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China Oil Co. to Acquire PetroKazakhstan

Posted on: Monday, 22 August 2005, 12:00 CDT

BEIJING - China's biggest state-owned oil firm announced Monday that a major oil producer in neighboring Kazakhstan has accepted a $4.2 billion takeover - a victory in Beijing's campaign to secure foreign energy supplies for its booming economy.

The acquisition of PetroKazakhstan Inc., a Canada-based company, by China National Petroleum Corp. International Ltd., a wholly owned subsidiary of China National Petroleum Corp., comes just three weeks after state-controlled CNOOC Ltd. dropped its bid for U.S. producer Unocal Corp. following opposition from American critics.

The deal, which still requires the approval of PetroKazakhstan's shareholders, would be the biggest acquisition yet in a string of Chinese corporate takeovers overseas.

CNPC agreed to pay $55 per share - a 21 percent premium over PetroKazakhstan's closing stock price on Friday. Shares of PetroKazakhstan climbed $8.50, or 19 percent, to $53.90 on the New York Stock Exchange. The stock's strongest level of the day was $54.52, well above its previous 52-week high of $46.92.

The high price reflects China's desire both to secure energy and to cement ties with Central Asia, said Paul Sampson, senior correspondent for London-based Energy Intelligence Group, publisher of the industry newspaper Oil Daily.

"They see the need to tie up future energy supplies as a matter of national security, and so there is a certain logic behind this," Sampson said.

China is trying to increase its role in Central Asia in part because of unease at the presence of U.S. forces in the former Soviet region that borders Afghanistan.

Beijing is especially interested in Kazakhstan, which is expected to become one of the world's leading oil producers. The discovery of the huge Kashagan oil field on its Caspian Sea coast in 2000 prompted some in the industry to call it the "Kuwait of Central Asia."

Chinese President Hu Jintao visited Kazakhstan in July and signed an agreement with Kazakh President Nursultan Nazarbayev to develop a "strategic partnership."

The two governments already are partners in the Shanghai Cooperation Organization - a six-nation security group led by Beijing and Moscow that is meant to combat Islamic extremism in Central Asia.

Elsewhere, China has signed a multibillion-dollar series of deals to develop oil fields or to acquire oil and gas from countries as far-flung as Sudan, Venezuela and Australia.

The search for energy is playing out amid a broader effort by Chinese companies to establish a place on the global stage through acquisitions in industries ranging from computers to automakers.

The biggest Chinese foreign acquisition to date has been Lenovo Group's $1.75 billion purchase of IBM Corp.'s PC business earlier this year.

But that sum was dwarfed by the $18.5 billion that CNOOC offered for Unocal. CNOOC dropped its bid on Aug. 2 amid complaints that the purchase could threaten national security in the United States.

PetroKazakhstan is based in Calgary, Alberta, but has all of its production in Kazakhstan, where it says it has reserves of 550 million barrels. Kazakhstan exports about 800,000 barrels of oil a day.

Canada's government didn't perceive the deal as a security threat and is eager for more commercial deals with China, said Michael Buzzell, a spokesman for Natural Resources Canada, a federal agency. Canadian Prime Minister Paul Martin visited Beijing in January and signed an energy agreement with China to expand ties in the oil, gas and nuclear-energy industries.

"Canada has an open market for the production and sale of crude oil, and foreign investment in development of these resources is encouraged," Buzzell said. "Foreign investment is welcome on the condition that companies operate within our market-based framework."

CNPC already has a presence in the Central Asian nation, including a partnership with Kazakh state oil company KazMunaiGaz to build a $700 million pipeline to carry Kazakh oil to energy-hungry China.

Buying PetroKazakhstan will guarantee supplies to fill the pipeline and meet demand in China's poor, isolated west, which Beijing is eager to see develop economically, said Kuen-wook Paik, a researcher at Chatham House, a London think tank.

The pipeline is essential to a government oil strategy that calls for dividing China into regions, Paik said. He said the north and coastal areas are to be supplied by domestic oil fields or by tankers from abroad, while the west depends on Central Asia.

"This is not the first time that they've paid over the odds for something, but that's the way they operate," said Sampson. "As long as these big state companies like CNPC and CNOOC have large amounts of cash at their disposal, they'll continue to buy oil reserves across the world."

PetroKazakhstan has been involved in joint ventures in Kazakhstan since 1991 and bought a state-owned oil company, Yuzhneftegaz, in 1996 in the country's first major oil privatization.

PetroKazakhstan has recently had some high-profile troubles. In April, a ruling from Kazakh regulators forced the company to immediately stop flaring gas - a move that slashed second-quarter production by 30 percent, compared with a year earlier, to 106,000 barrels per day. The company also has been scrapping with Russian oil giant Lukoil over a joint venture and both sides have filed multimillion dollar lawsuits against each other.

The CNPC offer would pay PetroKazakhstan shareholders $54 in cash per share, plus one share valued at $1 in a new company that would pursue energy deals elsewhere in Central Asia, the Canadian firm said in a statement issued in London.

The agreement requires PetroKazakhstan to pay a breakup fee of $125 million if it accepts another offer, CNPC said. It also allows CNPC to match any higher offer.

Source: Associated Press/AP Online

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