Oilweek Magazine
If capitalism were known by the colour purple, China today would be called Purple China. Its government may still act under the vestiges of Communist ideology, but its economy is rapidly metamorphosing into as true a capitalist model as Karl Marx could have anticipated.
Nowhere is this more evident than in the nations oil and gas industry. The men who run it, all of whom are of an age to have been imbued with a Communist education, do not even make a pretence of trying to maintain any vestiges of socialism in this most important resource sector.
So dedicated are they to the goal of transforming Chinas energy industry into a perfect model of capitalist efficiency that in 2000 they appointed to PetroChinas board Franco Bernabe, the brilliant Italian economist who transformed Italys ENI from a failing national oil company into a profitable corporate machine. Out of 15 members of PetroChinas board, Bernabe is the only qwai-lo, or Westerner.
Bernabe, who is now vice chairman of Rothschild Europe and head of the banks Global Oil and Gas Sector, visited Calgary in May to learn more about Canadas unconventional oil and gas production. While he was here, he spoke with Oilweek about his work with PetroChina.
The reason why the Chinese invited me to join the board was my success in the privatization process, he said. The reserved but engaging academic engineered a stunning turn-around at ENI, taking the Italian energy and petrochemical giant from a loss of US$767 million in 1992 to a staggering profit of US$2.6 billion in just three years.
When Bernabe was appointed managing director and CEO of ENI at age 42, the company resembled a vehicle burdened by all sorts of ill-fitting add-ons. For example, it operated a petrochemicals segment, an oilfield services contracting firm, a fertilizer division, and a publishing, printing and communications business.
Bernabe turned the makeover of Italys national oil company into a profitable corporation and the painful changes this would require into a national duty. What is happening at ENI, in fact, fits within a period of great transformation for Italy and the world, he said in a March 1993 speech to the employees.
Bernabes success at galvanizing the employees and the Italian public to support the changes at ENI has inspired PetroChinas managers. Theyve really been listening to the experience, he said, describing how they have absorbed his counsel. Mostly in terms of processes, and how one relates to shareholders. They wanted to learn how to become a successful company, one that is dear to its shareholders.
The idea of Chinese government technocrats wishing their flagship oil company to become dear to its shareholders is not one we would associate with officials of a Communist organization. Be that as it may, Bernabes influence has helped engineer a reversal of PetroChinas fortunes. Its market capitalization has increased eight-fold since Bernabe joined the board six years ago. PetroChinas transformation into a company barely distinguishable from its global peers is evident the minute one tours its website. The set-up of the English-language site is as familiar and user-friendly as that of any of the other multi-national oil and gas companies.
And this is exactly the message that Dr. Wenran Jiang, a professor of political science and director of the China Institute at the University of Alberta, wants to convey to Canadas oil industry. I dont see a Communist conspiracy. Im seeing a young, vigorous economic giant trying to solve its energy insecurity problems.
Jiang, who grew up under Communist rule and emigrated to Canada in 1987, spends much of his time speaking to think tank members in the U.S., China and Canada about the imperative of improving relations with China. Rather than the threat to Americas energy security that American lawmakers often portray, China should be viewed as a partner.
The Chinese feel they are squeezed and insecure, said Jiang. They are buying up Canadian companies with international assets as fast as they can. In 2005, China National Petroleum Corp. purchased PetroKazakstan for US$4.18 billion, while a joint venture between Indias ONGC and China National Petroleum corp. acquired Petro-Canadas producing assets in Syria for $676 million; in 2006 a Chinese consortium called Andes Petroleum Co. purchased EnCanas Ecuador assets for US$1.42 billion; and this past May Chinas Citic offered US$2.2 billion for Nations Energy Co., a company producing 48,000 barrels of oil per day in Kazakhstan.
It is precisely this rapid series of lucrative asset acquisitions from Canadian companies that has the American administration feeling squeezed and insecure. We need to think very clearly what is really driving Chinas energy behaviour, urges Jiang. Its essentially a developing country trying to meet domestic needs.
China looks hungrily towards Canadas oilsands to help it feed its growing consumption, and that too worries American congressional leaders. Some hawks view the oilsands and Canadian oil as a zero-sum game. They see it as one barrel of oil shipped to China equals one barrel less to the United States.
