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PetroChina: An Oil Giant Stirs


Forty years ago, in the bleak northern town of Daqing, tens of thousands of Chinese volunteers, full of revolutionary vigor, fought what the Communist Party hailed as the "battle for oil." The object: to secure the fuel that China would need to develop a prosperous, self-sufficient socialist economy. To that end, workers hauled drilling equipment across the marshy ground, using nothing more than log rollers and muscle, and assembled huge oil rigs by hand. Party leaders have been paying tribute to the spirit of Daqing ever since, and a museum at the site displays the worn copies of tracts by Mao Zedong that workers studied at night as they sat around campfires.

Today, Daqing symbolizes a very different kind of Chinese revolution. The 113,000 workers who now toil in these oil fields are part of the campaign to turn their employer, PetroChina Co. (PTR), into an efficient profit machine that will rank among the world's biggest petroleum companies. In just-released results for the year ended Dec. 31, PetroChina reported that earnings had more than doubled, to $6.7 billion, on revenues of $29.2 billion, blasting past previous earnings records for listed Chinese companies. In fact, PetroChina, with shares listed on both the New York and Hong Kong stock exchanges, already ranks as the world's fourth-biggest oil company based on output and proven reserves, though its market capitalization of $35 billion is about one-eighth that of Exxon Mobil Corp. (XOM)

While high oil prices are the biggest reason behind its strong financial performance, aggressive cost-cutting also has played a role. The Beijing-based corporation already is well into a Western-style restructuring. Prior to last year's initial public offering, which raised $2.9 billion, PetroChina hived off hundreds of noncore businesses, ranging from newspapers to hospitals, to its parent company, China National Petroleum Corp. It shed more than a million workers in the process. It is also pulling back from the refining business. Last year, PetroChina shuttered six refineries and 105 chemical facilities.

Now, PetroChina focuses on squeezing costs to get the most out of the lucrative business of oil and natural-gas production. From April until the end of last year, it laid off 38,000 workers, 8% of its workforce, at a cost of $380 million in severance pay; 13,000 more will go this year. Chief Financial Officer Wang Guoliang promises to pare $1.1 billion in annual spending by 2002. "Cost reduction will be an everlasting theme for our company," vows Wang.

These days, top management is preaching ideology from the little red book of shareholder value. It urges workers to pay more attention to profits than to production volume. To boost motivation, PetroChina promises to extend its path-breaking stock option plan from the 400 senior executives who currently participate to increasing numbers of its 442,000 remaining employees. Senior management has strengthened control over a company whose far-flung provincial bosses often ran their units like fiefdoms. That has allowed better use of capital. Debt has dropped sharply, and before new projects are approved, managers must show they can generate a 12% annual return on capital. BP Amoco PLC (BP), which purchased a 2.2% stake in PetroChina for $578 million, is helping it develop a chain of gas stations in the booming southern provinces. From the jazzy slide presentations that management puts on for investors down to the snappy new rectangular logo on its business cards, PetroChina is trying to become a modern company. It is headed by two men with three decades of experience as oil engineers: Chairman Ma Fucai and President Huang Yan.

STRIPPED AWAY. The restructuring of PetroChina marks dramatic change in a country where it was long unthinkable to reduce the size of an enterprise. PetroChina last year shut down 5.6 million tons of refining capacity, 5% of its total. That helped boost capacity utilization from 68% to 78%. A refinery and chemical factory in the gritty western city of Lanzhou, in Gansu province, are being merged. Layers of management are being stripped away, as are overlapping staff positions in marketing and production. PetroChina took an $800 million charge to rationalize its lube-oil operations in an effort to discard low-end products and to prevent different units from competing against each other. For the first time, company accountants know what's actually going on in everything from sales to inventory. Says Chairman Ma: "Restructuring and long-term sustainable growth are our targets."

The message that life has changed has certainly filtered down to Daqing. Conversations with oil workers uncovered a decidedly uncommunist interest in stock options and how they work in the West. Wang Qimin, one of the revolutionary pioneers who helped build Daqing with little more than enthusiasm and muscle power, used to live in a makeshift hut during bitter winters when temperatures dropped below zero. Now, he is a well-paid top manager at Daqing who helps oversee researchers trying to wring dwindling reserves out of one of the world's longest-producing oil fields. "Since being listed, we have much more pressure from our investors to keep our production high," says Wang, 63.

For all the progress, it will still be a while before PetroChina wins over its many skeptics. To attract investors, PetroChina must pay a much higher dividend on its shares than Western companies. Foreign shareholders have been burned time and again by Chinese companies that talk convincingly about transparency and Western business practices but then ruin their balance sheets with bad investments or by pursuing political priorities. Investors are waiting to see if PetroChina can "execute on its cost-cutting plan," says Goldman, Sachs & Co. analyst Paul D. Bernard. "This is the year capital discipline will be tested."

The biggest test will be a 2,600-mile natural gas pipeline PetroChina will build from the Tarim Basin in western China to Shanghai. Many foreign analysts believe the $5.2 billion pipeline is unlikely to yield anything close to the 12% return on capital Ma promises for new projects. But the government, which still owns 90% of PetroChina's stock, views it as a priority because gas is a cleaner fuel than oil. And Chairman Ma is enthusiastic: "Natural gas will be our new driver of growth," he says.

If the pipeline turns out to be a money drain, it will only confirm that China's new corporate giants aren't ready for the global stage. But if Ma can turn the project into a big source of profits and continue to cut costs and boost efficiency, he could well set a standard that will show the world that the Chinese multinational has arrived.

Corrections and Clarifications

The text of "An oil giant stirs" (International Business, May 7) on PetroChina Co. refers to an $800 million charge. As correctly noted in the accompanying table, the $800 million refers to a corporatewide restructuring, not simply the lube-oil unit noted in the text.

By Mark L. Clifford in Daqing


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