Kazakh Spat Casts Light on China Deals

Exiled Banker Alleges Chinese Oil Firm Routed $166 Million to Associate of Top Oil Executive, as Part of 2003 State Sale

An acrimonious battle between two prominent Kazakh businessmen has triggered a slew of allegations that purport to lift a lid on how Chinese companies built such a commanding position in Kazakhstan's oil industry.

The dispute pits a fugitive banker against one of the country's top oil executives—Timur Kulibayev, the powerful son-in-law of Kazakhstan's long-serving president.

Mukhtar Ablyazov, now living in London, accuses Mr. Kulibayev, the chairman of Kazakhstan's state oil company, of being behind several privatization deals over the past 10 years in which state assets were allegedly sold off at well below market value.

Anatomy of a Deal

The banker claims some of those transactions were made possible by private payments to Mr. Kulibayev's associates. One of his most incendiary allegations centers on a 2003 deal in which a Chinese oil company bought a 25% stake in a Kazakh oil producer. As part of that complex transaction, a business partner of Mr. Kulibayev allegedly realized a $166 million gain on an initial investment of $49, corporate documents of the deals indicate.

Mr. Kulibayev and the partner have denied the allegations.

The claims first surfaced in January in a series of open letters from Mr. Ablyazov to Kazakh authorities. His letters, accompanied by a trove of documents, were also published in the Kazakh media.

Mr. Ablyazov says his motivation is to expose what he calls "theft of state property on a grand scale" in the oil-rich former Soviet republic run by Mr. Kulibayev's father-in-law, President Nursultan Nazarbayev.

"It is important that the Kazakh people understand how these shadowy transactions have been conducted and what sort of methods are being used by those close to the president to gain creeping control over the economy in order...to enrich themselves," he said in a statement. "Valuable natural resources are being delivered into the hands of China without any public debate."

Some Kazakh observers see Mr. Ablyazov's motives as more personal: Mr. Kulibayev is deputy chairman of the state-owned national welfare fund that recently took control of Mr. Ablyazov's Kazakh bank, BTA. Last year, Kazakh prosecutors issued an arrest warrant for Mr. Ablyazov on suspicion he embezzled money from BTA and laundered it through loans to companies he secretly controlled.

Mr. Ablyazov, long a political opponent of President Nazarbayev, denies the allegations against him. He fled Kazakhstan for London last year shortly before the authorities took over BTA, saying he feared arrest.

Last week, the Kazakh financial police said it had investigated all of Mr. Ablyazov's allegations and found them "groundless." It said it planned no prosecutions in the matter.

Mr. Kulibayev initially took extraordinary steps to squelch Mr. Ablyazov's claims. When opposition newspapers there published the open letters the banker wrote to law-enforcement agencies in January outlining his allegations, Mr. Kulibayev won court injunctions ordering the print runs seized and banning publication of any material impugning his honor. After the newspapers appealed, the court overturned its decision.

Some of the most explosive allegations concern a deal involving a China-owned oil company, China National Petroleum Corp., or CNPC. They come at a time when Chinese authorities put four officials from Anglo-Australian mining company Rio Tinto on trial this week on charges of accepting bribes.
The Ablyazov affair has aroused passions in Kazakhstan, where the issue of Chinese oil investment is highly controversial.

Western oil majors, which in the early days of Kazakh independence won a string of historic contracts to develop some of the country's largest oil fields, have seen their influence wane in recent years as that of Chinese companies such as CNPC has grown.

Only last year, CNPC teamed up with the Kazakh state oil firm in a $2.6 billion deal to buy Kazakh oil producer MangistauMunaiGas, a deal that left Chinese interests in control of a quarter of Kazakh oil production.

China's rise has come despite the grass-roots mistrust many ethnic Kazakhs feel toward their more populous eastern neighbor. In January, Kazakh demonstrators protesting China's growing influence clashed with police in the country's business capital, Almaty.

One set of Mr. Ablyazov's allegations center on the 2003 sale of Kazakhstan's 25% stake in Aktobe Munaigas, the country's fourth-largest oil producer. At the time, Aktobe was already 60% owned by a CNPC unit.

Kazakh authorities sought about $380 million at the May 28 sale of the stake, but found no willing buyers. A day later, a unit of CNPC bought the stake for $150 million—less than half the original asking price. That would value the company, which produced about 100,000 barrels a day in 2003, at about $600 million.

That same year, CNPC-Aktobe MunaiGas reported profit of about $245 million, according to a copy of its 2003 annual report.

