Getting With the Drill
Russell Flannery, 04.18.05
Warren Buffett favorite PetroChina thrives, but life gets rougher away from its Texas-like fields.
Wang (Iron Man) Jinxi was Mao Zedong's model worker in the Daqing oilfields near the Russian border. Lionized in Chinese government propaganda of the 1960s, he personified the Texas-style grit that was helping to achieve the Great Helmsman's goal of self-sufficiency in oil.
"Everyone had revolutionary spirit and love of country," recalls Wang Qiming, a contemporary of the Iron Man who is still an oilfield executive after 45 years in Daqing. Of course, self-sufficiency had a different meaning for China then--a Communist oxcart society that consumed 7% of what it does today. But the concern for satisfying China's thirst for fuel has not abated. Today the Iron Man shouldering the brunt of this burden is PetroChina, Asia's most profitable oil company.
Befitting the scope of its mission, this semiprivatized company (90% state owned) was in the top rung of the Forbes 2000 almost from its public market incarnation six years ago. But it is a young giant with the challenges of older age.
Daqing, like Texas, is a mature source of oil. In some areas what comes out of the ground is 90% water, only 10% oil. "Today, we need to focus less on quantity and more on developing new technology [for recovery]," says veteran Wang Qiming, now an assistant president of PetroChina. Thousands of creaky sucker-rod pumps erected as long as quarter of a century ago on the then-empty plain are today hemmed in by cement-block apartment buildings, sing-along parlors and restaurants. Daqing is the largest, but most other oil pockets nationwide have similar scenes.
With local supplies unable to meet demand, China--like the U.S.--is growing ever more dependent on foreign oil. The country's oil imports rose 35% last year, and overseas crude now accounts for 41% of supply, a figure that could hit 60% by 2020, according to the government's Development Research Center.
China's role in chasing up world oil prices is now widely recognized. However, says Scott Roberts, China representative of Cambridge Energy Research Associates in Massachusetts, forecasts of its demand are likely to be "essentially meaningless" and out-of-date because the country's economy is so dynamic. One big projection still pertinent: China's spending on energy investment--not even including exploration--will account for up to 15% of the world's total through 2030, according to the International Energy Agency, a global governmental research body.
PetroChina is one of a handful of Chinese energy players (see box, p. 92) well positioned to gain from the early stages of the consumption story. For 2004 it reported a net of $12.4 billion, up 48%, on revenue of $47 billion. PetroChina's shares have quadrupled in price since listing in New York in 2000, making the company one of China's rare great equity successes.
One particularly influential backer: Warren Buffett. His investment umbrella, Berkshire Hathaway, reported in February that its 1.3% stake in PetroChina had more than doubled in value to $1.2 billion since Buffett disclosed his purchase two years earlier. In a personal letter that PetroChina Chairman Chen Geng quoted at a Hong Kong appearance in March, the billionaire lauded the company's dividend policy--to pay out 40% to 50% of its profits. (Neither Buffett nor PetroChina would release an actual copy of the missive.)
It's not hard to find what's fueling PetroChina's profit boom. With incomes rising, the world's most populous country is acquiring the great hydrocarbon addiction. Bumper-to-bumper traffic snakes around skyscrapers on streets filled a decade ago with bicycles. Pampered urbanites blast office heating in the winter and air conditioners in the summer; factories dot former rice fields.
Coal accounts for two-thirds of China's energy consumption, although the government is pushing to substitute cleaner fuels and hydropower. Daqing, accounting for 45% of PetroChina's oil and gas production, isn't going to run dry soon. All told, the company has 10.8 billion barrels of oil equivalent in reserves. But China's voracious appetite will pressure the giant to break out of its heretofore largely domestic production mold. Save for projects in Indonesia and Kazakhstan, it has kept close to home.
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