Chinese beat India for Kazakh oil fields
By Keith Bradsher and Christopher Pala The New York Times
TUESDAY, AUGUST 23, 2005
HONG KONG China's biggest state-owned oil company announced Monday that
it would pay $4.18 billion for a Canadian oil company with substantial reserves
in Kazakhstan, China's largest foreign acquisition yet.
China National Petroleum Corp. outbid India's state-owned Oil & Natural
Gas Corp. in reaching a deal to acquire PetroKazakhstan. The bidding underlined
growing competition for oil resources by the two most populous countries, both
of which are rapidly increasing their imports.
PetroKazakhstan's acceptance of the CNPC bid is a consolation prize for
China's oil industry. Another state-controlled Chinese company, China National
Offshore Oil Corp., or Cnooc, withdrew its $18.5 billion offer for the U.S.
producer Unocal on Aug. 2 following strong opposition in Congress.
But the tangled history of past Chinese oil investments in Kazakhstan
cast a possible shadow on the deal.
Kazakhstan has passed a law declaring its right to pre-empt the sale of
any oil property in the country. That law was the basis for many questions from
analysts during a PetroKazakhstan conference call Monday with investors,
analysts and journalists.
Bernard Isautier, the company's chief executive, said that while
Kazakhstan could pre-empt the sale of assets within the country, it could not
block the sale of PetroKazakhstan itself.
"We are not speaking about a sale of assets where pre-emptive rights
would apply," he said. "We don't expect any problem in that regard."
In Astana, the capital of Kazakhstan, Mikhail Dorofeyev, head of the
media department of KazMunaiGaz, the state oil company and industry regulator,
said by telephone that the company would have no comment on the announcement.
The deal Monday may benefit from increasingly close relations between the
Kazakh and Chinese governments, which have both suppressed Islamic
fundamentalism along their long common border, sometimes drawing criticism from
human rights groups.
CNPC has worked closely with the Kazakh government on several projects.
But a publicly traded subsidiary of CNPC, PetroChina, has stirred controversy
in the Central Asian country by bringing in large numbers of Chinese workers
instead of hiring locals.
Cnooc and the third of China's three state-owned oil companies, China
Petroleum & Chemical, known as Sinopec, had tried and failed to buy into
Kazakhstan's huge Kashagan field two years ago. Their initial agreements to buy
stakes were pre-empted by foreign operators in the field, who invoked clauses
in commercial agreements for the oil field in an attempt to buy the stakes for
themselves.
The Kazakh government then invoked a legal pre-emption, claiming a
partial stake for itself.
PetroKazakhstan, based in Calgary, Alberta, but managed from Windsor,
England, is a considerably smaller company than Unocal, and it does not have
Unocal's extensive natural gas reserves or reputation for high technology.
Nonetheless, it commanded a price of $55 a share in the deal Monday, a premium
of 21.1 percent to the stock's closing price Friday on the New York Stock
Exchange.
PetroKazakhstan stock rose $8.46 to trade at $53.86 late Monday.
In the oil industry, "China has consistently been willing to overpay for
assets - it's more of a security issue for them than the absolute price," said
John Kuzmik, a partner and China specialist at Baker Botts, a Houston energy
law firm. Oil & Natural Gas Corp. reportedly bid $3.6 billion.
PetroKazakhstan's main asset lies in its full ownership of one oil field,
Kumkol South, and half-ownership of two smaller ones, Kumkol North and
Germunaigaz. The company has managed to develop those fields even though they
are locked in the heart of Central Asia.
"It is a jewel - you look at the way they increased production," said
Vincent Noual, a specialist in Central Asian oil in the Geneva offices of IHS
Energy, a consulting firm.
PetroKazakhstan has had a series of legal skirmishes with Lukoil of
Russia, its main partner in the oil fields. Lukoil's main pipeline from
Kazakhstan into Russia is already full, but CNPC is expected to finish at the
end of this year a pipeline from Kazakhstan into China.
The pipeline was originally planned to carry oil from other Chinese-owned
oil fields in Kazakhstan but will have plenty of extra capacity to carry oil
from PetroKazakhstan as well, Noual said.
The deal Monday, announced before the opening of trading in New York,
represents a huge payday for PetroKazakhstan's investors and the company's
chief executive, Bernard Isautier.
PetroKazakhstan used to be Hurricane Hydrocarbons, which was bankrupted
in 1999 by low oil prices. But the company still held one superb investment:
its stakes in the Kazakh oil fields, purchased for just $120 million in 1996
when Hurricane bought the assets of Yuzhneftegaz, a Kazakh state-owned oil
company.
After the bankruptcy filing, Isautier joined the business, led the
company out of bankruptcy, bought 88 percent of a large Kazakh refinery for $51
million, and began investing $143 million to develop the oil fields. As oil
prices soared and the value of the Kazakh oil fields with them,
PetroKazakhstan's relations with the Kazakh government deteriorated. The
government and the company have been locked in extensive legal battles over
issues like the company's flaring - or burning off - of natural gas, which the
government wants to see shipped to markets instead.
Citigroup advised CNPC on the deal while Goldman Sachs advised
PetroKazakhstan. Citigroup has agreed to provide CNPC with a letter of credit
for the entire value of the deal, with the state-owned Chinese oil company not
borrowing any money from other Chinese government agencies.
Cnooc's plan to finance much of its bid for Unocal with borrowings from a
government-controlled bank had fanned opposition to that deal in Congress over
the summer.
The complex deal has an unusual feature that will allow Isautier, 62, to
remain active in Central Asian oil deals. He had said last spring that he
planned to retire this autumn, and the company disclosed in late June that it
had been approached by potential buyers.
CNPC agreed to pay $54 in cash for each share and put $76 million, worth
another $1 a share, into a new company that is to be spun off to
PetroKazakhstan shareholders and led by Isautier.
Keith Bradsher reported from Hong Kong and Christopher Pala from Astana,
Kazakhstan.
[Non-text portions of this message have been removed]
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