Nations sale marks the end of an era
Saidenov: Kazakhstan faces up to the down side of rapid growth
WHEN CITIC GROUP snapped up Nations Energy of Kazakhstan for $1.9 billion in December 2006, the deal was both a coup for the Chinese conglomerate and an indication of the increasingly frenzied attempts of foreign companies to grab assets in leading energy-producing countries.
Not only had resources-to-banking-to-construction conglomerate Citic beaten all of China’s leading oil and gas majors to land the Canadian-owned oil producer – in itself an eyebrow-raising event, but more intriguingly, the Beijing-based company’s all-cash bid was not the highest offer. Nations Energy’s shareholders were approached with several higher tenders but chose Citic because it was able to stump up the cash in a matter of days.
Citic’s competitors in the chase for Nations Energy reads like a who’s who of the world’s up-and-coming oil and gas players. Press reports at the time noted the number of visits made to the Kazakh capital, Astana, by senior officials at China National Petroleum Corporation (CNPC) and China National Offshore Oil Corporation (CNOOC). But in reality a host of foreign and domestic energy- and non-energy-related interests were lining up to buy the Canadian firm, stimulated by high oil prices, dwindling global energy reserves and the availability of an efficiently run private corporation headquartered in a leading energy-producing nation. Nations Energy, now renamed Citic Canada Petroleum, pumps out 45,000 barrels of oil a day at its Karazhanbas oil field in the Caspian Sea, which boasts proven oil reserves well in excess of 340 million barrels.
Three Russian energy majors – Gazprom, LukOil and Rosneft – were interested in Nations Energy, as were energy groups with close links to Dubai’s ruling Al Maktoum family. A trio of Kazakh interests, including Bank TuranAlem (BTA), the leading state-run oil and gas firm KazMunaiGas (KMG), and a local billionaire entrepreneur with close links to the energy ministry, also threw their hats into the ring. Two US energy firms, Chevron and Occidental Petroleum, also took an interest in the bidding process.
Hurried bids
Aware that the Kazakh authorities were keen to keep energy assets in local hands, in 2006 KMG hurriedly attempted to put together a bid that ultimately failed. Then BTA attempted a leveraged buyout – the first such major deal the bank had ever attempted. That also floundered, leaving the field open for foreign bidders.
In August 2006, Citic offered $1.9 billion for the Canadian firm, with the Chinese firm rushing to announce via its domestic news agency, Xinhua, that the deal had been completed.
Yet Citic was not the highest bidder – seven other energy interests tendered bids ranging from $1.98 billion to $2.5 billion, with the winning offer not being accepted, either by Citic’s political overseers in Beijing, by Kazakhstan’s energy ministry, or by Nations’ shareholders, until the last minute.
Surprise, if not astonishment, greeted Citic’s success. After all, here is a company with impeccable political connections thanks to its founder, Rong Yiren, one of China’s richest men before his death in 2005, yet with no interests in the energy sector. And it beat mainland oil and gas firms CNPC, Sinopec, PetroChina and CNOOC – four huge corporations that were in theory far better placed to benefit, financially and strategically, from a major oil reserve based just 400km from China’s western border. The lobbying between the five was fierce, says an investment banker close to the deal – CNPC was the first to bid; CNOOC was the front-runner for a long while; but after Peter Kwok Viem, the chairman of subsidiary Citic Resources showed up in late 2005, the tide moved in Citic’s direction. Beijing didn’t stand in the way of often nasty jostling between its leading energy firms but it let it be known via scattered media reports that Citic was its favoured bidder.
Why didn’t Beijing back one of its own leading energy firms? An oil and gas expert based in Beijing says Citic won precisely because it wasn’t just a giant oil and gas firm. CNPC is funding a $750 million oil pipeline from Atasu in Kazakhstan to China’s western frontier but Beijing oil majors, much to their chagrin, aren’t in the group that will profit from the big Kashagan oil field in western Kazakhstan. Citic, the expert says, is set to benefit from the renovation of Kazakhstan’s decaying infrastructure – over the next several decades the Chinese firm will be instrumental in building airports, hotels, roads, railway lines, ports, new cities, entire logistics services – everything Kazakhstan needs in order to ensure that its vast oil, gas and mineral resources are efficiently converted into greater wealth.
But this is just the first step along an uncertain, badly signposted road for Citic in Kazakhstan. First, it remains a foreign company in a country increasingly suspicious of foreigners operating in its energy sector. Second, rules in Kazakhstan can change overnight. "The government is now giving notice that it intends to defend national interests vigorously, even to the extent of changing contract conditions," says Irina Denisova in the March 2007 edition of the Russia- and central Asia-focused oil newsletter Caspian Investor. The appointment of new Kazakhstan premier Karim Masimov (the first fluent Chinese speaker to hold the post) in January 2007 presaged a detailed investigation of tax payments by oil and gas firms. "Most likely in 2007," adds Denisova, "subsoil users are going to receive an increase in tax claims from the state, lawsuits and other legal proceedings."
Third, and most important, it isn’t yet determined how much of Nations Energy’s assets will end up in the hands of the Chinese conglomerate.
Under Article 71 of Kazakhstan’s Subsoil Law, the state has pre-emption rights over the sale of any Kazakh oil, gas or mineral interests. Even if a contract that transfers domestic energy assets to a foreign interest is approved – as was the case with Citic and Nations Energy – Kazakhstan’s oil and gas firm KMG has the right to buy back up to 50% of the assets at the price booked during the sale. Thus, while Citic paid $1.9 billion for Nations Energy last year, KMG on February 1 said it would buy back 50% of Citic’s new assets in either the second or third quarters of 2007 for $955 million. The deal heavily favours KMG, which is drawing on a $805 million loan offered by Citic itself to buy back the assets. In a statement, KMG said the facility was "secured by Citic with a maturity of up to 10 years on a non-recourse basis".