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Interview

with Ole Willumsen, VP and Country Manager, Statoil China

05.04.2012 / Energyboardroom

Mr. Willumsen, you have been with the Norwegian major Statoil since 2004 and had the opportunity to work in the Middle East for 3 years before moving to Beijing to head Statoil’s operations in China in August 2010. What attracted you to China, and what has surprised you most about this market?

Statoil opened its first office in Beijing in 1982 and has a very long history in China. The Lufeng 22-1 operatorship (1997-2009) was the first outside of Norway. When I was offered a chance to head Statoil’s office in this region, I found it to be a wonderful opportunity. China is becoming the leading player in the energy industry, at a global level. To be part of this environment, and to work and live and learn about China, is a tremendous opportunity. Statoil also has great hopes for new operations in China, and I hope to contribute to this endeavor.

What has surprised me the most? Perhaps the speed of development in the many new urban areas. There are so many cities in the 5 million inhabitants-range being developed. These are hyper-modern cities, yet very few in the West have heard about them or even know that they are being built. China is more than Beijing and Shanghai!

From a business perspective, I was surprised to find, shortly after I arrived, that there is a truly enormous push here in terms of unconventionals. It is difficult to pinpoint the moment when the exploration and production of unconventional fuel transitioned from something that was merely ‘interesting,’ to something that everyone is absolutely eager to take part in. I have the feeling that the drive warmed up around two years ago. I think the next couple of years will be crucial in terms of deciding on the potential commerciality in the various basins. . Hopefully, China’s resource base will not disappoint.

To what degree have you found that foreign players are ‘welcome’ in an oil & gas industry tightly controlled by the state, and where, according to the European Chamber of Commerce’s members’ survey, many European businesses feel protectionism is actually on the rise?

The oil & gas industry—particularly, its offshore segment—has a positive history of working in China. CNOOC, China’s offshore NOC, has been working with international players since its inception in 1982. As a matter of fact, CNOOC is in many ways modeled under the Norwegian system of offshore development. In 1981, Norwegian officials were invited to China, in an advisory capacity, to discuss how they had organized and administrated the offshore sector in Norway. Of course, China then proceeded to organize the sector in its own way, but the effort was using the Norwegian experience as a reference point.

This is to say that, at least offshore, there has been much positive interaction and a positive working relationship between IOCs and Chinese national companies, for decades. China has a PSA model for offshore, which is something that IOCs are quite familiar with. The structure of the PSA agreements has not changed much over the years, which is important for oil companies, as it affords a measure of stability.

If we speak of unconventional exploration, this is something that is quite new in China, and the nation has not yet developed a fiscal regime in this segment. I am sure this will come sooner rather than later. So far, there is no commercial production of unconventional resources by an IOC in China—we find ourselves in the very early days.

Statoil is very content in this market. We have a long history with CNOOC and in Chinese offshore operations, and we also have had long-standing relationships with the other national champions, CNPC and Sinopec. We have not felt any particular issues or challenges in China regarding xenophobia or protectionism. As you mentioned, some feel that protectionist policies have become increasingly stringent—but we have not personally felt this.

You mentioned that the Chinese offshore system is modeled on the Norwegian system; can you delve a bit more deeply into this topic?

The system in Norway is very much based on a dichotomy of competition and cooperation. Every block in Norway—every license area—is a partnership between a certain number of companies. And, early on, Norway introduced a system of competition, meaning that they put blocks up for tender, and companies individually bid for the licenses they sought. The government then decided which companies would receive which blocks, and in what amalgamation of partnership.

On one side, this created competition, because of the competitive bidding; on the other side, this fostered collaboration. The system has been very successful for Norway. If we look at what happens in China, CNOOC usually cooperates with one IOC or more in various blocks. China has certainly developed its own unique system with its own particularities, but, again, there are similarities, and Norway served as an advisor in the early stages of the offshore development.

In China, the IOC is allotted a share of the profits via the PSA contract. This is a bit different from what happens in Norway where we have something called a tax-royalty contract: organizations pay quite a high tax, but the oil discovered becomes their property 100%. If an international company or consortium makes a discovery, the Norwegian government has no claims on those resources, but rather profits from the very high tax rate. In China, CNOOC has 51% equity in each block, so the situation is distinctive.

In 2009, Statoil discontinued production in the Lufeng 22-1 offshore field. The event was historic for two reasons: Lufeng 22-1 was Statoil’s first international operatorship, and it was also the first Chinese offshore oilfield to be abandoned. Can you describe life after Lufeng for Statoil China?

We currently focus on four dimensions. One area is exploration, and deep-water is an area where China and its national companies still see a clear advantage in cooperating with IOCs that have the expertise and experience. We are constantly examining our deep-water options in our discussions with Chinese counterparts.

Our second focus is business development. There, we focus on unconventionals. We are very interested in taking part in what are obviously early days for the Chinese unconventional industry—hence, our business development efforts are concentrated on advancing those opportunities for Statoil.