Since then, Kazakh oil assets have generally fetched higher prices, partly a reflection of rising oil prices. In 2005, CNPC paid $4.18 billion for a company called Petrokazakhstan Inc. an oil producer slightly larger than Aktobe but with only about half of its crude reserves.

A high executive officer of Kazakh gas company and a son-in-law of Kazakhstan's President Nursultan Nazarbayev Timur Kulibayev at the ceremony of opening the first stage of a support base for oil operations in the Caspian Sea.

The vehicle the Chinese oil company used to acquire the Aktobe stake was a company incorporated in the British Virgin Islands in April 2003, called CNPC International (Caspian) Ltd, or CICL. According to a partnership agreement leaked by Mr. Ablyazov to the Kazakh press, CNPC set up CICL through one of its subsidiaries, which paid all the issued capital of $100.

It also agreed to sell, for $49, a 49% stake in CICL to a British Virgin Islands company called Darley Investment Services Inc. That firm is owned by Arvind Tiku, an Indian national who is a business partner of Mr. Kulibayev. The two are shareholders in KazStroyService, a private oil engineering, procurement and construction company. The documents that form the basis of Mr. Ablyazov's allegations were given to him by a former business associate of Mr. Tiku.
Darley's nominal investment soon appeared to pay massive returns, the documents suggest.

Under the terms of the leaked partnership agreement, CNPC, through its subsidiary, agreed to loan CICL the entire sum needed to buy the 25% stake in Aktobe Munaigaz. The same document said that once the sale was complete and CICL owned the shares, CNPC agreed to buy back 29% of Darley's stake in CICL for $25.9 million.

In a series of deals over the next two years, Darley sold its remaining 20% stake in CICL to other offshore subsidiaries of CNPC for $140 million, according to Mr. Ablyazov, who provided summaries from Darley's bank account showing the alleged payments. That brought Darley's earnings from the Aktobe Munaigaz deal to $165.9 million, for an initial outlay of $49, according to the documents.
In his letter to Kazakh officials, Mr. Ablyazov alleged the $165.9 million paid to Darley was "effectively a bribe given to Timur Kulibayev, for organizing the sale of a state-owned asset for much less than the market price."

Mr. Ablyazov provides no evidence that the money that flowed through Darley ultimately benefited Mr. Kulibayev.

In a statement, Magwells, a London-based law firm representing Mr. Kulibayev, said its client is not, and has never been, a shareholder in Darley, and wasn't involved in the Aktobe Munaigaz transaction.

The Chinese oil company also contested Mr. Ablyazov's account of the transaction. CNPC said Mr. Ablyazov's claims were "groundless and libelous." In a statement, the company's Hong Kong and New York-listed subsidiary Petrochina said it "conducts its international business according to best business practice, with high integrity and in full compliance with regulations."

China has general laws against commercial bribery within the country. It has no equivalent of the United States' Foreign Corrupt Practices Act, which prohibits companies from bribing company or government officials abroad.

Through his London lawyer David Price, Mr. Tiku said Mr. Ablyazov's account of the Aktobe Munaigas deal "does not provide a true reflection of the transaction," and the facts as stated in it were "incomplete and inaccurate." In part, he said, the account does not reflect "economic conditions which played an important part in the outcome" of the Aktobe Munaigas transaction, including oil prices he says trebled between 2003 and 2005.

Mr. Tiku said he had made full and open disclosure to the Kazakh investigating authorities, but said that "due to confidentiality obligations" he was unable to provide further comment.

The Kazakh financial police said Mr. Ablyazov "presented only a part of the documents, which don't reflect the whole picture" of the deals. Neither the police nor Mr. Tiku would provide additional documentation.

In a separate development, Kazakhstan's financial police said Friday they have launched a criminal probe into an oil consortium led by Britain's BG Group Plc and Italy's Eni SpA, alleging it produced more oil and gas than its quota agreement permits. The police alleged the extra production at the Karachaganak field generated about $700 million worth of "illegal revenues." A BG spokesman declined to comment on whether its production that year was in accordance with the quota.

Karachaganak, the country's second-largest field, is the only major project in the country wholly operated by a foreign-owned team. The government had previously moved against the operating consortium for alleged labor and environmental violations, which industry observers say is related to efforts by KazMunaiGaz, the Kazakh state oil company headed by Mr. Kulibayev, to acquire a stake in the field.

—Shai Oster in Beijingand James Herron in London and Kadyr Toktogulov in Almaty, Kazakhstan, contributed to this article.

Wall Street Journal MARCH 27, 2010

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