KAZAKHSTAN: CANADIAN OIL COMPANY WEATHERS LEGAL

C O N F I D E N T I A L SECTION 01 OF 02 ASTANA 000090

SIPDIS

NOFORN
SIPDIS

DEPT FOR EB/ESC; SCA/CEN (O'MARA)

E.O. 12958: DECL: 10/12/2015
TAGS: ENRG EPET KZ CA
SUBJECT: KAZAKHSTAN: CANADIAN OIL COMPANY WEATHERS LEGAL
ASSAULT

REF: A. ALMATY 603


B. 05 ALMATY 3857

C. ALMATY 2301

Classified By: Charge d'Affaires Kevin Milas; Reasons 1.5(b) and (d).


1. (C) Summary: The Canada-based "NationsEnergy" oil
company, whose Kazakhstani subsidiary, "Karazhambasmunai JV"
(KBM),owns a 50,000 barrel per day oil field, recently won
an appeal in Kazakhstani court against an individual claiming
nearly 50% of KBM by virtue of a dispute with former
NationsEnergy shareholders. Nations Energy Vice President
Patrick O'Mara recently told Econoff that he believes the
claimant, Zoran Savicic, is cooperating with well-placed
Kazakhstanis in a plot to either win 50% of KBM in court, or,
failing that, to drive down NationsEnergy's price before an
acquisition bid. With a rumored asking price of $2 billion,
NationsEnergy is entertaining numerous potential buyers, both
Kazakhstani and international. End Summary.

Anatomy of the Legal Assault
--------------


2. (C) NationsEnergy won an August 19 decision in Mangistau
Oblast Appeals Court which reversed an April ruling, by a
Specialized Economic Court, granting Zoran Savicic, a Serbian
citizen, 17.9% of KBM. Savicic's claim arose out of a 1994
agreement with individuals who later became NationsEnergy
shareholders. Savicic's claim appears to have survived to
date against long odds. Court documents suggest that, not
only does Savicic appear not to have fulfilled his side of
the 1994 agreement, but he also managed to void a 1998
settlement agreement by arguing that he had been coerced into
signing. In 2006, Savicic managed to secure a default
judgment against the defendants in Nevada court, allegedly by
providing process servers with an incorrect address for the
principal defendant. Rather than seek collection of the
judgment in U.S. courts, however, Savicic chose to transfer
the case to Kazakhstan (convincing a Kazakhstani judge to
accept jurisdiction by switching his target from the
Nevada-registered NationsEnergy to KBM) -- where,
NationsEnergy lawyers maintain, he helped secure the
favorable April verdict by misrepresenting the significance
of the Nevada court's judgment, even after being enjoined
from doing so. Savicic's legal victories, however, came to a
halt in August in the Mangistau Court of Appeals.

Accusations of Kazakhstani Insider Involvement
-------------- -


3. (C) On September 16, O'Mara told Econoff that he is
convinced that a group of well-placed Kazakhstani insiders,
including Timur Kulibayev (the president's son-in-law),Askar
Balzhanov (General Director of "KazMunaiGaz (KMG) Exploration
and Production", Zhakyp Marabayev (Managing Director of KMG),
and Adilbek Dzhaksybekov (Head of the Presidential
Administration),were behind Savicic's assault on KBM in
Kazakhstani courts. O'Mara suspects that the idea to
transfer the case to Kazakhstani courts took form in 2004,
when rumors began to break that NationsEnergy was available
for sale (ref A). O'Mara surmises that the aim of the plot
was first and foremost to win 50% of KBM with the help of
corrupt judges and, failing that, to drive down
NationsEnergy's asking price for a potential acquisition bid.


CNPC Refuses to Cooperate with Plot
--------------


4. (C) O'Mara told Econoff that, in November 2005, in the
midst of NationsEnergy's negotiations to sell the company to
the Chinese National Petroleum Company (CNPC),CNPC officials
forwarded him text messages from Marabayev and Balzhanov
aimed at convincing the Chinese to hold-off buying
NationsEnergy (for a reported $2 billion),in order to give
Kulibayev's group time to "knock $700-$800" off the price
"with fines and legal actions." The Kazakhstanis would then
buy NationsEnergy and re-sell at least part of the company to
the Chinese. O'Mara also claimed that Kulibayev has a
history of dealing with Savicic (whom, he says, was a subject
of interest in the Serbian War Crimes Tribunals),having
partnered with the Serbian to profit from illegal sales of
oil under embargo of Saddam Hussein's regime.

Ace in the Hole: Threatening to Go Public
--------------

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5. (C) O'Mara credits NationsEnergy's success in the appeals
court both to the overwhelming weight of legal evidence in
the company's favor and to his own efforts to tacitly warn
the Kazakhstani insiders that he was aware of their actions
and would denounce them publicly if faced with losing a large
share of the company. (The case has thus far not entered the
Kazakhstani media. The threat of publicity, O'Mara believes,
is what will keep Savicic from appealing the August court
decision, though he has a year in which to do so.) O'Mara
told Econoff that he had communicated most of his suspicions
and warnings to Deputy Prime Minister Masimov -- who, O'Mara
recounted, eventually confirmed O'Mara's claims of insider
involvement (without naming names),and then professed to
have put an end to the plot. Smiling, O'Mara told Econoff
that, in what he termed "Kulibayev's revenge," the financial
police had raided NationsEnergy's offices on September 11,
and the Subsoil User's Inspection Office had come calling two
days later.

Suitors Still Flocking to Buy NationsEnergy
--------------


6. (C) Meanwhile, O'Mara said, potential buyers continued to
court NationsEnergy. Since November, he said, several groups
had shown up unannounced at NationsEnergy's Almaty offices,
some to bluff, others to threaten, and a few to make
legitimate offers. While the Chinese continued to make the
best offer, O'Mara said, he had the increasing feeling that
the GOK would prefer a different buyer. Masimov, he said,
was trying to set up a sale to Vladimir Kim of Kazakhmys (a
London-based copper mining company) -- but so far the offer
was too low. BankTuranAlem had made the best offer among
Kazakhstani buyers, O'Mara noted, while Occidental Petroleum
(a U.S.company) appeared to be putting together an attractive
offer in conjunction with a Dubai sheikh. Asked about news
reports of an offer by India's ONGC-Mittal Energy
Corporation, O'Mara waved it off, telling Econoff that, while
Kulibayev was pushing a deal with the Mittal group, ONGC "had
not given the slightest indication that they knew how to do
business."


7. (C) Comment: O'Mara's thesis -- that predatory buyers are
using Kazakhstan's legal system to drive down the purchase
price of an attractive oil and gas asset -- is a familiar
one. (See Ref B on PetroKazakhstan, and Ref C on Parker
Drilling, for recent cases which share this element in common
with the NationsEnergy case.) Although NationsEnergy has
managed so far to keep its legal problems out of the press,
it will be interesting to see if the company can succeed in
finalizing its sale prior to the expiration of Savicic's
year-long appeal period. While we cannot vouch for the
veracity of O'Mara's accusations -- and suspect that he would
be hard-pressed to offer any proof of his allegations -- we
view him as a generally credible individual. End Comment.
MILAS