KAZAKHSTAN: CHINA INVESTS ANOTHER $1 BILLION IN

UNCLAS SECTION 01 OF 02 ASTANA 001775 SENSITIVE SIPDIS STATE FOR SCA/CEN, EEB/ESC STATE PLEASE PASS TO USTDA E.O. 12958: N/A TAGS: PGOV PREL ECON EPET EINV KZ SUBJECT: KAZAKHSTAN: CHINA INVESTS ANOTHER $1 BILLION IN KAZAKHSTAN'S OIL PRODUCTION REF: (A) ASTANA 0678 (B) ASTANA 1035 (C) ASTANA 1445 ASTANA 00001775 001.3 OF 002 ¶1. (U) Sensitive but unclassified. Not for public Internet. ¶2. (U) SUMMARY: On September 30, the China Investment Corporation (CIC),China's sovereign wealth fund, announced that it had purchased an 11% stake in KazMunaiGas Exploration and Production (KMG EP),the operating branch of Kazakhstan's national oil company. CIC paid $939 million for the stake by purchasing global depositary receipts listed on the London Stock Exchange. END SUMMARY. PART OF A LARGER STRATEGIC PLAN ¶3. (U) According to press reports, on July 14, CIC began to purchase shares of KMG EP and completed all of the necessary registration procedures on September 30. China's share of Kazakhstani oil production will reach 22% by the end of this year when China National Petroleum Corporation (CNPC) should complete its acquisition of a 50% stake in MangistauMunaiGas, Kazakhstan's fourth-largest oil producer at 100,000 barrels per day (reftel A). KMG EP KEY FACTS ¶4. (U) In 2008, KMG EP produced 11.95 million tons of crude oil (an average of 240,000 barrels per day). The company's total volume of proved and probable reserves is 241 million tons (1.8 billion bbl). KMG EP's net cash, cash equivalents, and financial assets as of June 30 amounted to 603.8 billion tenge (approximately $4 billion), compared to 534.5 billion tenge ($4.43 billion) on December 31, ¶2008. KMG EP's deposits with two Kazakhstani banks, Halyk and KazKommertsBank, account for approximately 82% of the company's financial assets. As of June 30, approximately 39.7 billion tenge ($265 million) was held at BTA Bank, or approximately 7% of the company's cash holdings. INSIDERS CAUGHT BY SURPRISE ¶5. (SBU) Timur Rakhanov, Director for New Transportation Projects at KMG, told Energy Officer on October 2 that the announcement surprised him and his colleagues, particularly given that China already controls one-fifth of Kazakhstan's oil production. "For the Chinese," Rakhanov said, "the deal makes perfect sense. They have a clear, national strategy and now it's all coming together." Rakhanov said he will meet with CNPC representatives in Almaty on October 7 to negotiate the expansion of the Kazakhstan-China oil pipeline. "I wondered why they were so eager to expand that pipeline. I thought, 'Where is all the oil going to come from?' Then, I pick up the paper, and boom! They bought 11% of KMG EP. I was just shocked." Rakhanov said he expects KMG EP to find it difficult to work with the Chinese. "It's hard enough working with Western directors," said Rakhanov, who is KMG's representative to the Board of Directors of the Caspian Pipeline Consortium. "Now, KMG EP will have a Chinese representative on the Board of Directors. That is going to make things very difficult. We still have majority ownership, of course, but now we'll have to get their approval for major investment decisions. It's not going to be easy." "A SHREWD, STRATEGIC STEP" ¶6. (SBU) On October 5, Alikhan Baidussenov, director of strategic planning for KMG EP, also relayed his and his colleagues' shock about the announcement. "We found out about it through the press. We didn't see this coming." Baidussenov confirmed that the share purchase will give China the right to appoint one member to KMG EP's Board of Directors. He called the move a "shrewd, strategic step. We own 50% of their exploration of Karazhanbas and 15% of AktobeMunaiGas, and now they own 11% of our company. So now, we own a piece of each other." ASTANA 00001775 002.3 OF 002 ¶7. (SBU) COMMENT: In fact, China's acquisition of 11% of KMG EP is not at all surprising. China is flush with cash, eager for energy, and aggressive in approach. This investment clearly aligns with China's overall strategy in Central Asia and Kazakhstan's own multivector policy. At first glance, the transaction contradicts Kazakhstani government statements that Chinese investments in Kazakhstan's energy sector had already reached optimum levels (reftel C). But look closely. Although sizeable and significant, the acquisition of 11% of KMG EP does not give China control over an oil field, a pipeline, or a refinery. This is a portfolio investment carried out on the open market. The transaction was completed in a fair and transparent manner, at a time when KMG EP was buying back shares that it considered undervalued with its own cash. Evidently, China -- playing by market rules -- agreed. END COMMENT. HOAGLAND