KAZAKHSTAN - KMG Buys Into PetroKazakhstan System.

KMG E&P on July 5, 2006, bought from CNPC a 33% share in PK. It said it paid US$55 (43) a share for the stake in Canada-based PK but gave no total for the deal. CNPC had taken over PK in October 2005 for US$4.2 bn. That was China's biggest foreign acquisition and the latest in a string of efforts by Beijing to secure foreign energy supplies for its booming economy.

The Kazakh government had approved the takeover but immediately signalled its intention to buy part of the Calgary, Alberta-based company - which was originally known as Hurricane Resources and which had all of its energy assets in Kazakhstan (see detailed background in Vol. 63, OMT & Gas Market Trends No. 5).

Under another deal signed with CNPC, KMG E&P got 50% in Valsera Holding BV, an intermediate holding unit for PK. KMG Holding's then President Uzakbai Karabalin said the deal gave Astana control over the Shimkent oil refinery, the most modern of the country's three plants. He added: "This will ensure our energy security in the southern...Kazakhstan and increase the state share in the oil and gas sector". Karabalin said control over the "strategic" Shimkent refinery would allow the government to have greater influence on internal prices for petroleum products.

The KMG group on July 19 said it had completed acquisition of 50% in PK's unit KazGerMunai (KGM, which operates three oilfields. It said it had paid $1 bn for the shares of three of KGM's shareholders: Germany's RWE Dea AG, which held 25%; EEG-ERDGAS ERDOL, a Gaz de France (GdF) unit which owned 17.5%; and the World Bank's International Finance Corp (IFC), which had 7.5%. The deals were signed on July 11. The other half is owned by PK Kumkol Resources.

President Nazarbayev on Jan. 23, 2006, had told his government some E&P done confidentially in 2005 should be reviewed, stating: "Sales of mineral deposits were conducted behind closed doors last year and that needs to be looked at again. How and to whom they were sold and on what terms" [were to be settled eventually].

Astana had been expected to announce a series of Caspian Sea offshore oil exploration tenders in 2005, but few were publicly announced. The year's biggest oil deal was the $4.2 bn takeover of PK by CNPC. The deal initially angered Astana which complained it had not been informed about the takeover; but it dropped its objections after CNPC agreed to sell a third of the company KMG.

In the morning of Oct. 27, 2005, CNPC said it had successfully acquired PK through its wholly-owned China National Petroleum Corp Int'l (CNPCI). On Oct. 26, PK through CNPCI granted an "unconditional" final order by the Queen's Bench Court in Calgary, Canada. CNPC's bid for PK was US$55 per share, totalling $4.18b, the largest overseas takeover transaction ever made by a Chinese company. LUKoil of Russia, one of CNPC's major rivals in the deal, made no appeal, marking the completion of all legal procedures for the transaction. Later, CNPC announced completion of the deal. On October 26, Chinese PM Wen Jiabao met Kazakh PM Danial Akhmetov in Moscow while attending the Shanghai Co-operation Organisation (SCO) summit. Both PMs expressed their strong support for "the mutual-benefit cooperation" between CNPC and KMG over PK after the completion of the acquisition. {Some days earlier, CNPC had agreed to sell assets of PK to KMG as a condition of the deal. The Kazakh PM promised to help resolve any further problems of PK in Kazakhstan together with CNPC after the deal was to be closed.

In an earlier court hearing, LUKoil lawyers had claimed that the Russian major had the "right of first refusal" to buy 50% stake in Turgai Petroleum, a JV of PK and LUKoil. This resulted in a postponement of the court ruling to the following day. On Aug. 21, CNPC and PK had concluded their negotiations over the deal with the signing of an "Arrangement Agreement". According to CNPC, after two months of intense work, all the formal approvals and legal procedures had been obtained and completed by late October. CNPC now says PK's production capacity will be increased, and thus provide the Sino-Kazakhstan oil pipeline with reliable supply.

Royal Dutch Shell signed a PSA with KMG for a Caspian Sea block in December 2005. Sources among oil majors in October 2005 said talks on new tenders had intensified but the government was likely to keep the negotiations secret for some time.

CNOOC Ltd., China's largest offshore oil unit, was in early 2006 reported to be considering a bid of about US$2 bn for Canada-based Nations Energy, an independent oil producer with a large oilfield in Kazakhstan. The deal came days after CNOOC announced a US$2.27 bn acquisition in Nigeria. The company had been looking overseas for oil assets as energy demand in China increased with the country's rapidly expanding economy. In August 2005, CNOOC failed in a US$18.5 bn bid for US oil and gas producer Unocal. Citigroup Inc (C), which advised CNPC on its US$4.2 bn acquisition of PK, is advising CNOOC, while Credit Suisse First Boston is advising Nations Energy.

LUKoil on Oct. 20 said it expected to secure the 75% of votes from Nelson Resources shareholders in December it needs to complete the purchase of the Toronto-listed Kazakh oil firm. "We are confident we will collect the needed number of votes under any method of votes calculation", the head of LUKoil's overseas arm, Andrei Kuzyayev, told reporters. In the previous week, LUKoil bought 65% of Nelson, mainly from Nelson's Kazakh directors, despite opposition from some minority shareholders who criticised the $2 bn takeover for being struck at prices below market value. Nelson has stakes in four E&P ventures in Kazakhstan and options to buy 25% stakes in two offshore blocks in the Caspian, Kuzyayev said. LUKoil is seeking to expand into nearby countries, such as Kazakhstan, which lags behind only Russia in oil output among FSU states, as Russia raises tax rates on the oil industry amid high global prices.

President Nazarbayev on Oct. 15 signed amendments to the country's law on subsoil use, granting the government pre-emptive rights on all strategic assets or resources in Kazakhstan. The amendments allow the government the right to limit the transfer of property rights to strategic resources or assets and are aimed at changes of ownership which occur through the sale and purchase of shares listed on exchanges. The government has the right to cancel unilaterally all contracts with firms which conclude deals with third parties in violation of the new amendments.

Background: Oil production has increased mainly due to a big rise in the output of Tengiz, the super-giant operated by Chevron, the Komkol fields of PK, and the Karachaganak gas/condensate field. Total production had peaked at 569,000 b/d in 1991, when the country produced 13.2 BCM of gas. It fell to 430,000 b/d in 1994. It began to rise again to reach the average of 670,000 b/d in 1999. Between 1999 and 2005, oil production grew by almost 15% every year, resulting in a doubling of output.Oil was found in Kazakhstan in 1899 and was first produced in 1911, in fields which now are being operated by EMG. These, along with the older ones in Azerbaijan (see survey of Azerbaijan in OMT Nos. 1-3), were the focus of the Soviet Union's oil production until fields in western Siberia went on stream in the 1960s.