KAZAKHSTAN: CHINA NATIONAL PETROLEUM CORPORATION ACQUIRES

UNCLAS SECTION 01 OF 02 ASTANA 000678 SIPDIS STATE FOR SCA/CEN, EAP/CM, EEB/ESC STATE PLEASE PASS TO USTDA FOR DAN STEIN E.O. 12958: N/A TAGS: PGOV PREL ECON EPET EINV RS IR KZ SUBJECT: KAZAKHSTAN: CHINA NATIONAL PETROLEUM CORPORATION ACQUIRES 50 PERCENT STAKE IN MANGISTAUMUNAIGAS ASTANA 00000678 001.2 OF 002 ¶1. (U) Sensitive but unclassified. Not for public Internet. ¶2. (U) SUMMARY: On April 16, during President Nazarbayev's state visit to Beijing, KazMunaiGas (KMG) and China National Petroleum Corporation (CNPC) announced that they will jointly acquire the production assets of MangistauMunaiGas (MMG),Kazakhstan's fourth-largest oil producer at 100,000 barrels per day. The two companies will manage the assets via Mangistau Investments BV, an investment vehicle in which both companies have a 50 percent stake. CNPC will reportedly pay $1.4 billion for its share in MMG, which has proven reserves of 812 million tons of crude, including 194 million tons of extractable reserves. KMG will use a $5 billion loan from the Chinese to pay for its stake. The transaction is scheduled be finalized by the end of July 2009, after relevant regulatory approvals are obtained. The assets of MMG acquired by KMG and CNPC include the Kalamkas deposit and Zhetybai group. MMG's shares in the Pavlodar oil refinery were excluded from the deal. The Chinese sweetened the deal through an additional $5 billion loan to the Development Bank of Kazakhstan. END SUMMARY. ¶3. (U) On April 16, during President Nazarbayev's state visit to Beijing, KMG and CNPC Exploration and Development Company (CNPC E&D) signed an agreement to acquire 100% of the common shares in MangistauMunaiGas from Central Asia Petroleum Ltd. The shares in MMG will be acquired through Mangistau Investments B.V., a joint venture co-owned by KMG and CNPC E&D. The transaction is scheduled to close at the end of July, after relevant regulatory approvals have been obtained, and will be funded by the Export-Import Bank of China. The assets acquired by KMG and CNPC E&D include the Kalamkas deposit, Zhetybai group, and other exploration blocks owned by MMG. Notably, the shares and assets of the Pavlodar oil refinery, 58 percent of which was owned by MMG, were excluded from the transaction and are expected to be acquired and managed solely by KMG. ¶4. (SBU) On April 17, KMG First Vice President Maksat Idenov told the Ambassador at a private dinner that he had two comments about the deal with China. "First," he said, "this is the decision of the government, and of course we respect it and will implement it. Second, I will tell you what I would tell my wife in the kitchen. It's a shame. When we deal with the Chinese, there is always concern about quality and performance, safety and security, health and the environment. But how can you walk away from $10 billion?" (COMMENT: Idenov did not accompany the official delegation to Beijing, so it appears that this deal was made without his direct involvement, which is unusual for a transaction of this magnitude. We take Idenov's reference to "the government" to mean President Nazarbayev and/or Prime Minister Masimov. END COMMENT). ¶5. (U) According to the terms of the deal, KMG will receive $5 billion in financial support to finance acquisition of its share of MMG, and construction of the Beineu-Bozoi-Akbulak gas pipeline, which will traverse southern Kazakhstan and lessen the country's dependence on imported natural gas from Uzbekistan. In addition, the Development Bank of Kazakhstan will receive a $5 billion loan from the Export-Import Bank of China. ¶6. (SBU) MMG was established in 1995 and was reportedly controlled by President Nazarbayev's then-son-in-law, Rakhat Aliyev, through the Central Asia Petroleum Company, incorporated in the British Virgin Islands, until his 2007 falling out with Nazarbayev. MMG is one of the largest enterprises in Mangistau oblast and the fourth largest oil producer in Kazakhstan at 100,000 bpd. The company has 36 oil and gas deposits, 15 of which are under development. The largest deposits in terms of reserves are Kalamkas and Zhetybai. In 1996, the