China is Coming. Is a new wave of oil and gas investors a good thing, or bad? Much will depend on how you set your sails – will you participate and win, or simply watch from the sidelines?
Guest Blog by
Matthew Brandt
I’ve been watching and working with the Chinese since I was 29. I’m 52 now.
Much has changed over these 20+ years. Since 2005 I’ve been watching the Chinese outbound deal space. Although there is a lot of press on this of late, in a very real way, the flood of investment has not even yet begun.
Now that They Have the Means, They’re Looking for the Know-How
Over the last 2+ years I’ve been working with, and advising, a US company that wants to raise capital from China. When this group first contacted me in late 2011, almost nobody in China seemed to have heard about shale oil, horizontal drilling, fracking, etc. In February of this year, all that changed. Almost overnight, essentially anyone with money is now aware of the opportunity. Funnily though, they don’t know they can participate.
In China, only the government can own oil production via “state owned companies” (SOE) such as Sinopec. For years these were the only players.
Early this year, China began awarding rights to non-state owned oil and gas companies, in a public tender round, to drill and produce shale gas in China using horizontal drilling and fracking technology. While this was good in concept, most of these 19 companies had no background in oil and gas production, and they are floundering.
Guanxi = Schmoozing?
In October 2012 we began to test the market by reaching out to key Chinese connections that I have built over the last 20 years. This concept, called Guanxi by the Chinese is a key to success in China, without it, failure is nearly certain (more on this in future posts). In the early months – prior to February 2013 – there was interest in the concept of investing in US Shale Oil plays, but after, essentially all we speak with are interested.
Beginning in early 2014, we will begin bringing small groups of interested and highly qualified Chinese investors to the USA to do site visits, meet relevant operators and make investment decisions.
It’s been interesting holding these meetings in China as a divergence of interests has emerged; the US side is interested in the Chinese investment purely from a capital standpoint. The Chinese, while interested in the investment from a ROI standpoint, are ALSO are very interested in “learning about the technology.”
Many in China (those in Hong Kong have pure investment interests) have interest in trying to take back advanced technology with them to China which then can be used in Chinese shale and oil plays in the years to come. I’m not an oil guy, so I don’t feel qualified to say whether this will ultimately work or not, but I do know that A) the desire on the part of the Chinese to have this a/b play in place is very high and B) Chinese have long histories of importing (and knocking off in many cases) the “cheat, retreat and cheat again” identified by the CIA in the 50’s when watching Formosa (Taiwan) technologies and using them to their own benefit. Often this is for domestic use at first and almost always for export in the years that follow.
There is Still a Lot to Learn
While attending NAPE a few months ago, I was surprised how few Chinese I saw there. I counted 3, two from Taiwan and one, a PHD from the mainland who worked in the oil industry out of California. I wonder what these ratios will look like in years to come. Will more Chinese attend these shows? Will that be a good thing or bad?
So many cultural differences exist between the way an American does business and that a Chinese does business, that I could see potential misunderstandings, clashes and lost discussions taking place- at least in the early days. This has been true in every industry that comes to China and I expect this to be the same.
I’ve said since 1990 that no company in the world can compete with a properly structured Chinese company except an equally or better structured China based company. Now that I see the shale oil industry, I realize that this has been a limited view and not true. I’m still in the process of reformulating my thoughts to include my learning around US shale oil over the last two years.
Smart Investment Requires Smart Oil and Gas Investors
One thing is clear: the US side has huge capital requirements right now to finish off the drilling and production (now that HPB clauses have been satisfied) on the massive lands acquired in the “land grabs” of the past several years. I’m hearing from colleagues that there is a shortage of US capital to build this out fully, perhaps as much as three trillion USD. At the same time, we are seeing tremendous amounts of capital from the China side, much of which is now seeking to make “outbound” (not located in China) investments for the first time ever. Tycoon families we are speaking with in Hong Kong are also very interested.
Your Turn
What do you think? Would a new crop of investment spur up activity in your neck of the woods? And how much cultural impact do you think the Chinese may have versus other international investors? Leave your thoughts in the comment below.
