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Interview

with Li Yong, CEO & President, China Oilfield Services Ltd. (COSL)

09.03.2012 / Energyboardroom

Mr. Li, you first joined the CNOOC organization in 1984. Throughout these nearly three decades, China has changed dramatically, due to policies like ‘reform and opening up,’ ‘going out,’ and the public listing of state-owned enterprises. How have you seen the evolution of China’s national oil companies, and their service subsidiaries, reflect an evolving China?

I joined CNOOC after my graduation from university. It is true that, during the last 30 years, China and Chinese enterprises have changed greatly. CNOOC, for its part, has grown from a small organization to one of the three largest oil companies in China; on a global scale, too, it is now a relatively large entity.

Let’s look more closely at the evolution of COSL. In the early days of the organization, it existed in the fragmented form of seven separate CNOOC subsidiaries. Both its equipment and technologies were very simple and under-developed. Throughout the 80s, China focused, as you mentioned, on ‘reform and opening up’; thus, COSL was increasingly able to import advanced, contemporary technology from the western world. Nonetheless, progress was quite slow.

In 2002, when the seven subsidiary companies reformed as modern-day COSL, the total assets of the company approached only about 2Bn RMB. It was a small-sized company—but at that time, COSL was tasked with the simple mission of providing offshore services within China for CNOOC and its multinational partners. COSL helped in domestic geophysical prospecting, drilling, shipping and technical support. As long as COSL could satisfy the requirements of those companies that had offshore operations in China’s own reservoirs, its mission would be completed.

However, since the restructuring in 2002, COSL went public in Hong Kong and become an independent company. This decision marked a shift in the identity of our organization. Of course, CNOOC is still COSL’s major shareholder, but the way COSL operates has come to be completely in accordance with market rules and the will of investors.

It has been 10 years since our IPO, and our number of employees has more than doubled, from 7,000 to 16,000. Moreover, before our restructuring, there were many positions that functioned only in an administrative aspect, as we see in most Chinese traditional enterprises—today, even though we are a larger organization, we are also a more efficient organization.

The increase can be measured not only in quantity; quality has significantly increased as well. Besides national employees, we now have 2,000 international staff members from more than 30 countries. Our R&D department has 1,300-plus employees. In our headquarters, we have 13 departments, and more than half of our department managers have experience working overseas.

Our equipment asset base, too, has changed tremendously. For example, we had 12 drilling rigs at the time of the IPO; today, we own 34—both those made in China and those we have purchased from abroad. The percentage of outdated or worn-out equipment in our collection has increasingly diminished and will continue to do so; on the other hand, our new technologies for geophysical prospecting and drilling are the most advanced in the world. Except for a limited range of cases with specific requirements, our equipment can directly be utilized in operations in most areas of the world. In 2002, our total property was valued at 6Bn RMB; this figure has increased ten-fold to 65Bn.

From an R&D perspective, as I have mentioned, throughout our history we have often imported new technologies and machinery from overseas. However, we now have 5 integrated R&D institutions that develop innovative techniques and tools. We utilize these technologies within the organization, and have also been successful in selling our products to foreign markets. This year, we plan to launch additional R&D centers in Singapore and Houston. As our R&D teams grow and gain experience—especially with better access to information—we are able to develop technologies much faster and more efficiently. In the meantime, we have invited some internationally recognized experts to join our research efforts.

Let’s consider a specific instance of COSL’s deployment of new technology. This company is entering into the deep-water and unconventional segments—two brand new niches in China. How do these forays illustrate your approach to finding a balance between internal development and international knowledge transfer?

This is a very good question. In deepwater, for the three major equipment categories of geophysical prospecting, drilling, and shipping, we mostly utilize mature international technologies already available on the global market. Of course, manufacturing is conducted within China, but the design is mostly based on high-standard global models. COSL does not want to focus R&D work on this area; these techniques are globally utilized and already available to everyone. We can either partner or acquire the expertise.

In unconventional, we are indeed actively conducting R&D and working to improve our capabilities. We are looking for partners that can help us do so. Since we have not worked in this direction for long, yet want to make progress as expediently as possible, we currently both import cutting-edge international techniques and develop our own technology in tandem.

In 2002, this company derived 98.1% of orders from its domestic market. In 2012, on the other hand, COSL projects that 30% of revenue will be generated in foreign markets. By 2015, this figure is expected to increase to 40%. What was the initial driving force behind the internationalization of COSL, and what have been the key challenges you faced in foreign markets?

I believe that there are two principal reasons for our internationalization. One stimulus is that, after going public, our investors needed to see the company successfully expand overseas in order to feel sure about their investment. However, this was not the most important reason we saw to expand. The more significant reason was that COSL owned a substantial amount of heavy equipment, and had made a large number of investments. In order to ensure return on these investments, we see that we could not rely on a singal market—such an approach was too risky. Hence, we began to internationalize.

