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Interview

with Lim Haw-Kuang, Executive Chairman, Shell Companies in China

10.01.2012 / Energyboardroom

Mr. Lim, can you please begin by outlining Shell’s strategic priorities on the Chinese market?

I would start with an update for you on our strategic activities in China. Shell is currently working with the DRC, a think tank under the State Council, to do a joint energy study for the short and medium term. This piece of work goes beyond the 12th 5-Year plan and looks further into the future of China’s energy use. This is a high-profile venture sponsored by the DRC Minster.

As for our business strategy in China, I look at this market in quite a simple way. I first look at what China needs from an energy perspective.

Its first need is security of energy supply—in the broadest sense. Energy security entails looking for resources internationally, while diversifying the energy mix domestically. Diversification does not simply refer to renewables, but also to increasingly exploit more challenging oil & gas sources.

The country’s second priority is environmental protection. I am a member of the China Council for International Cooperation on the Environment (CCICED). The organization’s chairman is Li Keqiang, the Vice-Premier. Every year, we meet with Premier Wen Jiabao and speak at length about environmental and developmental matters. We discuss issues and challenges regarding what the Chinese government is doing or should be doing. The environment is an extremely important subject: Premier Wen has stressed that China will not pursue economic development at the expense of the environment.

Finally, China needs to make further progress in energy efficiency and emission reductions. This last but not least priority has direct and indirect linkages to the first two.

Shell’s strategic responses to these needs are as follows. First, we cooperate with our Chinese partners to develop energy projects overseas, with a view to bring this energy back into China. A specific example of this drive is our work with CNPC in Australia. Together, we acquired a company called Arrow Energy—a CBM (coal bed methane) company—and we have plans to develop CBM, convert it into LNG, and bring the gas back to Asia, China in particular. We are also cooperating with CNPC in the Middle East, including Syria and Qatar, and in Canada. In Canada, we are working jointly to construct a large-scale LNG plant in British Colombia.

Shell wants to focus more and more on gas. We believe in a diversity of energy solutions—even though, at the end of the day, fossil fuels will still be a staple for a long time to come. Keeping in mind this dominant role, it is best to choose the cleaner resource. Hence, Shell’s gas strategy. In the 12th 5-Year Plan, the Chinese government is also emphasizing the increased use of natural gas. CNPC’s gas targets, therefore, are not unlike Shell’s. In fact, they aim to increase the proportion of natural gas in their operations to 50% over time.

Currently, the contribution of natural gas to China’s primary energy mix is no more than 4%. The authorities, within the 12th 5-Year Plan, have set a target to increase its use to 8%. Different players have different views on how much the percentage will increase beyond the current Plan, but the upward trend is clear. However, there are certainly many issues and challenges inherent in this drive.

Both Chinese and independent sources believe that this country has abundant unconventional gas resources—perhaps even as much as the combined total in Canada and the U.S. No one knows for sure, however, because there has not yet been any structured exploration activity. Nonetheless, the industry, and China, has a gut feeling that this is the case. Shell has been working in the unconventional field for a long time, particularly in North America. In China, we also have had a very successful tight gas project in Changbei, Shaanxi province.

My second strategic priority is to work closely with our Chinese partners to develop unconventional gas opportunities, alongside conventional assets.

We are interested in cleaner natural gas solutions, together with the import of LNG into China. Shell is the world’s largest commercial LNG marketer, and the largest LNG supplier into China by contract volume.

If we look at what the Chinese government is articulating in the 12th 5-year plan, we see that they are no longer satisfied to simply have goods and services that are made in China—they also want goods and services to be created in China. Innovation, R&D, and technology have been very much at the forefront of the authorities’ thinking. China wishes to transform, over time, from a labor-intensive economy to a high-tech innovator. In some years, rather than being the world’s factory, China can itself create products and manufacture them overseas.

