PetroChina Legacy Impacts Upcoming Sinopec I.P.O.

(Washington, D.C.): A laser designator has just been placed on the next dubious
Chinese Initial
Public Offering (IPO): In an article published Wednesday, “Chinese Oil Firm Cut Sudan Links
Before IPO — Sinopec Saw the Fallout of PetroChina’s Ties to Controversial State,” the
Wall
Street Journal
‘s Peter Wonacott served notice on investors that there may be an
undisclosed
problem with the upcoming offering by China Petroleum & Chemical Corporation (a.k.a.
Sinopec).

According to Wonacott, the success of the so-called “PetroChina Coalition” in opposing an
IPO
initially offered by China’s largest state-owned energy company, China National Petroleum
Company (CNPC), over the latter’s ties to the odious government of Sudan, has caused Sinopec
to lowball its own ties to Khartoum, lest it run into similar problems. And with good reason:
CNPC was forced to create a new, wholly owned subsidiary — PetroChina — that would,
ostensibly, have no dealings with Sudan at all. When its IPO finally came to market,
PetroChina’s proceeds were reduced from initial projections of $10 billion to less than $2.9
billion.

Sinopec’s immediate response to the CNPC/PetroChina debacle was to delay bringing its IPO
to
market from April to November. More recently, it appears to have been instructed by its owner,
the PRC government, to engage in a contrived “divestment” sale of its Sudanese assets and
operations — to none other than CNPC. The Journal has established,
however, that this
divestment is — like the CNPC/PetroChina “firewall” before it — a cynical “shell game” that will
not ensure U.S. investor proceeds stay out of the coffers of the genocide-, slavery- and
terrorist-sponsoring Khartoum regime.

The revelations contained in the Wonacott article affirm the salience of the policy initiative
the
Center for Security Policy’s William J. Casey Institute has pursued over the past four years,
aimed at creating requirements for strengthened disclosure, transparency and discipline with
respect to “emerging market” entities increasingly seeking to raise funds from an often unwitting
U.S. investor community. The PetroChina Coalition — comprised of human rights, national
security, religious freedom, organized labor, Tibetan freedom and environmental groups —
remains committed to advancing these goals and several participating organizations can be
expected to subject the Sinopec IPO to every bit as close scrutiny as the earlier
CNPC/PetroChina offering.

In particular, due to the devastating effectiveness of the ongoing divestment campaign waged
by
Sudan-related human rights groups against Talisman Energy Inc. of Canada — which also has a
stake in Sudan’s primary oil development joint operating company — there would appear to be a
“question of materiality” at issue in the Sinopec IPO. The Securities and Exchange Commission
should immediately address this possibility so as to ensure that the potential for adverse impacts
on investors are properly disclosed and understood before the next Chinese IPO or
bond offering
come to market.

The Wall Street Journal, 11 October
2000

Sinopec’s Ties to Sudan May Hurt Its $3.5 Billion Global Stock
Issue

By Peter Wonacott

HONG KONG — China Petroleum
& Chemical Corp., which is promoting plans to raise as much
as $3.5 billion in a global stock issue, held an investment until June similar to one that nearly
sank the initial public offering of its rival: It had business ties to the pariah state of Sudan.

With its pricing Thursday, the company also known as Sinopec Corp. hopes to follow the
lead of
PetroChina Ltd., the country’s largest oil and gas producer, which achieved a New York and
Hong Kong stock listing in April, but only after withstanding a wave of opposition from
human-rights activists who protested projects in Sudan owned by PetroChina’s parent, China
National Petroleum Corp., or CNPC. Sudan’s alleged support for terrorism, and the persecution
of Christians there, prompted the U.S. government to impose sanctions on the Muslim-majority
country.

The U.S. pressure was a major reason why PetroChina limped to market, raising $2.9 billion,
or
about half the amount executives anticipated.

By contrast, Sinopec’s global road show to highlight its IPO has been a smooth one,
according to
bankers involved in the deal. The company is touting its dominance in everything from
petrochemicals to gas stations, but Sinopec officials have been quiet about their recent business
links to a Sudanese oil field.

Until June, Sinopec subsidiary Zhongyuan Petroleum Corp. had a joint venture in Sudan
with a
unit of CNPC. Over three years, Zhongyuan invested $30 million in an oilfield called Sudan 6,
conducting surveys and drilling four wells, according to Sinopec’s 1999 Yearbook. In July,
Zhongyuan transferred its Sudanese project’s engineering and other staff to CNPC, a spokesman
at Zhongyuan said in a statement, without putting a value on the asset transfers. But today,
“Neither the group [Sinopec] nor any of the subsidiaries have any investment in Sudan,”
Chairman Li Yizhong said in an interview.

There is evidence a Sudan relationship persists, however. Zhongyuan still maintains a Sudan
office at its headquarters in China’s central Henan province, despite the transfer of some of its
assets to CNPC. At the Henan office, a Zhongyuan executive says the Zhongyuan continues to
provide services for Sudan 6. An official at the commercial section of the Chinese embassy in
Sudan, as well as a Zhongyuan executive on site in Sudan, both said this week that Sinopec’s
work has continued on the oil field. The Zhongyuan official declined to provide further details,
saying the operation “isn’t public information.”

If handing Sinopec’s main domestic competitor a key overseas project seems unusual, the
timing
of the move wasn’t. The decisions followed the uproar CNPC’s business in Sudan caused the U.S.
listing of PetroChina. Protestors stalked investment bankers and Chinese executives, at one time
forcing them to switch venues for a PetroChina presentation. To assuage investors, PetroChina
announced accounting checks, or firewalls, to prevent revenue from Sudanese projects from
flowing back to it.

Sinopec’s removal of Sudanese operations marked a more radical attempt to distance itself
from
the controversial country. To be sure, Sinopec’s past links to Sudan were an obscure part of a
colossal oil and petrochemical empire. In fact, until July 1998, Zhongyuan belonged to CNPC.
Then the Chinese government divided the country’s oil assets, splitting the industry into two
behemoths and shifting the exploration and production firm to Sinopec. CNPC, on the other
hand, has invested $700 million in the 49,000-square-kilometer oil field called Sudan 6, which is
now able to produce 10 million tons of crude a year.

For Sudan, which is wracked by famine and civil war, the investment has been a boon. Since
1997, the government has endured a U.S. trade embargo for “ongoing efforts to destabilize
neighboring governments, and the prevalence of human rights violations, including slavery,”
according to a statement from the U.S. Department of Treasury explaining the sanctions.
Fighting for control of the rich oil regions has displaced millions of Sudanese.

But when other countries shunned Sudan’s government, China stepped in, signing a
memorandum of understanding in 1995 to help extract Sudan’s crude reserves. The Sudanese
oilfields are beneficial to China as well. As domestic production flattens out, oil from Sudan
serves as an important supply line for its fast-growing economy.

Sudan’s oil ministry declined to comment on the Chinese oil projects.

Unlike PetroChina, Sinopec’s links to Sudan hasn’t dented its IPO. Exxon Mobil Far East
Holdings Ltd., Shell Overseas Investments BV and BP Amoco PLC are buying $1.83 billion of
the issue. Hong Kong conglomerates Cheung Kong Ltd. and Hutchison Whampoa Ltd., owned
by billionaire businessman Li Ka-shing, have also made investments, according to Sinopec’s
sales documents. Sinopec’s listing in Hong Kong, New York and London later this month is
considered crucial for revamping a sprawling, inefficient state company, but one that foreign
industry executives believe has massive potential. “If we can’t get a higher price” than
PetroChina, said a senior Sinopec executive, “then we have failed.”

Center for Security Policy

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