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DE RUEHTA #0678/01 1130739
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O 230739Z APR 09
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 5219
INFO RUCNCIS/CIS COLLECTIVE 1524
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UNCLAS SECTION 01 OF 02 ASTANA 000678 
 
SIPDIS 
 
STATE FOR SCA/CEN, EAP/CM, EEB/ESC 
STATE PLEASE PASS TO USTDA FOR DAN STEIN 
 
E.O. 12958: N/A 
TAGS: PGOV PREL ECON EPET EINV RS IR KZ
SUBJECT:  KAZAKHSTAN:  CHINA NATIONAL PETROLEUM CORPORATION ACQUIRES 
50 PERCENT STAKE IN MANGISTAUMUNAIGAS 
 
ASTANA 00000678  001.2 OF 002 
 
 
¶1.  (U) Sensitive but unclassified.  Not for public Internet. 
 
¶2.  (U) SUMMARY:  On April 16, during President Nazarbayev's state 
visit to Beijing, KazMunaiGas (KMG) and China National Petroleum 
Corporation (CNPC) announced that they will jointly acquire the 
production assets of MangistauMunaiGas (MMG), Kazakhstan's 
fourth-largest oil producer at 100,000 barrels per day.  The two 
companies will manage the assets via Mangistau Investments BV, an 
investment vehicle in which both companies have a 50 percent stake. 
CNPC will reportedly pay $1.4 billion for its share in MMG, which 
has proven reserves of 812 million tons of crude, including 194 
million tons of extractable reserves.  KMG will use a $5 billion 
loan from the Chinese to pay for its stake.  The transaction is 
scheduled be finalized by the end of July 2009, after relevant 
regulatory approvals are obtained.  The assets of MMG acquired by 
KMG and CNPC include the Kalamkas deposit and Zhetybai group.  MMG's 
shares in the Pavlodar oil refinery were excluded from the deal. 
The Chinese sweetened the deal through an additional $5 billion loan 
to the Development Bank of Kazakhstan.  END SUMMARY. 
 
¶3.  (U) On April 16, during President Nazarbayev's state visit to 
Beijing, KMG and CNPC Exploration and Development Company (CNPC E&D) 
signed an agreement to acquire 100% of the common shares in 
MangistauMunaiGas from Central Asia Petroleum Ltd.  The shares in 
MMG will be acquired through Mangistau Investments B.V., a joint 
venture co-owned by KMG and CNPC E&D.  The transaction is scheduled 
to close at the end of July, after relevant regulatory approvals 
have been obtained, and will be funded by the Export-Import Bank of 
China.  The assets acquired by KMG and CNPC E&D include the Kalamkas 
deposit, Zhetybai group, and other exploration blocks owned by MMG. 
Notably, the shares and assets of the Pavlodar oil refinery, 58 
percent of which was owned by MMG, were excluded from the 
transaction and are expected to be acquired and managed solely by 
KMG. 
 
¶4.  (SBU) On April 17, KMG First Vice President Maksat Idenov told 
the Ambassador at a private dinner that he had two comments about 
the deal with China.  "First," he said, "this is the decision of the 
government, and of course we respect it and will implement it. 
Second, I will tell you what I would tell my wife in the kitchen. 
It's a shame.  When we deal with the Chinese, there is always 
concern about quality and performance, safety and security, health 
and the environment.  But how can you walk away from $10 billion?" 
(COMMENT:  Idenov did not accompany the official delegation to 
Beijing, so it appears that this deal was made without his direct 
involvement, which is unusual for a transaction of this magnitude. 
We take Idenov's reference to "the government" to mean President 
Nazarbayev and/or Prime Minister Masimov.  END COMMENT). 
 
¶5.  (U) According to the terms of the deal, KMG will receive $5 
billion in financial support to finance acquisition of its share of 
MMG, and construction of the Beineu-Bozoi-Akbulak gas pipeline, 
which will traverse southern Kazakhstan and lessen the country's 
dependence on imported natural gas from Uzbekistan.  In addition, 
the Development Bank of Kazakhstan will receive a $5 billion loan 
from the Export-Import Bank of China. 
 
