity.
There are good and bad manufacturers here, as there are elsewhere. What is perhaps lacking most for Chinese companies is documentation. It is true that the documentation is very poor—and procedures are very poor as well. COOEC has a combined capacity of 600 tons per annum, the largest in the world. Their procedures and documentation are too lacking, however.
The reason we at Petrofac set up our procurement office here—just like our competitors at Saipem and Technip—is to work with our Chinese vendors. We help them to improve, and provide training. We provide our resident inspectors and our resident expeditors to them. We view this as an investment, and we get a return from their quick delivery and cost saving. It is a matter of long-term development.
Petrofac is a remarkable story: a 25-person company started in 1981 is celebrating its 30th year in 2011 with a truly global presence and 14,500 staff members. As manager of this subsidiary, what are your ambitions for the future of this affiliate?
Petrofac is an EPC company. As we have discussed, at this office, we provide only business development and procurement. We are lacking on the engineering side. Our long-term goal is to change that. We need to develop an engineering base in China. China has a huge number of engineering graduates!
What is your final message to the international reads of Oil & Gas Financial Journal?
I would like to say a few words about the broader Chinese environment.
China is one of the friendliest environments in the world to do business, relative to some other countries that very aggressively protect their local market. I recently visited Indonesia, for example: to do business there, you must set up a local PD company, that must be 10% locally-owned. Some of the project bidding involves a requirement of 51% local ownership. International companies face a number of challenges there.
China is different. Anyone can come to do business here. One need not register as a company, nor take on local partners. It is a free environment. Furthermore, the potential of Chinese NOCs’ investment overseas brings huge business opportunities for all the companies in our industry, across the value chain: drilling services companies, engineering construction companies, equipment manufacturers, etc.
I really encourage companies to come do business in China.