China’s national oil companies: Risk management overseas

The killing of nine Chinese oilfield workers in north Ethiopia in April, and the  kidnapping of a further seven, highlights the challenge of risk management by China’s national oil companies (NOCs) as they go overseas.  

Risk is endemic to the business of international oil. Some of these risks long formed a well-understood part of the business, and lie at the heart of decision-making; for example technical and commercial risks. Safety management has also been one of an oil company’s key responsibilities, but standards of expectation continue to rise, whilst at the same time commercial pressures intensify. Though the success of the international oil companies has long depended on the successful management of legal and political risk, the challenges related to these risks continue to grow in scale and complexity and are closely tied to one further risk – physical security. With a century or more of experience, the large international oil companies (IOCs) have developed sophisticated systems and approaches for assessing and managing these risks, at a both corporate and local levels. But even they can be caught out, see for example Shell’s Sakhalin project in Russia and its need to adjust its reserves, and BP’s safety woes in the USA. But what all these companies fear is the loss of reputation which arises from the inability to manage these risks effectively.


NOCs going overseas face the same range of risks, though the balance between them may be different. Commercial and technical pressures may be less than for IOCs, and political and legal risks may be tempered, at least in the short-term, by the close relationship between their home government and the host government. Further, the NOC may have little reputation to lose.


An NOC overseas may be less sensitive to minor events or losses than the IOC, but they are likely to be just as keen to avoid catastrophic commercial losses, expropriation of assets, major accidents causing loss of life or extensive environmental damage, a severe breakdown of relationship with local communities, or extreme security breaches. The problem for the NOC is that the senior managers have little experience of identifying and managing risks outside their home country, and of operating in an arena where the slightest management failure can reach the international press in hours.


In the case of China’s national oil companies the challenge of international risk management is exacerbated by two factors: first, the speed and scale of their overseas expansion has left little time for managers to learn on the job; and, second, the high standing of these NOCs within China and the control of the press back at home has protected these managers from the pressures of external scrutiny at least until the last few years.


In this context the main challenge for the managers of China’s NOCs is to protect the reputation of their ambitious companies. This challenge has two inter-related components: to manage the range of risks identified above, and to manage public perceptions of the company. To date it appears that China’s NOCs lack systematic procedures for identifying, assessing and managing risk across the corporation. The task of risk management is left to the local operational managers. The extensive technical expertise of the Chinese NOCs and their choice of operating partners seems to have ensured that major technical, safety, and environmental incidents outside China have been avoided to date; though the reputation of CNPC was dented by an explosion at a petrochemicals plant in north-east China in 2005 which led to the leak of chemicals into a river flowing northwards into Russia.


Rather the key sources of reputational and commercial risk for the Chinese NOCs lie in their relations with host governments, with local communities or sub-national governments, with local employees and, consequent on these relationships, perceptions in the wider international community. In turn the Chinese government’s reputation is dependent on that of the NOC as well as its own behaviour.


Though host governments have been keen to welcome Chinese NOCs, their people have been less keen on occasions, and this seems especially to be true in Sub-Saharan Africa. During the civil war in Sudan, CNPC required both local and Chinese troops to protect their operations. The use of these troops further undermined the international reputation of CNPC and of China, already tarnished by their deep involvement in the country. To enhance its local image, CNPC has contributed substantially to local communities, building hospitals and schools, drilling wells for drinking water, building highways and other infrastructure, and training local oil technicians. Now the civil war in the south of the country has ended, relations between CNPC and the government in the south remain tense. Meanwhile, China’s government seeks to rebuff international criticism of its approach of ‘non-involvement in the domestic affairs of another country’ and is claiming to have discreetly put pressure on the Sudanese government to allow UN troops into the Darfur region.


Whilst the CNOC may have succeeded in protecting its people in Sudan, recent kidnappings of Chinese workers in Ethiopia and Nigeria show that Chinese companies are not immune to the security risks endemic to the oil industry in these countries. Indeed, the Chinese may be specifically targeted for local groups in both countries specifically warned the Chinese to stay out. Senior managers in CNPC realise that they need to improve their ability and capacity to reduce to risk of such events and to respond to them.


Despite these tensions with local communities and political groups, the Chinese NOCs do not appear to be suffering from the same tensions with local employees as Chinese mining companies are. In Zambia, for example, a visit of President Hu Jintao to a Chinese-run mine had to be cancelled on account of a demonstration threatened by local workers. This relative success of the NOCs may be due either to their smaller numbers of local employees or to better treatment of these local employees. 


Whilst the Chinese  NOCs, with the support of their government, may have been congratulating themselves on their effective management of relations with the various host governments, recent events suggest that things may not always go their way. In both Nigeria and Angola opportunities to participate in the construction or management of important refineries appear to have slipped from their grasp, despite the inclusion of these projects in high-level inter-government deals. In the case of Angola, this tension in the relationship is exacerbated by the large numbers of Chinese workers in the country, who will be seen as depriving the Angolans of opportunities to work, despite the generosity of the Chinese reconstruction loans.


The Chinese government itself faces criticism for its willingness to support the investments of these NOCs in countries such as Sudan, Iran, Myanmar and Angola. The government and the NOCs are accused of opportunism, a lack of regard for human rights, and a failure to support moves to enhance the quality of national governance which is believed to be the key to economic development. Whilst China, on the one hand, continues to reiterate its five principles of peaceful co-existence, some officials are stung by the criticism, for it undermines China’s claim to be undergoing a ‘peaceful rise’. The same officials are also aware that the actions of the NOCs themselves threaten to undermine the reputation of China. Though now specific steps seem to have been taken yet, we should expect the government to be looking for ways to encourage the NOCs to change their patterns of  behaviour overseas. In addition, the case of Sudan shows that China may indeed be prepared to modify its reluctance to engage with host governments on issues of domestic security and governance, albeit discretely.

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