The Case Of China National Petroleum Corporation Management Essay

The Case Of China National Petroleum Corporation Management Essay
National Oil Companies (NOCs) with Saudi Aramco in the forefront are increasingly becoming leaders in the oil and gas sector. China National Petroleum Corporation (CNPC) though with low domestic resource; currently ranks third due to its integrated value chain management as well as an accelerated internationalisation. With government of China backing, they aim at ensuring secured oil and gas supply to meet the country’s increasing demand. Driving their international competitive advantage is strong financial capabilities as well as their quest to increasingly innovate industrial technology which meets the changing nature of exploration and production of oil and gas. Undoubtedly their strategy comes with potential set back due to the culture and language of China adopted naturally by CNPC. However CNCP ensure success of their "go global" strategy through enshrined community support and involvement in business operation based on strong Corporate Social Responsibility (CSR).


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TERMS OF REFERENCE
The report addresses the elements which guarantee CNPCs success in their international strategy with a further view on value chain management. Focus is placed on government influence, financial competence and technological advancement. Challenges such as difference culture and language are identified with CSR is considered as a primary mitigation for ensured international business continuity.

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TABLE OF CONTENT
LIST OF ABBREVIATIONS
BP British Petroleum

CDB China Development Bank

CNPC China National Petroleum Corporation

CSR Corporate Social Responsibility

D Dimension

EIA Energy Information Administration

IOC International Oil Company

MOFCOM Ministry of Commerce for the People’s Republic of China

NOC National Oil Company

OPEC Organisation of the Petroleum Exporting Countries

SRI Socially Responsible Investment

US United States

Introduction
Over the last few decades, National Oil Companies (NOCs) like Saudi Aramco, Petrobras and China National Petroleum Corporation (CNPC) have become progressively more powerful relative to the initial key players who were International Oil Companies (IOCs) like BP and ExxonMobil. In Financial Times featured article "The New Seven Sisters", NOCs’ strengths were highlighted as based on reserve and production size. However, the characteristic feature which makes CNPC unique in the group of powerful NOCs is its inadequacy of mineral wealth. They nonetheless ensure increased competitive advantage within the industry by capitalising on production and integration. The state-owned company employs various strategies in its operations. However, internationalisation is the main strategy employed by CNPC and the focus of this report (Financial Times, 2013).

International strategy refers to a range of options to operate outside an organisation’s country of origin and is characterised by dependency on the external environment as well as organisational capabilities with latter focusing on sources of competitive advantage. So what drives this strategy in CNPC? The company acquires its external environmental competitive edge primarily through government of China backing. Though not extensively researched area, success in overseas businesses can be trace to relationship between host and home countries. Their financial resources form the basis of their capabilities. Within the petroleum industry, technology entrenched as the threshold capabilities and subsequently a basic requirement in business operations. CNPC’ operating principles and values are based on innovation and involve continuous technological development thereby gaining them added competitive advantage. Internationalisation comes with challenges; some of which are apparent and range government to cultural barriers regardless of the industry or effort applied. In the oil and gas industry however, critical success factors are virtually non-existent so companies try to outperform each other reputation-wise. For CNCP, this means being socially responsible in an environmentally challenging industry (Jianhong and Ebbers, 2010; Johnson, Whittington and Scholes, 2011; CNPC 2013).

This report critically examines the international strategy of CNPC and its drivers as well as challenges. The first part looks at the introduction to the report. The second section considers CNPC and its international strategy. It highlights this strategy from a supply chain perspective and takes into consideration their integrated nature across value chains. The next section addresses the key drives of this strategy outlining the role of the government of China, the financial capabilities and the quest for advancement in industrial technology. Section four captures barriers to the success of their strategy. Corporate Social Responsibility (CSR) is outline as a consideration for mitigating these barriers. The conclusions and recommendations are captured at the end the report.

