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“We are a big elephant already. If we don’t reform ourselves faster, we will become a dinosaur” – Fu Chengyu, former Chairman of Sinopec and CNOOC

China’s oil and gas industry is at risk of falling behind the times, according to the former chairman of two of the country’s biggest oil and gas producers.

Chinese oil companies have “tremendous room” to improve efficiency and will be “suffering for the next few years” as they look to compete against producers that have been forced to lower the cost of doing business over the last two years, said Fu Chengyu, former chairman of both CNOOC ltd. and China Petroleum & Chemical Corp. (Sinopec, Ticker: SNP).

China’s domestic producers need oil to be at least $60 per barrel to stabilize declining production in the world’s second-largest consumer of oil.

“We are a big elephant already,” Fu said on Tuesday at Columbia University’s Center on Global Energy Policy. “If we don’t move faster, reform ourselves faster, we will become a dinosaur.”

Policy and culture make it difficult to downsize companies in China

A significant portion of the efficiency problems that plague Chinese oil and gas operators center around the fact that they are unable to lay off workers. A shrinking workforce has been an unfortunate side-effect of lower oil prices, but companies outside of China have been able to stay financially afloat by reducing headcount; i.e. slashing payroll costs, and learning how to run their businesses more efficiently.

But in China, firing employees is not an option “either legally or culturally,” Fu said.

China’s largest crude oil producer, PetroChina (ticker: PTR) announced a 94% year-over-year decline in net income during the third quarter of 2016, as well as its first-ever loss during the first quarter of the year.

PetroChina’s situation is far from unique, however, with all of China’s state-owned oil and gas companies reporting much lower revenue. Sinopec (ticker: SNP), for example, reported an operating loss of nearly 31 billion yuan in the first three quarters of the year, up from 4 billion yuan during the same period last year.

The Communist Party secretary of China’s biggest oil field, Daqing, told the legislature during its annual meeting earlier this year that Daqing, which is owned by PetroChina, lost around $800 million in the first two months of 2016.

In response, Chinese President Xi Jinping said the government must protect its workers first.

“Today’s economic restructuring cannot come at the cost of workers’ well-being,” he said. “We must guarantee the incomes and treatment of the front-line employees.”

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To illustrate the difference, ExxonMobil (ticker: XOM) and PetroChina both reported about $260 billion in operating revenue for 2015. Yet, Exxon’s net profit of $16 billion was roughly three times PetroChina’s. Looking at employees, PetroChina has more than 500,000, compared with fewer than 75,000 at Exxon. From a financial efficiency point of view, ExxonMobil created $16 billion in net profit with 15% of the headcount of its Chinese rival.

Companies like Sinopec do have alternative options, however, Fu said in New York. The company can pay people not to work in money-losing parts of the company. That helps cut losses, he said. Over time, traditional energy companies in China will become “smaller” and green energy and energy efficiency will surge, according to the former Sinopec chairman.

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