with Ronald Morris, President, Roc Oil China
Your career in oil and gas has afforded you travel to some very interesting markets—throughout 30 years of working with organizations such as Chevron and OriOx, you have worked in countries such as Angola, Burma, Colombia, the North Sea, and North America. You joined Roc Oil China in 2008. Before we get into the operations of the company specifically, can you tell our readers how the Chinese market has been different from your other experiences?
I came to China from Burma—so I entered an Asian environment from another Asian environment. That made my transition quite a bit easier. One thing that I realized, having been in the international field for over 25 years, is that some language capability, or at least understanding of local culture, is very important. For a Westerner in China, it is probably even more important than in most other regions.
Even though many people speak English, Westerners are entering a totally different business environment than they have been accustomed to in the past. I have been in Europe, Africa, and North and South America, and these are distinctively different from Asia. Even within Asia, China unquestionably has its own nuances.
I wanted to hit the ground running when I came to this market. I entered as president of CACT—an operators’ group that was a joint venture between Chevron, Texaco, ENI, and CNOOC. I requested and received some intensive training on language and culture a few weeks before my arrival, so at least I had some measure of preparedness, which was very helpful. Nonetheless, there are some cultural characteristics here, relative to a Western environment, that I found challenging.
This is usually the point where biases come in. For example, there is a perception that China values are significantly different than the West and there is some truth in that. In the West, everything is straightforward and black and white, but in China, nothing much is black and white.
China has 10,000 years of history, and even in its ancient stages, society was already very well developed. Necessarily, China since ancient times has taken a totally different path in its evolution of society than the West. The result is a seeming clash of cultures, but, in fact, if one makes an attempt to study and understand the differences, then one can appreciate the reasons people think the way they do here in China, and why people in the West think the way they think. China also has 1.4 billion people competing with each other in the tough Chinese economy. So, that makes it easier to understand that business sometimes follows the ancient Chinese war strategies used by generals. Unless you can analyze the two systems with some detachment and objectivity, you will never be successful in China. You need both sets of eyes. To me, that is the biggest problem Westerners have when they come in, detached objectivity—if they carry in biases, chances are that they may never get past those.
In the West, we tend to think of authority as having to be purely altruistic, but matters are not always the same in China, and there is good historical reason for it. Can the Chinese take their business model outside of their own country? That will probably not work well. In the same way that the West must endeavor to understand China, China’s endeavor to understand the West will help them to succeed internationally.
I know that my effectiveness and success rests on how well I can see things from the perspective of the other side, in addition to seeing things from my own. Better business cooperation and understanding results and the needs of all parties are better served.
Western businesses have been working in China for a number of years. At this juncture, do you believe that they have been able to successfully integrate into the culture?
Perhaps a third of us have. Speaking on behalf of Roc Oil, we certainly had difficulty in the beginning. If I look back at some of the challenges Roc has experienced and overcome in this market, they are similar to the initial hiccups shared by myself and most Westerners.
Let’s examine the Roc history in China. In 2006, in Sydney, we interviewed Roc Oil founder Dr. John Doran. He explained to us that what differentiated Roc from other independent E&P players was, in his words, a “sensibly contrary” strategy and mind-set. Of course, China is a great example of this, because, as he said, in the 80’s and 90’s many foreign oil companies were not fond of this market—but Roc started working here in 1998! It entered Chinese soil in earnest in 2002 through an acquired 25% equity in a Beibu block. Can you shed further light on the state of operations that you inherited when you assumed full leadership in 2009, and the developments you have overseen in these two years?
China is no longer a sensibly contrary strategy. Everybody wants to come to China! By the time I joined this company, I had probably been in China, cumulatively, for about 6 or 7 years in the previous 10 years. I have had many successes and some failures in this region, and one learns from both. I could see that some of the things that Roc was doing were quite similar to some of the things I had done incorrectly during my first couple of years in China. I would like to think that I was able to help the company get through those learning pains, and get more easily and quickly to compromise and acceptable solutions.
Particularly in China—surely many have said this—relationships are important. In fact, they are just about the only thing that matters, assuming one can already demonstrate their technical and economic competence in the business. As anywhere in the world, trust and mutual respect are the keys to good relationships in China. If a newcomer displays any kind of arrogance, or if they believe there should be only one acceptable “Western” model for the conduct of business—then they might as well go home. In China, the contract is a starting framework for mutual success which still requires continuous communication and cooperation to be successful.