As Shell’s priorities are all in line with the goals of the 12th 5-Year Plan, our third strategic priority in China is to focus on R&D and technology cooperation in China. We have several ongoing projects in this regard. As of next year, Shell Group will set up a Center of Excellence for unconventionals in China. It will be our only such center outside of Houston. We also have a coal gasification business, which is currently based in The Hague. We plan to move it to China early next year. We will also migrate our CBM business unit to China. These are the Upstream movements. In Downstream, we are also making arrangements to incorporate China into our R&D value chain, such as the opening of our first lubricant Technology Service Centre in China. We are also working with Chinese partners in these development endeavors. Today, I look at China not as a market, but as a place where we can establish expertise that can serve our businesses globally.

Our fourth priority is quite interesting. As you know, Shell operates in many countries, and engages in many global projects. China has distinctive competencies in various oil & gas areas—in service industries, in manufacturing, in equipment, etc. Our priority, therefore, is to introduce Chinese expertise to Shell projects overseas, so that we can benefit each other. At the same time, in working in this direction, we can help the Chinese to understand the rules of the game internationally, and compete and grow abroad.

I can provide an illustration of our third and fourth priorities at work. Together with CNPC, we have set up a global joint venture in well manufacturing, with a focus on developing gas from unconventional resources. The innovative drilling technique and equipment the JV is developing will significantly increase the efficiency of drilling and reduce its cost. Our joint projects with CNPC and other partners require a lot of new thinking, IP, and Chinese manufacturing and service capability. Instead of worrying about the protection of our IP, we ask how we can leverage our ideas and Chinese capability in tandem, to unlock the massive unconventional opportunities in China and around the world.

We are jointly conducting R&D with a company called Wison in Shanghai, with a focus on a new generation of gasification technology. We are exploring a more efficient, cost-effective, and flexible way of gasification. We are utilizing our experiences over the years, together with engineering and operational capability on the ground.

As I have said, we are working with the Chinese in China, but we are looking at more than just the China market; we are considering a global perspective. This means capitalizing on a resource-rich country and a strong domestic base, but also leveraging our combined competence to grow internationally.

In a 2008 interview with China Business Weekly, you stated, “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.” Has you opinion changed?

Indeed, looking at the global Shell portfolio, $4Bn is a drop in the ocean. However, I would say that I have ‘graduated’ from this view; as I have indicated, I now have a more global perspective.

Besides, our business here has been expanding very rapidly. Four years ago, we had about 4,000 people; today, we have 18,000 people. In the upstream space, we have a very successful tight gas project; we also have exploration work underway in Shanxi and the Sichuan basin. There are other very interesting projects in the pipeline, but we have not yet publically announced them.

In downstream, China’s business environment can be divided into two segments: regulated and deregulated (there are also areas roughly in between, which usually lean more toward ‘regulated’). In the deregulated segment—lubricants, for example—we are growing very quickly. We have two strong brands in this sphere, which are 100% Shell-operated. I believe that we are by far the largest IOC in lubricant marketing in China.

Retail is a regulated environment, and there we work with joint venture partners. We know that we can never be as big as Sinopec and PetroChina in retail, and we do not intend to be. However, we have a firm determination to be number one in service and quality; thereby, we can offer a differentiated proposition to customers. In retail, we are also growing very fast, and covering more and more national territory.

In petrochemicals, we have a large joint venture with CNOOC for a processing plant in Huizhou, Guangdong province. We are also working with CNPC and Qatar Petroleum International to pursue a large, integrated petrochemical, refinery and marketing opportunity in Zhejiang province. We hope we receive the government’s principal support soon.

Back to your question, although I have changed my perspective, there is always much more to be done. China has great potential, as does international cooperation with our strategic Chinese partners. There is much more to be done under my four strategic priorities, which have been fully endorsed by the Shell Group, and which we have openly shared with our partners and the Chinese government, including Premier Wen Jiabao and Vice Premier Li Keqiang.

