with Yao Li, Chief Representative, PFC Energy China
PFC Energy recently released its yearly energy company rankings for 2012, and China’s principal NOCs accounted for three of the top 15 spaces, with PetroChina ranked second in the world by market cap. Just a few years ago in 2006, PetroChina was 6th, Sinopec did not crack the top ten, and CNOOC was in the low 20s. As an expert on China’s national energy players, how would you characterize the evolution of these companies over these past few years?
The reason that the Chinese government wanted to list their national oil companies—or, more generally, to list their state-owned enterprises—was to add value to state assets.
To that end, the three NOCs have been quite successful, and their market value has grown many times over, relative to their initial value at listing a little over ten years ago.
This is no surprise. The NOCs are active on the international market. For this reason, they must be competitively positioned. Meanwhile at home they are monopoly players. Capital markets have recognized that, and this strong position adds value to the NOCs as assets on the public market.
How accurately do such rankings reflect the comparative positioning of these companies relative to their IOC counterparts in terms of, say, measures like production or profitability?
If we look at production, PetroChina’s parent company CNPC, for example, generates four million barrels of oil equivalent per day globally—this puts it at par with major IOCs. Nonetheless, the company is much smaller than certain other national companies, such as Saudi Aramco or Gazprom. In terms of profitability, China’s NOCs are not yet up to the IOC standard, and PetroChina would definitely not be ranked number two in the marketplace by that kind of measure.
What do you see as the overarching goals of the increasing internationalization of China’s NOCs—which accounted for a fifth of all international M&A activity in the industry last year? Do they mean to secure energy for China’s domestic market, or simply to expand and diversify assets globally as private international oil companies do? Do they mean to gain access to new territories with political motivation, or perhaps to gain access to new technologies? Is it some mixture of these factors?
Firstly, I do not believe that their internationalization is due to government mandate. Their global forays are company-driven. However, the companies of course share many of the same goals as the authorities: they have similar political, commercial, and social targets.
I would say that the biggest driver, initially, for them to expand abroad was to secure employment at home. China has limited resource endowment: the country is not like Saudi Arabia, with an abundance of oil throughout its geography. Therefore, there is not enough work for Chinese service companies domestically. In China, the seismic crews, the drilling rigs, the equipment manufacturing sector all lack sufficient domestic work, or in other words, their captive market has very limited room to grow. If you are a service company in the energy sector and there are limited resources at home, you must look elsewhere.
The Chinese NOCs initially started their international program in the 90s. At that time, oil prices were very low—this is especially true for the second half of that decade, when the price dropped below $12/b at times. The NOCs were struggling at home with growth and profitability, and began to participate in certain major international projects. Additionally, the Asian financial crisis weighed on China’s domestic economy. These drivers and the resultant need to seek out new job opportunities for their staff expedited the NOCs’ internationalization process.
Today employment remains a valid reason for continued international asset acquisition for these companies, but it is not the primary reason anymore. The primary goal now is competition among domestic peers and business growth. As Chinese oil production is flat; how does a company then achieve its growth targets? Overseas acquisitions are a good way to go.
I also believe that it is not a matter of bringing the equity barrels back—because it does not make economic sense to do so. It is a liquid market—you sell to the closest buyers and you buy from optimal sellers.
We have spoken about this topic with Mr. Xavier Chen of the energy committee of the European Chamber of Commerce in China. He remarked that there is a misconception wherein many believe that the NOCs are going abroad to secure energy assets for China, but they actually bring very little of the energy back into the country.
Precisely. Beijing’s strategy is to utilize both domestic and international resources, and to take advantage of both domestic and international markets. Two resources, two markets: that is the basic goal. No other strategy could support this country’s established model of growth, which entails serving as a manufacturing base for the world. Manufacturing consumes a lot of resources; the energy strategy of this country is built to support this undertaking.
Of course, this model has come to a bottleneck now, because the side-effects are too severe: there is pollution, public health issues, labor rights issues, traffic congestion, water scarcity, etc. Beijing’s 12th Five-Year Plan addresses these issues and aims to shift the economy more toward domestic consumption rather than continued reliance on resource-intensive export manufacturing.
