CHINA An $85 million deal involving three blocks in southern Sumatra and a Chinese oil giant is under investigation. Depleted oil field is window into China’s corruption crackdown BY CHARLIE ZHU, DAVID LAGUE AND FERGUS JENSEN SPECIAL REPORT 1 CHINA CORRUPTION CRACKDOWN LIMAU, INDONESIA, DECEMBER 19, 2014 n a muddy clearing in southern Sumatra, a portable diesel power plant hammers Iaway alongside a wellhead, struggling to extract crude from a depleted reservoir that lies below farmland and rubber plantations. It was much easier to extract cash from a state-owned Chinese oil giant. A subsidiary of China National Petroleum Corporation (CNPC), PetroChina Daqing Oilfield, paid $85 million to pump from three blocks in the ageing Limau field un- der a 2013 contract with Indonesia’s state- owned oil company, Pertamina, according to senior Chinese oil industry officials with knowledge of the transaction. Today, the three Limau blocks squeeze PETRO PURGE: At least a dozen former top managers at China National Petroleum Corporation have out less than three percent of the oil been arrested as part of President Xi Jinping’s anti-corruption drive. Zhou Yongkang (below), a former pumped when output peaked in the 1960s. CNPC boss and rival to Xi, faces charges of corruption and leaking state secrets. A wellhead atop the When PetroChina Daqing announced the depleted Limau field in Indonesia (cover). REUTERS/BOGDAN CRISTEL/JASON LEE/FERGUS JENSEN deal, it didn’t disclose the seller, the price or any other financial details. “We all know it is a ridiculous invest- ment, but I have no idea where the mon- ey has actually ended up,” says a senior billion Chinese oil industry official who has seen $25 The amount that CNPC spent on budget figures for the Limau wells. The management at CNPC is now in- overseas assets in the five years vestigating the deal as part of a sweeping to 2013. crackdown on official graft by Chinese President Xi Jinping that has destroyed a Source: Based on CNPC data powerful political rival who once ran the oil giant – Zhou Yongkang. The anti-corrup- tion campaign is cutting a swathe through Indonesia’s anti-graft watchdog told Indonesia in which the CNPC group paid the senior management ranks at CNPC, Reuters last month that it plans to probe a combined $350 million to buy assets from with at least a dozen former top managers the country’s oil sector. Satoto Agustono, little-known private companies. “Basically, under arrest. director of development at Pertamina EP, they are worthless,” says the same oil in- There is vast scope for corruption inside a unit of Pertamina, told Reuters he had no dustry official who has seen the budgeting the CNPC empire, which includes its huge knowledge of the price of the Limau deal figures for the Limau deal. “It has caused listed subsidiary PetroChina Company Ltd but said oil companies sometimes paid top heavy losses for the state.” and hundreds of other units, say company dollar for risky investments. CNPC chairman Zhou Jiping told an officials familiar with the investigation. The “The oil and gas business is really crazy,” internal meeting in August that the com- group is one of the world’s biggest corpora- he said. “We do not know why they want to pany would “actively explore” new ways of tions, last year reporting revenues of $432 buy at high prices when production is low. conducting investigations in its overseas billion. Current and former senior compa- But, some people, they buy it. This is crazy.” operations as part of its crackdown on cor- ny officials say it is difficult to keep track of Chinese oil industry officials say they ruption, the company said in a statement all the businesses and deals underway. have identified two other suspect deals in on its website. A CNPC group spokesman SPECIAL REPORT 2 CHINA CORRUPTION CRACKDOWN SPENDING SPLURGE: Declining output Indonesia is relying heavily on imported oil Former CNPC head Jiang as production from its ageing oilfields falls. Jiemin spearheaded the In a bid to boost output, the government acquisition of offshore oil is encouraging investment from foreign oil reserves. He is now under companies including China’s CNPC group. arrest and has been expelled from the party. PRODUCTION VS. CONSUMPTION REUTERS/PAUL YEUNG Million barrels per day Production Consumption 1.5 1.0 in Beijing declined to answer questions to become the most senior leader to be from Reuters about the suspect deals. prosecuted since the 1981 trial of the Gang The story of the Limau transaction pro- of Four, driving figures behind the Cultural vides a window into the mechanics of what Revolution. 2002 2009 Chinese oil industry officials say is one sus- On December 6, the official Xinhua Becomes net Leaves pect deal. News Agency said Zhou had been ex- importer of oil OPEC Interviews with CNPC officials, searches pelled from the ruling Communist Party. 