Kazakhstani reprivatization

Thus far, the government is leading in the fight for shares in prospective projects. It has firmly decided to enhance its position on the hydrocarbon market, taking into account the increasing prices for mineral resources. Over the past year, the government has made four purchases, including the recent, ceremonious entrance of state-operated KazTransGas into the Georgian market. This is only counterbalanced by three victories by foreign companies that are competing for influence in the Caspian region. Kazakhstan paid US$3.3 bln [for purchasing shares] in its desire to participate in those projects.

Elena Butyrina

Increasing prices for crude oil on the world markets only enhances the interest of petroleum producers – state and private, small and large – in highly profitable projects that are already in the development stage, which do not require huge investment [risks]. These projects are the most attractive due to the availability of the infrastructure and production equipment already in place. Revenues from participation in such projects are in the millions of dollars, taking into account the favorable price situation on resource markets. As per a previous prognosis of the Ministry of Economy and Budget Planning of the Republic of Kazakhstan, the cost per barrel of oil over the period of 2006-2008 should be, at the absolute minimum, US$22-24, on average at US$28.5-34, and could fetch a maximum of US$40. However, over the last year the price per barrel has hit a benchmark of US$70, which turned out to be quite profitable for oil producers.
The national appetite began growing long before the current share grab in different projects on the oil and gas market. In almost all cases, prior to the conclusion of one or another transaction having the participation of the government, the same scenario repeated itself, excluding certain nuances. So, the results of at least two large deals relating to share acquisitions, in the North-Caspian project and in PetroKazakhstan, could be predicted ahead of time. The intrigue has been that the master of the subsoil reaches has repeatedly, but not without reason, interfered in the realization of certain projects, having then over a period of time gained shares in them.
For example, last year’s return of national interests into the North-Caspian project occurred following a long conflict between the government and foreign investors in the venture regarding a plan for a two-year delay in commercial extraction of oil. The international consortium of Agip KCO is carrying out exploration work on the Kashagan field, which is gigantic by international standards. As is known, during the course of the aforementioned dispute, the Kazakhstani authorities even impounded the Sunkar drilling barge, with the help of which exploratory drilling in Kashagan had been done, and fined the subcontractor for a breach in customs law that was to have occurred during its operation. At the conclusion of 2004, amendments to the legislation on subsoil use were introduced, giving the government a priority in buying out the shares in petroleum projects that have been put up for sale. This has permitted KazMunayGas (KMG), the national oil and gas operator, acting on behalf of the government, to buy a share last May in the North-Caspian project.
At first, Agip KCO paid US$150 mln as a penalty for postponing the start of oil production, and later on KMG signed an agreement with participants in the consortium “On the introduction of changes and amendments to the PSA on the North-Caspian, signed on November 18, 1997.” According to this agreement, last year foreign shareholders sold 8.33% of the shares of the North-Caspian project for US$913.142 mln to KMG (this was half of what had originally been BG Group’s 16.67% stake in the venture). Foreign investors did not initially want this transaction. The deal allowed the Kazakhstani government to act as a shareholder, thus being able to gain control over this “project of the century” from the inside.
A logical continuation in the KMG’s expansion on the hydrocarbon market, was last autumn’s passing of amendments to legislation allowing the government to gain the right for privileged buying on the secondary market of shares and assets of those firms that extract oil in our country. This hasty adoption of amendments was done by the government at a time when ongoing negotiations were occurring on the sale of PetroKazakhstan to China National Petroleum Company (CNPC), and of Nelson Resources Ltd. to Russia’s Lukoil Overseas. Kazakhstani authorities made everyone understand that they may block such transactions, and assert their rights to such assets.
At that time, representatives of PetroKazakhstan stated that the sale of [total] assets was being done both voluntarily and forcibly, as the authorities were pressuring them by imposing many “unjustified” fines for breaches in regards to production and anti-monopolistic legislation. The government was not satisfied with the fact that the management of this Canadian company refused to supply oil products at decreased rates during sowing and harvest seasons, as well as the fact that the Shymkent refinery sold its products only through its network of twelve limited liability partnerships, with the help of which they carried out a policy of eliminating competition on the market. This complicated relations between the Kazakhstani government and PetroKazakhstan, even resulting in very sharp disputes within the Parliament, such as when Dariga Nazarbaeva, leader of the Asar Party, suggested that this company’s license for oil production be rescinded.
