Yuan aims to make COSL global leader

Chief sticks to core strategies to pursue goal Yuan Guangyu could not hide his pride and happiness as he talked about China Oilfield Services Ltd (COSL), even a month before the threefold surge in its share price on its trading debut on the Shanghai stock market. The well-built, tough-looking and straightforward 48-year-old industry veteran, who took over the helm at the dominant provider of offshore oilfield services in November 2003, spoke of its consistent growth record and its global expansion goals that were achieved through organic means and acquisitions. The listing in Shanghai late last month will help provide funds to increase capacity and ease growth bottlenecks. Mr Yuan boasted of increased company earnings, with first-half net profit this year 2.4 times that of 2004. They have been bolstered by soaring drilling rates and higher drilling demand as oil companies spend more to find new resources amid spiralling oil prices and a scarcity of major discoveries. A 1982 graduate of East China Petroleum Institute with a bachelor's degree in drilling engineering, Mr Yuan completed a Master of Business Administration in the Capital University of Economics and Business in 2001. He joined China National Offshore Oil Corp in 1982 and was deputy general manager of its drilling unit in Bohai Bay in the country's northeast between 1993 and 1996. After serving a three-year stint at China National Offshore's operations department until 1999, he was promoted to head the northern drilling unit until 2001 and then chief operating officer of COSL, a unit of China National, in 2002. COSL was listed in Hong Kong in November 2002 after the merger of seven companies to create an integrated business entity. Mr Yuan plays golf in his spare time. He is married and has a son. Q: Why are COSL's drilling rates substantially lower than those of its international peers? Is it any indication the company has given particularly favourable prices to sister firm CNOOC [the country's dominant offshore oil and gas producer]? A: This is similar to asking why Beijing and Shanghai's property prices are lower than those of New York. Given that China is still a developing economy, its labour, material and processing costs are bound to be lower than those of developed nations. It is natural, as industries are gradually being shifted from high-cost nations to low-cost ones in the global industry transfer process. COSL's core competitive edge lies in the fact that it can provide the same services at lower prices. As long as our rates are lower than international levels, we have a competitive edge. We do give CNOOC, our biggest customer, reasonable discounts as it gives us long-term bulk contracts, which is normal business practice. Q: Drilling rates have been rising rapidly in the international market. Do you see a peak coming? A: History tells us that our service prices have been steadily rising on the back of our expanding service capacity and the industry and economic cycle upturn. I don't see any reason for us to say now that this trend has reached a turning point this year or will do so next. I think the global oilfield services sector is in a boom period and is at a high point of the cycle, but I can't tell whether it has reached the peak. Any industry has its cyclicality and can't stay at the high point indefinitely. However, I'm optimistic on the long-term prospects of oil prices and drilling rates due to limited oil resources in the world, rising exploration and drilling activities, and strong energy demand from rapidly growing developing economies. Q: CNOOC is your biggest customer, contributing 63.2 per cent of COSL's turnover last year. With PetroChina starting to venture into deep-sea exploration, would it become a significant customer of COSL? A: Very likely, although PetroChina has yet to award any offshore contract to us. I think that when it actually needs drilling service, and a substantial amount of it, we may win some work. Q: How about COSL going onshore? A: Because of the good quality of our service, COSL has for some time provided non-drilling services to PetroChina in Xinjiang autonomous region, albeit small in value terms. Q: Can offshore technologies be deployed onshore? A: Onshore drilling technologies actually were originally derived from offshore ones. There is no substantial difference. Q: How about China Petroleum & Chemical (Sinopec)? A: Yes, we have provided some shallow-water drilling services to Sinopec's Shengli oilfield. Q: Your company has hired 1,300 new employees in the first half of this year alone, raising your headcount 11.8 per cent. Does COSL have any policy to attract talent? A: We do have some publicity programmes for recruitment, but mostly we use a market-oriented approach in hiring based on our demand and the market's supply. We hire both fresh graduates from universities and seasoned professionals in the market. All the 1,300 new hires are fresh graduates. Q: What do you think are your major achievements since you became COSL's chief executive in November 2003? A: My major accomplishment is that COSL has managed to surprise the [stock] market continuously and satisfy shareholders all the while. We work for our shareholders. As long as they are satisfied, we are happy. Q: What strategic philosophy have you instilled in COSL to help propel its growth? A: Technology-driven, cost leadership, vertical integration, internationalisation. Successful implementation of these core strategies has been key to our success in the past few years and will be in the future. Q: In which areas can COSL do better? A: As service capacity has been a bottleneck of our growth, especially in overseas development, after the implementation of our capacity expansion initiatives, I foresee international expansion as our major challenge. We will need to manage and operate in regions unfamiliar to us. How to effectively transfer our highly cost-effective operating model in offshore China to overseas projects will be an area we have to work hard on. It's not as simple as increasing the percentage turnover contribution of our overseas operations but, more importantly, how to maintain the entire company's cohesiveness in thinking and culture as it grows internationally is a major task ahead of us. Q: How many of COSL's 12,300 employees are foreigners? A: Some 500 to 600, mostly in Indonesia, the Gulf of Mexico and Myanmar. If we manage to complete the acquisition in Russia, we will have another 500 overseas staff. What is your philosophy in managing overseas employees effectively? A: First and foremost, we need to understand the local culture and convey to them COSL's goals, strategies and culture. The overseas staff need to feel that they are being cared for and be given jobs they feel will give them good career prospects, so that they will have a sense of belonging in the overall organisation. Q: COSL has been waiting more than six months for the Russian government to approve its impending acquisition of Russian-British oil firm TNK-BP's oil services unit STU. Given the small deal size and non-resource nature of the acquisition, does it have more to do with Sino-Russian politics than business? A: Yes, I think it is certainly linked to international relations, as the acquisition itself should not pose any strategic threat to Russia given our business' indirect service nature [as opposed to direct resource exploitation]. There must be some other reason, but I wouldn't be able to comment on it. Q: How may the acquisition benefit COSL? A: Russia is the world's top gas producer and one of the biggest oil producers. Its economy has grown by leaps and bounds on the back of rising oil and gas prices and it has increasingly used energy as a bargaining chip in the international political stage. The energy-rich nation is a very attractive market for us. The acquisition would help pave the way for our market entry and enhance our understanding of the Russian market. Q: What goals have you set for COSL? A: Our goal is for COSL to become a first-rate oil services company. By that, we mean becoming one of the top three global companies in this field by 2020. By 2010, we want COSL to be more internationalised and be regarded as an internationally competitive company. In the process, we are not only pursuing quantity, but more importantly, quality. Q: How do you define 'top three'? A: By revenue. Last year, Schlumberger had sales of US$17 billion, Halliburton had US$13 billion and Baker-Hughes had US$9 billion. Q: How did COSL rank last year? A: We had revenue of about US$840 million last year. We did not yet have a ranking.