Oil chief knows the drill for M&As

Sinopec chairman leads way for Chinese energy companies in overseas markets

Shortly after Fu Chengyu became chairman of China Petroleum and Chemical Corp, or Sinopec, the world's second-largest oil company, the company assigned him an interpreter for a meeting with foreign guests - only to find that their 61-year-old head could speak English fluently.

"After that, we all started to learn English," confessed a Sinopec executive.

With China's energy companies becoming increasingly influential worldwide, no one represents their driving force better than Fu, who has overseen many of the industry's high-profile mergers and acquisitions, and is as familiar with Western business practices as with Chinese politics.

His transfer from China National Offshore Oil Corp to Sinopec last year, however, was a major change for him. As Asia's largest oil company, with nearly 2 million employees, Sinopec is much bigger than CNOOC, although it is not as internationalized or market-orientated.

But since he took over, Sinopec has completed 10 overseas deals worth a total of $13 billion (10 billion euros).

"Fu is a transformational figure in China's oil industry and emerging markets as a whole," says Ivan Sandrea, president of the Energy Intelligence Group, research analysts. "By effectively harnessing China's strong technical skills, he has been a catalyst in this globalization of his country's petroleum business."

Among the heads of Chinese companies, Fu had already distinguished himself by his ability to manage overseas M&As. In 2005, he led CNOOC, the smallest of the three State-owned oil companies, in a bid to purchase mid-size American oil company Unocal Corporation for $18.5 billion in cash. It would have been the biggest foreign acquisition by a Chinese company.

He was questioned at the time about the deal at home and in the United States. It was a colossal amount by Chinese standards, costing as much as the Three Gorges Dam project, the most important infrastructure project in China at the time.

In the US, it was seen as politically threatening, whereas in China, people wondered whether his abilities matched his ambitions, asking questions such as "is the snake is going to eat an elephant?".

But for Fu, the risks were carefully calculated. Indeed, "it is no longer a risk when you realize it", he says, using another Chinese idiom, when speaking at an oil industry event in London earlier this month where he collected a leadership award.

Fu says he was sure the Unocal transaction was going to prove profitable. He believed the US oil company's share price was undervalued. It had gas reserves of 4 billion barrels, with only 1.7 billion barrels registered. Share prices would rise as soon as it made the rest of the reserve public.

He was also aware of Chevron's position as CNOOC's rival in the bid. Chevron had extra gas that it could not sell, and its share price would only decline if it sought to buy more gas assets from Unocal. But CNOOC could sell the gas in China where there was strong demand.

"It was a simple equation," he says. "I dared to offer the high price because I believed it could go up even further."

The deal was eventually blocked by the US government. However, it turned out to be the start of his overseas expansion plans, not the end.

Sinopec has made more than $10 billion in foreign investments in the past two years, and now has assets in the world's major oil and gas regions, Africa, South America, the Middle East, Asia- Pacific, Russia and central Asia, and North America.

In 2011 alone, it completed five overseas oil and gas M&As, including buying Brazilian deep-water assets from Portuguese company GALP for $5.1 billion.

This year, it bought one third of Devon Energy's stake in five shale projects in the US. It also intends to buy a 49 percent stake in Talisman Energy's UK subsidiary, which would give it access to 51 North Sea oil and gas fields.

Fu says overseas business has gone smoothly since the Unocal deal.

"We have learned lessons and changed the way we do things," he says. "We did not meet any major obstacles after that."

Chinese investment in the US oil sector has surpassed $20 billion since the Unocal bid.

For a Chinese company to operate overseas, it needs to work closely with local people, Fu says, and to learn about their ways and culture. Local politicians should understand the aims of Chinese investment and local companies should benefit from it.

To avoid doubts and suspicions, he advocates buying minority shares in companies, rather than trying to take them over.

"It is normal that protectionism increases when an economy is not doing well, but you cannot stop that," he says.

These are lessons learned from practice, not business models, he says. MBA course textbooks say the same thing, but the situation is different for every company.

"You have understand who you are and where you are."

China is going through an impetuous period, when individuals and companies want success too quickly and tend to do things before thinking them through, he warns.

"When you are not clear about something, don't do it."

When companies plan expansion, he adds, the key question is not about whether a price is too high or low when making an offer, but whether the deal will add value to a company.

"You have to study how to increase from 5 to 5.5," he says, "rather than buy for the sake of buying."

When people look at the headlines and numbers, they might think Sinopec is doing things too quickly, but Fu says many of the companies it has bought have been longstanding business partners. They understand each other very well, and he feels at ease with them.

Also, mergers and acquisitions in the oil industry are different from those in manufacturing. In some ways, they are less risky. In the oil business, the output, means of production and value of a company stay the same when ownership changes.

No matter how big the risk is, if you are aware of it, it is no longer a risk, he repeats. "The biggest problem is when you cannot see the risk."

According to a Chinese saying, "those who do not have a strategy at heart have plenty of ideas, and that is the biggest risk", he says.

Fu has been in the oil business for more than 30 years, starting as an oil field worker in Northeast China, but one thing has never changed, he says, and that is his confidence in Chinese companies to compete internationally.

He first went to the US in 1984, and was shocked at the differences between China and the US. He realized that there were many things to learn if he and his country were to catch up.

After working with Americans for more than 10 years, he began to notice that the Western way had weaknesses and the Chinese one had advantages.

In the oil business in China, for example, people are patriotic and willing to sacrifice personal benefit for a bigger goal, whereas this kind of devotion is absent in Western companies.

This interest in the greater good also shapes Fu's business strategy. A company in China should serve the development strategy of the whole country, he says, if it is to succeed in the future.

The 18th Party congress this month called for building a "beautiful China", and that means a company like Sinopec must make tackling environmental problems a priority. These problems, he says, cannot be solved from the outside.

Fu finds the extent of waste in China daunting. Energy is used inefficiently. In relation to GDP, the amount of energy used in China is three times that of the US, four times that used in Europe, and five times of Japan.

"Our fast economic growth has also resulted in an acceleration of global resource pressures," Fu says. "We have to be, we are determined to be, part of the solution to these problems."

diaoying@chinadaily.com.cn

(China Daily 11/23/2012 page19)