The government approved the deal between PetroKazakhstan shareholders and CNPC only after KMG signed a memorandum of understanding with the Chinese company last October. This document regulates issues related to the participation of the Kazakhstani party in the acquisition of PetroKazakhstan shares, and was signed the day that Kazakhstani President Nursultan Nazarbaev approved the abovementioned amendments to legislation, which allows the government to interfere in the sale and purchase of available shares in hydrocarbon projects.
CNPC won the fight for the purchase of the Canadian company, defeating India’s state-operated Oil and Natural Gas Corporation (ONGC) and Lukoil Overseas, the latter announcing its interest in the takeover at the very last moment. CNPC paid US$55 per share for 100% of PetroKazakhstan, making a total outlay of US$4.18 bln. From the very start of negotiations between PetroKazakhstan and the Chinese company, Lukoil Overseas asserted its privileged right for the purchase of the remaining 50% share in JV Turgai Petroleum, which was held by PetroKazakhstan. Lukoil Overseas stated then that its offer would completely meet the interests of PetroKazakhstan’s shareholders, as it proposed a deal at the equivalent price, but [to be paid] within a shorter period, and with a higher level of certainty than the offer by CNPC.
Analysts noted then that Lukoil Overseas put forth a matching offer, most likely out of the desire to influence a court decision regarding Turgai Petroleum, rather than out of commercial interests. At that time, the Russian investor even addressed the Arbitration Institute under the Stockholm Chamber of Trade, demanding the transfer of the remaining 50% of shares in that enterprise. In doing this, Lukoil Overseas referred to the agreement between shareholders, according to which in the case of a partner relinquishing its interest within the project, the other maintains the right to buy out that partner’s shares at an agreed price.
In general, the Russians understood that the chances of receiving assets from PetroKazakhstan were not high. In that period, aside from Turgai Petroleum, Lukoil Overseas was focused on the purchase of Nelson Resources, which had five projects in the Aktobe and Mangistau oblasts of Kazakhstan, as well as options on two blocks in the Kazakhstani sector of the Caspian Sea.
Lukoil Overseas completed the transaction for the purchase of 100% of Nelson Resources at the beginning of last December, after Nelson’s minority shareholders approved the sale at an extraordinary meeting held in London. On that occasion, the transaction was approved by the more than 97% of the shareholders who were present at the meeting. About of 85% of minority shareholders agreed to the transaction. Overall, the Russian company had hoped to purchase all of Nelson’s shares at the earlier date of October, but minority stockholders acted against the deal due to [what they perceived as] a low price offered for their shares. As a result, Lukoil Overseas purchased all Kazakhstani assets for US$2 bln, the entire amount being covered by a short-term credit.
The assets of Nelson Resources became a real bargain for Lukoil Overseas, which had for a long time hoped to procure Kazakhstani hydrocarbons. The Alibekmola, Kozhasai, Karakudyk, Northern Buzachi and Arman fields are quite newly developed, and some are undergoing exploration and exploitation works, which means that the reserves of oil and gas have yet to be used up completely. At the same time, oil production equipment is in place at [some of] those fields, and the quality of the oil itself allows export without any major difficulties. Nelson’s stockholders pointed out the advantages of its projects, such as at the time of the purchase of half the Northern Buzachi field from CNPC, which took place during the period from December 2003 to February 2004, having a total price tag of US$90 mln. They later mentioned the same benefits in December 2004, when they bought 50% and 40%, in the Arman and Karakudyk fields, respectively, from KMG at US$10.8 mln for the former and US$36 mln for the latter. As a result, the Nelson’s real share in Karakudyk increased up to 76%, taking into account that 36% of the project indirectly belonged to the company through the participation of Chapparel Resources, a wholly owned subsidiary – with the other 40% being directly owned by Nelson Resources. During 2003-2004, due to the active procurement of production assets, Nelson became known as the most ambitious company in Kazakhstan. Learning about the desire of its shareholders to sell out completely came as quite a surprise, happening merely a year following the acquisition of these rather successful and inexpensively gotten acquisitions.
