An $85 million deal involving three blocks in southern and a Chinese 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 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 ’s anti-corruption drive. (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. 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 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 -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 , 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 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. according to an oil industry official who has ment supply deals. After reviewing internal records, senior examined the deal. Jiang and Wang Yongchun have been Chinese oil industry officials say the purchase expelled from the party and are under in- price for exploration and development rights Editing by Peter Hirschberg vestigation for “taking huge bribes,” ac- cording to the Central Commission for Discipline Inspection (CCDI). Calls to the SUSPECT DEALS: Beijing numbers for the CCDI spokesman CNPC officials on the agency’s website were not answered. are probing two As is routine in Chinese corruption transactions in cases, Jiang, Wang and Wei couldn’t be Indonesia in which reached for comment nor could their law- the group paid a yers be identified. combined $350 Indonesia has been a key target for the million. REUTERS/ CNPC group’s expansion plans. Once self BOBBY YIP sufficient in oil, output in the Southeast Asian nation has declined since its 1995 peak. Jakarta has been anxious to at- tract foreign investment to arrest falling production. Some of CNPC’s early investments in Indonesia, made when oil prices were lower,

SPECIAL REPORT 4 CHINA CORRUPTION CRACKDOWN

have paid off. Its listed unit, PetroChina, bought the Indonesian assets of U.S. oil OIL EMPIRE: With $432 producer Corp in 2002. billion in revenues last year, CNPC was the country’s seventh-ranked CNPC is one of the world’s producer in 2011 with 3,500 employees biggest corporations. and an annual output of about 40 million REUTERS/KIM KYUNG-HOON barrels. The Limau deal was a departure from PetroChina Daqing Oilfield’s normal busi- ness model. The oil services company hailed the 2013 agreement as its first “technolo- gy-for-resources” deal, having traditionally relied on fees for its income. In this deal, it would trade its expertise in extracting oil from mature fields in return for a share of any increased output, it said in a statement. In a subsequent statement in June last year, the company said it had completed an “equity acquisition related to the Limau for Pertamina for more than 20 years, con- output from the three blocks is now about project,” without disclosing the seller or the firmed that Vision Horizon was involved 1,200 barrels a day, according to Agustono. price. in the Limau deal but declined to provide In its 2013 statement announcing the Interviews with Chinese oil indus- details. Wijaya also declined to discuss deal, PetroChina Daqing said it aimed to try officials and documents related to the PetroChina’s $85 million payment. “This is boost production of the three Limau blocks transaction show PetroChina Daqing ac- about our business,” he said. “I am not go- to about 7,300 barrels a day. Upstream in- tually bought Vision Horizon Holdings ing to give any answer.” dustry experts familiar with the Limau field Ltd., a company registered in the British Like many of Indonesia’s mature oilfields, say it is highly unlikely that PetroChina Virgin Islands. A company search shows Limau has been in decline since it peaked in will ever meet this target. that Vision Horizon was registered in May the 1960s. The field covers more than 200 2009. BVI companies are not required to square kilometres of forest and farmland, in- With reporting by Wilda Asmarini in Jakarta disclose directors and shareholders. cluding patches of rubber and palm oil plan- and Benjamin Kang Lim in Beijing. Editing by Through other shell companies regis- tation, in Province. Peter Hirschberg and Michael Williams tered in the tax haven, Vision Horizon is In a 2013 technical paper, Wijaya and linked to BVI-registered Indospec Energy two Pertamina experts advocated using ad- Limau, the company that holds a joint op- vanced recovery methods to boost ouput. FOR MORE INFORMATION erating contract for the three Limau blocks. They reported that production from the Charlie Zhu In an interview with Reuters in his Jakarta three blocks had peaked at 46,000 barrels a [email protected] office, the chief executive of Indospec day in 1960. A report by Wood Mackenzie, David Lague Energy Limau, Indra Wijaya, confirmed an energy consultancy, showed that by the [email protected] that the company had won the contract 1990s, water injection and other recovery Fergus Jensen from Pertamina through a tender. methods were needed to keep the field [email protected] A draft of the 91-page contract reviewed pumping. Bill Tarrant, Enterprise Editor by Reuters shows that Indospec Energy A company that earlier operated Limau, [email protected] Limau is scheduled to invest another $50 Hong Kong-listed South Sea Petroleum Peter Hirschberg, Asia Investigative Editor million in the first three years of a 20-year Holdings Ltd, said in a stock exchange fil- [email protected] operating agreement. ing that output for the entire field in 2007 Michael Williams, Global Enterprise Editor Wijaya, who said he had earlier worked was about 7,000 barrels a day. The combined [email protected]

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SPECIAL REPORT 5