China has realized that low value-added growth is unsustainable, because of negative externalities that I just mentioned. The country needs to add more value to its growth model. However, this will not happen overnight and instead will be a very gradual process, as part of which Beijing still wants its international companies to ensure that economic growth at home is stable.
A final goal of internationalization is to bring international best practices—HSE and other practices—as well as advanced technology and management skills, back to China.
Turning to PFC Energy: you remarked prior to the interview that you were the one that established the China office of this company. What need did PFC Energy see in the market for establishing a subsidiary here, and how has the company developed to date?
We always wanted to have a China office. However, we were not fully sure that China has the demand for high-end consulting. We do not just sell data or models, but, more importantly, sell analysis. Our forward-looking insights help shape and guide clients’ views of the oil and gas industry. We asked ourselves to what extent Chinese companies would be interested in a U.S. consulting company’s view—China does not have a very strong consulting culture, and Chinese companies like to do everything themselves. They like self-sufficiency, and they are often distrustful of external views. They tend to keep information to themselves, and do not like to share; they do not like to be fully transparent.
Hence, we were always interested in the market, but never made a commitment. But we saw that when Chinese companies went global, they did not know the rest of the world as well as they knew China. There was a need, therefore, for them to acquire knowledge of other regions. That is how we came in: we first established our China-based business by selling our global analysis to Chinese NOCs.
After about two years, we built our own local analytical capability. We started our China Advisory Service, managed from Beijing, and sold our China expertise to international companies working here. Many of the people you have interviewed are my clients!
What do you believe is the perception of this company in the eyes of these clients?
For our customers, we are a company that offers a lot of personalized, highly tailored services. We do not just put out articles and reports and leave them for the clients to decipher. We talk to our clients, especially those that are based in China, on a daily basis. At any time, they can pick up the phone to ask us a question. That kind of service is what clients value most—we do more than dump information on them.
As far as we understand, that level of customer service is not yet the norm in China—would you agree?
Yes, that’s right. Moreover, there are few reliable sources of analysis that can explain everything clearly to foreigners in China. We look to fill that gap. We write about Chinese politics and economics, Chinese oil and gas markets, NOC dynamics, etc. in detail, with a wealth of insights. We conduct a lot of client briefings.
How would you characterize the challenge of conducting accurate market analysis in China, a country with a famous culture of secrecy, which puts enormous resources into disguising its demand for commodities? Can you really claim to be accurate?
I cannot claim absolute accuracy. Any company that does analysis will be wrong most of the time, in the sense that reality never matches forecasted numbers precisely. But numeric precision is less important. What counts is that you understand and clearly indentify the structure and key trends of China’s energy supply and demand dynamics and that you can explain the latter effectively to clients. However, thanks to our strong network with Chinese government institutions and Chinese and foreign oil companies as well as due to our strong analysis of the economic drivers of China’s energy demand, I am pretty confident in our analysis and forecasts. And we have a proven record to be more accurate and insightful than some of our competitors.
You have told us that this company is rapidly expanding. What is driving this expansion, and what are your ambitions over the medium term?
Firstly, we would like to do more bilingual analysis. For those within our client companies who are Chinese nationals, this will be very useful.
We also want to create an original Chinese analysis service that caters to domestically-focused Chinese companies.
That is interesting—you remarked that it is difficult to sell foreign views to Chinese businesses, especially domestically.
It is. However, we have built our brand name in China over time. In our work with these clients overseas we have built a lot of trust, and the Chinese know PFC for the quality of our analysis and people. They know our team very well, and some of our work has proved critical to them.
Therefore, when we roll out our product geared toward domestic companies, we are confident that they will be interested. They will be interested to see how an international, independent consulting organization—that knows so many companies and has seen corporate strategies evolve over decades—views the market. We can offer out-of-the-box views on the Chinese companies’ own strategy, development, performance, and challenges.
What is your final message to the international readers of Oil & Gas Financial Journal?
I believe that although China is not an open marketplace in the oil & gas sphere, there are still growing opportunities here for all types of organizations working in the industry. Companies must, however, act decisively to capture these opportunities. A hesitant, hands-off approach will not succeed here.