Our third dimension is in R&D. We clearly see the very high number of highly qualified, skilled people graduating from top Chinese universities, and that is something we want to tap into. We want to conduct oil & gas R&D activities in China, for the benefit of the Statoil group globally. We have already started that process: we have expats on the ground, and are hiring Chinese locals, to work on the effort. We see an exciting potential there.

Our final China activity, currently, is procurement. We are interested in getting closer to China as a supplier market, and we have staff here whose task is to understand Chinese companies and to pre-qualify Chinese suppliers for Statoil operations globally.

What kind of timeline are you looking at to reenter upstream?

Although I have only been in China for around two years, I know that it is difficult to predict specific timelines for Chinese ventures. The timelines are in large part controlled by the decisions of the Chinese government and Chinese companies. We have our strategy, which I have delineated; unfortunately, we cannot speak in terms of time specifics.

Let’s examine one aspect of your strategy more closely: unconventionals. Statoil has been eager to make a shale gas play in China—which, by some estimates, may have the world’s largest shale gas reserves—but several analysts, as well as Statoil international upstream head Mr. Peter Mellbye, have speculated that the negotiations may have been derailed as retaliation for Norway’s decision to award the Nobel Peace Prize to jailed Chinese dissident Liu Xiaobo. What is the current status of Statoil’s on-going shale drive, in the wake of the September visit to China by Norwegian oil and energy minister Ola Borten Moe?

This was the first visit to China by Mr. Borton Moe since he became the oil and energy minister, and the first visit to China by any minister since the Nobel award in October 2010. Of course, this trip was a very positive development. I cannot say with assurance whether things have really changed, but it was good to see him here, and we hope to see him again.

As for the status of our project: as you mentioned, we have indeed been interested in a shale play for some time. We have been in many good discussions with our Chinese colleagues regarding opportunities for partnership in this sphere, and we believe the possibilities for cooperation are promising. However, we are business people, and not politicians. This is again a matter of control over timelines: we cannot in any way decide when things will happen. Our top management remains eager to enter the unconventional areas in China, but we must be patient. Any deal between an IOC and a Chinese national organization will require approval from China’s top decision makers, and our deal has not been signed yet.

You mentioned earlier in the interview that as an international company, you feel quite comfortable here—but it seems that politics can get in the way of business. Is this kind of comingling typical of the other markets where you have worked?

Actually, if we speak of my work in the Middle East, we might say that there is absolutely no separation between the two: business is politics. The same people that control the national oil companies are in control of the state. Therefore, it is impossible to do business in for instance the Middle East countries without being involved in politics.

To work in a schism were business and politics interplay is typical of many countries. On the other hand, there are many countries where the two hardly interact at all. China belongs to the former case—although in my experience, as Chinese companies expand globally, and ‘China Inc.’ gains further exposure to international partnership, the trend is clearly towards business rather than politics.

However, in what remains a state-driven sector, I am not surprised that our ongoing discussions are perhaps delayed by international relations. This is the reality of the market.

Speaking of the internationalization of China Inc.—Statoil is actively partnering with Chinese enterprises in markets around the world. For example, Statoil has collaborated with China Oilfield Services in the North Sea, and with Sinochem on the Peregrino field in Brazil. What do you believe is driving the increasing level of cooperation between Statoil and China’s national champions, and what are the mutual synergies achieved?

As a national oil company ourselves, I think there is a joint will for cooperation with other national oil companies. There are several reasons for that. One is that we can learn from each other. As Statoil, we like to say that we are an NOC with the capabilities of an IOC. We were established only 40 years ago, as a 100% state-owned enterprise. Subsequently, we stock-listed about 30% of our company, and expanded internationally. We are still majority-owned by the government, but are clearly broadening our horizons. In this way, we feel very much akin to the Chinese. Just look at what China’s national oil companies are doing—the history is very similar: they started as 100%-owned state entities, then stock-listed part of their operations, then went abroad.

Having undergone this process a bit earlier than the Chinese, we have had some experiences and periods of learning that we hope we can offer to our Chinese partners.

Another synergy is risk sharing. Going abroad carries several types of risk: geological, political, financial, operational, etc. By cooperating, those risks can be distributed amongst the partners.

A third element is the fact that if we create cooperation with the Chinese NOCs internationally, it can create positive spill-over effects for our operations in China. Our operations abroad with the Chinese are very beneficial in that regard. We are deepening our relationship. Negotiating at the table is one thing, but really working on a project together is quite another. By doing that, we can enhance our mutual understanding.

As a final message to our readers, what can you offer about the prospects of Statoil in China, and what is your advice to another foreign manager parachuted into Beijing?

Our goal at Statoil is to grow our business in China, in each of our four areas of concentration. Short term, we very much would like to enter into unconventional development onshore, so that is our priority, and we very much believe in our prospects therein.

As advice to my fellow expat, I would say to get immersed in the Chinese culture and language. I feel quite humble coming here: I am from a small country in the far North of Europe. Going back some 500 years, we were at quite a basic level whilst the Chinese had already developed into an advanced society. I think for any foreign executive, learning more about this country, this civilization, this language, will be beneficial not only for gaining a business understanding, but also for gaining more interest and respect for China and our Chinese counterparts.

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