Investors Beware: China National Petroleum’s Wall Street IPO Bid Won’t Fly on National Security and Human Rights Grounds

(Washington, D.C.): U.S. investment banks and fund managers should by now be
persuaded that
they must adopt a new, security-minded approach to “due diligence” with respect to foreign
government-affiliated entities seeking to enter the U.S. debt and equity markets. China National
Petroleum Company (CNPC) — the Chinese government’s largest oil concern (with reportedly
over 1 million employees) — has become one of the first major foreign companies whose bid to
list on the New York Stock Exchange (and promptly issue a multibillion dollar initial public
offering) is being strongly opposed on the basis of national security and human rights
concerns.

On Tuesday, Investor’s Business Daily — which has done yeoman service
in calling attention to,
among other things, the troubling security dimensions of prospective foreign government-related
entries into the U.S. capital markets — published a devastating front-page article which outlines
the case against the planned CNPC equity offering in New York. It describes mounting
opposition to this initiative in Congress, at the state and local level and elsewhere.

Not since Russia’s huge natural gas monopoly, Gazprom, sought to come to the U.S.
bond
market for a $3 billion offering in October-November 1997 have U.S. law-makers and former
members of the U.S. security community mobilized to oppose a foreign entry into the U.S.
capital
markets. In that case, Gazprom’s investment in an energy consortium to develop the South Pars
off-shore gas fields of Iran was deemed to be a violation of the Iran-Libya Sanctions Act, giving
rise to a furor on Capitol Hill. These underlying security concerns chilled the market
environment for Gazprom’s bond offering which was ultimately withdrawn. The
IBD report,
which appears in its entirety below, may be an early indication that CNPC’s listing and IPO
could meet the same fate.

Is China Stock a Security Risk?
Critics Fret Over Market Links To Rogue Nations

By John Berlau

Missiles and terrorism aren’t the only things that have U.S. policy-makers worried these
days.

A U.S. congressman has asked the chairman of the Securities and Exchange Commission to
keep
a Chinese state-owned oil company from being listed on the New York Stock Exchange, citing
“serious national security implications.”

What has him so upset?

In a letter dated Sept. 30, Rep. Frank Wolf, R-Va., warned SEC Chairman
Arthur Levitt that
China National Petroleum Corporation, which said earlier this year that it wanted a listing on the
New York Stock Exchange, has invested $1 billion to $2 billion in an oil pipeline in Sudan.

Sudan is one of seven countries the U.S. government has designated as state sponsors of
international terrorism. U.S. sanctions prohibit most trade with the regime.

But Wolf and others worry that the CNPC listing would bypass the sanctions, letting U.S.
money
flow indirectly to Sudan.

“Allowing the CNPC to raise capital in the U.S. . . . would make it easier for Americans to
invest, perhaps unknowingly, in a company that is propping up a regime engaged in slavery,
genocide, and terrorism,” Wolf wrote.

Sudan isn’t the only country causing concern.

“It’s regrettable that (CNPC) seems to have concentrated on some terrorist-sponsoring,
proliferating states in an effort to help meet China’s energy requirements,” said Roger Robinson,
head of consulting group RWR and an official of President Reagan’s National Security Council.

In 1997, CNPC and Norinco, China’s largest weapons producer, signed an output-sharing
contract with Iraq to develop the Al-Ahdab oil field. It’s unclear how much output will take place
while U.N. sanctions on Iraq stay in place. China has long opposed the U.N. sanctions.

CNPC also has pursued oil deals with Iran, according to news reports. In 1997, Energy
Compass,
an industry newsletter, reported that CNPC had plans to build a 1,000-kilometer pipeline from
Kazakhstan to Iran, “tapping the gradually opening Iranian oil market.”

Like Iraq and Sudan, Iran is on the State Department’s terrorist-sponsor list.

While American companies generally can’t do business with terrorist nations, the law is
unclear
on whether foreign companies that do business with these regimes can raise money on U.S.
capital markets.

Canada-based Talisman Energy Inc., a partner of CNPC in Sudan, is now listed on the
NYSE.
Critics say that gives terrorists indirect access to American capital.

CNPC isn’t the first foreign company to face a national security controversy when raising
money
in the U.S. In 1997, lawmakers blasted a U.S. bond offering by Russia’s Gazprom, which was
involved in developing an Iranian off-shore gas field.