Canadians are caught in the middle. Although Jiang does not believe that the U.S. would strong-arm its smaller neighbour into forcing a Canadian oilsands company to back out of a deal the way Congress pressured CNOOC to drop its bid for Unocal, it is likely that they would attempt to change an outcome they didnt like.
Open, direct pressure is unlikely, but subtle informal pressure definitely. I think the Canadian government would resist to become a client of the U.S., but Im not sure what the Harper government is doing. I hope its not going the road of Bush administration China-bashers.
Rather than kow-towing to U.S. demands, Canada should consider its own needs, said Jiang. He accuses the Canadian government of failing to consider this countrys long-term interests. We dont have a national energy strategy towards China. Such a long-term plan is crucial: China has capital, labour and no resources. Canada has no labour, but has resources. We could be complementary. Besides, he adds, Theyre not short of cash. They dont have to knock on investment bankers doors.
Jiang rails against the Canadian governments short-sightedness when it comes to allowing business exchange between the two countries. It takes six to eight months for a Chinese executive to come to Canada with a work visa. There is no visa reciprocity.
With the recent announcement that Canadian Natural Resources Ltd. is negotiating with a company that would bring Chinese labourers to work on its oilsands projects, the movement towards greater co-operation appears to be gaining momentum, with or without federal government interference.
We need to think very clearly what is really driving Chinas energy behaviour, said Jiang. Its essentially a developing country trying to meet domestic needs.
Against that backdrop, it would be to Canadas advantage to nurture trade relations that would allow it to influence Chinese policy. This is particularly true in the environmental sector, where the countrys acute air and water pollution problems have forced its leaders to enforce heavy penalties on factories that do not reduce their emissions.
While Jiang provides the view of Chinese economic issues from 40,000 feet, Anil Tahiliani, Portfolio Manager at the wealth management firm McLean & Partners, provides observations from the ground level.
Tahiliani spent the second half of May travelling from Hong Kong to Shanghai, then on to Shezhen and from there to Guangzhou. In each city he visited business owners, bankers and factory supervisors. He started in Shanghai where he attended a conference on investment in China attended by 65 international companies.
From his discussions Tahiliani learned that the average Chinese person aspires to four things: to increase his income, to own his own home, to have a car and to own a rental property.
A car is still a prestige symbol. There are 17 million cars on the roads in China today and that number is estimated to double by 2010, said Tahiliani. Interestingly, only 17 per cent of fuel consumption is gasoline, while 34 per cent is diesel.
Opportunities for Canadians with technological know-how abound in one area in particular energy efficiency. The Chinese use 40 to 50 per cent more energy per unit of GDP than we do in North America because of inefficiencies. The government is aware of the problem and has set a goal of getting the country to be 20 per cent more energy efficient in the next five years.
One thing hampering the governments ability to achieve such dramatic reductions is subsidies that are so entrenched in the system that 800 million farmers rely on them for their survival. Gasoline prices are much lower than they would be otherwise and the government does not levy a fuel tax. As a result, refineries have been taking big losses. Sinopec had a $10 billion loss last year, and the government cut them a cheque, Tahiliani says,
Another area where Canadian expertise is sorely needed is that of environmental mitigation. There are 2,000 factories in the Pearl River Delta, Tahiliani says. Everywhere I noticed the amount of air pollution. The government wants at least 15 per cent of the gasoline sold by 2020 to include biofuels.
When it comes to clean water, 58 per cent of Chinas rivers are too polluted to serve as drinking water. China has about the same amount of fresh water resources as Canada, but has 40 times the population, notes Tahiliani.
Through speaking with Chinese people from small business owners to wealthy bank managers, Tahiliani learned that they do not spend much time worrying about Chinas anachronistic Communist ideology. They can see for themselves that their nation is turning from red to purple from the ground up, or in the case of PetroChina and the other national oil and gas companies, from the top down.
Small changes in China show the citizens that their country is moving in the right direction. For example, the government now allows people in rural areas to sue local officials for corruption.
Most people I talked to believe their standard of living is better than five years ago. And theyre confident that within the foreseeable future it will improve to the Western standard.
What they do not want is to follow Russias example, which led to economic chaos and rampant corruption because reforms were imposed too fast. You could almost say that China is more capitalist on a local level than it is Communist.