In its own turn, Lukoil Overseas did not only end up with these assets, but in Spring of 2006 began the process of purchasing all outstanding shares in the Chapparel Resources, a partner of the Russian company in the development of the Karakudyk oilfield. Lukoil Overseas decided to consolidate the Chapparel’s assets, in which it already owned 60%, in order to achieve full ownership of the company and improve the system of management. The offered buyout was US$5.80 per share, valuing the remaining shares at US$88.6 mln, which based on an assessment of proven reserves, set at a price of US$8.10 per barrel. Later on, Lukoil’s unsuccessful negotiations for the purchase of Nations Energy, which was developing the Karazhanbas field in Mangistau oblast, became public. Hashim Djojohadikusumo, the owner of Nations Energy Company Ltd. admitted his dissatisfaction with Lukoil’s offer, and refused to sell.
Analysts called the two July 2006 acquisitions of KMG the biggest transactions of the year. First, the national company signed an agreement for the purchase of a 33% block of PetroKazakhstan shares, as well as 50% of the shares in Valsera Holding BV, which is the management company for the Shymkent Refinery. Later on, KMG signed an agreement with RWE Dea AG, EEG-ERDGAS ERDOL GmbH (a subsidiary of Gaz de France) and International Finance Corporation (IFC) on the purchase of a 50% share in JV KazGerMunay, which develops the Nurali, Aksai and Akshabulak fields in Kzylorda oblast. Prior to completion of this transaction, the above companies held 25%, 17.5% and 7.5% of the shares in the JV, respectively.
In only six months following the signing of the memorandum of understanding with CNPC last October, concerning the participation of KMG in PetroKazakhstan projects, were the Kazakhstani authorities and the Chinese party able to realize the subject of that accord in practice. The stock price in PetroKazakhstan given to the Kazakhstani party was the same CNPC paid last October – US$55 per share. The purchase of 33% of PetroKazakhstan was arranged through a 10-year, US$1.372-bln bond issue, having a floating rate of interest, with underwriting services handled by KMG PKI Finance BV. The fact that the collateral for the issue was KMG’s own share in PetroKazakhstan is in itself interesting.
That was the end of the long-running disagreement, the winner of which became the Kazakhstani authorities, as was expected. KMG – basically the proxy of the government – received its share in PetroKazakhstan, a necessity for accessing the Kumkol group of fields, in which oil of very high quality is produced – a necessity for maintaining the strategic control of Kazakhstan over the activities of subsoil users. This also provided the opportunity for the Kazakhstani party to jointly manage the Shymkent Refinery – a part of PetroKazakhstan – along with the sale of oil products on a par basis. At the end of this, KMG issued a statement, “The direct participation of the national companies of two countries in a joint project will permit the building of a partnership on an equal basis, creating the conditions for ensuring the long-term stable supply of oil and related products on the domestic market of Kazakhstan.”
At present, CNPC, for which it is highly profitable to maintain a broad presence in hydrocarbon-rich Kazakhstan, has become an equal partner to KMG in Kaz-GerMunay through its subsidiary, PetroKazakhstan Kumkol Resources. Taking into account the fact that the Kazakhstani national operator has recently become the owner of a 33% block in PetroKazakhstan itself, it will indirectly control 67% of shares in KazGerMunay. The value of the purchase by KMG of its direct 50% stake was large indeed – US$1 bln. 20% of the amount was paid for by cash on hand, with the other 80% was financed through the recent placement of a three-year, US$800-mln eurobond issue on the international capital markets, which carries a fixed rate of 6.5% per year.
The reasoning behind IFC’s sale of its share in KazGerMunay is quite understandable: initially this international financial corporation never included oil assets within its holdings. And as regards the other former participants in the project – RWE Dea AG and EEG-ERDGAS ERDOL – they, on the one hand, praised KazGerMunay, while on the other acknowledging that they had made plans a long time ago to sell off their interests in the enterprise, as they are more interested in gas projects, including those on the Caspian shelf. With regards to this, they have been negotiating with KMG, and have even achieved some progress on the issue.