Company’s context
China National Petroleum Corporation (CNPC) is China’s largest state-owned oil and gas producer and supplier established in 1988. It was established as a result of the restructuring of the Ministry of Petroleum Industry and based on learning’s from other international policies including Japan’s 1973 energy policy (Nolan and Zhang, 2002). For CNPC, the Peru service contract in October 1993 marked the beginning of their international ventures. In 2003, CNPC-Aktobemunaygaz Kazakh-Chinese joint venture saw the company obtain 100% stake in an agreement signed by Kazakhstan and Chinese presidents’; providing leverage for future business operations within Kazakhstan (Oil and Gas Journal, 2013). The company currently has interest and assets in about 33 countries. A range of entry modes have been employed by CNPC in their quest for international conglomerate status. They include mergers and acquisitions, joint development, contract sharing agreements as well as service contract. CNPC’s operations spans across upstream, midstream and downstream and additionally focus on new energy development with further interest in financial service including asset management and insurance. The company also has about nine-tenth of PetroChina shares. This surmises CNPC as listed on Hong Kong, New York and Shanghai stock exchanges.

CNPC has a three pronged strategy, which can be linked to the ultimate aim of building an international energy conglomerate. These core strategies are;

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Increasing resources through maximization, diversification and orderly replacement of reserves whiles maintaining domestic upstream leadership status.

Market Expansion with emphasis on integration of upstream and downstream and a focus on exploiting economies of scale.

Increased international role by enhancing international cooperation and trading in mutually beneficial ways.

CNPC is mostly seen as a good partner by host countries because they comply with regulations and fulfil tax and other operational obligations. The company ensures coordination across its subsidiaries (both domestic and international) through companywide internal rules and regulations (CNPC, 2013).

Internationalisation of CNPC from a strategic value and supply chain management perspective
Internationalisation deals with the options available to a company to operate in other countries besides their home. As a strategy, CNPC goes global through aggressive mergers and acquisitions, joint ventures as well as service contract. CNPC integrates its operations in some countries, but currently operates in a single line along the supply chain in others. Supply chain management evidently plays a vital role in the oil and gas industry; trailing from exploration and drilling to domestic and international transport to marketing and ending with various users across the globe. Supply chain management entails reducing cost along the levels of processes to ensure minimal cost to customers but not at the expense of customer satisfaction. Why highlight CNPCs global strategy to supply chain management? For an integrated state-owned company in a country with low resource and increasing demand, creating efficiency within the value chain and value network becomes a means to ensuring energy supply to the different economic strata within the country. It also further implies improve and derived profitability and efficiency from their operations and processes such as refining (Chima, 2007).

For industries dealing with manufacturing and use of raw materials, the finish products become the ultimate operational requirement. In the oil and gas sector, this means refining crude and transporting through complex politically liaised route using pipelines, sea or rail. Thus the importance of refining and transporting raw materials cannot be over emphasized in the CNPC supply chain process. Not only does CNCP include refinery in their operation by owing 60% stake in the N’Djamena joint venture refinery with the Chadian Oil Ministry for example. They also ensure integration multiple and diversified transportation networks. As described by Mayer and Wübbeke (2013), about 90% of their routes are longer than 1000km. As a milestone, the longest gas pipeline of about 8704 routed from Central Asia to Hong Kong became operational in December 2012 (Tan, 2013, MOFCOM, 2013).

Unfortunately for CNPC, its very lucrative low sulphur production in Sudan for example is miles away from the most preferred destination by the government of China. Nonetheless CNPC can be seen as making lemonades out of their high sulphur oil content from Kazakhstan which is within close proximity to some parts of China. As the world’s leading importer of sulphur, this constitute diversification to meet local sulphur needs in the agricultural industry for example (fertilizer for grains, citrus crops etc.). This is an assertion that they ensure value in both their primary and support activities across various geographic locations. It also infers profitability of the company is as important to them as securing energy supply for China (Jakobson, 2009).