“Should foreign companies engaged in activities which violate U.S. laws and undermine our
policies be allowed unrestricted access to our capital markets? . . . I don’t think so,” said former
Sen. Alfonse D’Amato, R-N.Y., then-chairman of the Senate Banking Committee. Gazprom
eventually pulled its offering.

Robinson said the CNPC offering is part of a “broader problem.” That is, he said, the lack of
focus on “the security dimension of prospective entries in the U.S. debt and equity markets.”

Robinson wants more scrutiny at the SEC to “at least give a heads-up to relevant
congressional
committees” if an offering poses security risks.

SEC spokesman John Heine would not comment on Wolf’s letter or CNPC’s proposed
listing.
“As a matter of protocol, we don’t comment on correspondence with the Congress,” Heine said.

Wolf had earlier written to NYSE Chairman Richard Grasso asking him to delay the
company’s
listing. “We’ve received the letter, and we’ll respond to the congressman,” said NYSE
spokesman Ray Pellecchia.

The SEC said the company hasn’t filed yet. Another of China’s state-owned oil companies,
the
China National Offshore Oil Corp., filed recently for a NYSE listing.

Because it could face a future oil shortage, China wants to look for oil in other countries. To
do
so, its three main state- owned oil companies are all looking to raise money in foreign capital
markets.

The Sudan consortium is CNPC’s largest overseas venture. According to Wolf, CNPC has
invested $1 billion to $2 billion in Sudan, and the Chinese government has invested some $15
billion.

According to the State Department’s “Patterns of Global Terrorism,” Sudan “provides
safe-haven
to some of the world’s most violent terrorist groups, including Usama Bin Ladin’s al-Qaida.”

Bin Ladin’s Islamic extremist group is suspected in the bombings of several U.S. embassies
in
Africa in 1998.

Last year, President Clinton ordered U.S. planes to bomb a factory he said was linked to Bin
Ladin and the making of chemical weapons.

The evidence for both claims has so far turned up short. But observers say that this doesn’t
absolve Sudan on other national security concerns, such as its defiance of a U.N. order that it
hand over three fugitives linked to the assassination attempt of Egyptian President Hosni
Mubarak.

Sudan’s National Islamic Front government, which is in a 16-year civil war with Christian
and
other groups in southern Sudan, has also attracted criticism on Capitol Hill for its human rights
record.

“In Sudan, there is slavery,” said Wolf, who has visited the country three times.

The Sudanese government denies slavery exists. Abdallah, a press attache at Sudan’s
permanent
mission at the United Nations, said what’s being called slavery is really the “abduction of
children” by warring tribes, and the government is trying to stop it.

But a 1997 report from the U.N. Commission on Human Rights concluded that “abductions
(and)
slavery are carried out by persons acting under the authority and with the tacit approval of the
government of the Sudan.”

And critics concerned with both national security and human rights worry that the oil money
will
give the near-bankrupt Sudan government the ability to prolong the war.

“The massive influx of Western capital is money upfront for the Sudanese regime,” said
Jesse
Sage, associate director of the American Anti-Slavery Group, which is leading a divestment
campaign against companies such as Canada’s Talisman that do business in Sudan.

The Comptroller of New York City, whose employee fund invests in Talisman, recently sent
a
strongly worded letter of concern about it doing business there.

Sudanese spokesman Abdallah said all the money will be used for “infrastructure,” such as
telecommunications.

But critics point to a story in April by the French wire service Agence France Presse that
quoted
Sudanese leader Hassan al Turabi as saying that oil revenues will be used to finance new
factories to produce tanks and missiles.

Observers also worry about a strategic alliance forming between China and Sudan. A story
from
Sudan’s news service, Suna, said China’s ambassador to Sudan vowed to oppose possible U.N.
sanctions on the country, and that Sudan supports China’s “one China” policy with Taiwan.

Some worry that China might even be paying Sudan for oil partly with weapons.

Dennis Bennett, an economist who runs the ViTrade Web site, which is critical of Sudan,
and has
been on several relief missions to Sudan, said he’s seen Chinese writing on tanks and artillery
shells captured from Sudan’s government.

CNPC did not answer numerous queries about its proposed NYSE listing.

Kevin Butler assisted with research.