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China is the fourth or fifth largest oil producer in the world, vying for position with Canada and following Saudi Arabia, Russia, and the United States. Although it ranks high in the list of global mega producers, China is a very different type of player than Western majors. For one thing, China’s large domestic oil production and extensive worldwide investment is driven by three national oil companies (NOCs), which are owned (though not run) by the Chinese government.
“China is a very different player in Oil & Gas than Western majors.” – Click to tweet
Thunderbird professors Andrew Inkpen, Michael Moffett, and Kannan Ramaswamy discuss the rocky history and unusual structure behind China’s oil industry in a new book, The Global Oil & Gas Industry: Stories from the Field. The changing world of NOCs is one of four key themes the professors say characterize the current state of the oil and gas industry and its future prospects. (The first is the role of change, innovation, and disruption and the second is the role of megaprojects in remote and technically challenging regions.)
All four themes will be addressed in depth in the upcoming Thunderbird executive education course, Advanced Management Program for Oil & Gas Industry Executives. Held December 4-15 in Glendale, Arizona and taught by Inkpen, Moffett, and Ramaswamy, the course is designed for upper-middle to senior-level leaders facing industry-related globalization challenges.
In their new book, Inkpen, Moffett, and Ramaswamy discuss specific issues plaguing China’s oil and gas industry – including corruption, inefficiencies, and a global scramble to offset lagging domestic production. “The wide performance differentials between state-owned and privately owned firms were striking in the oil and gas industry,” write the professors. Those are the same challenges that many national oil companies – and state-owned or government-backed enterprises in any industry – have.
“The wide performance differentials between state-owned and privately owned Oil & Gas firms is striking.” – Click to tweet
To move past those challenges, many of the NOCs have “rapidly globalized and consequently behave much like international oil companies, although their corporate objectives are different than their for-profit oriented competitors.” One key difference between NOCs and their for-profit competitors: “Governments see national oil companies as guarantors of energy security and often the engines of domestic social and economic change.”
Major oil fields founded in the 1950’s and 1960’s were challenged as China’s large and growing consumption overtook domestic production, which had seen limited growth. The gap drove an increasing dependence on oil imports.
To the rescue came China’s three energy leviathans, the national oil companies: China National Petroleum Corporation (CNPC), China Petroleum and Chemical Corporation (Sinopec), and China National Offshore Oil Corporation. (CNOOC). These Chinese NOCs played a huge role in both global investment and in the domestic economy. CNPC alone employed 1.6 million people in 2014.
Born in the 1980s as part of economic reforms, China’s three NOCs replaced what had been the Ministry of Petroleum Industries. Still, the top officials in each NOC are closely connected to the top leadership of the government and the Chinese Communist Party. The heads of CNPC and Sinopec hold ministerial ranks in China’s political hierarchy. Yet for all their promise, China’s NOCs are what the Brookings Institution describes as “ineffective institutions and powerful firms.”
Exploring the history of China’s NOCs, Inkpen, Moffett, and Ramaswamy show that the structure of the companies and the relationship between China’s domestic energy needs and global investment are quite complex. For example:
Prospects for China’s NOCs are looking up, as they continue to look out. “As 2016 dawned, it appeared that the Chinese NOCs had been able to build a reputation for their expertise in enhanced recovering technologies, operating in politically challenging regions, and complex deal making,” the professors write.
Despite initial reverses, China’s NOCs seem to be settling into a long-term global strategic approach with a focus on resource acquisition. “They have been able to build bridges with technology providers, the supermajors, and regional powerhouses,” write Inkpen, Moffett, and Ramaswamy. Still, there is tremendous opportunity for reform, especially given the woeful financial performance of the holding companies under the two-tiered listing approach.
“For China’s national oil companies, success is all about relationships.” – Click to tweet
The key to success for the NOCs and those wishing to do business with them: “The ability to build and sustain collaborative partnerships,” which “will become more central than sheer economics alone.” It’s no small task, given the “playing field of multicultural, political, and economic interests – a foundation perpetually in flux.”
“Winning is hard on a playing field of multicultural, political, and economic interests – a foundation perpetually in flux.” – Click to tweet
Advanced Management Program for Oil & Gas Industry Executives
December 4-15, 2017 | Thunderbird Campus