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Apologies for the short write-up yesterday on the Shell/CNOOC spat. Even with the little information that is available there is a bit more to the story, but I was unable to dive deeper into it yesterday. I had some time to think the story over and – although the Volkskrant story was one-sided based on Shell information – my sympathy almost went to CNOOC. Let me explain why I think the move by the Shell official to vent his frustrations in the media was silly at best, but first on the interview itself.

I do not think a journalist needs a decade of China-experience to ask the right questions in this kind of situation, but in this case we are missing crucial background. The Shell/CNOOC joint venture had an 50/50 ownership construction, already when the contracts for the petrochemical installation were signed at the beginning of the century. At the time I frequented many informal, off-the-record meetings where now and then Shell officials emerged there too. The first question everybody asked them was why they set up a 50/50 ownership construction if everybody else thought it was a proven receipt for problems.

They accepted the general perception that you should avoid a 50/50 construction. If you needed a Chinese partner for legal or strategic reasons, one of them should be in charge: you do not want a baked-in stalemate if both partners would fall out with each other. But, the Shell people said, they were different. Their relationship with their Chinese partner was so extremely well, this could not go wrong.

Even when that would be right at the time, we all knew that would be a good foundation for future trouble, when the officials of both sides would have been replaced by others, who did not have a similar close relationship.

That would have been an obvious question for a journalist to ask: why did Shell do it wrong in 2002, and why did they want to continue a proven receipt for trouble?

Otherwise, the move by Shell to complain in the media about CNOOC was silly. CNOOC plans to build a USD 7.5 billion refinery next to the current petrochemical installation, and they invited their current partner Shell over to participate, in exchange for a reduction of their equity. Already in January the CNOOC told in the People’s Daily they were going to negotiate:

“Even if CNOOC agrees to let Shell participate, it won’t get as high a stake as the 50 percent it has in CSPC because CNOOC is not short on the capital or the technologies needed to build the new plant,” said Diao Guotao, secretary of the Communist Party of China Committee of CNOOC Huizhou district.

That might not have made Shell happy, but when CNOOC does not see how its current Anglo-Dutch partner can add any value, does not Shell have to explain how they do? Why are they still needed? By complaining in the foreign media, they suggest they have given up on the negotiations altogether. You can use silly arguments at the negotiation table, but when you start looking silly in the media, you create yourself a problem. CNOOC came with a fair argument and our Shell official replies with conspiracy ideas against foreign firms in general. (Although there are some signals of a tendency, they seem mostly to be used by Chinese partners when it fits their agenda).

It looks like the 50/50 joint ventures has again proven it is a receipt for trouble, so renegotiating is the better option over whining.

PS: I agree with Cindy in her comment on the previous post that Shell’s history in China has seen a few more hiccups, apart from the pipeline she mentions. They are not alone in having problems in China, but you would mostly read about them when they go wrong (Yahoo, Google, BestBuy, Home Depot and more), but less in the many cases when things go right.

Related articles

• China’s Energy Industry Pushes Into Developed Markets (dealbook.nytimes.com)
• China CNOOC Ltd chairman to become Sinopec Corp head -source (reuters.com)
• CNOOC eyes massive pipe to link China LNG terminals -official (reuters.com)
• Cnooc, Total Sign Agreements to Buy Tullow Ugandan Interests (businessweek.com)

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A breaking story on Saturday in the Dutch daily De Volkskrant suggesting the Anglo-Dutch oil company Shell is being chased out of China by its Chinese partner, the state-owned CNOOC. Since in terms of investments it has been Shell’s largest investment ever, certainly in China, the story is important enough. In the past Shell has invested also much in its relationships in China, making the question what is going wrong extra interesting.

A few remarks in advance. The story has been written by the journalist Fokke Obbema, who is working on the economic desk, but has no background in China. He went along with a Dutch ministerial delegation to China, headed by the minister of economic affairs Maxime Verhagen. I have been along with those trips a few times as a journalist and coming back with any slightly original story is a challenge.

De journalist did not ask CNOOC for comment, and even does not suggest he tried to get that. That should be a huge disclaimer: this kind of complicated stories have at least two sides, if not more. The story on the Dutch side is told by former Shell manager Frans van Gunsteren and is not publicly supported by Shell. Only an anonymous Dutch diplomat is quoted (but they would always do that, so should be discounted for that reason).

The generic stake of the story is: foreign companies are getting increasingly a tough time in China, when they are dealing with state-owned companies. In this case a 50/50 joint venture between Shell and CNOOC has build a 3 billion euro petrochemical installation in Southern China. The building started in 2006. CNOOC now wants to expand a nearby petrochemical installation with an investment more than double the existing Shell/CNOOC installation.

This time CNOOC only wants Shell to participate for 30 percent, and Shell does not want to. They want to keep expensive expats and foreign companies out, suggest Van Gunsteren.

To me, it sounds like a business conflict that is now blown out of proportions by Shell. But then, the Volkskrant story has only one side. Not sure if there will be a follow-up.

Shell – if they support the challenges made by their manager – wants to make the story bigger than it is in my view. Some foreign companies are doing well in China, some fail because they made a wrong assessment of the market. And some get in trouble with their local partner. There is a nice saying in Dutch: when to fight, two are to blame. We need to hear the CNOOC story.