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November 2005

Vol. 10, No. 45 Week of November 06, 2005

FSU republic: Best of times, worst of times

Getting out of Kazakhstan no simple job for two companies with Canadian links, PetroKazakhstan, Nelson Resources

Gary Park

Petroleum News Canadian Contributing Writer

For all of its multi-billion barrel oil prospects, the one-time Soviet republic of Kazakhstan, which occupies a key geopolitical space between Russia and China, is no place for the faint-hearted.

Extricating themselves from the Central Asian state has been every bit as messy for two companies with Canadian ties as their experience of building an industry in the region.

For PetroKazakhstan, its final days encapsulated its 15 years in the Kazakhstan — baffling, unpredictable and nasty.

For Nelson Resources, a company with assorted Canadian links, the US$2 billion takeover of its Kazakh assets has annoyed some shareholders and stirred the interest of securities regulators.

Lukoil at center

In both cases, the Russian oil giant Lukoil was at the center of the controversies.

PetroKaz was merely looking for a quiet exit from its adventures and misadventures in Kazakhstan, hoping for a simple shareholder approval of its US$4.18 billion takeover by China National Petroleum Corp., CNPC, and a quick court ratification.

The first step was easy — 99.04 percent of investors supported the CNPC offer, which assured them of a US$1.7 billion cash premium.

But the calm of the 30-minute special meeting of shareholders in Calgary seemed surreal as governments and companies from China, India, Kazakhstan and Russia engaged in a global tug-of-war over the assets, including 550 million barrels of reserves, production of 153,000 barrels per day and a Kazakh refinery.

Torrent of events

In the run-up to the shareholders meeting, a torrent of events threatened to derail the transaction:

• Kazakh President Nursultant Nazarbayev signed a law giving his government the right to buy foreign-held stakes in Kazakh oil companies.

• The Kazakh government launched an action to recover US$552 million in alleged “monopoly profits” by PetroKaz, which has been frequently accused of inflating fuel prices from its refinery.

• Indian Petroleum Minister Mani Shankar Alyar accused PetroKaz investment bankers Goldman Sachs of conducting an “unfair” auction of PetroKaz assets by snubbing a better offer from India’s ONGC Videsh and Mittel Group, the Dutch steelmaker.

• Lukoil started court action in a bid to block the CNPC deal, claiming it had right of first refusal to buy the PetroKaz stake in a 62,000 bpd joint-venture called Turgai Petroleum, which held 20 percent of the PetroKaz reserves.

CNPC an unwanted partner

Ihor Wasylkiw, vice president of investor relations at PetroKaz, told Petroleum News that his company simply wanted to wrap up the deal and get CNPC money into the hands of shareholders, leaving CNPC to do “whatever they wish” with the assets.

But Lukoil was not about to fade quietly into the night, despite the shareholders’ obvious wishes.

It waged battle for four hours in a Calgary court room, crowded with observers from China, Kazakhstan and Russia.

Lukoil’s hired Canadian lawyer Sean Dunphy made it clear Lukoil did not want any part of having CNPC as a partner in Turgai, claiming it was entitled to right of first refusal on the assets under its joint-venture agreement.

PetroKaz lawyer Daniel McDonald suggested Lukoil was trying to scuttle the CNPC offer, which was due to expire Nov. 30, then acquire PetroKaz for a “far better price.”

In a written judgment a week later, Alberta Court of Queen’s Bench Chief Justice Neil Wittmann conclusively sided with the shareholders, saying that losing the CNPC offer would likely cost them their US$1.7 billion premium.

He said that if CNPC walked away from the deal there was no evidence that a matching deal would be forthcoming.

Wittmann said Lukoil’s fears that CNPC might put pressure on the Turgai joint venture to export its production to China rather than Russia was “too vague and speculative” to stall the transaction.

Tribunal panel rules next year

Lukoil may still notch a victory when a Swedish arbitration tribunal rules next year on its right-of-first refusal claim. If that happens, PetroKaz hopes to be a mere footnote in history.

But, for now, CNPC and the Kazakh government have wasted no time reaching an accommodation.

CNPC announced Oct. 27 that it will sell 33 percent of the PetroKaz assets to state-owned KazMunaiGaz, including a 50-50 joint venture to operate the 140,000 bpd refinery, to assure guaranteed oil to the Kazakh domestic market.

Having created substantial wealth for his shareholders, PetroKaz Chief Executive Officer Bernard Isautier, a former French diplomat, is ready to take a break at his private resort island in the South Pacific, although he is not about to quit the industry.

Along with a handful of senior executives from PetroKaz he plans create a new E&P company to scout for new reserves in Central Asia — just not in Kazakhstan, “definitely not Kazakhstan,” Isautier said as he bid Calgary au revoir.

Nelson originally a mining company

For all of the chaos swirling around PetroKaz in its apparent swansong, it was tame compared with the murky wheeling and dealing between Nelson Resources and Lukoil.

From low-key beginnings as a Canadian gold mining company, Nelson has emerged over the last four years as a serious energy producer, scooping up a Kazakh oil field in 2000 for US$2.7 million or about 2 cents a barrel of proved and probable reserves.

That became the platform to build a company with 270 million barrels of reserves, 32,000 bpd of production and steadily growing profits.

It set up headquarters in London, became registered in Bermuda and traded on the London Stock Exchange’s Alternative Investment Market and the Toronto Stock Exchange.

Cott Holdings Group of St. Kitts-Nevis and Energy Investments International of the British Virgin Islands controlled 40 percent of Nelson.

Cott is run by Baltabek Kuandykov, who is president of Nelson and was a senior official in the Kazakh government before 1997, when he became president of a state-owned oil company.

Nelson accepts Lukoil offer

But when Nelson accepted a US$2 billion takeover offer from Lukoil, Kuandykov did not participate in a two and a half hour conference call, leaving Chairman and Chief Executive Officer Nick Zana to placate shareholders, angry that they were being offered C$2.57 a share, 39 cents a share lower than the closing price on the day before the offer was unveiled.

For Lukoil, it was the chance to pay US$7.40 a barrel for Nelson’s proved and probable reserves, 11 percent less than what CNPC paid for PetroKaz.

Four major shareholder groups, owning 67 percent of the stock, entered a lockup agreement with Lukoil to sell their shares in a transaction requiring approval by at least 75 percent of shareholders when the final vote takes place on Dec. 2.

In the meantime, the Ontario Securities Commission, which regulates the Toronto exchange, has intervened to investigate share trading by senior Nelson executives prior to the bid.

Zana and Kuandykov were among five Nelson insiders who sold 4.7 million shares at C$2.82 two weeks before the Lukoil bid.

James Passin, a money manager at Firebird Management in New York, described the Lukoil offer as “ridiculously low,” given the prospect of success from offshore Kazakh blocks in the Caspian Sea in which Nelson has a 25 percent option.

Zana issued a statement welcoming the securities probe and pledging to “fully cooperate” with the Ontario Securities Commission.






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