Let's watch this show, for it will give us a sense of the Energy and the alignment of the Force:
In the Battle for Kazakh Oil, India's Advantage
Aug 16, 2005
Summary
India and China are locking horns in a battle for oil assets in Kazakhstan. Both countries will offer enough money, meaning that ultimately Astana will determine the winner based on geopolitics. On the surface, China appears to be the front-runner, but India has one significant advantage in the eyes of the Kazakhs -- it is not China.
Analysis
A bidding war between India and China is brewing over PetroKazakhstan, a Canadian company that is Kazakhstan's second-largest foreign oil producer, with 549.8 million barrels of proven and probable oil reserves in the country. With money not an issue, the Kazakh government will use its geopolitical scale to weigh the offers. Should it find the China side a bit too heavy, India will walk away with the prize.
State-run China National Petroleum Corp. (CNPC), through its listed unit PetroChina, is preparing to submit a bid for PetroKazakhstan, the Financial Times reported Aug. 15. Meanwhile, India's state-run Oil and Natural Gas Corp. is teaming up with the country's Mittal Steel industrial group and is believed to have submitted a $3.585 billion offer for PetroKazakhstan, which is valued at $3.2 billion.
India and China have publicly spoken of the need for cooperation in the energy sphere -- as opposed to competition -- to avoid bidding wars that would be excessively costly to both. With the Indian and Chinese economies both expanding rapidly, however, energy security is taking on ever-growing importance for each, meaning that niceties are likely to go out the window when oil is at stake.
Given their motivation, both India and China will easily find the money necessary to offer the Kazakh government the right price. They also need not worry about other competitors entering the fray. Russian oil firms would seem a logical possibility, LUKoil in particular, given its increasing activity in Central Asia. LUKoil and PetroKazakhstan, however, are embroiled in a multi-million dollar lawsuit over a disputed joint venture.
Western firms are showing no interest either. Not only are they wary of buying reserves distant from the Caspian Sea in central Kazakhstan, where PetroKazakhstan's reserves are located, but they also want to avoid getting involved in the company's multiple high-profile problems.
In April, Kazakh authorities forced PetroKazakhstan to cut production from 150,000 barrels per day (bpd) to 85,000 bpd. In June, company founder Bernard Isautier announced that he would retire in September, after raising eyebrows in 2004 when he cashed out $92.6 million worth of stock options. In July, the Kazakh government slapped the firm with a $55 million anti-monopoly fine. State firms, such as those in India and China that do not have to answer to shareholders, can afford to brush off such concerns.
In the end, however, India and China likely will have little say in who gets the firm because the Kazakh government has the right to block any deal PetroKazakhstan makes, as all PetroKazakhstan operations are joint ventures with the state. In other words, Astana will be choosing who gets the company -- and it will not be making the decision based purely on economics.
Kazakhstan is pursuing a multi-pronged foreign policy that plays all the powers interested in Central Asia off of one another. The goal is to minimize the influence any one of them has in the region, thereby safeguarding Astana's independence as much as possible. China, along with the United States and Russia, is one of the major concerns.
Kazakhstan, which shares a border with China more than 1,000 miles long, looks warily upon its giant neighbor to the east. Beijing can offer Astana great economic opportunities, but with 1.3 billion people compared to Kazakhstan's 15 million, China could easily take over its neighbor. Astana is seeking closer economic and security ties with Beijing, both bilaterally and within the framework of the Shanghai Cooperation Organization -- but it is doing so carefully. China's rise was a primary motivation for the move of the Kazakh capital from Almaty, which is within easy reach of the Chinese border, to Astana, further to the north and west.
CNPC already has reserves in western Kazakhstan, and two pipelines of 1,250 miles and 1,865 miles each under construction that will connect them to China's Xinjiang province starting in 2008. PetroKazakhstan's assets also are located to the west of CNPC's operations, and the Canadian firm has a pipeline sending oil west to Kazakhstan's western oil infrastructure -- a flow that China would love to reverse. Astana's multi-vectored foreign policy, however, calls for it to limit China's influence in its oil sector.
Selling PetroKazakhstan to India, on the other hand, would not only limit Chinese influence in Kazakhstan, it also would introduce a new player to the Kazakh foreign policy equation -- and as far as Astana is concerned, the more foreign players there are fighting over it, the better off it will be. This is a compelling reason for the Kazakh government to favor an Indian bid.
Such a decision, however, would be met with dismay in Beijing, and the only thing worse than having King Kong as your next door neighbor is making him mad. Proximity means that Kazakhstan has to live with China whether it wants to or not, which means playing nice at times. The question now is whether Astana feels it already has made sufficient concessions to Beijing in eastern Kazakhstan that it can pacify an irritated China if it gives PetroKazakhstan to India.
The decision over PetroKazakhstan, then, will reveal how intent Astana is on maintaining its independence, and how close it is willing to get to Beijing.
Copyright 2005 Strategic Forecasting Inc. All rights reserved.
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