From crisis to opportunity

Wang Ming Wu
CNOOC
Beijing, China

In this century, China's petroleum and petrochemical industries have suffered three economic crises. This latest crisis is the first since the industry matured in the 1990s and is different from the 1929 and 1970s crises in six ways:

Both industries have been heavily affected by the Asian economic crisis.
An oversupply of oil has slowed the automobile, aircraft, and shipping industries.
Oil and petroleum products are now commodities, leading to maturation of the industry in the 1990s.
Some growing industries such as information technology now consume smaller quantities of oil and petrochemical products.
New product development in traditional oil consuming industries is often concerned with lowering petroleum consumption (fuel-saving engines).
Many environmental measures seek to reduce petroleum consumption, leading to intense competition.

Readjustment is unavoidable. Oil prices failed to increase in spite of OPEC's two limitations on production. In this current crisis, upstream independent companies working in China have suffered the most. Most have survived by reducing costs, reducing non-productive expenses, lowering wages, and laying off staff.

Downstream companies are the only beneficiaries of the low prices. To strengthen itself, an upstream independent must expand into a vertically integrated company with risk-tolerance capacity. Only in this way can upstream losses be covered by downstream or sideline businesses.

Diversify to survive

China's enterprises began to diversify when they were short of funds. Some enterprises under China's war industry sought new businesses, with success. The result was a succession of companies - Changhong, Changling, and Jieling. Other companies missed a golden opportunity.

Service firms have been successful in China. They are projected to grow in China because the issues of company size and organization are not yet resolved. It is difficult to form a specialized system, similar to foreign oil companies. Only a mixed management system can be adopted. With the current domestic economy, a question of funding is more easily resolved than the issues of new technology and new markets.

Also, we have seen little reluctance by foreign companies to make the huge investments needed to develop an oil field. Oil companies working in China also must make investments in environmental projects, even with lower oil prices and start-up difficulties. The industry is forced to reduce costs.

Current results

China's government established a production goal of 30 million metric tons per year, and a production cost target of below $10/bbl within three years. China's offshore oil industry expects to create a Y700 million profit by producing 16.50 million metric tons of crude oil. However, CNOOC will lose Y30 million on the basis of the original cost/bbl. So, extreme efforts must be taken to reduce cost. Reducing costs has become the core of developing offshore oil resources. Bohai Company's gas field development is the focus for finding new lower cost ways for offshore development.

Advances in technology are an important factor. They decide whether economic development can be sustained or not. The action of the knowledge economy accounts for 50% of GDP in OECD member states. By comparison, the growth in knowledge and technology in the US has accounted for 80% of its gross productivity growth.

CN00C has enjoyed a 30% gain using new advanced technology. The key to cost reduction lies in applying new ideas in technology such as the Liuhua oil field. It was successfully developed at a lower cost due to new technology and fast drilling techniques. Fifteen wells were drilled in 55 days, for a total of 28,146 meters. This equals a one year workload in the past. Such productivity shook China's domestic oil sector.

By 2000, China's many achievements in scientific research will be directly applied to oil production. Undoubtedly, they are of importance for reducing production costs and boosting economic benefits. This makes new technology a high priority.

Future economy

China's offshore oil enterprises must move to develop a knowledge economy. "Creating new knowledge as a path to new technology" must become a core belief. Applying new technologies is of particular importance in reducing costs. CNOOC must reduce its cost/bbl. What counts is whether China's technological capacity can keep pace with demands.

China's Chairman Ji'ang Zemin has stated: "We must have a sober understanding that it is impossible to purchase the most advanced world levels (of technology). A nation unable to bring forth new ideas cannot tower in a forest of advanced world nations."

A ruthless market-driven economy brings both opportunities to develop offshore oil, as well as real crises and real risks. We cannot lower our guard. Thinking of danger in times of peace is necessary for economic well being. That is the way it works.