PETROKAZAKSTAN FOLLOW-UP

C O N F I D E N T I A L ALMATY 003143

SIPDIS


DEPT FOR EB/ESC; EUR/SNEC (MANN); EUR/CACEN (MUDGE)

E.O. 12958: DECL: 08/25/2015
TAGS: EPET CA CH IN KZ ECONOMIC
SUBJECT: PETROKAZAKSTAN FOLLOW-UP

REF: A. ALMATY 3075


B. 03 ALMATY 2522

Classified By: CHARGE MARK ASQUINO, REASONS 1.4(B) and (D)


1. (C) Summary: PetroKazakhstan (PK) officials expect to
finalize the company's sale (ref A) to "PetroChina" (a CNPC
subsidiary) next week, and a company vice-president
discounted press rumors that India's Oil and Natural Gas
Corporation (ONGC) might attempt to top PetroChina's bid. A
well-placed employee of a SINOPEC (Chinese Petroleum and
Chemical Corporation) subsidiary, however, revealed that
SIPC, a SINOPEC subsidiary, is a secret CNPC partner in the
PetroChina joint-venture. The oil community consensus here
is that the Chinese paid a premium for PK. The proximity of
PK's fields to the Chinese pipeline, along with the rumor of
significant unbooked PK assets, reduce the perceived
magnitude of that premium. The Government of Kazakhstan
(GOK) has yet to officially acknowledge the sale, but
insiders now assume that CNPC had the GOK's blessing prior to
public announcement of the deal. End Summary.

Ownership Surprise
--------------


2. (C) In a August 25 conversation with Emboffs, PK Vice
President Rob Goldsmith dismissed press reports that India's
ONGC was likely to top CNPC's bid. ONGC had not approached
PK about such a bid, Goldsmith noted, and added that it made
neither economic nor political sense for the two companies to
compete over PK: the proximity of PK's Turgai fields in
Eastern Kazakhstan to the Chinese pipeline made the company
worth "at least seven dollars a share more" to CNPC than to
ONGC, which would face higher transportation costs to bring
Turgai oil to market. Further, Goldsmith doubted that India
would undermine a recent energy cooperation agreement with
China in order to secure PK assets.


3. (C) On August 26, an expat employee of the First
International Oil Corporation, Ltd. (FIUC) -- itself a
subsidiary of SINOPEC -- told Emboffs that the PK ownership
surprise would come from a different direction: SIPC, a
subsidiary of SINOPEC, was in fact CNPC's secret
joint-venture partner in the buying "PetroChina" entity.
Asked why SINOPEC's role in the deal was being kept secret,
the FIUC employee speculated that the Chinese did not want
this deal associated with SIPC/CNPC's failed attempt to buy
into the Kashagan consortium (ref B).

Valuation: Paying a Premium or Unbooked Reserves?
-------------- --------------


4. (C) The general consensus here is that CNPC overpaid for
PK. Conoco-Phillips Country Director Hakim Janah called the
$4.18 billion bid "crazy," calculating that once fair-value
for PK's Shymkent refinery ($300 million in his estimation)
was factored out, the Chinese had paid nearly $8 per barrel
for PK's proven and probable reserves (estimated at
500,000,000 barrels),compared to an industry norm of $4-5 a
barrel. Goldsmith seemed to acknowledge that the Chinese had
paid a premium, while suggesting that PK's "exploration"
activities also added value to the company. Our FIUC source
reinforced the point, which we have heard elsewhere,
suggesting that PK had recently made some significant
discoveries which had not yet been booked as reserves.


Kazakhstani "Yukos"
--------------


5. (C) To date, the GOK has not commented officially on the
sale. When the Charge asked the Canadian Ambassador if she
thought the GOK had blessed the deal, she paused before
giving a noncommittal answer. Nevertheless, the official
daily "Kazakstanskaya Pravda," published two glowing
articles about an ongoing CNPC venture here, CNPC-AKTOBE, on
August 23 and August 25. In one piece, the CNPC-AKTOBE
Chinese national director pledged to go beyond GOK requests
for discounted diesel during the harvest season -- a cause de
guerre for PetroKazakhstan and flashpoint with the
government. A Russian internet trade journal, "RusEnergy.Com"
dubbed the sale "Turgaiskii Yukos," after the basin where
PetroKazakhstan has its fields. A Kazakhstani-based
electronic media source, "Kursiv," forecast a battle with the
GOK since the state producer KazMunaiGaz lost out. Our

sources, including the FIUC employee, hint at CNPC giving up
the Shymkent refinery to KMG to placate the GOK.


6. (C) Comment: It appears that the GOK is on-board with
this deal. If so, the question becomes: what did CNPC give
up to gain the GOK green light? Contacts tell us the
Shymkent refinery is one possibility. That leaves the
Russians to placate. They may, however, have been left out
of this deal, with a GOK promise to protect the Chinese from
the kind of one-sided Kazakhstani justice with which Lukoil
helped bring down PK. If the GOK's guarantee is good, a
CNPC-owned PK has little to fear from Lukoil in Kazakhstani
courts. Nevertheless, little can be know for certain until
we get a public GOK statement. End Comment.
ASQUINO


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