Senior Legislators Press S.E.C.’s Levitt on PetroChina IPO — Missives from Reps. Oxley and Baucus Should be Wake-Up Call to S.E.C., U.S. Investors

(Washington, D.C.): The rising crescendo of opposition to the bid by China National
Petroleum
Company (CNPC) to penetrate the U.S. capital markets reached new heights in recent days —
i.e., at senior levels on Capitol Hill. Specifically, two chairmen of relevant House
subcommittees
in letters to the Chairman of the Securities and Exchange Commission, Arthur Levitt, Jr.,
signaled serious concerns about the multi-billion dollar Initial Public Offering CNPC’s wholly
owned subsidiary, PetroChina, is expected to offer after listing next month on the New York
Stock Exchange.

The first missive to hit the SEC chairman’s desk was sent on 7 March over the
signatures of
Representatives Michael Oxley (R-OH), Chairman of the House Commerce
Subcommittee on
Financial and Hazardous Materials — which has direct oversight over the SEC — and
Spencer
Bachus (R.-AL), Chairman of the House Banking Subcommittee on Domestic and
International
Monetary Policy. Noting that there is “considerable controversy surrounding this proposed
IPO,” the Oxley-Bachus letter laid down a clear marker for Chairman Levitt: “To ensure
that
investors have full and accurate information regarding this public offering, we request
your
assurance that all requirements under the Securities Act of 1933 have been met, in
particular
the required disclosure relating to the intended use of proceeds from the offering.”
(Emphasis
added.)

In order to amplify and reinforce the concerns that prompted the 7 March
correspondence,
Representative Bachus sent the following, more detailed communication to Chairman Levitt on
16 March. It raises questions about the lack of transparency associated with the draft
prospectus now being circulated for the PetroChina IPO — involving, among other things, both
serious omissions and potentially problematic commissions concerning the use of the proceeds
and their users. Rep. Baucus is to be commended for his call for a “thorough
investigation” by
the SEC of “the prospect that many other foreign companies utilizing the American capital
markets to finance activities that are directly opposed to vital U.S. interests…in order to ensure
that…SEC procedures …are appropriate for guarding our vital national interests.”

March 16, 2000

Arthur Levitt
Chairman
U.S. Securities and Exchange Commission
450 Fifth Street, NW
Washington, D.C. 20549

Dear Mr. Levitt:

I am writing to express my serious concerns about the proposed PetroChina IPO that was
registered with the SEC on Monday, February 28, 2000. My primary concern is that there has
been insufficient disclosure of the potential risks to investors and of the intended use of the
proceeds. The use of proceeds section does not provide meaningful disclosure of the actual use
of the proceeds by PetroChina nor the extent and use of the proceeds that would accrue to CNPC.
The PetroChina filing also fails to mention the widespread reports of a divestment campaign or
the realistic possibility that future sanctions could materially affect the value of its shares.

My second concern is that there may have been violations of the proper procedures for SEC
filings based on the events that have already occurred during the processing of this proposed
IPO. As a result of these two concerns, I am requesting that you require an extended three month
period of review before the registration becomes effective and that you decline any request to
accelerate the effective date. This delay is necessary so that the SEC will have enough time to
determine whether sufficient disclosure has been provided to potential investors and that no
irregularities occurred in the registration process for the PetroChina IPO.

As you are aware, PetroChina is a subsidiary largely owned by the China National Petroleum
Corporation (CNPC), which is itself a state-owned entity controlled by the government of the
People’s Republic of China (PRC). CNPC has extensive dealings in countries that are currently
under United States sanctions, such as Sudan and Iran, and American companies or persons are
legally prohibited from direct or indirect business dealings with these countries to protect vital
U.S. national interests.

In particular, CNPC is the largest investor in one of Sudan’s most profitable enterprises, and
provides vital hard currency for Sudan’s government, the National Islamic Front (NIF). You
should be aware that oil revenues largely support and finance NIF’s egregious violations of
human rights. There is no question that oil revenues are an integral part of NIF’s genocidal war
on its own population. The Khartoum regime has waged a relentless 17-year war killing over
2,000,000 residents, who are primarily innocent civilians.

The connection between oil revenue and violations of law has been widely recognized in
Sudan
as well as other countries under U.S. sanctions. For instance, with respect to Iran in 1995,
President Clinton’s former Under Secretary of State for Policy said, “”A straight line links Iran’s
oil income and its ability to sponsor terrorism, build weapons of mass destruction, and acquire
sophisticated armaments. Any government or private company that helps Iran to expand its oil
must accept that it is contributing to this menace.” Indeed, Sudan’s government is using its oil
revenue to prosecute a vicious genocidal war against Sudanese Christians living in the southern
portion of that country, as well as sponsor acts of international terrorism.

It appears that PetroChina’s registration statement provides insufficient disclosure in several
respects. In its filing, PetroChina proposes three separate, but relatively undefined uses for the
proceeds: an unspecified amount for undisclosed “capital expenditures and investments,”
repayment of short and long-term borrowings to undisclosed “third party financial institutions,”
and “additional funds for general corporate purposes.” In addition, CNPC will receive an
undisclosed amount of funding and will use those funds to repay an unspecified amount of
“borrowings” (the underlying activities which these borrowings funded is also unknown), and to
“fund the employee retraining and severance plans established in connection with the
restructuring of the CNPC group.”