Matthew Brandt
Latest posts by Matthew Brandt (see all)
- New Oil and Gas Investors: China is Coming - January 7, 2014
Western oil and gas companies flock to China to explore shale gas resources
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https://www.vcpost.com/articles/20543/20140107/western-oil-gas-companies-go-china-explore-shale-resources.htm
Western oil and gas companies flock to China to explore shale gas resources
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https://www.vcpost.com/articles/20543/20140107/western-oil-gas-companies-go-china-explore-shale-resources.htm
China’s 2013 Shale Gas output rises to 200 million cubic meters
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https://www.bloomberg.com/news/2014-01-08/china-s-2013-shale-gas-output-rises-to-200-million-cubic-meters.html
China’s 2013 Shale Gas output rises to 200 million cubic meters
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https://www.bloomberg.com/news/2014-01-08/china-s-2013-shale-gas-output-rises-to-200-million-cubic-meters.html
The Real China Challenge for Oil Play Investment
Several years ago while in China for business I took a weekend and went to the Great Wall with by local Beijing Sales team. The two associates that acted as my tour hosts had done so many times for other visitors but never with anyone as knowledgeable in Chinese history as me. While leaving one of the museums we noticed dozens of military trucks pulling up. The local PLA base uses the Great Wall as the location of their weekly graduation ceremony. This would of course be akin to a USMC recruit class at Quantico going to the Washington Monument to graduate.
About 1,000 young Chinese got out of the trucks along with their drill instructors and marched in formation to the top of the Great Wall. Right behind them were their parents, boyfriends & girlfriends, (the graduating class was COED). The drill instructors lined the unit up and went into a typical pitch. Having watched my son graduate from his USAF basic training made me realize that drill instructors were the same all over the world and the parents and loved ones there were just as proud of their son or daughter as I was of mine. The biggest fights I saw in China were people trying to get onto the limited shuttle buses that were taking shoppers to the newly opened Wal-Mart. At the Chinese McDonalds, KFC, & Pizza Hut while they speak Chinese vs. Spanish you are better understood and your order is correct vs. here.
The biggest single issue to oil investments, teaming and technology transfers in the evolving Chinese energy space won’t be discussing the merits of various ways to accomplish optimal directional drilling ,who has the best PLC or process automation systems to manage the energy once its found but in the area of cultural awareness. All parties concerned will need guidance and mentoring in this area to enjoy joint investment plays.
Hi Jim – nice to hear from you. Think I should mention that you and I worked together in the late 1990’s when you were (as i recall) Chief Technology Officer for I-Bus (a division of Maxwell Technologies) and I was director of global distribution.
You are absolutely right. Cultural issues are the key in making these things work. I did the Wharton AMP a few years ago and they spoke of 70% of USA M&A deals not meeting value creation expectations (and 70% of the reason for failure was attributed to lack of “cultural integration.”) How much worse would it be with a China USA deal without qualified “u-joints” in between?
I heard a speaker at NAPE in August saying that they were spending a huge amount of time in Beijing, “trying to learn the culture.” He also said, or at least it is what I heard, “that China is the future of oil and gas in many ways and if you are not over there now in a big way, you’d better be…” This comment was to a room of oil guys.
It’s going to be an interesting 10 years or so….
The Real China Challenge for Oil Play Investment
Several years ago while in China for business I took a weekend and went to the Great Wall with by local Beijing Sales team. The two associates that acted as my tour hosts had done so many times for other visitors but never with anyone as knowledgeable in Chinese history as me. While leaving one of the museums we noticed dozens of military trucks pulling up. The local PLA base uses the Great Wall as the location of their weekly graduation ceremony. This would of course be akin to a USMC recruit class at Quantico going to the Washington Monument to graduate.
