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RUEAIIA/CIA WASHDC
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UNCLAS SECTION 01 OF 03 ASTANA 001035 
 
SENSITIVE 
SIPDIS 
 
STATE FOR SCA/CEN, EAP/CM, EEB 
 
E.O. 12958: N/A 
TAGS: PREL PINR ECON EPET EINV ELAB SMIG CH KZ
SUBJECT:  KAZAKHSTAN:  DOING BUSINESS WITH CHINA 
 
REF: (A) ASTANA 0678 
 (B) ASTANA 0982 
 
ASTANA 00001035  001.3 OF 003 
 
 
¶1.  (U) Sensitive but unclassified.  Not for public Internet. 
 
¶2.  (SBU) SUMMARY:  On June 11, Energy Officer met separately with a Western manager from the U.S. oil services company Baker Hughes and an American partner with the consulting firm PricewaterhouseCoopers, both of whom shared experiences and insights about doing business with Chinese companies in Kazakhstan.  In particular, they noted that once Chinese companies sign a contract, they "close the circle," bring in their own personnel and equipment -- often illegally -- and control the project tightly, under close supervision from Beijing.  A Chinese Embassy official confirmed 
China's strategic interest in Kazakhstan's energy resources and 
acknowledged that Chinese companies sometimes violate Kazakhstan's immigration and customs laws.  END SUMMARY. 
 
MAKING PROMISES THEY CANNOT KEEP 
 
¶3.  (SBU) On June 11, Energy Officer met with XXXXXXXXXXXX 
(protect throughout), Caspian Sales Manager for Baker Hughes. 
XXXXXXXXXXXX. He said that Baker Hughes currently employs Chinese nationals in Kazakhstan and has oil services contracts with AktobeMunaiGas, in which China National Petroleum Corporation (CNPC) has an 85 percent stake, and PetroKazakhstan, in which CNPC owns 67 percent.  XXXXXXXXXXXXsaid that American companies bidding against Chinese companies are 
often at a disadvantage, because "the Chinese companies make 
promises they know they cannot keep.  They make these impossible 
commitments on time and cost that they admit in private they will 
not be able to meet.  But that's what goes in the bid, and they win 
the work." 
 
CHINA'S INTEGRATED ENERGY STRATEGY 
 
¶4.  (SBU) XXXXXXXXXXXX said he understands the logic behind CNPC's acquisition of 50 percent of MangistauMunaiGas (MMG, reftel A), its construction of oil and gas pipelines to China, its ownership of the Shymkent oil refinery, and its plans to build a new oil refinery in 
eastern Kazakhstan.  "They are building an integrated production, 
processing, and delivery system.  And for China, Kazakhstan has the 
cheapest oil in the world.  It's close and it's convenient.  This is 
a very strategic move on their part," he said.  XXXXXXXXXXXX predicted that China will increase its oil imports from Kazakhstan by 40 percent over the next three to five years and will begin to sell 
refined oil products to Kazakhstan in the near future.  He said that 
CNPC is immune from rising oil prices because they own a diverse 
portfolio of upstream and downstream assets around the world and can balance and swap reserves as necessary.  "CNPC is in a position now where they can manipulate the market," XXXXXXXXXXXX said.  (NOTE:  Even with CNPC's recent acquisition of MMG, China controls no more than 18 percent of Kazakhstan's current oil production.  U.S. companies Chevron and ExxonMobil combined to produce approximately 22 percent of Kazakhstan's oil in 2008.  END NOTE). 
 
DOING BUSINESS WITH CHINESE COMPANIES 
 
¶5.  (SBU) When asked to describe how the Chinese operate in 
Kazakhstan, XXXXXXXXXXXX said that they typically buy a medium-sized oil field, something productive and valuable, but "under the radar." According to XXXXXXXXXXXX, the Chinese then bring in their own workers, their own suppliers, and their own equipment.  They do not hire very many local staff or subcontractors and show no interest in developing the professional skills or capacity of local staff.  They also do not share information about operations, even with their own staff and subcontractors.  XXXXXXXXXXXX said CNPC's projects are tightly controlled by Chinese management and are run "almost like military operations.  There is a checklist for everything and all decisions follow a clear chain of command that goes straight to Beijing." When told that CNPC twice declined to meet Energy Officer in Almaty, 
 
ASTANA 00001035  002.2 OF 003 
 
 
XXXXXXXXXXXX said he was not surprised.  "They won't talk to you.  They won't talk to anybody," he said. 
 
