Fu helps Sinopec navigate overseas markets

China Daily, November 20, 2012

Shortly after Fu Chengyu became chairman of China Petroleum and Chemical Corp, or Sinopec, the company arranged to have an interpreter accompany him to an event where he was to speak to foreign guests.

There, the 61-year-old gave practically everyone a surprise by speaking fluent English.

After that, several of his associates said they needed to learn English.

Chinese energy companies are becoming more and more of a driving force in the global energy industry.

And few people are more emblematic of Chinese companies' increasing prominence than Fu, who has overseen many of the largest mergers and acquisitions in the industry.

Fu, dressed in a blue, pinstriped suit, is as familiar with Western business practices as he is with Chinese politics.

His career underwent a large change in 2011, when he went from China National Offshore Oil Corp, or CNOOC, to Sinopec. His new employer, for one, is a much bigger company, now having the second-largest refining capacity in the world and nearly 2 million active and retired employees.

On the third day that Fu was in his new post, he found himself contending with a scandal. Media outlets were reporting that a company official had spent millions of yuan on liquor. As is usual in State-owned companies, Fu responded immediately. Within several days, he removed the corrupt official, called for the company to conduct a self-examination and held briefings to answer public questions.

Fu said Sinopec has a lot of potential and he is adapting to it.

"At first, I was influenced by the general way things are done at Sinopec," he said. "I first tried to become integrated. If I remained an outsider and didn't integrate, I wouldn't be able to have any influence. Adapting has helped me do my job better."

From April 2011 to October, Sinopec completed 10 overseas deals that, taken together, were worth $13 billion.

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

Before receiving an award earlier this month in London for being a leader in the global oil industry, Fu used Chinese idioms to speak about lessons that he believes will be of use to Chinese companies trying to have an international presence.

"It is no longer a risk when you realize it," he said.

Among other leaders of Chinese companies, many say, Fu distinguishes himself by his ability to manage overseas mergers and acquisitions.

In 2005, he led CNOOC, one of the three State-owned oil companies in China, in its ultimately unsuccessful attempt to purchase the American oil company Unocal Corp for $18.5 billion.

During the time leading up to the proposed transaction, he was questioned both at home and in the United States. In the US, the bid was seen as a threat from China. In China, people wondered whether his ambitions matched his abilities, asking questions such as: "Is the snake going to eat an elephant?"

Outsiders did not understand what he was trying to accomplish, he said. For him, the risks he took were calculated. He said he felt certain the proposed transaction would prove profitable.

For one, he believed Unocal's share price was undervalued. The US company had 4 billion barrels in its gas reserves but had only registered 1.7 billion barrels. As soon as the rest of that reserve were made public, he said, the company's share prices would go up.

He also had clear ideas about Chevron Corp, CNOOC's rival in the bid. Chevron had extra gas it could not sell, and Fu thought the company's share price would only decline if it bought more gas assets from Unocal. CNOOC, though, was trying to meet the oil demand in China, which was strong at the time.

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

The bid was eventually blocked by the US government. Even so, that failure turned out to be a prelude to a series of mergers and acquisitions rather than an end to such transactions.

Since Fu joined Sinopec, the company has made more than $10 billion in overseas investments in the past two years and now has assets in Africa, South America, the Middle East, the Asia Pacific region, Russia and Central Asia, as well as North America.

In 2011 alone, it completed five overseas oil and gas mergers and acquisitions. One was the purchase for $5.1 billion of Brazilian deepwater assets owned by the Portuguese company Galp Energia Group.

This year, it bought a third of Devon Energy Corp's stake in five shale projects in the United States. It also intends to buy a 49 percent stake in Talisman Energy Inc's UK subsidiary. When completed, the deal will give it access to 51 North Sea oil and gas fields.

Lessons learned

Fu said Sinopec's overseas business is proceeding smoothly.

"We have learned some lessons and changed the way we do things," he said.

Since the Unocal bid, Chinese companies have made more than $20 billion worth of investments in the US oil industry.

For a Chinese company to operate overseas, it needs to work closely with local people, he said. It also needs to make an effort to learn about the culture of its host country and about how people there do things, he said. One step he always takes is to make sure that local politicians understand the goals behind Chinese investments. He also wants to see local companies benefit from the deals in some way.

To avoid doubts and suspicions, he is usually in favor of only arranging purchases of minority shares of companies.

"It is normal to see protectionism become stronger when an economy is not doing well, but you can't stop that," he said.

He said he has learned these lessons from experience rather than business models. Textbooks all teach the same things, he said, but the circumstances companies operate in are rarely so uniform. "You have to understand who you are and where you are," he said.

China now finds itself amid times when people and companies are striving to achieve success too quickly. In seeking to move forward, companies should make plans and stick to them.

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

He said decision-makers should not devote a great amount of thought to trying to determine if a deal offers them a price that is too high or low. They should instead ask if what they are contemplating will add value to their companies.

When people look at headlines and financial figures, they might think Sinopec is moving too quickly. In his mind, though, he is clear about the reasons behind the deals.

Many of the companies bought by Sinopec had been the company's business partners for years, he said, ensuring that there was a certain amount of familiarity with what was being bought.

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, a company's output, means of production and value remain the same even when it changes hands.

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

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

Chinese way

Fu has been in the oil business for more than 30 years, starting as a worker in an oilfield in Northeast China. During that time, he said, he has never lost his confidence that Chinese companies can compete internationally.

He first went to the US in 1984, and was shocked by the differences he saw between China and the US. He realized that both he and his homeland had much to learn if they were to catch up.

At the same time, he noticed flaws in Western work habits and advantages to the Chinese way of conducting business. For instance, in the oil business in China, people are patriotic, and they are willing to sacrifice personal advantages for a bigger goal, he said. This kind of devotion, which makes it far easier to get things done, is scarce in Western companies, he said.

Higher interests also shape his thinking about business. A Chinese company should support the country's development strategy, he said. For instance, the 18th Party congress called for people to work to ensure China is beautiful, meaning that companies such as Sinopec should place a priority on protecting the environment. He said these problems cannot be solved on the outside and solutions must instead come from within.

The extent of waste in China is daunting, he said. Energy, he said, is too often used in an inefficient way. For each percentage of the country's GDP, the amount of energy used in China is three times of that used in the US, four times of that in Europe and five times of that in Japan.

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