Kazakhstan looks in, out and shakes it all about

By bne IntelliNews September 5, 2007

Nicholas Watson in Prague -

Even as the Kazakh state oil and gas firm KazMunaiGaz becomes more acquisitive abroad, the government in Astana is acting in an increasingly protectionist way at home.

On August 27, Romanian businessman Dinu Patriciu announced he had agreed to sell a 75% stake in The Rompetrol Group to KazMunaiGaz. The deal came as a surprise to the market and is something of a coup for the Kazakh firm. Though Patriciu, who will remain as CEO of the Dutch-based company, refused to disclose details of the deal, he provided tantalizing hints of how his firm ended up in Kazakh hands.

On price, Patriciu said the enterprise value - the measure of the value of a company's business rather than the value of the company itself - of Rompetrol stands at $3.6bn, which would imply that KazMunaiGaz paid about $2.7bn in cash for its 75% stake. And seven months ago, he said nine oil companies and investment funds entered into a bidding process that was organized by the investment bank Morgan Stanley. Quoting Sun Tzu's "The Art of War", Patriciu told reporters that, "a war is won by those knowing how to defend themselves, not by those knowing how to attack."

What analysts took this to mean was that Russian companies were behind some of those investment funds, which were said by Patriciu to have made better financial offers than the one provided by KazMunaiGaz. Also, Gazprom has reportedly been wooing Rompetrol since October last year. "However, I was not interested in providing Rompetrol with liquid money but liquid oil, and building the company as an alternative to Russia's Gazprom," Patriciu said.

Though a combined KazMunaiGaz and Rompetrol will be a far cry from the Russian gas giant, it will give a firm with an annual refining capacity of 4m tonnes access to large oil and gas reserves which, crucially, aren't located on Russian soil. This is sure to delight the European Commission, which must approve the acquisition, as it's desperately trying to diversify Europe's energy supplies away from the current heavy reliance on Russian energy. The EU gets 30% of its oil imports and almost half of its imported gas from Russia.

"The arrival of KazMunaiGaz is likely to strengthen Rompetrol Group's business profile, for example through secured long-term access to crude oil supplies from Kazakhstan," says Arkadiusz Wicik of Fitch Ratings, which put the Romanian company's rating on 'positive watch' after the deal was announced.

The snaring of Rompetrol is part of a much large acquisition strategy of KazMunaiGaz, which is trying to turn itself into a national champion along the lines of those in neighbouring Russia. "Our ambitions are quite big, we're aiming to become a national champion," CEO chief executive Askar Balzhanov told Thomson Financial News in July.

He said KazMunaiGaz has built up a cash pile of $7bn to finance this acquisition spree, which until the KazMunaiGaz deal had centred on home soil.

Chinese whispers

In April, KazMunaiGaz paid $969m for a 50% stake in compatriot oil firm Kazgermunai, making it the second largest producer in Kazakhstan. The firm also intends to exercise an option to acquire 50% of CITIC Canada Petroleum, formerly Nations Energy, and is in the process of acquiring 33% of Canada-based PetroKazakhstan. These acquisitions, once completed, will boost the company's output by 50% and reserves by 40%, the firm says. Production in 2006 was 9.3m tonnes, and proved and probable reserves reached 1.5bln barrels at end-2006.

All these deals reflect what observers see is a growing tinge of nationalism in Kazakhstan over its energy assets, especially when it comes to the Chinese. When President Nursultan Nazarbayev gave his blessing to the purchase of Petrokazakhstan, a Calgary, Canada-based company then producing 150,000 barrels per day (b/d) in Kazakhstan, by China National Petroleum Company (CNPC) for $4.18bn in the summer of 2005, it prompted some alarmist noises from politicians.

