IMPLICATIONS OF CHINA’S TAKEOVER OF PETROKAZAKHSZTAN

The state-owned China National Petroleum Corporation’s (CNPC) more-than-friendly takeover of the PetroKazakhstan company would, if consummated, signify yet another setback to U.S. and European energy interests in Central Asia. The deal, first announced on August 22, would mark a setback of a novel type.

Until now, the United States and the European Union have seemed resigned to Russia’s transit monopoly on Central Asian oil and gas supplies to Western countries. With all the long-term political risks involved in that situation, those supplies are at least reaching European and world markets on schedule.

However, China’s acquisition of PetroKazakhstan would establish a new model, whereby energy supplies do not reach international markets, but instead are pre-committed exclusively to a single destination. In this case, that destination is an authoritarian great power with a state-controlled economy and wide-ranging geopolitical ambitions.

Although treated by the media generally as a business-as-usual corporate takeover — and, in the process, a truly spectacular stock-market event — the CNPC-PetroKazakhstan deal only became possible because one of the parties is a government with discretionary control over the national economy and the cash it generates.

CNPC is blatantly overpaying in order to acquire PetroKazakhstan. It has agreed to pay $4.18 billion, or $55 per share, which is 21% more than the stock-market price for PetroKazakhstan’s shares one day prior to the CNPC-PetroKazakhstan announcement. Thus, the deal does not reflect, but rather distorts, the free market. The Chinese state is able to underwrite such overpayments thanks largely to profits it extracts from underpaid labor in the national economy.

Such offers by Chinese, Russian, or other non-market players seem likely to recur elsewhere amid an intensifying global competition for access to oil reserves. Offers of this type might tempt the boards and shareholders of many a private energy company. Consummation of such deals can also turn a few CEOs into stock-market heroes in the short term, with little thought about the strategic consequences. PetroKazakhstan’s board accepted the Chinese takeover bid soon after the American company Unocal narrowly averted such a fate. One lesson is that physical access to energy reserves cannot be left to the discretion of “market forces” when non-market players manipulate the market in overbidding for those reserves.

PetroKazakhstan, based in Calgary, Alberta, Canada, and run from London, fully owns the Kumkol South oilfield and holds 50% stakes in Kumkol North and the KazGermunai fields, all situated in the South Turgai basin in south-central Kazakhstan. Russia’s Lukoil holds the other 50% in Kumkol North, and German interests are minority shareholders in KazGermunai. PetroKazakhstan also controls the Shymkent refinery in the far south of Kazakhstan. The company’s fields produced 151,000 barrels of oil per day in 2004, equal to 12% of the total oil output in Kazakhstan. PetroKazakhstan owns proven and probable reserves of 550 million tons of oil equivalent in the South Turgai basin, and it advertises a considerable potential for further exploration there.

CNPC is also involved in the Aktobe extraction project onshore in northwestern Kazakhstan. This operation produced 140,000 barrels per day in 2004 — or nearly 11% of the total oil output in the country — and is scheduled to be linked to western China by pipeline. CNPC intends to complete a pipeline link from the PetroKazakhstan fields to that mainline leading to China.

The government and parliament of Kazakhstan may yet consider blocking the sale of PetroKazakhstan to CNPC. Under Kazakhstan’s law, the state has a right to preempt the sale of any oil property on the country’s territory. A precedent exists to the exercise of that preemption right, and it relates specifically to China. In 2003, Kazakhstan blocked the Chinese state-owned company Sinopec’s bid to acquire a stake in the super-giant Kashagan oilfield on the Caspian continental shelf. Kazakhstan’s KazMunaiGaz company preempted Sinopec and acquired that stake.

(Bloomberg, Wall Street Journal, Financial Times, August 23-25; Asia Times, August 25; petrokazakhstan.com; see EDM, August 16, 17)