Consolation prize for China oil firms By Keith Bradsher and Christopher Pala The New York Times
TUESDAY, AUGUST 23, 2005
HONG KONG China's biggest state-owned oil company agreed on Monday to pay $4.18 billion for a Canadian oil company with substantial reserves in Kazakhstan, China's largest foreign acquisition.
The Chinese company, China National Petroleum Corp., outbid the Indian state-owned company Oil and Natural Gas in reaching a deal to acquire PetroKazakhstan.
The bidding underlines growing competition for oil resources by the world's two most populous countries, both of which are rapidly increasing their oil imports.
PetroKazakhstan's acceptance of the CNPC bid is a consolation prize for China's oil industry after another state-controlled Chinese company, Cnooc, withdrew an $18.5 billion offer for Unocal on Aug. 2 after encountering strong opposition in the U.S. Congress.
Cnooc and the third of China's three major oil companies, Sinopec, tried and failed two years ago to buy stakes in Kashagan, Kazakhstan's biggest oil field.
PetroKazakhstan, based in Calgary, Canada, but managed from Windsor, England, is a considerably smaller company than Unocal, and without Unocal's extensive natural gas reserves or Unocal's reputation for high technology. It nonetheless commanded a price of $55 a share, a premium of 21.1 percent to the stock's closing price on the New York Stock Exchange on Friday.
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 large Houston law firm specializing in energy.
PetroKazakhstan's main asset lies in its full ownership of one field, Kumkol South, and half-ownership of two smaller ones, Kumkol North and Germunaigaz, locked in the heart of Central Asia, and the company's ability to operate in Kazakhstan has drawn admirers.
"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 the Russian company Lukoil, its main partner in the oil fields. Lukoil's main pipeline from Kazakhstan into Russia is already full, but CNPC is expected to finish a pipeline from Kazakhstan into western China at the end of this year.
That pipeline was originally planned to carry oil from other Chinese-owned oil fields in Kazakhstan, but it will have plenty of extra capacity to carry oil from PetroKazakhstan as well, Noual said.
Monday's deal, 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 previously operated as Hurricane Hydrocarbons; it was forced into bankruptcy in 1999 by low oil prices. But the company still held one superb investment: its stakes in the Kazakh oil fields, which were purchased for $120 million in 1996 when Hurricane Hydrocarbons bought Yuzhneftegaz, a Kazakh state-owned oil company.
After the bankruptcy filing, Isautier joined the company, led it out of bankruptcy, bought 88 percent of a large Kazakh refinery for $51 million, began investing $143 million to develop the oil fields and changed the company's name to PetroKazakhstan.
As oil prices soared and the value of the Kazakh oil fields rose 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.
The Kazakh and Chinese governments have close relations, however, which may help them resolve these disputes. Both governments have suppressed Islamic fundamentalism along their long common border, drawing strong criticisms from human rights groups in the process.
Citigroup advised CNPC on the deal while Goldman Sachs advised PetroKazakhstan. A person familiar with the deal said that Citigroup had agreed to provide a letter of credit to CNPC and that CNPC would not be borrowing any money from the Chinese government.
Cnooc's plan to finance much of its bid with borrowings from a government-controlled bank had fanned opposition to that deal in the U.S. Congress over the summer.
Monday's complex deal has an unusual feature that will allow Isautier, 62, to remain active in Central Asian oil deals. He had announced in May 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 an additional $1 a share, into a new company that is to be spun off to PetroKazakhstan shareholders and led by Isautier. The new company will pursue oil and gas deals in Central Asia except in Kazakhstan and can seek a public listing with CNPC's approval, PetroKazakhstan said in a statement.
The deal is subject to approval by two-thirds of PetroKazakhstan's shareholders at a meeting to be held in October.
PetroKazakhstan agreed to pay a breakup fee of $125 million to CNPC if PetroKazakhstan later accepts a higher offer.
Monday's transaction dwarfs what had been the biggest overseas Chinese acquisition so far, Lenovo's purchase of IBM's personal computer unit for $1.25 billion, completed in May.
In Astana, Kazakhstan's capital, Mikhail Dorofeyev, head of the media department of KazMunaiGaz, the state oil company and industry regulator, said in a telephone interview that the company had no immediate comment about the deal.
In another interview, Oraz Jandosov, who previously as head of the antimonopoly commission dealt with PetroKazakhstan for several years, voiced a commonly held view when he said he expected that KazMunaiGaz would eventually acquire the refinery from the Chinese and Lukoil would eventually acquire the Turgai oil field, which produces about 35,000 barrels a day.
Jandosov and many Kazakhs have frequently asserted that Hurricane Hydricarbons, as PetroKazakhstan was first named, must have paid bribes to acquire Yuzhneftigaz, for $120 million in 1996.
"The price offered by the Chinese proves that the initial was too low and they were cheating the state," Jandosov said.
Terrance Powell, PetroKazakhstan's spokesman, said that at the time, the field was producing much less oil than now, that Kazakhstan was in a state of financial crisis and that the price was fair.
Jandosov agreed that PetroKazakhstan had suffered in the courts.
"They are vulnerable," he said.
Jandosov was referring to the fact that the company's assets were all in Kazakhstan and that Canada, which is home to about half of its shareholders, had little diplomatic clout with Kazakhstan.
Keith Bradsher reported from Hong Kong and Christopher Pala from Almaty, Kazakhstan.
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