with Michael Dolman, Baker Hughes China
Mr. Dolman, your 2009 appointment as Managing Director for Baker Hughes’ North Asia region coincided with Baker Hughes’ reorganization by GeoMarkets. What is your understanding of why the company decided to implement this structural shift, and how would you appraise the effectiveness of this approach three years later?
It is what our customers asked from us. In order for us to better serve our clients, and take a more holistic approach to our business and clients’ needs, we decided to restructure our company.
Previously, we were organized according to independent divisions based on product lines. When our customers expressed that they did not wish to see multiple managers representing separate facets of the company, we responded. In many cases, our customers prefer to speak to one person who can represent all of Baker Hughes.
The reorganization has worked very well for us. It also ushered in a strong emphasis on business growth in China. To give some perspective, Baker Hughes has been in China since the late 1970s. On Deng Xiaoping’s first visit to the United States, he visited Baker Hughes headquarters and was presented with a drill bit. To this day, the drill bit remains on prominent display at Chengdu University. Following the historic visit, the door was open in China for our company.
Traditionally, our business in China was focused primarily on offshore work in areas like Bohai Bay and the South China Sea. However, with the major opportunities that have presented themselves in the China land market, Baker Hughes has now increased its focus onshore. We have invested heavily in our business during the past three years. We have invested in infrastructure, opening new support bases and offices. We also have invested in people and implementing a technical training program that utilizes both in-country knowledge and international knowledge transfer.
The past three years also have been marked by an introduction of new technology. Technology is one of our key roles in this market as a service company, and essential to our success.
In our recent conversation with Mr. Li of TD Williamson China, we discussed the chicken and the egg. Mr. Li said that service companies in this industry must invest a great deal in order to be positioned to seize local opportunities. This, of course, makes sense—the service company needs to have staff and major equipment on hand in order to quickly and competitively deploy these resources to a project. On the other hand, Mr. Li said that opportunities must exist in order to invest in the first place—a company needs to be able to justify a major investment. No investment, no opportunity; no opportunity, no investment. What about Baker Hughes? Has this company invested enough in the China market?
Our executive management is committed to our business in China. The North Asia GeoMarket has been identified as a very important territory for Baker Hughes. We recognize the growth opportunity for our business in North Asia, and especially, within China.
Let’s consider a particular growth opportunity for the organization here. Baker Hughes’ Executive Chairman Chad Deaton, who has been visiting China very frequently, commented that the emergence of smaller Chinese oil and gas producers represented the best chance for the company to expand operations in this territory. This is perhaps especially true in the wake of the government’s decision to liberalize the bidding process for shale gas developments. Can you expound on Mr. Deaton’s point?
Traditionally, and still today, China’s oil & gas industry is dominated by the ‘Big Three’ Chinese NOCs. Liberalization of the market is a process. Nonetheless, we are encouraged by the fact that we are now seeing the Chinese government open tenders for licenses to grant smaller, independent energy companies an opportunity to participate in the oil & gas business alongside the state-owned players.
There are now opportunities for such players in unconventionals, like shale gas, CBM, and shale oil. Baker Hughes is well positioned to provide services to these companies.
Many experts are skeptical about China’s shale gas potential, saying that, while it does appear that reserves are vast, it is too early to tell how economically viable, or geographically challenging, exploitation will be. What is your opinion? Can China shale be the next success story for this industry, and for Baker Hughes?
This is one of the big questions in our industry today—will China be the next place for shale gas, and for unconventionals?
The potential resources are there. Personally, I believe that the growth opportunities could be huge for both operators and service companies. However, from what I have seen in my three years in China, the Chinese take a very long-term approach. By thinking in broader terms, a strategy is being implemented to move from coal to cleaner energies. I see the investments being made. And yet, it will take time.
We will have to contend with challenges. The business here is completely different from North America. For instance, even the fundamental logistics are challenging—many of the areas that appear to have resource potential are in difficult-to-access, mountainous terrain with high population density. There is a potential lack of water sources for hydraulic fracturing. China must invest, too, in its pipeline network, as the gas must ultimately be transported to consumers.
For these reasons, I believe that a ‘shale gas boom’ will not happen overnight. However, I see a very bright future, because political will is clearly behind the exploitation of this resource. Baker Hughes is investing in these opportunities because we believe the market will develop.