In 2010, oil demand took a sudden downturn. It that year, COSL received the greatest encouragement yet that internationalization was a good choice; if, at the time, we had depended only on China, we would have experienced great difficulties. Instead, when the offshore market tumbled domestically, we quickly reallocated our major business overseas, and our performance remained stable.

There is perhaps a third reason for internationalization: it allows us to gain experience in the universal standards and rules now used all over the world to approach markets and organize companies. This helps COSL to follow a higher standard in running our business and managing the organization. For example, last week I went to Indonesia to sign a contract with BP for a drilling operation in the region. As you know, BP is an extremely high-standard company—and, particularly since the Gulf of Mexico oil spill, BP has a much stricter standard in selecting their drilling contractors. It took us more than one year to prepare to submit our bid for their business. BP visited our company to inspect our safety systems several times before we finally secured the bid. Because of their high standards, our company has to improve our standards significantly, especially in terms of HSE management. These, too, are the benefits of being global.

During the years of our globalization, changes in revenue and market share have been very obvious. But I think the most notable difference is within our administrative team: the way we think and work has changed fundamentally. The ability of adapting and operating based on international standards is perhaps hard to observe from an outsiders’ perspective, but I can confidently say that the inner power and quality of our company has grown tremendously.

If we look at our company’s history, we have been around for approximately 40 years. Even our restructuring story now has a 10-year history. And yet, we still think of ourselves as a very young company that is full of energy. Our entire team has a strong desire to develop the organization to greater heights.

COSL has historically had a very enviable EBIDTA margin of 40-50%. With the continued expansion of this company, do you believe such a rate is sustainable?

This is a good question. It is true that in relation to other international companies in our field, our financial performance has been quite strong. This reflects one of our advantages: costs control. We have done an outstanding job in this respect.

On the other hand, in terms of sustaining such strong margins in the wake of company growth, we are not without challenges. For example, our asset base—notably, the equipment we own—has grown very fast; this means that depreciation, too, will grow quite large at some points. However, it is useful to compare us to competitors who face the same difficulties. We are convinced that our competitive advantage in cost control is sustainable for the long term.

One of the key reasons for our self-assurance in this sense is that we have implemented an efficient management style, and our employees are passionate about their work. We rarely see this in companies from other countries. I just came back from a business trip; I saw that in Singapore, Malaysia and Indonesia, our employees are so devoted and inspired to work that they even like to keep working on weekends.

In China, we call it the spirit of dedication. We work on weekends not just because of bonus pay. Our whole team, from managers down, rarely mentions or asks questions about receiving payment for working extra hours. (Of course, we do indeed pay them, according company policies.) My point is that our employees are very devoted to our company’s development. No one forces them to think in this way—rather, they volunteer out of a sense of company spirit.

China’s national companies have been making a seemingly endless string of international acquisitions. Acquisition has also traditionally been a significant growth driver for the world’s largest oilfield services companies. COSL itself made a high-profile M&A move in 2008 when it formed COSL drilling Europe by acquiring Norwegian company Awilco Offshore. What did you learn from this experience?

We learned quite a lot from our purchase of Awilco, especially from a management perspective. First of all, we now truly understand how a difference in culture can be a major confounding element. To this day, I believe that merging this company has been the greatest challenge we have ever met.

In terms of company structure, organizational management, and operational management, I think our companies did not have much difference between each other—at the end of the day, we both work in the offshore drilling field. But the cultural difference became a significant issue. Throughout the integration process, we as COSL have always tried to learn and understand. This is true on both the Chinese and European side. There have been conflicts, and I think there are no tricks; it is all a matter of communication. The key is that we respect each other. Today, I believe the integration has been successful, and we do not face major challenges any longer.

I cannot say how many companies we will acquire in the future, but I can certainly say that, should we integrate another asset, we will definitely be more experienced from both a managerial and operational point of view. If we try again, we will do better. We understand now the potential challenges of M&A; with Awilco, we had little idea of what would happen.

PetroChina surprised the Oil & Gas industry by becoming, at one time, the largest company in the market by capitalization. How long do you believe it will take for a service company like COSL to similarly surprise the industry, and overtake some of its large international competitors?

This question is very challenging. Indeed, I believe that at COSL—or perhaps this is my personal view—we do not much care about how we are ranked relative to others. I always say that the ranking of a company, no matter national or international, is not very important. What is important is that we care about our performance and we try our best to accomplish our goals. As a company, if you perform well, your ranking will increase naturally. I always tell my employees that rank is something we cannot control, but we can control the health and strength of our organization. We need to train our employees well, update equipment in time, and develop high-standard technologies and efficient management styles. We want to make sure the company continues to generate a strong profit and retains an admirable HSE record. This is our vision: we want to be good, not necessarily large.

In any case, not everything is in our hands: our position in the rankings will be based both on our own efforts and outside factors in the market.

What is your final message to the international readers of Oil & Gas Financial Journal?

We hope that more and more international oil companies, as well as international investors, come to recognize our brand and trust the COSL name. We constantly strive to win the respect of our clients and our peers.

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