About 1,000 young Chinese got out of the trucks along with their drill instructors and marched in formation to the top of the Great Wall. Right behind them were their parents, boyfriends & girlfriends, (the graduating class was COED). The drill instructors lined the unit up and went into a typical pitch. Having watched my son graduate from his USAF basic training made me realize that drill instructors were the same all over the world and the parents and loved ones there were just as proud of their son or daughter as I was of mine. The biggest fights I saw in China were people trying to get onto the limited shuttle buses that were taking shoppers to the newly opened Wal-Mart. At the Chinese McDonalds, KFC, & Pizza Hut while they speak Chinese vs. Spanish you are better understood and your order is correct vs. here.
The biggest single issue to oil investments, teaming and technology transfers in the evolving Chinese energy space won’t be discussing the merits of various ways to accomplish optimal directional drilling ,who has the best PLC or process automation systems to manage the energy once its found but in the area of cultural awareness. All parties concerned will need guidance and mentoring in this area to enjoy joint investment plays.
Hi Jim – nice to hear from you. Think I should mention that you and I worked together in the late 1990’s when you were (as i recall) Chief Technology Officer for I-Bus (a division of Maxwell Technologies) and I was director of global distribution.
You are absolutely right. Cultural issues are the key in making these things work. I did the Wharton AMP a few years ago and they spoke of 70% of USA M&A deals not meeting value creation expectations (and 70% of the reason for failure was attributed to lack of “cultural integration.”) How much worse would it be with a China USA deal without qualified “u-joints” in between?
I heard a speaker at NAPE in August saying that they were spending a huge amount of time in Beijing, “trying to learn the culture.” He also said, or at least it is what I heard, “that China is the future of oil and gas in many ways and if you are not over there now in a big way, you’d better be…” This comment was to a room of oil guys.
It’s going to be an interesting 10 years or so….
What would you see as a typical scenario for a oil play to unfold ?
Texas never did go into the downturn that effected the rest of the
U.S. in 08 and actually has gained a lot of business relocation .
The upside is many fold but most key is the region is far more open
and aware of other cultures;especially Asian. 30 years ago on my first
oil trips to Dallas I’d have been hard pressed to find even an egg roll.
Several months ago when a sales associate I’d travelled with extensively
in China visited I was able to take him to an area of over 30 restaurants for
our evening meal. He was pleased that we found a place that severed several
of our Beijing vegetable side dishes.
Hi Jim. Thanks for your question.
As I said in the piece above, I’m not an oil guy, but a China guy; so I’ll be commenting from that perspective.
What we are seeing as likely so far is Chinese investors placing funds into upstream plays with established operators. There is also similar possibility with strategic (corporate) and institutional investors expressing interest. It largely will likely boil down to which relationships are established as that will guide the investment path (at least in these early days).
There are discussions about founding a company to explore (or perhaps a fund) the US Shale opportunity too; if that materialized the investment scope would likely be lager, perhaps including MLPs. Chinese love IPOs as you well know.
We are planning on being in the USA in March and April with Chinese guest. If you’d like to meet, we’d be happy to do so.
Thanks again for your question.
What would you see as a typical scenario for a oil play to unfold ?
Texas never did go into the downturn that effected the rest of the
U.S. in 08 and actually has gained a lot of business relocation .
The upside is many fold but most key is the region is far more open
and aware of other cultures;especially Asian. 30 years ago on my first
oil trips to Dallas I’d have been hard pressed to find even an egg roll.
Several months ago when a sales associate I’d travelled with extensively
in China visited I was able to take him to an area of over 30 restaurants for
our evening meal. He was pleased that we found a place that severed several
of our Beijing vegetable side dishes.
Hi Jim. Thanks for your question.
As I said in the piece above, I’m not an oil guy, but a China guy; so I’ll be commenting from that perspective.
What we are seeing as likely so far is Chinese investors placing funds into upstream plays with established operators. There is also similar possibility with strategic (corporate) and institutional investors expressing interest. It largely will likely boil down to which relationships are established as that will guide the investment path (at least in these early days).
There are discussions about founding a company to explore (or perhaps a fund) the US Shale opportunity too; if that materialized the investment scope would likely be lager, perhaps including MLPs. Chinese love IPOs as you well know.
We are planning on being in the USA in March and April with Chinese guest. If you’d like to meet, we’d be happy to do so.
Thanks again for your question.