company received 25-year licenses from the government to develop the oil and gas fields of Asar, Burmasha, Kalamkas, East Zhetybai, and Oimasha; the oil fields of Alatobe and North Asar; and the oil-and-gas-condensate fields Zhetybai and South Zhetybai. ¶7. (SBU) According to Tanya Costello, Director of the Eurasia Group, the acquisition of MMG is particularly important for CNPC ASTANA 00000678 002.2 OF 002 because MMG is already producing oil and does not require significant development investment. It also produces heavy oil, which is needed to mix with the lighter oil currently produced in the Turgai Basin that travels via the Kazakhstani-China oil pipeline. Costello said that the lighter oil from the Turgai Basin risks freezing during winter months without being blended with heavier crude. ¶8. (SBU) Costello also commented on the $5 billion loan from China's Export-Import Bank which will go to the Development Bank of Kazakhstan, which is owned by the Samruk-Kazyna National Welfare Fund, where President Nazarbayev's son-in-law Timur Kulibayev serves as Deputy Chairman. She said it is unclear exactly which sectors of the economy will receive support from this loan and worried that funds will be directed to companies associated with Kulibayev himself rather than the most vulnerable parts of the economy. ¶9. (U) In addition to purchasing 50 percent of MMG, China plans to build a refinery in Kazakhstan, near the Chinese border. In a newspaper interview on April 14, Chinese Ambassador to Kazakhstan Cheng Guoping said the original plan was to build the refinery in China, "but the Kazakhstani side changed their minds and wants the refinery to be on its territory. Kazakhstan badly needs oil products and we do not mind." Cheng added that more than 300 Chinese companies have invested $10 billion in Kazakhstan and will continue to invest in the country. Kairat Kelimbetov, CEO of the Samruk-Kazyna National Welfare Fund, said at a press conference on April 17 that he expects Chinese firms to invest more than $5 billion in Kazakhstan in 2009. "In addition to oil exploration and production," he said, "we expect to sign contracts with the Chinese in the uranium and power generation sectors. We also see opportunities for Chinese investment in the mining, chemical, petrochemical, and non-energy sectors." He said Kazakhstani energy officials will meet China's National Energy Administration head Zhang Guobao on April 27 to discuss uranium cooperation. Kelimbetov said that Chinese uranium firms will develop the uranium mine Semisbay, although no specific terms have been negotiated. ¶10. (U) CNPC also owns shares in five oil producers in Kazakhstan: AktobeMunaiGas, North Buzachi, PetroKazakhstan-Kumkol, KazGerMunai, and ADM. CNPC acquired two-thirds of PetroKazakhstan in 2005 for $4 billion, including the Shymkent oil refinery, which it operates jointly with KMG. PetroKazakhstan's annual crude oil production now exceeds 200,000 bpd, accounting for 14 percent of Kazakhstan's total oil output. ¶11. (SBU) COMMENT: MangistauMunaiGas was an attractive target for China, which beat out India's ONGC and Russia's Gazpromneft for an ownership stake in the company -- presumably by offering the best financial package to the Kazakhstanis. Production from MMG's fields could eventually supply the Atyrau-Kenkiyak-Kumkol-Atasu-Alashankou oil pipeline to China, which has a design capacity of 200,000 bpd and is expected to be completed this year. The MMG purchase may very well have been accelerated by the global economic crisis. As senior MFA official Talgat Kaliyev (please protect) put it to us on April 22, "We needed the money." That said, we do not view the deal as representing a shift away from the West in the development of Kazakhstan's oil and gas resources. Western companies continue to play the leading roles in Kazakhstan's three major hydrocarbon projects -- Kashagan, Tengiz, and Karachaganak -- and continue to look for new investment opportunities. The China deal is, in fact, consistent with the U.S. objective of ensuring Kazakhstan has multiple routes for its energy exports and is less reliant on transport through Russia. END COMMENT. HOAGLAND