One of the most fascinating energy stories in the world is the relationship between Shell and PetroChina—likely the most advanced IOC-China alliance. CNPC Chairman Jiang Jiemin and Shell CEO Peter Voser regularly meet. How is the PetroChina-Shell relationship unique, and different from partnerships that Shell usually ties around the world?

An interesting point is that our relationship truly exists on various planes. It is not just a corporate partnership. At a range of key levels—particularly in-country—we have a strong relationship. This relationship has really developed over an extended period of time, and is not accidental.

Over the last 5 or 6 years, we have developed a high level of mutual respect based on our performance and delivery, and our understanding of each other. The top executives often meet; nothing can be executed unless there is a cohesive set of prerogatives at each level, from the bottom up. Providing instructions from the top is very important, but we must achieve alignment between the lower level staff. This makes all the difference: a relationship of friendship, trust, and respect at the top; and in-country relationships in a similar vein.

Importantly, as I have said, our collaboration is also based on delivery and performance. For example, PetroChina has long been telling people: learn E&P from Shell’s work in Changbei. To me, that is the highest compliment that can ever be given to a joint venture partner.

The top authorities in China often like to talk about win-win relations. How does each party benefit from this partnership?

Win-win is always easier said than done. Globally, Shell has introduced something called the “5 Behavior Imperatives.” These are behaviors that emphasize external focus, commercial mindset, delivery, simplicity, and speed. It is quite fascinating to evaluate a partnership against these five guidelines in a country like China.

I always tell my people: “Let us not focus first on what we want. Let us focus first on what China needs in terms of energy, and how we can address those needs.” Everything we do, we do in line with national objectives. I think this in itself is the answer to your question.

Lastly, I will say that one of the mentioned behaviors is critically important in China today: speed. Shell in China, together with our head office, can work and move and make decisions extremely quickly. I will give you one illustration: just two days ago, a colleague of mine was attempting to close a deal, and we needed to make a decision in 48 hours. I sent a note directly to our group CEO, asking to receive approval within the timeframe. I sent the request on a Friday evening; I received support by Saturday morning. This is how quickly we can move today.

Shell is the largest IOC lubricant manufacturer and marketer in China, the largest IOC LNG supplier in China, the largest IOC bitumen supplier, largest IOC coal gasification technology supplier, an operator in several fields—the list goes on. But it still remains a small player upstream compared with Chinese NOCs. Many IOCs are voicing concern that for all of the wealth of reforms of the last 30 years, China has not become truly open to international competition. Do you share this view?

In any of today’s growing economies—be it India, Malaysia, Indonesia, China, etc.—you are not welcome, as a multinational, unless you add value. Therefore, if anyone wants to come to China, and bid it to open up, they will find that they have no luck. They will find a similar situation in any other developing market. The IOC will always receive the same answer: “We do not need you. We can do it ourselves.”

Because of my various external positions, I have had the chance to engage with China’s top leadership quite regularly. I tell them that the problem with China is that it is too polite! 20 years ago, the authorities met with positively everybody regarding foreign direct investment. Today, I believe they should be much more selective. They should tell the visitor what they do not want, rather than have another courteous discussion.

Today, IOCs need to bring something that the Chinese want. They can continue to complain that regulation is not on their side, but this will get them nowhere—neither in China, as I said, nor in many other places. We have talked about win-win; indeed, let’s start with win-win. Let’s earn the right to grow. Let’s figure out as a corporation, how to earn this right—rather than demand it, and waste our time.

It seems that the value that Shell brings is that it is very strong technologically, and has a wealth of experience in third markets, where it can help Chinese partners to gain a foothold. However, after the Chinese themselves absorb these competencies—after PetroChina is advanced enough to make unconventional plays without Shell’s help, for example, or advanced enough to enter foreign markets independently—what value can Shell continue to bring in the future?