Drivers of CNPCs international competitive advantage
Much like internationalisation, competitive advantage is derived from position and capabilities. For most oil and gas companies, first-entrant (incumbency) advantage is the dominant driver of their positional strength but for others it is the derived learning’s from being a late mover. Regarding capabilities, advantage can be derived from a company’s ability to move from threshold to core competences which are rare and inimitable. It is however difficult to gain advantage from unique resources within the petroleum industry because crude for instance is categorised either as sweet or sour (Johnson, Whittington and Scholes, 2011; Saloner, Shepard and Podolny, 2001 p. 39-55). Considering company leadership made of primarily Chinese management with domestic education and experience, CNPC appears to have made good strides in their international operations. This success can be attributed to a number of factors including fast learning pace and adaptation to the different geographic locations. It can also be attributed to the visionary leadership and direction of a good management team.

Government Influence

Oil and gas business are liaised between geopolitics, economics and resources along various levels in the value chain because natural resources are usually found in specific geographic locations. The nationalised nature of the resource in most countries translates to high elements of government control over resources except in the United States for instance where the natural resources are controlled by land owners. With increased globalization and international policy formulation, countries have become more dependent on each other. Bilateral governmental relations are advocated for in various sectors which have projected increasing demand but questionable sustained supply such as in agriculture due to food security and supply as well as in the energy, oil and gas sector. China as projected by the Energy Information Administration (EIA) is expected to have the highest energy consumption rate (almost 200 quadrillion Btu) between 2008 and 2035. This will translate to the high Gross Domestic Product (GDP) per capita and thus a major concern area for the country.

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CNPC like most NOCs exist to guarantee continuous energy supply for China particularly with the country’s increasing demand. The government therefore has and will continue to have interest in CNPC operations and ensure its competitive advantage. Government’s diplomacy issues with particular reference to foreign aid and other infrastructure development can be linked to CNPC’s access to some international projects particularly in Africa. The Chinese government is often seen to offer the much needed assistance without political conditions imposed by countries like U.S. making them preferred partners (Inkpen and Moffett, 2011; Sullivan cited in Goldthau, 2013 p. 2000-2002).

In Central-Asia for example, CNPC-KazMunaiGaz successful relationship has been seen to be derived benefits from the Shanghai Cooperation Organization (SCO) as well as due to good bilateral relationship between China and Kazakhstan. For some analysts, the SCO is a strategic move for China particularly because members and observers collectively possess 17.5 per cent of the world’s proven oil reserves, 47–50 per cent of known natural gas reserves. With increasing world focus on the Caspian Sea and particular interest in Kazakhstan’s oil potential. China and thus CNPC subsequently ensure sustained relationship with the Kazakhstan government, KazMunaiGaz and with local Kazakhs. Consequently CNPCs interest which runs from reserves to refinery as well as a pipeline connecting Western Kazakhstan to China is seen as a strategic to China. They obey regulations of the country and have consistently complied with Kazakhstan’s increasing energy policy reforms (Kaiser and Pulsipher (2007); Palazuelos and Fernández, 2012).

Financial capability

The oil and gas industry is a capital intensive usually requiring long term investment. The time taken to recoup initial investment is also quite long and projects are not always successful with exploration and production leading to dry holes occasionally. Companies additionally face complex tax regimes and mineral price volatility (World Energy Council, 2003). These characteristics highlight the need for sound financial standing as a means of ensuring business continuity. Resource-rich countries have a preference for companies with good finance due to some of the reasons above. The British Petroleum (BP) 2010 Macondo incident also highlights the need for finance even from company’s operational point of view, because not many businesses can survive after paying fines incurred by BP, Transocean and for just one crisis incident (Oil and Gas Journal, 2013).

CNPC like most Chinese oil companies is involved in massive diversification across geographies; the company has displayed no misgivings operating in politically unstable countries like Iran. This means no particular country is off limits with any cost too great especially with about $3.3trillon in national foreign exchange looking to be invested. In 2005 CNPC’s $4.2bn acquisition of Petrokazakhstan made headlines and show the company’s willingness to spend; making it a good partner for farm-ins and preferred candidate during mergers and acquisitions. It guarantee them partnership with host governments but also other companies like Italy’s Eni and Royal Dutch Shell Their ability to acquire a $30 billion low interest loan from the China Development Bank (CDB) also give a good indication of their ability to raise capital to fund investments when needed (Inkpen and Moffet, 2011, Financial Times, 2013).

