East Meets West at PetroChina

CEO Huang Yan talks about his U.S.-style financial practices, China and the WTO, and talks for a joint-venture $18 billion natural-gas pipeline

Huang Yan, CEO of PetroChina, is on the cutting edge of reform as he struggles to transform a lumbering, state-owned behemoth into a nimble, privately run giant of a company. PetroChina (PTR ), which was spun off from unlisted parent company China National Petroleum in a landmark New York Stock Exchange listing two years ago, operates with Western-style financial discipline. The results have been impressive: For the year ended Dec. 31, 2001, PetroChina earned $5.65 billion.

Those profits haven't been painless. PetroChina -- the country's largest oil company -- has cut its workforce aggressively in the two years since the listing. And with the company indirectly caught up this spring in some of China's most protracted labor disputes, Huang is treading carefully (see BW, 4/08/02, "China's Angry Workers"). He spoke recently with BusinessWeek Asia Regional Manager Mark Clifford in Hong Kong. Edited excerpts from their conversation follow:

On relations with the government:

There is less and less central government interference. But local governments have some old ideas, which constitute a hindrance to closing our less-efficient refineries. Local governments see that it will reduce their tax revenues. Our plan...will be postponed by about one year.

We're also going to improve our methods -- refineries can't simply be shut down. Doing so will be connected with product portfolio adjustments and technical upgrading.... Employee issues are also [a] very difficult [aspect of the plan].

On the impact of the labor disturbances this year in Daqing, where angry workers targeted operations of PetroChina's parent, China National Petroleum:

There's no change in our goal, [but] there is a change in our method. We're trying to figure out a better way, a more prudent way [to lay off workers]. We must have a very thorough dialogue with the social-security department, with the medical-care department, and with the unemployment-insurance department in order to make sure workers have a stable life [after they're laid off].

Our target is to reduce our workforce by 3,000 to 4,000 more workers this year, which would mean that we'll have cut a total of 60,000 workers since our initial public offering. I'm confident that this target can be achieved.

On the impact of China joining the World Trade Organization:

There are fewer and fewer government regulations. For example, production quotas, capital spending, selling price -- there's almost no intervention. We have a great deal of autonomy. The sale price of crude depends on supply and demand. Also, the market sets the sales price of natural gas -- except for fertilizer plants.

On PetroChina's refinery business, a weak part of the company:

Many investors suggest that we sell off the refineries and chemicals businesses, but we think that in this strong competitive environment we must maintain some downstream products [like refining and marketing].

[The problem is] our downstream business is concentrated in [China's] northeast and northwest [where the local economies are troubled]. Now, our company is very actively studying the possibility of adding the refinery and chemical business to the southeast [where the economy is booming].

On the $18 billion, 2,610-mile, East-West pipeline:

We're really close to signing the framework agreement for the joint venture [with our foreign partners]. Our timetable is for the first part of July.

Shell, Gazprom, and ExxonMobil have an investor consortium.... There are two or three remaining issues between PetroChina and the investment consortium, but I'm really confident about the success of the negotiations.

All the preparations for the construction have been very well made, and we're prepared to start full-scale construction in July. We've already made a promise to downstream customers that the natural gas will be delivered in the early part of 2004. Marketing [to potential customers] is much better than we had expected.

We predict that in 2005, in the pipeline's second year of operation, the volume will be 8 billion cubic meters, which is the breakeven level. PetroChina's total natural-gas sales will double from 15 billion cubic meters in 2001 to 31 billion cubic meters in 2005.

Edited by Patricia O'Connell

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