China Scores Win for Capitalism!

Brian Hicks

Updated October 26, 2005

Today, the Chinese petroleum industry achieved a hefty victory in its drive to procure enough oil to keep China burgeoning for decades to come. Chinese company CNPC has taken over Canadian-based Kazakh oil firm PetroKazakhstan (PKZ.TO) with a US $4.18 billion buyout.

Canadian courts had been deliberating on the sale of PetroKazakhstan, whose offices are in Calgary. The legal sticking point had been a Russian-Kazakh joint venture called Turgai Petroleum, which Russian firm LUKOIL insisted should block the CNPC acquisition.

Kazakhstan lies directly west of China and south of Russia and holds the Caspian region’s largest recoverable oil reserves, touching off recent bidding wars between its neighbors. Earlier this year, LUKOIL overpaid for Toronto-listed Kazakh producer Nelson Resources, according to Alfa Bank. Clearly, Kazakh oil is at a premium.

The PetroKazakhstan takeover is the latest, but certainly not last, in a series of Chinese moves to pump oil from as many directions as possible, which will keep its energy flow constant in case of instability in one adjacent region or another. For its part, Kazakhstan will benefit by purchasing 1/3 of PetroKazakhstan, once it is securely in Chinese hands.

In recent years, the Kazakh government has accused PetroKazakhstan of monopolizing the local petrochemical market, proving that just because a company bears a country’s name, the government is not necessarily a fan of said company.

Through the CNPC deal, Kazakhstan will also gain access to its country’s most modern refinery, which is operated by PetroKazakhstan. The 1,860-mile Kazakhstan-China pipeline is set to be completed in December of this year.

Why is this important?

First, when the American government blocked the sale of Unocal to the Chinese, many thought this sounded the death knell to the Chinese economy.

But here, I always gave my readers the "basketball" analogy: If a 6-foot guard is trying to score a bucket facing a center who is 7’4, it’s best not to jump over him. Rather, it’s easier to dribble around the taller opponent.

This is exactly what China is doing: Going around the US looking to snap up oil assets.

Second, Canada’s oil assets are now open season for the highest bidder. And the highest bidder no longer speaks English, but Mandarin.

-Sam Hopkins
Editor, Waking Dragon

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