It is obvious from these proposed uses of proceeds that CNPC stands to gain substantially
from
the PetroChina IPO. A recent news article stated that CNPC would receive payments between $1
billion and $1.5 billion from PetroChina. In addition, PetroChina is assuming a large portion of
the debts formerly owned by its parent, CNPC. There is no question that this will significantly
increase CNPC’s access to financing that would otherwise be unavailable to fund its foreign
operations. Therefore, the direct transfer of funds and assumption of old CNPC debt will
significantly and materially aid CNPC in that it will now be able to use its current or future
revenues to finance its foreign operations.

Because of the substantial revenue and debt sharing between the parent and its subsidiary, it
is
essential that the investor community be fully apprised of the growing controversy surrounding
the activities of PetroChina’s parent by a coalition of human rights, religious freedom, labor, and
national security groups. There are numerous press reports about these activities that I would be
pleased to share with you.

In addition, there is a significant possibility that future sanctions could be imposed on
PetroChina (or on its parent CNPC, which would materially affect the subsidiary) similar to
those recently imposed on the joint oil venture Greater Nile Petroleum Operating Company Ltd.
(GNPOC) or Sudapet Ltd. Currently, engaging in business with GNPOC or Sudapet carries
criminal penalties for corporations and individuals, as well as the possibility of imprisonment for
up to 10 years. As you are already aware, CNPC is the largest investor and partner in GNPOC.
If these or other forms of sanctions were later extended to CNPC, there is no question that they
could materially affect the value of PetroChina stock. All potential investors should be made
aware of these possibilities and the ultimate use of the proceeds before you approve this
transaction.

A number of questions have also arisen from the process through which the IPO was created.
First, this proposed issue was originally to be a $10 billion IPO for CNPC but has been changed
several times to the current estimated $5 billion IPO for PetroChina, its newly created subsidiary.
Goldman Sachs, the IPO’s primary underwriter, submitted its registration statement for the new
PetroChina subsidiary to the SEC on Tuesday, February 29, 2000, after which the “quiet” or
“waiting period” officially began. As you are aware, while oral statements are permitted during
the waiting period, it is clearly understood that no written OR oral statements or solicitations
may be made before the registration statement is filed. Various sources have reported, however,
that Goldman Sachs may have used “research groups” or other venues to discuss information
about the IPO with potential investors. We request that you investigate whether any information
has been provided to potential American investors that would dispose them to have a more
favorable view of investing in the PetroChina offering.

Using “research groups” or other techniques to educate potential investors before filing with
the
SEC, instead of the usual “road show” after an SEC filing, would not only skirt the law, but
would also violate the spirit of proper disclosure policy. While these facts remain
unsubstantiated at this time, various press reports and additional assertions made to my staff
indicate that some disclosure may have occurred in violation of proper procedures.

Furthermore, there is no record of any preliminary filings with the SEC, despite indications
that
various draft proposals were submitted to the SEC. In addition to various press reports, some
evidence of this was obtained in the course of a congressional staff inquiry that occurred prior to
PetroChina’s February 28, 2000 filing with the SEC. Several days before the first recorded
filing with the SEC, a spokeswoman for Goldman Sachs stated that the PetroChina documents
had been filed with the SEC and that no questions could be answered because the quiet period
had already begun.

While we share your desire to have a free flow of information between SEC staff and
attorneys
preparing the IPO filings, it is important not to avoid disclosure requirements or the Freedom of
Information Act. Therefore, it would be helpful if the SEC were to clarify the proper procedures
for an “informal” waiting period during which drafts of SEC filings are reviewed by the SEC
staff and changes made before any formal filing is submitted. At the minimum, there should be
some record in the EDGAR database indicating that an initial filing has been made from the very
first moment that documents are provided to SEC staff. Requiring electronic filing for foreign
corporations in the same way that they are required for domestic filings would be a simple
solution to this problem.

One final but important concern regarding the PetroChina filing process is Goldman Sachs
ability to freely disseminate information regarding the proposed IPO abroad, while being
prohibited from doing so domestically. Given the multi-national nature of many of the IPO’s
potential corporate investors, it is virtually impossible to avoid having information provided
widely in Hong Kong reach the desks of targeted investors here in the United States.

In closing, my primary concern remains the question of whether proceeds from the
PetroChina
IPO will be used to benefit the activities of CNPC, which could compromise American national
interests and possibly circumvent U.S. laws regarding sanctions against Sudan. By way of
example, an earlier version of the proposal would have required PetroChina to pay a dividend to
CNPC of $1 billion to $1.5 billion and to CNPC’s retirement or worker retraining obligations.
PetroChina’s current registration statement indicates that an unspecified sum will be paid to
CNPC, that an unspecified amount of CNPC debt will be assumed, as well as providing for
payments to CNPC for other purposes. These facts eviscerate the assertion that a legal firewall
has been created to segregate the funds generated by the IPO for PetroChina’s purely domestic
activities. It seems likely that the billions raised will either subsidize the overseas operations of
the parent company or, due to the fungibility of money, at least indirectly finance CNPC’s
overseas operations by freeing it of debt or other obligations.

With the prospect of many other foreign companies utilizing the American capital markets to
finance activities that are directly opposed to vital U.S. national interests, it is imperative that
you investigate this matter thoroughly in order to determine those SEC procedures that are
appropriate for guarding our vital national interests.

Sincerely,

Spencer Bachus
Chairman
Monetary Policy Subcommittee