BEIJING - China
National Petroleum Corporation (CNPC), China's
largest oil and gas producer, reached an agreement
with PetroKazakhstan Inc on Monday to buy the
Canadian-registered company for US$4.18 billion.
If the deal closes as expected in October, it
would become the largest-ever overseas acquisition
for a Chinese firm, breaking the record set when
Lenovo acquired IBM's PC unit.
"CNPC,
through its wholly owned subsidiary China National
Petroleum Corporation International (CNPCI), has
participated in acquiring PetroKazakhstan (PK),"
the Beijing-based oil giant said in a statement
Monday. CNPC, the state-owned parent of Hong
Kong-listed PetroChina, and PetroKazakhstan,
formerly known as Hurricane Hydrocarbons, have
entered into an "arrangement agreement" whereby
the Chinese oil firm will pay US$55 a share, or
21% more than its closing share price on Friday,
PetroKazakhstan said in a statement.
India's Oil & Natural Gas
Corporation (ONGC), in a combine with the
steelmaking Mittal group called ONGC Mittal Energy
(OME), had also bid for the company. The board of
directors of PetroKazakhstan, which is
Kazakhstan's third-largest oil producer,
recommended its shareholders accept CNPC's offer
and agreed on a $125 million break-up fee. The
deal is expected to close at a shareholders'
meeting in October, said the Calgary-based oil
company, which produces 7 million tons of crude
oil annually. CNPC is considering a proposal in
which PetroKazakhstan shareholders could get
discounted shares in a spin-off of its newly
formed venture with Hong Kong-listed PetroChina,
Newco, PetroKazakhstan said.
The deal,
China's largest ever overseas acquisition, follows
three weeks after US political opposition scuttled
an $18.5 billion cash bid for Unocal by the
Beijing-based China National Offshore Oil Corp
Limited (CNOOC). It marks a victory for China in
its rivalry with India, another of the world's
most populous and energy-hungry nations, for
overseas oil and gas reserves. Industry analysts
attributed the winning of CNPC's bid for
PetroKazakhstan to China's solid relationship with
Kazakhstan, in contrast to mounting concerns in
the US that China's growing economy and energy
demand may threaten its national security.
"We have been involved in talks with
PetroKazakhstan about the purchase for a long
time, and gradually worked out [this] successful
bid, [unlike] CNOOC's sudden intrusion into the
highly China-sensitive US energy market," said Han
Xuegong, a veteran senior analyst with CNPC, who
once trained those in the senior ranks of
Kazakhstan's oil companies. "Kazakhstan will also
benefit from its partnership with CNPC, through
improvements in oil and gas exploitation
technology and supply to the local market," Han
added.
CNPC started its overseas expansion
activities more than 10 years ago, and Kazakhstan
is the oil giant's second overseas market
following Sudan. China and Kazakhstan are
developing a 3,000-kilometer pipeline costing $3
billion to pump crude oil to China across the
Central Asian state, with the first phase of the
project to be completed by the end of this year.
Landlocked Kazakhstan, which plans to triple oil
output by 2015, is seeking new ways to transport
oil to international markets.
CNPC
produced 15.63 million tons of crude oil and 1.9
billion cubic meters of natural gas from its
overseas fields in the first half of this year,
according to a CNPC official who refused to be
identified. The parent company made a net profit
of $220 million in the six-month period from its
overseas projects, selling $1.47 billion worth of
oil and gas products.
Some Indian
observers cry foul The CNPC bid was met
with dismay in the Indian press August 23, with
the Times of India complaining that
"[PetroKazakhstan] played foul to put ONGC-Mittal
Energy out of the race". OME had been negotiating
with PetroKazakhstan for months and its initial
bid was higher than CNPC's. Most of the complaints
centered on the allegation that OME was never
allowed the opportunity to match a late increase
in CNPC's bid. The New Delhi-based Financial
Express newspaper said the original bids for
PetroKazakhstan were submitted on August 15; at
this time, the CNPC bid was lower than the OME
bid. But while CNPC revised its bid to $4.18
billion, the ONGC-Mittal combine was neither given
a chance to match the bid, nor was it allowed to
re-bid.
OME's original offer was around
$3.9 billion while CNPC's initial bid was $3.6
billion, according to the Times of India. On
August 19, OME had told PetroKazakhstan's merchant
bankers, Goldman Sachs, that it was willing to
increase its bid if "certain information" was
provided. It is believed that this information
concerned equity holdings by "other partners" of
PK, which has been having legal problems with some
of its equity partners. PK asked OME to submit
details about the queries to the company by
Monday, August 22; but even as the Indian
consortium was assembling the required
information, PK, acting preemptively, accepted the
CNPC offer, announcing its decision at 7:30 AM
London time on Monday, before the deadline it had
given OME.
Sources told the Financial
Express that the Chinese were allowed to raise
their original bid price because they were ready
to proceed without any conditions, whereas the OME
bid was conditional. It is also believed that the
CNPC offer included a large cash component. CNPC's
offer of $55 a share represented a 21.1% premium
over the stock's closing price at the New York
Stock Exchange on Friday. In effect, therefore,
CNPC offered to overpay for PK, partly in cash,
without asking any awkward questions; and PK
preferred this to the Indian bid.
OME
officials seemed baffled Monday by the sudden turn
of events. A senior ONGC official said: "We have
no explanation as to why we were not given a
chance to re-bid or even submit the clarifications
sought from us." And ONGC chairman Subir Raha,
while admitting that "it seems we have lost by a
narrow margin", added, "if PetroKazakhstan asks us
for a counterbid, we will do it. Our merchant
bankers are already working on it."
Has
the fat lady sung? As of Tuesday, it did
not appear certain that CNPC's bid would
ultimately succeed. For one thing, the Kazakh
government has the legal right to preempt the sale
of any oil property in the country, which means
the deal will require approval in Astana. At an
August 22 conference call where PK management took
questions from investors and journalists, the
approval issue was the basis of many questions.
But PK CEO Bernard Isautier maintained that the
law allows the government to preempt asset sales
within the country, but does not give it the right
to block the sale of PK itself, saying: "We are
not speaking about a sale of assets where
preemptive rights would apply ... we don't expect
any problem in that regard."
There
appeared to be at least a glimmer of hope for OME.
Due to the strained relations of PK management
with Kazakh regulators and the "goodwill" OME
partner Mittal enjoys in Astana (according to the
Times of India), the Kazakh government has tended
to be supportive of the OME offer. The final
decision will be made at a PK shareholders'
meeting in October, the date of which has not yet
been announced.