CLOSING THE CIRCLE 
 
¶6.  (SBU) On June 11, Energy Officer met with XXXXXXXXXXXX
(protect), XXXXXXXXXXXX PricewaterhouseCoopers. XXXXXXXXXXXX has been resident in Almaty provides tax and legal advice to a wide range of foreign investors in Kazakhstan, including Chinese companies active in the oil and gas and mining sectors.  XXXXXXXXXXXXindependently confirmed the Chinese modus operandi described by XXXXXXXXXXXX.  She said that before a transaction, Chinese clients "deal above board and play by the rules."  They pay promptly, hire top talent, and conduct thorough due diligence to understand the risks and costs of acquiring property, registering as a legal entity, hiring local and expatriate staff, and purchasing subsoil licenses. However, according to XXXXXXXXXXXX, after the transaction is over, "they close the circle tight."  XXXXXXXXXXXX said her Chinese clients then bring 
in their own people, systems, procedures, and equipment.  She said 
that she does not have much information about what happens 
operationally at this stage, because her Chinese clients are more 
closed and opaque after closing a deal. 
 
CASH IS KING 
 
¶7.  (SBU) Commenting on CNPC's labor and immigration practices, 
XXXXXXXXXXXX said it is common knowledge that Chinese workers entering Kazakhstan always wait at the end of the line and carry plenty of cash.  He said that is because most of them enter the country 
illegally, without required work permits, and must pay bribes in 
order to pass through immigration, labor, and customs controls. 
XXXXXXXXXXXX acknowledged that CNPC and its subsidiaries have paid fines for past violations of labor and environmental regulations, but he said this has had no effect on their business practices.  "They have plenty of money and have no problem resolving these issues by paying cash."  When asked about CNPC's relationship with national oil company KazMunaiGas (KMG) -- which has insisted on a more prominent role in the development of the Kashagan oil field -- XXXXXXXXXXXX said simply, "KMG carries weight, but CNPC controls the cash, so they make the calls." 
 
CHINESE EMBASSY OFFICIAL DISCUSSES ENERGY, LABOR ISSUES 
 
¶8.  (SBU) On May 25, Energy Officer met with XXXXXXXXXXXX of the Chinese embassy.  XXXXXXXXXXXX the Chinese Embassy, 
acknowledged China's long-term, strategic interest in securing 
access to Kazakhstan's energy resources.  He said CNPC aggressively pursued the MangistauMunaiGas acquisition, but insisted the company competed fairly for the asset.  According to XXXXXXXXXXXX, Kazakhstan selected CNPC because it balances the presence of U.S., European, and Russian oil companies in western Kazakhstan.  He noted that Chinese companies have also lost out on lucrative projects, such as the Balkhash coal-fired power plant, which he said was first promised to a Chinese company, but was eventually awarded to Korea's KEPCO Samsung. 
 
¶9.  (SBU) Anticipating questions about the labor practices of 
Chinese companies in Kazakhstan, XXXXXXXXXXXX said it is very difficult to obtain work permits for Chinese expatriates with the necessary skills and experience to produce oil in Kazakhstan's challenging environment.  He said Chinese companies would prefer to use cheaper local labor, but he complained that there are not enough qualified Kazakhstani specialists to staff ongoing projects.  He also said that Chinese oil companies work under extreme deadlines and have no time to train local labor on projects that must be finished this year.  He admitted that Chinese companies often bring expatriate 
employees into Kazakhstan without visas and work permits, but 
quickly added, "Of course, the Chinese Embassy requires the 
companies to comply with local legislation." 
 
 
ASTANA 00001035  003.2 OF 003 
 
 
¶10.  (SBU) COMMENT:  Until a year ago, Kazakhstan was leery of 
Chinese investment.  With the onset of the economic crisis, China 
became a more attractive partner, because it brought ready capital. 
Nonetheless, Kazakhstani businessmen and government officials are 
frank in their criticism of the practices described above to Embassy 
officers.  For instance, a Deputy Minister of Finance, referring to 
amendments to the subsoil law which could allow abrogation of 
contracts for national security reasons, pointedly told the DCM, 
"Don't worry.  The Law is not aimed at you.  It is for the Chinese." 
 END COMMENT. 
 
HOAGLAND