This post is for the benefit of those few people on this thread and the many lurkers who are actually trying to deal with this incredibly complex story from a fundamental point of view...and it will be a long one. So, those who have a limited attention span or feel that idle speculation need not be backed up with any knowledge specific to this particular situation, should hit the "NEXT" button right now.
The rest of you might be interested in knowing that I attended a private, invitation-only symposium on the economic future of Central Asia in Washington, DC on Wednesday. The thirty or so attendees included consultants to the oil industry, experts on Central Asia, former and current oil company executives...and my friend and I. The focus of the conference was Kazakhstan, Azerbaijan, and Turkmenistan. While I will not bore you with all the details, suffice it to say that I learned more about the political and economic dynamics of the region than I ever thought I would want to know. here are some of the highlights:
- Azerbaijan and Kazakhstan were the main focus since they have most of the oil. Turkmenistan is important, as well, but more for its natural gas deposits than for oil. Azerbaijan has reached the saturation point in terms of opportunities in terms of possible oil exploration and production deals. It seems that everyone who wanted to be there is there. AMOCO was described as being a huge influence in the country as a sponsor of a huge array of social and educational programs...a sort of mini-welfare state within the state. Since Azerbaijan is max'd out, it was stated that the only remaing opportunities lie in Kazakhstan where, to date, Chevron has been the main player.
However, it was pointed out that there are some fundamental challenges facing oil companies in Kazakhstan that they did not face in Azerbaijan. In the latter country, oil companies signed fairly standard PSC's (Production Sharing Contracts) with the government. In Kazakhstan, knowing the "art of the deal" is the key to doing business .
A guest speaker noted that, to make a deal in Kazakhstan, it was a question of who you knew in and outside the government, what "incentives" you were prepared to offer the political elite, etc. In other words, the Kazaks do not seem to be interested in straight royalty agreements and tax revenue. They want to be a part of the deal and I am not talking about the government per se or the national oil company. Those American companies that master the art of setting up financial packages or corporate structures that, in some way, benefit the political elite will succeed. Those that do not might find it difficult going.
While I was listening to the above I could not help thinking about MSUP which some of you will recall owns the License to the concession. Two Kazak companies, DANK and Enterdynamics, own between them 25% of MSUP. Med Shipping owns 5% and AIPN owns 70% most of which will be turned over to one or several major oil companies in return for substantial cash payments. My guess is that AIPN will be left with a 20% on-going interest in the License Area and revenue produced from it over the years. Furthermore, Enterdynamics owns about 4 million shares of AIPC. Now, I am convinced that both Enterdynamics and DANK, two companies that nobody seems to have heard of, are not real companies with real business activity. Rather, they seem to exist only to provide their principals with a vehicle through which they could secure an equity interest in this deal which they must know to be valuable. The fact that they also own 10% of AIPC stock means that they stand to benefit from the appreciation of AIPN stock. Their equity interest also provides us with a very important insurance policy against getting screwed by the government. I have no doubt that the people behind DANK and Enterdynamics would qualify for a prominent listing in the Who's Who of Kazakhstan. So, on the surface, it would seem that George Faris and his colleagues seem to have mastered the "art of the deal" as described by the speaker at Wednesday's conference.
- I spoke to a gentleman at the conference who had just returned from spending 6 months in Almaty as a consultant to UnoCal which, until recently, owned the "76" chain of gas stations.He told me that UnoCal was flush with cash..$2 billion to be exact..and had hired him as part of their effort to bid for one of the pipeline projects. They lost the bid but still have all that cash...and NO presence in Kazakhstan. While he was in Almaty he had heard about AIPC's situation and seemed to have been following the story through wire reports (if he was, others must have been as well).We had a long talk.
When I asked him which oil companies, in his opinion, would be interested in getting a stake in AIPC's concession, the first name out of his mouth without hesitation was AMOCO. I then asked him if it was conceivable that a major would pay a lot of money for a percentage of a concession that had only been evaluated for "potential" oil based on Soviet data. He responded with an emphatic "yes" claiming that everybody knows the oil is there and the only way to be a "player" in this game is to own an interest in an oil concession. He said nobody wants to be left "hors jeux" so, if the data were verified they would pay or"potential" oil and simply "inventory" the concession...leaving worries bout rigs and pipelines to a later date. The key is to get into the game with a concession most likely to produce oil in the long run.
Playing "devil's advocate", I asked him what possible valuation could be put on a concession that didn't have a single barrel of "proved" reserves let alone a single producing well. He said it was a simple method of valuation. The acquiring oil company would simply value the "potential" reserves at between .50-$1/barrel. So, if a field had 1 billion barrels "potential", they would pay $500 million for the rights. The valuation for "proved" reserves is about $6. So if the field only yielded a quarter of the "potential" reserves in "proved" reserves...the field would still be worth $1.5 billion...which they would have obtained for only $500 million. Get the picture? This man who seemed to have at least 30 years experince in the oil industry did not hesitate in asserting that oil companies would definitly make a deal based on verifiable (WaveTech) "potential" estimates. Logic and Cathi dictate that he is right. If you waut until the reserves are "proved" you end up paying a much higher price per barrel.
On a humorous note, it was also pointed out that the President of Kaakhstan is running out of brothers-in-law and sons-in-law to place at the head of private Kazak companies. Once again, this was an example of what it is like doing business in Kazakhstan. What's that rumor we have all heard that the President's brother-in-law is the Chairman of MSUP?
There is much more I could discuss about the geo-politics of the region. Perhaps I will some other tim. For now, suffice it to say that I came out of that meeting convinced that AIPC has made all the right moves and that we are about to see the fruits of his shrewdness and diplomacy. I know it sounds weird, but, as shareholders in this company, we are on the inside track of the Kazak oil rush. If the Kazaks are right, the Chikaduk field alone is as big as Tengiz which has "proved" reserves of 10 billion barrels. There is a lot at stake in this deal and the numbers that will eventually be released will, in my opinion, be mind-boggling. Be patient..it's almost time to start the engines!
Cheers...Faris |