You are absolutely right—China is indeed developing these competencies. And many of our IOC counterparts are not moving fast enough. Many companies, on the other hand, are doing things very differently—GE and Microsoft are good examples. I think it is time for the oil & gas industry to wake up.

If you adopt the conventional wisdom, you can sit tight and do nothing. Look at deep water or LNG globally: before you know it, many companies have the expertise to take on such projects. So what do you do to stay ahead? Shell believes in being a leader in technology and R&D. We invest heavily in R&D, and operations. Operations are important because they help you to refine and improve your technology and provide a feedback loop to your R&D engineers. We aggressively develop new technology, so that we are always at least half a step ahead of our partners. If you hope that the world will stand still, you will be disappointed.

I came to China 6 years ago. At the time, my colleagues said to me, “We have the most advanced coal gasification technology.” I told them that they were right, but that our biggest competitors would be the Chinese. The Chinese have been investing into coal gasification research for the last 20 or 30 years. Today, they are very competitive!

I mention coal gasification as a small piece of the story. But we can think of many other examples. We mentioned LNG, and multinationals—especially Shell—are an integral part of the global LNG story. However, in mini-LNG, the Chinese are currently conducting many experiments domestically—more so than other countries. Shell feels strong in LNG, but we have much to learn from our partners. ‘Win-win,’ from a Western perspective, tends to be quite arrogant: too often, Western companies are more concerned with securing their own win, and ensuring that the partner does not take the win away from them. They worry about a partner ‘stealing’ their technology. My perspective is different: share the technology, and we can learn much from our partners as well. Just look at what other industries are doing in China. Again, the oil and gas industry needs to wake up!

My challenge in China is as follows. Two years ago, I went to the Royal Dutch Shell board to present my China strategy. I received support for all of our initiatives. However, one board member issued a challenge that I will always remember: do not think of Shell as CNPC’s strategic partner; instead, think of what it will take to become China’s strategic partner. Our four strategic priorities are a small attempt to try to address this board member’s very powerful comment.

Shell seems to take quite a unique approach to this market. You mentioned your arrival in China 6 years ago. In our research, we found that when you moved to this country in 2005, your first act was to localize Shell’s China management. Why did you feel at the time that it was important to take this decision, and what have been its lasting effects for today’s operations?

In China, I focus on two things: growing business and growing people. In terms of people, anywhere and everywhere I go—and this is a Shell global philosophy—I aggressively localize our operations.

More than 98 % of our employees in China are Chinese nationals. Look at an example in Changbei tight gas project: around 80% of technical and senior staff members are now Chinese nationals, a great increase from only 35% five years ago.

By the same token, I aggressively globalize local talent. We have discussed the fact that we are moving some of our global divisions into China; this helps to fast track the globalization of our Chinese staff. Instead of, say, sending 10 people to learn in Australia, and 5 to learn in the UK, why not move the global operations here?

Why did I make this decision? I like to believe that it is a matter of common sense. My key stakeholders include the Chinese government, who are 100% Chinese; my customers, who are 99.9% Chinese; my joint venture partners are 100% Chinese—I can continue!

The effects of this change on the business are self-evident. Just look at the growth of our operations. I can explain the theory, but our success is the greatest indicator. Performance and delivery are better than slogans.

Mr. Lim, you have been with Shell for many years, and it seems that this company has truly given you everything: beginning from your scholarships to study at the University of London and the International Management Institute, to your position as a foreign national heading Shell operations in what could well be the world’s most important strategic market. What are your personal goals for the future development of this organization in China?

When I first came to China, I always liked to spend a lot of time with young people—in particular, young graduates who recently joined our organization. Our Chinese graduates are always quite bright, and very “cheeky”. One young girl once asked me what I would view as my biggest achievement after I leave Shell China. My answer is quite simple. When I leave Shell, I wish for my employees to be very proud of themselves and of the company. That is what I want to leave behind. I know it is not easy, but it is my ambition. When you are proud of yourself and your company, the combination is very, very powerful.

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