20-10-05 Chinese oil company CNPC’s $ 4.2 bn takeover of independent oil producer PetroKazakhstan appears back on track, after CNPC agreed to sell a stake in the venture to Kazakhstan’s state energy company and to share ownership of the Shymkent oil refinery. The deal underlines the state’s determination to extend its role in the oil and gas sectors -- and the necessity, for companies operating in the country, to embrace this.
The China National Petroleum Corporation (CNPC), one of China’s state-owned oil companies, announced on October 17th that it had agreed to transfer a stake in PetroKazakhstan -- the Canadian-owned company it is buying for $ 4.2 bn -- to Kazakhstan’s national energy company, KazMunaiGaz. It seems, furthermore, that CNPC has agreed to cede to KazMunaiGaz 50 % of the Shymkent oil refinery -- one of only three refineries in the country -- as well as made a commitment on supplying crude to Shymkent.

Green light for CNPC?
This deal appears to clear the principal obstacle to CNPC completing its takeover of PetroKazakhstan. When the deal was announced in August, it was assumed that the Chinese company had the Kazakh government’s blessing to acquire PetroKazakhstan. Bilateral relations between the two governments are strong and underpinned by a range of common interests and perspectives, and the deal was made public soon after a high-level government meeting.
Furthermore, China is potentially an important customer for Kazakhstan’s oil and a pipeline currently being built between the two countries represents Kazakhstan’s biggest move to date in reducing its reliance on Russian export routes.

Uncertainty over the future of the deal was sparked in mid-September, however, by a call from Dariga Nazarbayeva, a Kazakh parliamentary deputy and the eldest daughter of the president, for the government to revoke the production licences of PetroKazakhstan's Kumkol Resources (Kumkol is PetroKazakhstan’s main oilfield).
At around the same time, parliament approved amendments to Kazakhstan's subsoil legislation giving the state pre-emption rights not only during asset sales -- as became law in 2004 -- but also during share sales. This prompted speculation that the state was seeking to secure a share in PetroKazakhstan for the national oil company, KazMunaiGaz. In particular, its interest was thought to centre on the Shymkent refinery, which -- given past policy in the refined products sector -- the government may be seeking to take over.

Leaning East
Although the details of the CNPC-KazMunaiGaz agreement are not public, they have been the subject of considerable speculation. According to the Wall Street Journal, the Kazakh oil company will pay $ 1.4 bn for a 33 % stake in PetroKazakhstan. A report had said earlier that the Kazakh government wanted up to 50 % of PetroKazakhstan, while the Chinese side were offering 30-33 %.
The Kazakh government’s preference for Russian or Asian investors, rather than Western ones, is not altered by the developments surrounding the PetroKazakhstan sale. This arises partly from political ties -- in particular, the congruence of Kazakh, Russian and Chinese security interests in Central Asia as well as a governmental preference for social stability over fully open societies and political systems -- but it also has economic and business elements. Russia and China are large markets for Kazakhstan and there is considerable realistic potential for further growth. In addition, Kazakhstan and China have common ground with regard to the business environment and the preferred model of state-business relations.

For the sake of the nation
The Kazakh government’s decision to muscle in on the PetroKazakhstan deal merely confirms the increasingly assertive approach of the state authorities towards the oil and gas sector. President Nursultan Nazarbayev’s government welcomed foreign investors in the 1990s with open arms and generous terms.
The recovery of oil prices after 1999 marked a turning point, however, because it strengthened thehand of the Kazakh authorities vis-à-vis foreign investors. Since then, there has been an effort on the part of the government to rewrite the terms of existing investments -- and to drive a harder bargain with new potential investors.

PetroKazakhstan’s experience in the country is illustrative. The company had found the environment increasingly difficult, as for several years the authorities have seemed determined to harass PetroKazakhstan through various methods. Local interests in southern Kazakhstan, in particular, have repeatedly attempted to drive the Canadian firm out of the country. In recent months the government demanded that PetroKazakhstan stop flaring gas, alleging environmental contraventions under a new law adopted in December 2004.
The result was to force the company to cut production by about one-third. In addition, in April 2005 the government launched court proceedings against two PetroKazakhstan executives, and in July a court fined the firm $ 55.4 mm for alleged monopolistic practices by its refined products distribution companies.

Squeeze at the margins
The chosen vehicle for greater state involvement in the oil and gas sector is KazMunaiGaz, which was formed in 2002 by merging the state oil and gas company with the pipeline monopoly. In reality, this amounted to the takeover of the former by the latter and it was intended to strengthen Mr Nazarbayev's control over the oil sector.
Nevertheless, the vast majority of Kazakhstan’s oil is produced by private companies and this is unlikely to change. Wholesale renationalisation of the oil sector is not on the government’s agenda, nor even (yet) a partial campaign along the lines of the Kremlin’s assault on Yukos -- an attack that set in train a process whereby the Russian state’s share of national oil output will rise to nearly 30 %. State-owned KazMunaiGaz pumps only 15 % of Kazakhstan’s oil, and this figure will not rise by much even if it gains 50 % of PetroKazakhstan.

While the international oil majors that pump most of Kazakhstan’s oil are not facing eviction, however, their situation in the country is becoming less comfortable as the elite becomes more assertive in pressing its demands. In late 2002, for instance, the government successfully forced the main foreign-dominated joint venture, TengizChevrOil (TCO), to alter its investment programme.
The PetroKazakhstan deal signals that any future asset sale is almost certain to be pre-empted by the state, and next time the sale price might be depressed by the prospect of government interference. In this sense, PetroKazakhstan’s Canadian owners -- despite their rough experiences in the country of late—might be considered fortunate.

The state’s expansion into oil and gas is not merely limited to current projects, however. The main thrust of the government’s effort to assert greater control is directed at new hydrocarbons projects. New laws on production-sharing agreements (PSAs) and subsoil use stipulate that KazMunaiGaz shall have mandatory participation of50 % in new projects.
The new laws also set onerous local content requirements for foreign investors, the terms of which are concluded in unpublished contracts. Although the formal goal of this is to develop domestic industry, in practice the local firms involved are usually well connected to the government -- suggesting that the content requirement is yet another symptom of creeping control over foreign investors.

Yet for as long as foreign companies are eager to tap Kazakhstan’s oil, meaning that any firm that quits the country will be replaced by another, the authorities will have the upper hand -- and private companies will have to play by the government’s rules.