Investing

Petro Politics

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Who knew that a distant Central Asian republic would ever prove so, well, interesting to Canadian investors? Over the past few weeks, developments involving Kazakhstan have presented investors here with both success and setback, as a couple of Canadian companies–PetroKazakhstan and Nelson Resources Ltd. (TSX: NLG)–became pawns in what appears to be a tussle between world powers over access to oil. Meanwhile, another issue looms–the potential consequence for Canada's oilpatch.

Event No. 1: Calgary-based PetroKazakhstan officially became a subsidiary of Chinese state-owned firm China National Petroleum Corp. (CNPC), which finally closed a deal to acquire Petrokaz for US$4.2 billion. The Petrokaz deal is believed to be the largest acquisition to date of a Canadian firm by a Chinese state-owned enterprise.

Event No. 2: Former gold miner Nelson Resources, which is now drilling for oil in Central Asia, became the subject of an Ontario Securities Commission investigation following its acquisition by Russian oil concern Lukoil. The CEO of Nelson, Nick Zana, exercised options for almost two million shares in September, just a few weeks before the $2.6-billion deal closed. “The official story is that he didn't know about the impending deal when the options were cashed,” says Dmitry Loukashov, a Moscow-based analyst for investment house Aton Capital. But Loukashov adds he himself wasn't exactly surprised that the Lukoil acquisition has raised questions in Canada. “Kazakhstan doesn't belong to the world of Anglo-Saxon capitalism, as those in the West understand it,” he says. “Someone familiar with the logic of the country wouldn't find anything surprising in this.”

For his part, Loukashov was disappointed by the deal, in which a majority of Nelson shareholders agreed to sell to Lukoil at below-market price. “I had a lot of clients in them,” says Loukashov of Nelson shares. “I'm pissed off.” Minority shareholders in Nelson have expressed hopes another bidder might step in–perhaps even Petrokaz-buyer CNPC, which happens to be challenging Lukoil over some of Nelson's assets jointly owned by the Chinese company.

This wouldn't be the first time Lukoil and CNPC have gone head-to-head. They're also in conflict over Petrokaz, which has several outstanding lawsuits to settle with Lukoil. But CNPC doesn't seem likely to step into the Nelson deal. According to Loukashov, the Chinese government blessed the bid for Petrokaz because its assets are close to the Chinese border, where China can better assert control over the Turgai oilfield (which Petrokaz was working)–this despite the fact Nelson, in Loukashov's estimation, was the more valuable company. “If CNPC were not a tool of the Chinese government, they would have bought Nelson rather than Petrokaz,” says Loukashov. “The real amount of oil in Nelson is substantially higher.”

But perhaps there's another reason CNPC chose to go after Petrokaz rather than Bermuda-headquartered Nelson. When politics meets oil, nothing can be assumed, but conspiracy theorists might find it interesting that CNPC has yet to close Petrokazakhstan's Calgary office, even though Petrokaz is now delisted from the TSX, its officers and directors have moved on, and all of its assets are overseas–far closer to Beijing than Calgary. One former Petrokaz official had this to say: “I think this [Calgary] office could be of importance in North American acquisitions. If it wasn't, I think they would have shut it down already.”

Could it be the story that ended with the Petrokaz deal is just getting started?