The management of KMG has not excluded the possibility that in the future the shares purchased in KazGerMunay would be transferred to its subsidiary, JSC Exploration and Production KMG (EE KMG). The daughter company, operating in Mangistau and Atyrau oblasts, exploits both older fields and those with water in the formations, the resources of which have mostly been used up, requiring special technologies for further development. So far, fortune has not been favorable to this subsidiary. Last year, the company encountered failure when performing drilling operations on the Tepke structure in Mangistau oblast. Until now, this last year’s research on the P9 structure near Atyrau has yet to be made public. In the current year, EP KMG was excluded from the list of participants in the auction for the shares in the largest enterprise in Udmurtiy (in the Russian Federation), JSC Udmurtneft, which belongs to the Russo-British company, TNK BP. The subsidiary was unable to pass the auction’s third stage, due to the larger offers put forth by competitors, or so the Kazakhstani company believes. The amount offered by EP KMG was not made public, but it is known that other bidders offered more than US$4 bln for Udmurtneft. However, independent experts evaluated the company, which operates on older oilfields, producing about 6 mln tons per year, at US$1.5-2 bln.
On the mergers and acquisitions (M&A) market, the offer of Udmurtneft was viewed as one of the largest [in the last year]. Real giants from the global oil sector were vying for the company, and the winner was China’s Sinopec, which gave Rosneft an option to purchase a controlling stake in Udmurtneft. The failure of KMG’s daughter company in the fight for the Russian venture followed the refusal of the Lithuanian government to allow KMG into a joint project on the Mazeikiu Nafta refinery. The Lithuanian side preferred partnering with the Polish concern of PNK Orlen, which had previously defeated KMG two years previously in the fight for a 63% block in Unipetrol, a Czech holding company.
Such failures neither make KMG very happy, nor do they cause much frustration. The national company seriously aims to move onto international markets, and has already made an announcement on its plans to build refineries in Turkey and China. They, as well, intend on purchasing a share in the Ventspilskiy Port in Latvia, including the construction of a modern transshipment facility there. This last project appears to be a reply to the Lithuanian authorities in an attempt to show them what they lost, and what Latvia has instead gained by choosing a Kazakhstani partner.
The only successful deal to date Kazakhstan has managed on the international oil and gas market was the spring acquisition of Tbilgasi, a Georgian gas distribution company, by another KMG subsidiary, KazTransGas (KTG), a gas transport enterprise. The Georgian company’s assets include a network of over 2,000 kilometers, servicing more than 210,000 customers, as well as above 3,000 municipal locations and 400 industrial enterprises. KTG purchased Tbilgasi for US$12.5 mln, and has already invested US$20 mln into its development in the first stage. Overall, investments to the amount of US$82 mln will be made over the period of 2006-2011. The Russo-Kazakhstani company KazRosGas, which plans on supplying Russian gas to the Georgian capital via the gas Mozdok-Tbilisi-Armenia pipeline at the price of US$110 per a thousand cubic meters, believes that it will be able to normalize the gas supply situation within this region, and that the experience of KTG will be useful across the CIS area. Moreover, the Kazakhstani company, which has established a JV in Kyrgyzstan for the supply of natural gas to the southern regions of Kazakhstan, now continues its negotiations with the Kyrgyz government on the purchase of the Kyrgyzgaz network. KTG is also looking at Ukraine, in which it is interested in gas-powered generation of electricity.
Specialists believe that the last 12-14 months have been unusually full of such transactions, and that in the immediate future there will be a relative calm in this sector, at least inside the country. As of today, almost all government plans have been [fully] realized, excluding that pertaining to Turgai Petroleum, for which Lukoil Overseas continues to fight, though it has ceased utilizing the more open methods. However, this does not mean that the government has satiated its appetites in the market. The participation of state companies in one or another project provides it with the possibility of controlling the market from the inside, thus preventing crisis situations. Judging by the experiences of previous years, the government had itself been forced into immediate and direct intervention for the purpose of solving such situations. Purchasing projects that have already passed the exploration stage, and those in which oil production has already been initiated, is quite important, considerably lowering the associated risks over the foreseeable future. Besides, the state gains the opportunity to be able to interfere with regards to future oil transportation. In case of necessity, it may sell its shares to other countries at a profit, or use their interest as a powerful argument when selling shares to other participants of a project. And finally, bearing in mind the increasing number of project personnel, including subcontractors, according to the government’s request Kazakhstani companies will receive the largest number of profitable contracts which eventually will positively affect the social situation in the oil-producing regions and in the country in general.