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How to turn $120 million into $4,180 million in less than ten years

August 23, 2005

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PetroKazakhstan is not quite Unocal.  But it is nothing to sneer at either.  To no one's surprise, CNOOC's failed bid for Unocal did not end Chinese oil firms' interest in foreign acquisitions .   In a harbringer of the future, CNPC outbid India's state oil company for PetroKaz, and looks set to complete the largest foreign takeover ever by Chinese firm.

And to no one's surprise, Western firms (Ok, a Western lawyer in this case) are complaining that China is over bidding. 

In the oil industry, "China has consistently been willing to overpay for assets; it's more of a security issue for them than the absolute price," said John Kuzmik, a partner and China specialist at Baker Botts, a big Houston energy law firm.

I suspect Western oil firms will have to get used to Chinese over-bidding.   The equilibrium price of oil reserves just went up.  Particularly oil that can be piped into western China.  No risk of a US naval blockade. 

From the New York Times:

PetroKazakhstan has had a series of legal skirmishes with Lukoil of Russia, its main partner in the oil fields. Lukoil's main pipeline from Kazakhstan into Russia is already full, but C.N.P.C. is expected to finish at the end of this year a pipeline from Kazakhstan into western China.

The FT's Lex column also highlighted China's strategic interests -- which explains why PetroKaz's reserves sold for a premium over Unocal's reserves.

PetroKaz's shareholders should celebrate. CNPC International, a subsidiary of the state-owned parent of PetroChina, will pay $7.60 per barrel of oil equivalent of proved and probable reserves. Analysts estimate Chevron paid just under $5 a barrel for Unocal. A bidding war with Indian rival ONGC cannot be ruled out. If the deal completes, PetroKaz's management will have done a superb job in difficult circumstances.

Despite the high price, CNPC will also be happy: after all, its mandate is largely shaped by strategic considerations. The Kazakhstan government may also relish the chance to cosy up to Beijing in the face of US-backed democracy movements in several former Soviet republics.

The appreciation in the value of PetroKaz since the mid-90s is rather impressive.  Yuzhneftegaz - the precursor of PetroKaz -- was bought for $120 million in 1996 - so the owners of PetroKaz got something like a 50% annual return on their investment over the past nine years.  Hedge fund managers take note ...

With that kind of appreciation, is it really a surprise that Russia's government is looking to change the terms of the initial privatization of Russia's oil?  There are windfall gains, and then there are windfall gains.   Russian oligarchs got control of Russian oil firms for pennies on the barrel, so to speak, in rather chaotic circumstances back when oil was at 20.  THe combination of a huge windfall gain and doubts about the legitimacy of the initial sale makes Russia's oil firms relatively easy targets.

And unless something changes, it would not be a total surprise if CNPC is negotiating with the Al-Hakim family over the terms of a major Chinese investment in the southern Iraqi oil fields sometime before 2010 ...  Look at the graphs on p.44 and 47 of this PFC report.   Most Gulf oil already flows east, not west.

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