Shell Said to Drop Plan to Buy Stake in Kazakh State Oil Company

(Bloomberg) — Royal Dutch Shell Plc dropped plans to pur­chase a stake in KazMunayGas National Co. after a due dili­gence process that includ­ed dis­cus­sions about the risk of cor­rup­tion at the Kazakh state oil com­pa­ny, peo­ple with knowl­edge of the mat­ter said.

An inves­ti­ga­tion con­duct­ed on Shell’s behalf dis­cussed the infor­mal con­trol one of Kazakh President Nursultan Nazarbayev’s sons-in-law exer­cis­es over the oil and gas pro­duc­er, three peo­ple said, ask­ing not to be iden­ti­fied as the issue is not pub­lic. U.S. law firm Debevoise & Plimpton LLP con­duct­ed the due dili­gence, one of them said.

Shell had been con­sid­er­ing buy­ing a stake in KazMunayGas before a planned ini­tial pub­lic offer­ing. Instead, the Anglo-Dutch com­pa­ny has agreed to help KazMunayGas to improve its cor­po­rate gov­er­nance, two of the peo­ple said.

Shell, the world’s sec­ond-largest oil pro­duc­er by mar­ket cap­i­tal­iza­tion, already has a sig­nif­i­cant pres­ence in Kazakhstan, work­ing with KazMunayGas in the giant Kashagan and Karachaganak oil and gas fields. The Karachaganak part­ners agreed Oct. 1 on a $1.7 bil­lion set­tle­ment to end a dis­pute with Kazakhstan over their con­trac­tu­al obligations.

Family Links

The KazMunayGas sale is part of Kazakhstan’s biggest wave of pri­va­ti­za­tion and the ‘100 Step’ pro­gram of reforms Nazarbayev put for­ward in 2015 as a slump in oil prices ham­mered the cen­tral Asian country’s com­modi­ties-depen­dent economy.

Timur Kulibayev, the leader for life’s son-in-law, left his post as first vice pres­i­dent at KazMunayGas in 2005 but there’s evi­dence of a con­tin­u­ing link. He became chair­man of the Kazenergy asso­ci­a­tion, a group of ener­gy pro­duc­ers that liais­es with the government.

Spokespeople for Shell, Samruk-Kazyna, Kazenergy and Deboise & Plimpton all declined to com­ment. KazMunayGas and had no imme­di­ate com­ment when con­tact­ed by Bloomberg News.Kazakhstan’s nation­al cham­ber of entre­pre­neurs Atameken, which is chaired by Kulibayev, didn’t reply to request seek­ing comments.

One direc­tor on KazMunayGas’s eight-mem­ber board is an exec­u­tive from Kazenergy, and one mem­ber of KazMunayGas’s sev­en-per­son man­age­ment board came from a com­pa­ny owned by Kulibayev.

Pipeline Contract

In 2014, it was pub­licly dis­closed that Kulibayev owned a stake in KazStroyService, an ener­gy ser­vices com­pa­ny with $1.2 bil­lion in rev­enue. One of its biggest projects has been a 644-kilo­me­ter gas pipeline built for a KazMunayGas ven­ture in 2013 and 2014.

As of December 2016, Kulibayev held a 32.2 per­cent stake in KazStroyService Global BV, accord­ing to the finan­cial state­ments of his hold­ing com­pa­ny Steppe Capital.

KazStroyService has “qua­si-monop­oly posi­tion on Kazakhstan’s engi­neer­ing, pro­cure­ment and con­struc­tion pre­mi­um oil and gas mar­ket,” Moody’s Investors Service said in 2014.

KazMunayGas has rec­og­nized cor­rup­tion as a sig­nif­i­cant issue in Kazakhstan, cit­ing the country’s rank­ing in Transparency International’s Corruption Perceptions Index among the risk fac­tors in its April bond prospec­tus. Kazakhstan ranked 122 out of 180 coun­tries in 2017, com­pared with 131 out of 176 coun­tries in 2016.

With assistance from Kelly Gilblom.

To con­tact the reporters on this sto­ry: Jack Farchy in London at jfarchy@bloomberg.net;Nariman Gizitdinov in Almaty at ngizitdinov@bloomberg.net

To con­tact the edi­tors respon­si­ble for this sto­ry: Torrey Clark at tclark8@bloomberg.net, Will Kennedy, James Herron

For more arti­cles like this, please vis­it us at bloomberg.com

Jack Farchy and Nariman Gizitdinov

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