0.5 of company filings and documents related The statement accused him of corruption '95 '97 '99 '01 '03 '05 '07 '09 '11 '13 to the agreement reviewed by Reuters show and leaking state secrets. Zhou’s case has PetroChina Daqing paid for control of a been handed to judicial authorities, it said CNPC IN WESTERN INDONESIA shell company registered in a tax haven, the – terminology that usually means criminal Oil/gas blocks British Virgin Islands (BVI). This transac- charges will follow. It is not known if he tion allowed PetroChina Daqing to take has a lawyer. over the operation of the three Limau blocks. Zhou built an extensive power base at Only a trickle of oil has been pumped CNPC as he rose to the top of the oil gi- MALAYSIA since the deal was announced in March ant in the 1990s. At least 11 other former Sumatra 2013, according to Chinese and Indonesian top CNPC group officials are under ar- INDONESIA SINGAPORE oil industry officials with knowledge of the rest. Two – former CNPC vice president SP field. Wang Yongchun and the former head of the The probes into the Indonesian deals group’s Indonesian operations, Wei Zhigang JABUNG are part of a much wider corruption in- – were involved in assessing the Limau in- vestigation in China that has sparked the vestment, according to Chinese oil industry SOUTH JAMBI ‘B’ LIMAU biggest political upheaval since the 1989 officials. Wang Yongchun was also president BANGKO Tiananmen protests. of PetroChina Daqing Oilfield. Zhou Yongkang, born in 1942, was a “The investigations into Wang and Wei 200 miles Jakarta member of China’s elite Politburo Standing are linked to but not limited to the Limau Committee until his retirement in 2012. A acquisition,” said one of the Chinese oil in- 200 km former head of China’s feared internal se- dustry officials. Sources: EIA; Wood Mackenzie; China National curity apparatus, he is now almost certain Two months before he was arrested in Petroleum Corporation. SPECIAL REPORT 3 CHINA CORRUPTION CRACKDOWN August last year, Wang said the company was keen to expand in Indonesia, according Probing ‘worthless’ deals to the company’s website. Wang was quot- ed hailing the Limau deal as an example of BY CHARLIE ZHU AND DAVID LAGUE for this field was $120 million. “We don’t deepening cooperation. even know if there are any reserves there,” In a November 28 report, the Communist It is particularly difficult to monitor smaller says a veteran Chinese oil industry official Party mouthpiece, the People’s Daily news- offshore investments in high risk oil and gas who visited Indonesia last year. paper, confirmed that graft busters were exploration, say current and former officials Madura has also failed to deliver for probing Zhou’s network in the petroleum at China National Petroleum Corporation Hong Kong-listed United Energy Group industry. It was the first official acknowl- (CNPC). Deals where managers engineer Ltd, a company with close ties to CNPC. In edgement the CNPC arrests were tied to kickbacks can be disguised as misjudgements June 2009, it took a 10 per cent exploration him. or blamed on faulty data, they say. stake in the field for $21.505 million. In a CNPC has disowned Zhou. “We will Alongside the investigation into the stock exchange filing, United Energy said it never provide shelter for corrupt elements,” Limau deal, CNPC officials are also probing had bought its stake from a BVI registered the company pledged in a statement coin- two other suspect oil deals in Indonesia in company, Madura Petroleum. ciding with the news of his arrest. which the group paid a combined $350 United Energy has made scant mention of Under former CNPC head Jiang Jiemin, million. the deal in its filings. A spokesman for United who was arrested last year, the group “Basically, they are worthless,” says an Energy, Zhao Pingshun, said there had been launched a headlong spending splurge, oil industry official who also investigated the no output from the field because it was still heeding a political command to secure Limau deal. “It has caused heavy losses for in the exploration stage. “We haven’t made more offshore oil reserves. In the five years the state.” any major progress in the project so there to 2013, the company spent $25 billion on In the first of these suspect deals, CNPC’s is not much information we can share with overseas assets and $241 billion on capital flagship listed unit, PetroChina Co Ltd, you,” he said. expenditure. announced in 2009 that it had acquired an In an undisclosed transaction last year, Investigators are now scrutinizing the 80 per cent stake in the Madura block in PetroChina paid about $230 million for an group’s domestic and offshore spending on East Java without providing any details of the exploration contract for a field in Sumatra, oilfields, oil service contracts and equip- vendor, price or description of the asset.