Contracts in China are intentionally written to be flexible. As a Western lawyer examines a Chinese contract, I believe the first reaction might be “no way.” However, the vagueness is something that very much promotes more give-and-take between the Chinese and the foreign partner to meet each other’s needs that fit the specific project, then we do wind up with win-win outcomes.
These compromise outcomes are not always easy to see, because the Chinese way of negotiating is very different than that of the West. It is not always very forthright, and often is it difficult to understand motives and processes to be followed. The ambiguity is something that makes every foreign partner uncomfortable. Many Westerners discontinue, or never start, operations here because they simply cannot handle the uncertainty, and the flexibility that might be required to reach the right development and economic solutions for all sides.
Returning to our discussion of my joining Roc operations: as I have said, my long time in China had given me the opportunity to recognize mistakes. My initial project for ROC was for a 2 marginal fields. In China, the PSCs are not originally written with marginal fields in mind—in such a field, you often end up conducting a lot of exploration for little reserves return, and you may end up with a negative value of investment for one or both sides using the traditional PSC form. We had to jointly discuss and agree a new form of contract that was fit for purpose for small fields.
Our joint solution was to put together a number of opportunities, in aggregate. The restructured contract now allowed for a totally integrated number of projects together with existing infrastructure of CNOOC.
Roc looked at our marginal fields, and CNOOC looked at their marginal fields, and we came together and created a project that worked for both parties. This is the first project that developed multiple marginal fields, with one processing facility, jointly built by a Chinese NOC and foreign partners.
As Roc, we have about half of that new facility, and other CNOOC projects have the other half; however, CNOOC are also in with us on 51% of our project, so essentially, they own three quarters of the facility. That being the case, the question is to how to make it even more beneficial to all—and that comes from the synergies achieved in sharing CNOOC’s operations, support, logistics, drilling rigs, etc. For example, we can utilize their existing water injection system instead of building a new one. We thus have turned over operatorship to CNOOC because it was the right solution for all. This was something that was misreported in the press. By working closely together ROC was able to develop a trusting relationship by meeting each other’s needs. Today, all our operations are based on that same principle of mutual respect and a focus on meeting each others needs. We work closely together with our other Chinese partners in the Bohai Zhao Dong project of PetroChina and Sinochem and have a trusting relationship as a result.
For all our Chinese partners, they are our reason for success and we appreciate them. We also see ourselves in a very important niche in the overall development of the medium and small field reserves in China. That niche is something that you will see developing more and more in the mature provinces where national oil companies are involved. Some of NOC’s management systems—and this is true of Asia at large—are not as dynamic and fast-reacting as those of a Western company, particularly a company the size and experience of ROC. I think that is generally understood. That makes ROC quite attractive, as a potential future outsource opportunity to fast-track projects. If there is a trust that exists between the parties, then the alliance can be quite complimentary.
What have you learned from these collaborations? Are they, in your view, any different from others you may have experienced in your 30-year career?
They have been quite different. The contract flexibility that I have mentioned is the starting point. It is the key ingredient that tells people that enter this market that, if they do not wish to be allies, they should not come. The contract must be understood less in terms of the written word, and more in terms of friendly relations and mutual respect. In many other countries, the agreements are usually more precise, and are handled in a more precise way; in those cases, the implementation of a petroleum contract is totally different.
The planned economy is also something that might seem in conflict to the capitalistic notion of growing as fast as possible, in the short term. The Chinese generally look at things in the longer term. Of course, as we see today they are nonetheless growing extremely quickly, so there is no rule that says a planned economy cannot grow fast.. As guests in this market, we work with the Chinese to find ways to fit in to the planned economy system. Open communication is essential. Once trust is truly established, that allows openness in the relationship making for efficient and effective collaboration. I believe we have arrived at this point with all our Chinese partners, PetroChina, CNOOC and Sinochem.
Indeed, Roc lists its collaborations with PetroChina, Sinochem, and CNOOC among its most important global ventures. What makes China so significant to this organization?
