KAZAKHSTAN: SALE OF NATIONS ENERGY -- TO BE OR NOT TO BE?

UNCLAS SECTION 01 OF 02 ASTANA 000927



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E.O. 12958: N/A

TAGS: ECON, EIND, ENRG, EPET, EFIN, KZ

SUBJECT: KAZAKHSTAN: SALE OF NATIONS ENERGY -- TO BE OR NOT TO BE?



REF: ASTANA 90



ASTANA 00000927 001.2 OF 002





1. (SBU) Summary: On October 25, Canadian-registered Nations Energy

officially announced its intention to sell the company's Kazakhstani

oil assets (Karazhanbasmunay) to the China International Trust and

Investment Corp (CITIC) for $1.91 billion. The announcement

triggered strong opposition, with Energy Minister Izmukhambetov and

Mazhilis deputies, among other, voicing concern that Chinese

companies owned too large a percentage of Kazakhstani oil production

base. Nations Energy's Vice-President O'Mara believes the deal will

go forward, however, with state-owned oil company KazMunayGaz (KMG)

possibly buying a minority share of his company. In recent days the

Government of Kazakhstan (GOK) tone has softened, suggesting that

the deal may yet go forward. End summary.



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Concern over the "Chinese Factor"

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2. (U) On October 25, Nations Energy announced the company's sale to

Hong-Kong based CITIC, ending a long courtship in which numerous

companies, both domestic and foreign approached the company with

offers (reftel). Shortly afterward, on November 1, a number of

deputies of the Mazhilis (lower house of parliament) expressed their

strong concern about Chinese expansion in the oil and gas sector of

the country. Mazhilis deputy Alikhan Baymenov addressed a special

request to the Prime Minister for information on the share of

domestic companies in the mineral sector. According to deputy

Valeriy Kotovich, "under our eyes great efforts are being made to

acquire (by China) a number of oil companies operating in

Kazakhstan. It is very persistent and undisguised." If China buys

these companies it will control over 28% of oil production in

Kazakhstan, deputies claimed.



3. (U) On November 8 during an Almaty round-table discussion

entitled "The Chinese Factor in the Kazakhstani Economy: Myths and

Reality," experts appealed not to exaggerate the scale of Chinese

economic expansion and recommended that the GOK define more clearly

its national interests. The director of the NGO "Risk Assessment

Group" Dossym Satpayev noted that the threat is caused not by

Chinese expansion but by corrupt local officials, who permit the

signing of contracts which are disadvantageous to Kazakhstan. To

avoid Chinese intrusion, opposition politician Oraz Zhandosov

recommended that the GOK transfer 50% of mineral sector to domestic

companies and divide the remaining percentage between Russia, China,

the U.S., and Europe.



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Parallels with PetroKazakhstan Deal

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4. (U) The concerns voiced over the Nations Energy sale echo the

public outcry over the 2005 deal in which the Chinese National

Petroleum Corporation (CNPC) beat out Russian rivals to acquire

PetroKazakhstan for $4.2 billion. In mid-November Energy Minister

Izmukhambetov said that Kazakhstan should take emergency measures to

halt the sale of Karazhanbasmunay to CITIC. "At first we should

introduce urgent measures to postpone the agreement, then review it

further," the Minister stated. In order to postpone the deal, the

Ministry offered to initiate amendments to legislation on subsurface

use and petroleum operations that would limit foreign investment in

oil and gas sector if such investments could harm the energy

security. (Note: In 2005, in response to the sale of

PetroKazakhstan to CNPC, the GOK rushed into law amendments which

gave the state a priority right to purchase shares of any

enterprises whose primary place of business in Kazakhstan. End

note.) The Minister announced that the GOK received the official

request for the purchase at the end of November. According to the

law, the request should be considered within 45 days.



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Nations Energy Exec Predicts

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5. (SBU) Patrick O'Mara, Vice-President of Nations Energy, told

Energy Officer on December 7 that it looked like the sale of Nations

Energy to CITIC would go through. However, he said, there was a



ASTANA 00000927 002.2 OF 002





possibility that KMG would exercise its pre-emptive right to buy

30-35% of Karazhanbasmunay. Post has heard from several sources

that local investors - including BankTuranAlem (BTA) - have also bid

to buy Nations Energy. One prominent local lawyer suggested that

the GOK was likely to let CITIC's bid expire, thus clearing the way

for BTA - or other local investor - to buy Nations Energy at a lower

price. According to O'Mara, BTA had sought financing for the deal

from Deutsche Bank. In reaction, O'Mara said, the Chinese

government told Deutsche Bank that its business in China would be in

jeopardy if the bank financed BTA. This was enough, O'Mara claimed,

to make Deutsche Bank back down.



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GOK Softens Reaction

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6. (U) On December 13, Minister Izmukhambetov appeared to change

course and signal Energy Ministry's approval of the deal. The

Chinese only owned 12% of Kazakhstani oil assets, he said,

clarifying the earlier full debate which had suggested 28% of

Chinese ownership. "China has an equal right along with Russia and

the U.S. to show its interest in our energy resources,"

Izmukhambetov concluded.



7. (SBU) Comment: The public debate surrounding this sale makes it

clear - if indeed, there were doubts about after the PetroKazakshtan

experience - that the GOK views the Chinese avidity for Kazakhstani

oil assets with great caution. At this point it looks like the deal

will go through - most likely in return for Chinese concessions in

some other area of importance to the Kazakhstanis. End comment.



MILAS