Technological innovation

Product differentiation in the oil and gas industry is very difficult and usually uncommon because the end product is the same no matter the geographic location. Attempts at differentiation however exists subtlety because companies like Shell have graded their end products in terms of the enhanced performance offered from Shell Extra or Shell V-Power, where the latter is more expensive as it ensures better performance in vehicles. However, a key driver that highlights the most differentiation in the industry is process as well as operational oriented and obtained through technological advancement. Technology is fast changing and increasingly sophisticated across many industries with the most obvious occurring in telecommunication with the oil and gas industry in similar pursuit (Royal Dutch Shell, 2013).

With the current spate of "diminishing" reserves and the inclination towards deeper depths in regions like the North Sea and Gulf of Mexico, technological advancement has become even more competitive and import in the oil and gas sector. CNPC’s interest in technological advancement is evident in the number of specialized service companies, research institutes and personnel involved in areas like research and software development. The company’s position as leader in onshore and geo-mountain technology is one of the highlights of its international competitive advantage. However the company also operates on all levels of offshore drilling and has about half seismic data-acquisition in comparison to most companies.

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Despite these research and technological advancement, CNPC sees a need for even more innovation. The company has plans for modification in refinery technology ranging from catalyst cracking to lube oil production to solidify its integration status. Additionally, CNPC has highlighted geophysical advancement in its "12th five-year plan" (figure 1). It emphasizes 2D, 3D and 4D as areas for further development and covers the different phases from exploration to development for onshore and offshore projects. This plan is expected to improve prediction success by 80% for reservoir identification and oil field development (Zhenwu et al., 2010).

Figure 1: Blueprint of geophysical technology Development for CNPC

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Source: Zhenwu et al. (2010)

Barriers to CNPCs success in international operations
The oil and gas industry is a very competitive one. Companies use varied strategies to search for and develop reserves so they can obtain competitive edge and sustain profitability for their shareholders. Hurdles are often unavoidable and form an integral part of strategies. Ghemawat’s Cultural, Administrative and political, Geographic and Economic distances (CAGE framework cited in Johnson, Whittington and Scholes, 2011) outlines key challenge areas in an international strategy. CNPCs foremost challenge can consequently be identified as pertaining to cultural and language barriers. Chinese are a large population with diverse provinces and social stratification hence multiple internal cultures apparent in domestic operations of CNPC. Dietz, Orr and Xing (2008) infer a hierarchical organisational structure for CNPC. This leader-subordinate view is vastly different from Western countries which dwell on individual accountability. In linguistics, African countries predominantly have English, French and Portuguese as first languages and thus the ultimate mode of communication for businesses. This creates difficulty in communication for CNPC leaders who have limited or no knowledge of these languages.

Just as laws are important in all human institutions, regulations form an integral aspect of oil and gas operations. OPEC and governments seek to coordinate policies and operations of both NOCs and IOCs to maintain some balance of power within the sector. China as a country has less rigorous environmental regulations than the developed world. This familiarity with relax domestic regulations becomes very exigent for CNPC in countries with more strict regimes. Additionally, with increased internationalisation comes the need for tailor-made organisational structure. Partners have different business expectations which need to be addressed with the overlapping feature integrated into the parent operations. With increased local content requirement by host nations, CNPC is face with the daunting task of utilising local employees and partners who can help with cultural, language administrative adjustment but may have questionable industrial expertise.

