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    Greater China
     Aug 24, 2005
Kazakh oil coup for China, India cries foul

BEIJING - China National Petroleum Corporation (CNPC), China's largest oil and gas producer, reached an agreement with PetroKazakhstan Inc on Monday to buy the Canadian-registered company for US$4.18 billion. If the deal closes as expected in October, it would become the largest-ever overseas acquisition for a Chinese firm, breaking the record set when Lenovo acquired IBM's PC unit.

"CNPC, through its wholly owned subsidiary China National Petroleum Corporation International (CNPCI), has participated in acquiring PetroKazakhstan (PK)," the Beijing-based oil giant said in a statement Monday. CNPC, the state-owned parent of Hong Kong-listed PetroChina, and PetroKazakhstan, formerly known as Hurricane Hydrocarbons, have entered into an "arrangement agreement" whereby the Chinese oil firm will pay US$55 a share, or 21% more than its closing share price on Friday, PetroKazakhstan said in a statement.

India's Oil & Natural Gas Corporation (ONGC), in a combine with the steelmaking Mittal group called ONGC Mittal Energy (OME), had also bid for the company. The board of directors of PetroKazakhstan, which is Kazakhstan's third-largest oil producer, recommended its shareholders accept CNPC's offer and agreed on a $125 million break-up fee. The deal is expected to close at a shareholders' meeting in October, said the Calgary-based oil company, which produces 7 million tons of crude oil annually. CNPC is considering a proposal in which PetroKazakhstan shareholders could get discounted shares in a spin-off of its newly formed venture with Hong Kong-listed PetroChina, Newco, PetroKazakhstan said.

The deal, China's largest ever overseas acquisition, follows three weeks after US political opposition scuttled an $18.5 billion cash bid for Unocal by the Beijing-based China National Offshore Oil Corp Limited (CNOOC). It marks a victory for China in its rivalry with India, another of the world's most populous and energy-hungry nations, for overseas oil and gas reserves. Industry analysts attributed the winning of CNPC's bid for PetroKazakhstan to China's solid relationship with Kazakhstan, in contrast to mounting concerns in the US that China's growing economy and energy demand may threaten its national security.

"We have been involved in talks with PetroKazakhstan about the purchase for a long time, and gradually worked out [this] successful bid, [unlike] CNOOC's sudden intrusion into the highly China-sensitive US energy market," said Han Xuegong, a veteran senior analyst with CNPC, who once trained those in the senior ranks of Kazakhstan's oil companies. "Kazakhstan will also benefit from its partnership with CNPC, through improvements in oil and gas exploitation technology and supply to the local market," Han added.

CNPC started its overseas expansion activities more than 10 years ago, and Kazakhstan is the oil giant's second overseas market following Sudan. China and Kazakhstan are developing a 3,000-kilometer pipeline costing $3 billion to pump crude oil to China across the Central Asian state, with the first phase of the project to be completed by the end of this year. Landlocked Kazakhstan, which plans to triple oil output by 2015, is seeking new ways to transport oil to international markets.

CNPC produced 15.63 million tons of crude oil and 1.9 billion cubic meters of natural gas from its overseas fields in the first half of this year, according to a CNPC official who refused to be identified. The parent company made a net profit of $220 million in the six-month period from its overseas projects, selling $1.47 billion worth of oil and gas products.

Some Indian observers cry foul
The CNPC bid was met with dismay in the Indian press August 23, with the Times of India complaining that "[PetroKazakhstan] played foul to put ONGC-Mittal Energy out of the race". OME had been negotiating with PetroKazakhstan for months and its initial bid was higher than CNPC's. Most of the complaints centered on the allegation that OME was never allowed the opportunity to match a late increase in CNPC's bid. The New Delhi-based Financial Express newspaper said the original bids for PetroKazakhstan were submitted on August 15; at this time, the CNPC bid was lower than the OME bid. But while CNPC revised its bid to $4.18 billion, the ONGC-Mittal combine was neither given a chance to match the bid, nor was it allowed to re-bid.

OME's original offer was around $3.9 billion while CNPC's initial bid was $3.6 billion, according to the Times of India. On August 19, OME had told PetroKazakhstan's merchant bankers, Goldman Sachs, that it was willing to increase its bid if "certain information" was provided. It is believed that this information concerned equity holdings by "other partners" of PK, which has been having legal problems with some of its equity partners. PK asked OME to submit details about the queries to the company by Monday, August 22; but even as the Indian consortium was assembling the required information, PK, acting preemptively, accepted the CNPC offer, announcing its decision at 7:30 AM London time on Monday, before the deadline it had given OME.

Sources told the Financial Express that the Chinese were allowed to raise their original bid price because they were ready to proceed without any conditions, whereas the OME bid was conditional. It is also believed that the CNPC offer included a large cash component. CNPC's offer of $55 a share represented a 21.1% premium over the stock's closing price at the New York Stock Exchange on Friday. In effect, therefore, CNPC offered to overpay for PK, partly in cash, without asking any awkward questions; and PK preferred this to the Indian bid.

OME officials seemed baffled Monday by the sudden turn of events. A senior ONGC official said: "We have no explanation as to why we were not given a chance to re-bid or even submit the clarifications sought from us." And ONGC chairman Subir Raha, while admitting that "it seems we have lost by a narrow margin", added, "if PetroKazakhstan asks us for a counterbid, we will do it. Our merchant bankers are already working on it."

Has the fat lady sung?
As of Tuesday, it did not appear certain that CNPC's bid would ultimately succeed. For one thing, the Kazakh government has the legal right to preempt the sale of any oil property in the country, which means the deal will require approval in Astana. At an August 22 conference call where PK management took questions from investors and journalists, the approval issue was the basis of many questions. But PK CEO Bernard Isautier maintained that the law allows the government to preempt asset sales within the country, but does not give it the right to block the sale of PK itself, saying: "We are not speaking about a sale of assets where preemptive rights would apply ... we don't expect any problem in that regard."

There appeared to be at least a glimmer of hope for OME. Due to the strained relations of PK management with Kazakh regulators and the "goodwill" OME partner Mittal enjoys in Astana (according to the Times of India), the Kazakh government has tended to be supportive of the OME offer. The final decision will be made at a PK shareholders' meeting in October, the date of which has not yet been announced.

(Asia Pulse/XIC/news services)

India, China: comrades in oil (Aug 19, '05)

CNOOC withdraws its bid for Unocal (Aug 4, '05)

Rocky waters for China's US acquisitions (Jul 21, '05)

Unocal bid highlights globalist-nationalist conflict (Jul 20, '05)

In pursuit of the snow leopard (Nov 8, '03)

China's hunger for Central Asian energy (Jun 11, '03)


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