Online Extra: Q&A with PetroChina's Huang Yan

The oil company chief on restructuring the former state-owned enterprise

It's easy to talk about reform. But PetroChina (PTR ) President Huang Yan is one of the executives who need to make the excruciating decisions to actually close down facilities and lay off workers. An industry veteran, Huang started working for the Petroleum Ministry when he graduated from a technical institute in Nanjing in 1966.

Now, thanks to a restructuring in preparation for PetroChina's April, 2000, initial public offering, he's running one of the world's largest and most profitable oil companies. It's an organization that's in the throes of change as it tries to move from a socialist, planned-economy style of management to a market-oriented company. When PetroChina was hived off in November, 1999, from China National Petroleum Corp. (CNPC), its parent company, a staggering 1.02 million workers were left behind with the latter. And the cuts go on. At his Beijing office, Huang discussed PetroChina's transformation recently with BusinessWeek Asia Regional Editor Mark L. Clifford. The following are edited excerpts of the interview:

On changes in PetroChina's business philosophy since the IPO:

"The most significant [difference] is the business-philosophy change of the senior management and all the employees of PetroChina. Previously, we had to be responsible for the government and for society. At that time, we had no idea of responsibility for shareholders' value. Under the planned-economy system, the company was driven by production quotas and scale, and we cared little about the return of capital costs. Under the old system, the company was not like a commercial entity -- we had redundant workers and overlapping management. After the IPO, the company has undertaken great changes."

"The most uncomfortable thing is that we're scrutinized by investors. Before going public, if I made a decision and it was approved by the government, we could do it very easily. Now we have to be accountable to so many investors. We have to answer their inquiries. Before, I had only one boss -- the government. Now I have so many bosses, and their temperaments are so different."

On organizational changes and capital discipline:

"The second most obvious change is [in] the organizational [structure] of the company. Under the old system, the company had 53 subsidiaries. Each of those also had subsidiaries. We had a multilevel system. This kind of multilevel legal procedure and decision-making is not beneficial for the company in terms of the optimal utilization of resources. This hurt the efficiency and profits of the company. After the IPO...we canceled [the] legal entities of the 53 subsidiaries, and we practice centralized decision-making."

"Under the old system, the regional companies approved some [capital-spending] projects. Now our company practices centralized management of capital, debt, and accounting. This is unprecedented for all the SOEs [state-owned enterprises] in China. For example, under the old system, the whole company has more than 100 [bank] accounts. We had deposits, and we had large amounts of debt. We centralized capital management and canceled over 100 accounts. In this way we have [realized] 2 billion renminbi [$241 million] savings in financial costs last year. This kind of achievement is very rare among the SOEs."

"The system of the company has changed. The company is operating according to the best international practice. We are changing the people's concept [of the company]. It's not easy. We're fighting with the old system."

"[For instance]: The capital expenditures of our company should be a purely commercial behavior, but some of our large projects must be approved by the relevant government departments."

"[To take the most pressing example], the East-West [natural-gas] pipeline will cost 40 billion to 50 billion renminbi [$4.8 billion to $6 billion]. This project is very important for [the development of PetroChina's] gas business. We're going to conduct this huge project according to commercial principles and practices. If according to the result of [our] economic analysis, [there] is a lower than 12% [return on investment], PetroChina will not be the owner of the pipeline. CNPC, our parent company, may be the owner of this project if the return is lower than 12%."

"Our study result [to date] shows the return on investment is higher than 12%. We want to maximize returns to shareholders and to safeguard their interests. We will try our best to sign this contract [to build the pipeline with an international consortium] at the end of the third quarter. In the second half of 2003, the eastern part [of the pipeline] will be finished. The western part will be finished in 2004."

On layoffs:

"This is a difficult and sensitive question. It's very difficult to cut our labor force. In China the social-security system is not mature. Most of our employees have [only] worked in state-owned enterprises. They think this kind of job is permanent. But because our company has too many workers, in order to improve the profits of the company we have to cut down the head count. This is very difficult. In 2000 we reduced the number of employees by 38,400. This year our target is 13,900."

"The government supports cutting workers. The country is establishing a social-security system. Laid-off workers can still enjoy a pension. When we cut down the labor force, we mainly focus on loss-making enterprises and plants. Because they're loss-making enterprises, they will have no future and no prospects."

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