US embassy cable - 05ALMATY3075

C O N F I D E N T I A L  ALMATY 003075 
 
SIPDIS 
 
 
DEPT FOR EB/ESC 
 EUR/SNEC (MANN) 
 EUR/CACEN (MUDGE) 
 
E.O. 12958: DECL: 08/21/2015 
TAGS: EPET, IN, KZ, CA, CH, ECONOMIC, Energy 
SUBJECT: PETROKAZAKHSTAN SOLD TO CHINESE CNPC SUBSIDIARY 
 
REF: ALMATY 1433 
 
Classified By: POEC CHIEF DEBORAH MENNUTI, REASONS 1.4(B) and (D) 
 
1.  (C) Summary:  Canadian oil company PetroKazakhstan (PK) 
announced its sale to PetroChina, a wholly-owned subsidiary 
of the China National Petroleum Company (CNPC), on August 22, 
for $4.18 billion.  Thomas Dvorak, president of one of two 
principal Kazakhstan-based PK operating companies, was 
optimistic that PK shareholders would approve the sale, while 
noting that a successful deal hinged on the yet-unknown 
Government of Kazakhstan (GOK) reaction.  A successful sale 
could bring relief to PK's troubles in the Kazakhstani 
courts, which include both anti-monopoly charges against the 
company and criminal charges against Dvorak and other senior 
executives. End Summary. 
 
Chinese to Pay a 24% Premium 
----------------------------------- 
 
2.  (U)  PK provided details of the sale in an August 22 news 
release, noting that the $4.18 billion offer constituted a 
bid of $55 per share, or a 24.4% premium over recent PK stock 
prices.  The transaction will be subject to the approval of 
two-thirds of PK's shareholders, and is expected to close in 
October 2005. 
 
Company President Upbeat About Sale 
----------------------------------- 
 
3. (C) Thomas Dvorak, president of Kumkol Resources, one of 
two principal PK operating companies, told Econoff that he 
was guardedly optimistic about the sale.  He anticipated that 
PK shareholders would approve the deal, noting that the 
"premium" to be paid by the Chinese was somewhat exaggerated 
due to the recent fall in PK share prices over recent PK 
legal troubles with the GOK.  Dvorak resisted suggesting that 
the Chinese had overpaid for PK, noting that CNPC was 
acquiring an intact company, rather than pieces of one. 
Furthermore, PK's oil field in the Turgai basin was of 
particular value to the Chinese, as a source of oil for 
Atasu-Alashankou pipeline (reftel). 
 
4. (C) Less clear to Dvorak was whether the GOK supported the 
sale -- something which would be known from the GOK's public 
statements in the coming days.  Nor did Dvorak exclude the 
possibility that the company would be split up, with the 
Turgai assets going to Lukoil, PK's refinery to KMG, and 
Kumkol remaining with the Chinese.  (Note: Respected trade 
journal Argus Energy Consultants reported such a deal two 
weeks ago, and one PK employee thought it likely.  End Note.) 
 
 
5. (C) Dvorak added that a successful sale might cause his 
legal problems to abate. GOK opposition, on the other hand, 
could make his problems worse.  (Note: in 2003 the 
Kazakhstani Agency for Regulation of Monopolies charged seven 
PK distribution companies with colluding to raise oil product 
prices, and in April 2004 criminal charges were brought 
against Dvorak and PK VP and CFO Clayton Clift for alleged 
violations of the antimonopoly law.  In June 2005, another 
executive, Daniel Herrmann, was criminally charged with 
"illegal entrepreneurship" for allegedly violating the terms 
of a PK drilling permit.  Details on Herrman's trial septel. 
PK has also been hard-hit by GOK enforcement of anti-flaring 
regulations, suffering a recent drop in production of nearly 
20 percent.  End Note.) 
 
6. (C) If the GOK does not approve of the deal, it might 
invoke the December 2004 preemption law to block the sale. 
While PK's lawyers -- and many others -- believe the 
preemption law would not apply, MEMR and KMG have stated 
privately that it does and could be enacted in any deal 
wherein a controlling interest is purchased on the open 
market in a third country. 
 
7. (C) Comment: The sale of PK to the Chinese makes sense on 
a number of levels.  First, the GOK wants to keep China 
happy, but also wants to keep them from offshore blocks, like 
Kashagan.  A KMG source told us that the Chinese had demanded 
an offshore bloc in return for supporting a GOK scheme to 
build a natural gas pipeline across Kazakhstan from West to 
East.  While not offshore, PK may just be enough to keep the 
 
Chinese happy and secure support for the gas pipeline. 
Second, as Dvorak noted, PK's Kumkol fields are ideally 
located to supply the Chinese pipeline.  The wild-card here 
is Russia.  The GOK has supported Lukoil in the Russian 
company's dirty fight with PK over the Turgai joint-venture. 
If the PK-CNPC deal was done without the GOK's blessing and 
turns out to harm Lukoil's interests, expect PK's travails to 
continue.  If, on the other hand, the GOK  worked out a deal 
with the Chinese ahead of time, this deal should stick. 
ASQUINO 
 
 
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