You mentioned the example of Mr. Li of TD Williamson, and his discussion of the ‘chicken and the egg’ in making investment decisions, such as an oilfield service company. I am not sure I subscribe to this manner of thinking. I believe investment is a very clear business decision, and as with any such decision, we must weigh our necessary capital expenditure against our expected return. If we look at Baker Hughes’ China strategy during the past three years, we see that as the company has expanded and invested into the business, there is a clear alignment with defined, targeted business opportunities, such as shale gas.
How would you describe the relationship you have cultivated with China’s ‘Big Three’?
Today, we have excellent relationships – not only with the NOCs, but their service companies and with other partners in China. In the past, the relationship between a service company and its customers was largely based on the provision of discrete services—i.e. the company provides a service or product, payment is made, and that is the full extent of the relationship. Today, our work together is so much more than that. We have expanded our cooperation with our partners and our customers into many different areas: technological development, technical training, etc. This approach has been absolutely critical for our success in China.
To what extent have you leveraged these relationships in third markets internationally?
China’s NOCs are branching out across the entire globe. As Baker Hughes, we believe it is a very natural progression of our collaboration in China to extend the partnership on a global scale. Baker Hughes has a very large footprint, with established operations in more than 80 countries. We have more than 58,000 employees who are ready to offer our expertise to China’s national companies on their projects overseas. We have much to offer, and we are leveraging our combined strengths.
We recently were told of an interesting dynamic that has emerged in recent years: Chinese service companies are bidding to win international contracts, and, as China’s national service companies and upstream companies are grouped in single corporations, oilfield service companies have found that clients are now sometimes competitors, as well. How does Baker Hughes mitigate this dynamic?
Indeed, this is a valid concern. We have partnerships and joint ventures with the NOC service companies here in China, but as the Chinese NOCs go abroad and take their service companies along, it is possible that we could find ourselves collaborating in China while competing overseas.
Obviously, this kind of situation brings concerns regarding technology, intellectual property, etc. We are very much aware and mindful of that. It is all about finding the right balance, and the right mechanism, in collaborating while maintaining our own commercial interests. Through dialogue, we can establish boundaries up front.
You earlier mentioned your efforts in technical training as an approach to delving deeper into the local market. Indeed, Baker Hughes committed, for instance, to a China Geoscience Training and Recruitment Center in 2006. Can you shed some further light on this aspect of your work?
At Baker Hughes, we have some of the most sophisticated training centers in the world. A very large one is located in Dubai, and we have major facilities in Europe and the United States.
We discussed the interest brewing in this market in unconventionals, and there is specific expertise and knowledge required to develop these resources. Building that knowledge base in China will help us grow our business. Our customers have recognized the value of our expertise and training capabilities, and want to collaborate with us in those areas. In turn, this solidifies and reinforces our relationship, creating a win-win situation.
Prior to the interview, you mentioned that you had been in China for two years in the 1990s. Having returned once again when taking this post, what surprised you most about the changed environment?
The main difference I have seen is the sense of urgency that exists today. This may have something to do with the fact that in the mid-90s, companies were only just starting to seriously develop their own capabilities.
However, I believe the root of the urgency is China’s growth. There is an ever-accelerating increase in the demand for energy. This has really galvanized the country to try to capitalize on its own energy resources. Approximately 56% of China’s oil is now imported. This has been a growing number. There is a true sense of urgency as the country focuses on brownfields, greenfields, conventionals and unconventionals — all driven by the five-year plan, and the demand for energy as the fuel for this economy.
What have you found it takes to be successful in China?
We have focused on several of the main facets: technology, investment, training of personnel, etc. All of this is critical. However, at the end of the day, just as in any other country, you will be judged on the value that you create for your customers. Doing business in China is different in many aspects relative to other markets around the world, but in this respect, it is exactly the same.
What is your final message to the international reader of Oil & Gas Financial Journal?
Having been in China for three years, I am very excited about the opportunities in this country. As Baker Hughes, we have had considerable success during these past three years, and we have seen our client growth accelerate.
We have combined our industry-leading technology with a highly-qualified and highly-experienced, strong, local workforce. We have supplemented this workforce with foreign experts and we have established solid relationships with our customers and partners. Based on that recipe, we look forward to continued and greater success in China.