Authors: Fang Xiangliang and Coco Feng
Posted on: Caixin Global, March 3rd, 2017
In 1999, Luo Lin quit his secure job at China National Petroleum Co. (CNPC) and founded his own private firm providing services to the massive state-owned oil giant.
Back then he couldn’t have foreseen the dramatic ups and downs that would characterize the 25-year transition that such smaller oilfield service companies have experienced – through privatization, oil-market volatility, and China’s crackdown on industry corruption.
Luo’s Anton Oilfield Services Group, once dubbed China’s Halliburton, was a major player during the “golden decade” of the petroleum sector, as global crude prices more than tripled from 2003 to 2013.
That period of prosperity saw more than a thousand private companies emerge in the previously monopolized oil sector, offering services such as exploration, drilling, and transportation, most of which relied on personal connections with the dominant state-owned oil behemoths.
But in 2013 the industry was shaken by anti-corruption measures that resulted in key personnel changes at many oil firms–which was disruptive for companies that had come to rely on personal connections to get business done. Things worsened a year later as crude prices fell sharply.
Losses, acquisitions, layoffs and business closures. These are the stories often heard about the numerous private oil services firms that have risen and fallen amid the industry turbulence. Through overseas expansions, fund-raising and business transformation, some are making efforts to survive the upheaval. But for many, the bust was too severe.
Riding the Boom
In 1998, what was then CNPC split into CNPC and China Petrochemical Corp.oration (Sinopec), which were eyeing public listings, leaving space for smaller private players to cut in.
The opportunities widened as crude prices edged up, and soaring demand urged encouraged oil producers to accelerate drilling. For example, crude yielded from CNPC’s Changqing oilfield in northern China’s Ordos Basin quadrupled between 2003 and 2012. Although CNPC ran its own services subsidiaries, they were inefficient and unable to keep up with surging production.
After relatively modest beginnings, Anton developed significantly, with revenue jumping from 80 million yuan ($11 million) in 2004 to nearly 500 million yuan four years later. Besides Changqing, it operated in other oil-rich areas in China, including in the Xinjiang Uyghur Autonomous Region and in Heilongjiang province. It also expanded overseas, with operations in Central Asia, the Middle East, Russia, Canada and Africa.
Struggling in the Industry’s Downturn
Anton’s fortunes began to reverse in 2014, when it saw losses followed by personnel changes amid an industry-wide anti-corruption campaign and crude-price plunges.
In August 2013, the country’s anti-graft agency, the Central Commission for Discipline Inspection, announced an investigation into four core executives at CNPC. Some 50 management-level personnel at oil companies came under the watchdog’s focus in the following two years.
CNPC teams in its remote oilfields were also shaken, including in Changqing, where several managers were replaced in 2013 for bribery during bidding processes.
In Changqing, private services providers set up separate firms in part to bribe CNPC leaders, a person who provided oilfield technology services in Xi’an, where CNPC’s Changqing branch is headquartered, told Caixin.
Plummeting international crude-oil prices exacerbated the downturn. The global benchmark Brent Crude halved its price in the second half of 2014 and remains low.
In Changqing, half of the more than 1,000 drillers were shut down at that time, which contributed to losses of at least 15 million yuan a day as some personnel still required payment and equipment depreciated.
Profit losses and debt accumulation were worse in some of the companies, like Anton, that had spread overseas early, an executive of a privately-held oil services company told Caixin, as aggressive expansion efforts left companies financially more vulnerable.
Anton’s losses reached 200 million yuan in 2014, and continued in subsequent years. Another major services player, Honghua Group, saw its profits plummet from 850 million yuan in 2013 to a loss of 42 million yuan the following year.
“Honghua has largely invested in offshore oil projects, which cost too much to produce returns so far,” an oilfield equipment salesperson told Caixin.
Salvaging What Remains
The year 2014 was a turning point not only for Chinese oil companies, but also for the global giants. Some of the largest oilfield services providers–such as Schlumberger, Halliburton, Baker Hughes, and Weatherford International–have each laid off more than 10,000 employees to save labor cost since that year.
In 2015 China’s Honghua fired more than 1,000 employees, or a quarter of its total workforce, and Yantai Jereh Oilfield Services Group shed 500 employees. Anton is said to have downsized its number of employees by 40% in 2015, without revealing an exact figure.
Anton’s strategy also included bringing in new investments, managing to sell a 40% stake in its Iraq projects to China Oil HBP Group last May. Seven months later, HBP spent another 100 million yuan buying a 5% stake in Anton. The two companies are in talks for increased collaboration, a person at HBP said.
HBP was one of the few oil services firms that avoided the volatile domestic market by going abroad.
“HBP shifted its focus overseas, especially in Iraq, so it hasn’t been affected much by the shake-up in China,” an HBP employee told Caixin.
Insiders pointed out that instead of relying on networking at home, private firms should reach out to global giants for more stable business opportunities in the future.
“The private players have an advantage in offering lower prices, as crude remains relatively cheap,” a professional in the oil sector told Caixin. “So it’s the time for them to make the best of their advantage.”