¶6.  (SBU) MMG was established in 1995 and was reportedly controlled 
by President Nazarbayev's then-son-in-law, Rakhat Aliyev, through 
the Central Asia Petroleum Company, incorporated in the British 
Virgin Islands, until his 2007 falling out with Nazarbayev.  MMG is 
one of the largest enterprises in Mangistau oblast and the fourth 
largest oil producer in Kazakhstan at 100,000 bpd.  The company has 
36 oil and gas deposits, 15 of which are under development.  The 
largest deposits in terms of reserves are Kalamkas and Zhetybai.  In 
1996, the company received 25-year licenses from the government to 
develop the oil and gas fields of Asar, Burmasha, Kalamkas, East 
Zhetybai, and Oimasha; the oil fields of Alatobe and North Asar; and 
the oil-and-gas-condensate fields Zhetybai and South Zhetybai. 
 
¶7.  (SBU) According to Tanya Costello, Director of the Eurasia 
Group, the acquisition of MMG is particularly important for CNPC 
 
ASTANA 00000678  002.2 OF 002 
 
 
because MMG is already producing oil and does not require 
significant development investment.  It also produces heavy oil, 
which is needed to mix with the lighter oil currently produced in 
the Turgai Basin that travels via the Kazakhstani-China oil 
pipeline.  Costello said that the lighter oil from the Turgai Basin 
risks freezing during winter months without being blended with 
heavier crude. 
 
¶8.  (SBU) Costello also commented on the $5 billion loan from 
China's Export-Import Bank which will go to the Development Bank of 
Kazakhstan, which is owned by the Samruk-Kazyna National Welfare 
Fund, where President Nazarbayev's son-in-law Timur Kulibayev serves 
as Deputy Chairman.  She said it is unclear exactly which sectors of 
the economy will receive support from this loan and worried that 
funds will be directed to companies associated with Kulibayev 
himself rather than the most vulnerable parts of the economy. 
 
¶9.  (U) In addition to purchasing 50 percent of MMG, China plans to 
build a refinery in Kazakhstan, near the Chinese border.  In a 
newspaper interview on April 14, Chinese Ambassador to Kazakhstan 
Cheng Guoping said the original plan was to build the refinery in 
China, "but the Kazakhstani side changed their minds and wants the 
refinery to be on its territory.  Kazakhstan badly needs oil 
products and we do not mind."  Cheng added that more than 300 
Chinese companies have invested $10 billion in Kazakhstan and will 
continue to invest in the country.  Kairat Kelimbetov, CEO of the 
Samruk-Kazyna National Welfare Fund, said at a press conference on 
April 17 that he expects Chinese firms to invest more than $5 
billion in Kazakhstan in 2009.  "In addition to oil exploration and 
production," he said, "we expect to sign contracts with the Chinese 
in the uranium and power generation sectors.  We also see 
opportunities for Chinese investment in the mining, chemical, 
petrochemical, and non-energy sectors."  He said Kazakhstani energy 
officials will meet China's National Energy Administration head 
Zhang Guobao on April 27 to discuss uranium cooperation.  Kelimbetov 
said that Chinese uranium firms will develop the uranium mine 
Semisbay, although no specific terms have been negotiated. 
 
¶10.  (U) CNPC also owns shares in five oil producers in Kazakhstan: 
AktobeMunaiGas, North Buzachi, PetroKazakhstan-Kumkol, KazGerMunai, 
and ADM.  CNPC acquired two-thirds of PetroKazakhstan in 2005 for $4 
billion, including the Shymkent oil refinery, which it operates 
jointly with KMG.  PetroKazakhstan's annual crude oil production now 
exceeds 200,000 bpd, accounting for 14 percent of Kazakhstan's total 
oil output. 
 
¶11.  (SBU) COMMENT:  MangistauMunaiGas was an attractive target for 
China, which beat out India's ONGC and Russia's Gazpromneft for an 
ownership stake in the company -- presumably by offering the best 
financial package to the Kazakhstanis.  Production from MMG's fields 
could eventually supply the Atyrau-Kenkiyak-Kumkol-Atasu-Alashankou 
oil pipeline to China, which has a design capacity of 200,000 bpd 
and is expected to be completed this year.  The MMG purchase may 
very well have been accelerated by the global economic crisis.  As 
senior MFA official Talgat Kaliyev (please protect) put it to us on 
April 22, "We needed the money."  That said, we do not view the deal 
as representing a shift away from the West in the development of 
Kazakhstan's oil and gas resources.  Western companies continue to 
play the leading roles in Kazakhstan's three major hydrocarbon 
projects -- Kashagan, Tengiz, and Karachaganak -- and continue to 
look for new investment opportunities.  The China deal is, in fact, 
consistent with the U.S. objective of ensuring Kazakhstan has 
multiple routes for its energy exports and is less reliant on 
transport through Russia.  END COMMENT. 
 
HOAGLAND