How Citic oiled the wheels of Kazakh M&A
Saidenov: Kazakhstan faces up to the down side of rapid growth
There was also a rising tide of economic nationalism that called for foreign-owned energy assets to fall into local hands.
When Nations’ shareholders finally opted in December 2006 to sell out to Chinese conglomerate Citic Group for $1.9 billion the decision was made with a certain amount of relief. It was also the end of a long road for the company, which had been on the block for five years. The first to take a crack at it, according to individuals and bankers with close connections to the Canadian firm, was the Korea National Oil Company, back in 2002. Its "insulting" offer of about $600 million was finally rebuffed after a long summer of negotiations, according to one individual with knowledge of the deal.
Over the ensuing years a bevy of Chinese energy and resources firms, and even one large Chinese armaments manufacturer, came to pay court to Nations Energy. Citic won in the end largely because of the effectiveness of its lobbying team, after convincing Beijing that it should be the preferred bidder, though not before beating off powerful no-holds-barred lobbying from rival Chinese firms including China National Offshore Oil Corporation, Sinopec and PetroChina.
An Almaty-based investment banker who has advised on many oil and gas deals says Kazakhstan’s oil and gas sector officials are becoming "almost demagogically" obsessed with keeping oil and gas interests in the hands of local Kazakh companies – and particularly KazMunaiGas, the country’s most powerful state-run energy firm. It isn’t quite as bad as Russia, but the authorities in Kazakhstan, like those in many of the world’s other leading energy-producing nations are becoming unduly obsessed with owning and controlling their entire energy sector.
Astana officials would do well to consider a future bereft of foreign investment, equipment and technical and managerial know-how. When Nations Energy in 1997 took over the Karazhanbas oil field on the Caspian Sea between Aterau and Aktay, the field was churning out a pitiable 3,000 barrels a day.
Indeed, the Kazakh government has become quite distressed at the development and production delays evident with the enormous Kashagan offshore project in the Caspian Sea. Peak oil, or optimum production, is now expected to occur some time around 2015, with first oil, once predicted for 2006–07, now projected for 2011.
The government’s ambitious growth plans will continue to depend on existing producers and new projects, if any are allowed to develop. Under the current subsoil tax regime, few are encouraged to begin new projects, as the government’s take is simply too high. Older projects, such as Karazhanbasmunai, are grandfathered with the favourable tax regime made effective during the 1996–97 state asset privatization period, making them everyone’s favourite takeover targets.
During that period, Nations’ shareholders and management decided to take a punt on what would either be the deal of a lifetime or result in countless sleepless nights, white hairs, ulcers and ultimately bankruptcy notices. Turning the company around wasn’t cheap – company sources say around $900 million was poured in – investing in the oil field, paying off existing debt and taking on 3,800 workers and contractors previously employed by the state firm.
By August 2006 – when the Citic deal was signed, if not yet announced, the field was pumping out 56,000b/d, with a further 340 million barrels in proven reserves yet to tap from the giant Caspian field. The company had also parlayed its success in Kazakhstan into oil and gas interests in Azerbaijan.
Nations’ shareholders could have held out for a higher bid later this year or in early 2008 – with oil prices continuing to inch up towards $70 a barrel and perhaps set once again to touch the $80 mark, prospective buyers would hardly be thin on the ground.
But after 10 years of unrelenting pressure from Kazakhstan’s officials, Nations Energy’s owners finally decided enough was enough. The original shareholders have set up a new company, Nations Petroleum, based in Calgary and London, and with assets covering oil, gas and gas condensate in Indonesia, California and Azerbaijan.
"They could have received in excess of $2.5 billion for that company even later this year from a reliable buyer," says an institutional investor knowledgeable in the area. "It was time to leave. There will never be another Nations Energy, where a small group of private investors take over a state enterprise, are allowed to own it 100%, build it up, and sell it. Those days, sadly, are over."