Valery Kotovich, a member of Nazarbayev's Nur Otan party, caused a stir in parliament last year by claiming that China's aggressive purchasing policy posed a threat to Kazakh independence. "If they buy Nations Energy, they will control 28% of our production; and if they buy MangistauMunaiGaz, it will be 40%," he said in a speech that drew much comment in the local press. MangistauMunaiGaz is another domestic producer of about 115,000 b/d that has indicated it's looking for a buyer, preferably from China, since the Chinese have shown they are ready to pay a premium.

Analysts say that existing production sharing agreements (PSAs) are popularly viewed as highly disadvantageous for Kazakhstan and there are worries that the populist opposition, embodied in the Nationwide Social-Democratic Party (NSDP), could use them as a stick with which to beat foreign interests. Blunting this likelihood is that neither the NSDP nor the other opposition party, Ak Zhol, managed to pass the necessary 7% threshold in the August elections to gain seats in parliament. Instead, Narzarbayev's Nur Otan party "won" 88% of the vote, creating a one-party lower chamber, the Majilis.

However, it's not just the opposition that is causing concern. The government is embroiled in a spat with Italian major Eni over its operatorship of the giant offshore oilfield Kashagan, which with the August 22 claims that Eni has committed environmental violations was sounding eerily reminiscent of the Kremlin's hounding of Royal Dutch Shell into giving up control of the Sahkalin-2 project.

On August 21, Environmental Protection Minister Nurlan Isakov said his ministry had gathered evidence of environmental violations by the AgipKCO consortium developing the oilfield and a possible link between the consortium's operations and the deaths earlier this year of hundreds of Caspian seals. A week later, the government-ordered halt to work at the field for three months, followed by news that the Finance Ministry has launched a criminal investigation into a subsidiary of AgipKCO for alleged customs violations.

The moves by the Kazakh government undoubtedly reflect genuine irritation with Eni over the delays in getting the world's biggest undeveloped oilfield into production. In June, Eni asked the Kazakh authorities to change the terms of the project development, seeking an increase in the budget and a postponement in the deadline for starting commercial production.

Kashagan was originally expected to come on stream in 2005, but has been postponed a number of times with Eni's latest estimate now a late-2010 start-up. And official cost estimates for full field development are now put at $3bn, although unofficial estimates suggest the final figure could exceed $5bn. Kashagan is estimated to hold up to 13bn barrels of recoverable oil and is projected to reach a production peak of 1.5m b/d.

While the Kazakh authorities have threatened to strip Eni of its operatorship of the field, analysts says it's more likely the government is manoeuvring to take a larger slice of the consortium. The shareholders in the Kashagan project are operator Eni, Total, Shell and Exxon Mobil with 18.519% each; ConocoPhillips with 9.259%; and Japan's Inpex and the Kazakhstan state with 8.333% each. According to reports, the Kazakh state wants to raise its stake in the project to 40% - which as matters stand looks entirely possible. "The suspension of work at Kashagan, together with the launch of the criminal probe, has hit Eni like a one-two punch, leaving the Italian company reeling and on the defensive," says Andrew Neff, an analyst with Global Insight.

Ariel Cohen, senior fellow for International Energy Security at Washington's Heritage Foundation, cautions against seeing the Kashagan dispute as a sign that Kazakhstan is heading down the same path as Russia of harassing non-state energy firms and expropriating their assets. "I believe that Kazakhstan remains more liberal in its business approach than Russia," says Cohen.

He says contrary to what's happening in Russia, where competing Siloviki factions (Kremlin groups with ties to the security services) are making a lot of the decisions on what assets to seize and to whom to sell them on to, in Kazakhstan it's a more orderly and pro-business environment. "Once you cut deals with the people in Kazakhstan who are the decision-makers, you're pretty much on the right track," Cohen says.

However, Cohen warns that the moves by the Kazakh government reflect a wider theme from Venezuela to Vladivostok, where governments see energy and natural resources "as the proverbial goose that lays the golden egg and they want to grab the goose."

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Kazakhstan looks in, out and shakes it all about

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