Our operations here represent over 60% of our income. By the end of 2012 or in 2013, that figure could rise even further. In Malaysia, and in China, we are always looking into discovered reserve opportunities. We see that as our niche. To go into deep water, for example, is—to be honest with you—ridiculous for a company of our size. We cannot spend $50Mn on one wildcat well. It also is not within our competency to make that kind of play. However, we can, however, put more brainpower per barrel to work on our projects than the majors want to. Think about what are the priorities of the national oil companies today? They have to look at their whole portfolio worldwide and develop as much as they can for the national interest. We have seen some mature national oil companies expand internationally, and China is in the process of doing that. That entails taking a fairly experienced core of people and spreading them out over more and wider distributed assets. A company like Roc can offer hundreds of years of combined experience: if, say, you take ten of our senior team here in China, you get a lot of successes and a few failures, and a lot of lessons learned. We have a good ability to find the right fit for purpose solutions, and we can move quickly. Our Chinese partners can collaborate with us to successfully develop assets on the lower end of their portfolio, while they focus on the bigger fish. As for the little fish, we do perform very well, and make a material profit on our side while facilitating a profit for the partner, as well. Most importantly, we can help to develop national resources sooner than might be developed, which is a prime directive from an NOC’s government.
You mentioned that you expect your share of Roc’s global revenues to increase over the next two years. What prospects will drive your expansion here?
Our Beibu project should come into production next year. These are two marginal fields, as I have mentioned—but they are certainly profitable as they are now planned for development. They are very significant from Roc’s perspective, and, at peak production, may come to represent 20-25% of our portfolio.
What about challenges? Do you see any reason to be concerned about the viability of long-term growth?
There is no smooth sailing these days, no matter where you are. As is well known, last year was a banner year for disasters in the oil and gas industry worldwide. Those mistakes were mostly caused by variables that, today, companies understand how to avoid. They were mostly human or management system errors. We all have to always stay aware and introspective of our operating practices, and not go down that same path.
In China, things are no different than internationally, if we look at the response to the recent spills. These events certainly sent a shudder through the industry, and regulators, and government. The question that government is asking is: “Why did this happen, and what can we do to prevent it from happening again?” Most of us in the industry know why it happened, and we know what we need to do to keep it from happening again. I can guarantee that we are all very motivated to do so, irrespective of any new legislation that might be implemented.
My viewpoint is that there is plenty of regulation throughout the world, but best practices always can be better. Our business is one that, first and foremost, produces an explosive, flammable, potentially polluting product. We have to extract and contain the product safely, and in an environmentally responsible way. We take that quite seriously. No matter how good your systems are, they will not be able to fully compensate for human failure. Governments are always working on better legislative paradigms, but it is more important to train our people correctly, and empower them to make the right decisions at the right time, without picking up the phone and having to call the boss. In our business, because of the dangerous nature of our product, we have to be prepared, trained, available, and willing to make those decisions on the spot—and they have to be the right decisions.
ROC pride ourselves at having a strong HSE record for excellence and having systems and well experienced and empowered people in our operations to continue doing the right things that prevent accidents. However, Safety is earned every day, 24 hours a day/7 days a week. We have to ensure no complacency creeps into our operations.
In light of these challenges, what do you believe are the benefits of a trained engineer such as yourself leading an oil company?
The oil business is very much a science-based business. There are people that believe it is an art form—and finding oil is truly an art form with the help of science. Producing it, however, is science. Producing is a matter of understanding physics and chemistry, and being in control of all the processes. The laws of nature are consistent: e.g., if something is blowing out, the pressure down below is higher than the pressure up above. Going to the moon is certainly possible, and drilling in deep water is certainly possible. It is a matter of properly managing the science involved.
I think an engineer is nothing more than someone that understands the language of science, and the principles that need be engaged in making sure that you can do things safely.
What is your final message to the international readers of Oil & Gas Financial Journal?
I think Roc, through its experiences with partners such as PetroChina, CNOOC and Sinochem, understands Asia quite well. That puts us in a strong position, in my mind, to be a preferred partner for Asian companies. We understand the necessity for good cooperation and communication and making sure all stakeholders needs are met in an optimal way.
We also know how to perform well with less people. As a small company, this allows us to have a bigger appetite than our size might indicate, and at the same time, to be welcomed by all parties involved, because we bring to the table that competency, and that surety, that whatever we attempt is going to be technically and economically sound—indeed, as a small company, we cannot afford to be otherwise! Our niche, too, is a growing niche in the developing world—there is a lot of opportunity out there that the major internationals are not interested in. There are certain projects that will never work with their corporate model, but they work for us. That is the value we bring in China, and we can use our proven foundation here to enter other countries in Asia with confidence.