Overcoming barriers through Corporate Social Responsibility (CSR)
With increased modernisation comes the need for ensured business continuity through satisfaction of stakeholders by means of Corporate Social Responsibility (CSR). The concept of CSR in international business plans is believed to have evolved following crisis events in the petrochemical industry; with great emphasis on the Union Carbide Bhopal incidents in 1984 as well as the Chernobyl Nuclear disaster two year later. However with increasing environmental concerns from governments, non-governmental organizations and the general public, issues of corporate social responsibility are increasingly important and constantly highlighted in annual company reports of oil and gas companies. This is to ensure local support and business continuity since CSR offers a common purpose for companies and the communities in which they operate. Additionally, regulatory reforms as well as some investment strategies employed by asset managers and banks through the Socially Responsible Investment (SRI) for example sustain the need for socially responsible operations. The SRI, a growing financial measure in North American and United Kingdom is seen to reward companies through higher stock rating and ensured investor interest (Regester and Larkin, 2008 p. 73-94).

For many companies, CSR means accountability primarily to external stakeholders (government, communities and the public at large) but for CNPC this means covering the entire span of stakeholders through employee development, sustainable energy supply, responsible operations and the much emphasized public welfare. In the 2011 CSR report, CNPC highlighted achievements in their anti-terrorism and security efforts overseas. This effort becomes even more commendable following the Amenas gas hostage crisis in Algeria in January 2013 and offers a sense of security for their employees in particularly in Algeria and other unstable economies like Sudan, Syria and Iraq. As measure to overcome global talents issues and address language and cultural challenges, CNPC locals in international operations and currently has more than 90% local content in Ecuador for example. Additionally, they strategically train domestic staff in languages like Russian, Spanish and Arabic. CNPCs most recent attempt to score CSR points in international operations was on April 8th, 2013. CNPC President Zhou Jiping said during the Kazakhstan-China pipeline expansion agreement on principle signing that "CNPC will promote the company's efforts in helping improve people's living standard, supporting local employment, participating in public welfares undertakings, and contributing more to the local economic development" (Feng and Mu (2010); CNPC, 2013).

Conclusion
The issue of internationalisation has become increasingly important to oil and gas industry because minerals are found in different geographic locations. IOCs and NOCs constantly intensify their territorial resource ownership through various means such as mergers and acquisitions. With current efforts by Brazil, Russia, India and China (BRIC) to advance as world economies and their increased success projected by scholars, the implied success for CNPCs internationalisation is great. With the Chinese government focusing on ensure energy supply for citizens, CNPC displays aptitude their ability to succeed as a business but also achieve government goals. Thus the company ensures profitability across value chains in their international ventures.

CNPC as a state-owned company receives complete backing from the government which provides competitive advantage over other companies especially the IOCs. The company also has strong finances which forms the basis of their capabilities. These ensure that CNPC succeeds in achieving sustained energy supply and security to meet the country’s increasing demand. For an industry with threshold capabilities entrenched in technology, CNPCs operating principles and values based on innovation ensures continuous technological development; gaining them additional competitive advantage. Regardless of the efforts, internationalisation comes with setbacks ranging from regulatory to operation regardless of the industry. Difficulty in developing global talent, differences in regulations and cultural and language barrier are considered as some limitation factors to the success of their international strategy. However, good Corporate Social Responsibility (CSR) initiatives have been identified as a means of overcoming these challenges. Their CSR cover a broad spectrum of activities and seek to ensure total stakeholder satisfaction.

Recommendation
CNPC currently has the status of aggression and willingness to spend within the industry and their $4.2 billion Petrokazakhstan acquisition emphasizing that fact (New York Times, 2013). The Enron-Andersen debacle has established accountancy fraud within businesses while measures like the Sarbanes-Oxley Act (SOX 2002) seem to address these issues, CNPC could potentially face wrongful acquisition of a company thought to be lucrative. This may translate to losses relative to their investment. From an international relations point of view, their strategic pace can also lead to tensions and create legal modifications by host countries. Kazakhstan’s pre-emptive clause in reaction to the British Gas (BG) - Sinopec sale in 2003 is an example of a similar situation faced but another China NOC. Based on this, the report recommend that, CNPC does due diligence in their processes and quest for internationalisation. CNPC will also have to tone down on its aggressive spending and set limits to allocated finance for some projects during its negotiations. This will reduced the tendency of wrongful acquisitions; hence salvage the company from potential legal and economic implications.
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