Depleted oil field is window into China's corruption crackdown

Depleted oil field is window into China's corruption crackdown
A well head is seen at Limau field in Prabumulih, South Sumatra province, November 21, 2014.

In a muddy clearing in southern Sumatra, a portable diesel power plant hammers away 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 (S$111.8 million) to pump from three blocks in the ageing Limau field under 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 out less than three per cent of the oil pumped when output peaked in the 1960s. When PetroChina Daqing announced the deal, it didn't disclose the seller, the price or any other financial details.

"We all know it is a ridiculous investment, but I have no idea where the money has actually ended up," says a senior Chinese oil industry official who has seen budget figures for the Limau wells.

The management at CNPC is now investigating the deal as part of a sweeping crackdown on official graft by Chinese President Xi Jinping that has destroyed a powerful political rival who once ran the oil giant - Zhou Yongkang. The anti-corruption campaign is cutting a swathe through the senior management ranks at CNPC, with at least a dozen former top managers under arrest.

There is vast scope for corruption inside the CNPC empire, which includes its huge listed subsidiary PetroChina Company Ltd and hundreds of other units, say company officials familiar with the investigation. The group is one of the world's biggest corporations, last year reporting revenues of $432 billion. Current and former senior company officials say it is difficult to keep track of all the businesses and deals underway.


Indonesia's anti-graft watchdog told Reuters last month that it plans to probe the country's oil sector. Satoto Agustono, director of development at Pertamina EP, a unit of Pertamina, said he had no knowledge of the price of the Limau deal but said oil companies sometimes paid top dollar for risky investments.

"The oil and gas business is really crazy," he said. "We do not know why they want to buy at high prices when production is low. But, some people, they buy it. This is crazy."

Chinese oil industry officials say they have identified two other suspect deals in Indonesia in which the CNPC group paid a combined $350 million to buy assets from little-known private companies. "Basically, they are worthless," says the same oil industry official who has seen the budgeting figures for the Limau deal. "It has caused heavy losses for the state."

CNPC chairman Zhou Jiping told an internal meeting in August that the company would "actively explore" new ways of conducting investigations in its overseas operations as part of its crackdown on corruption, the company said in a statement on its website. A CNPC group spokesman in Beijing declined to answer questions from Reuters about the suspect deals.

The story of the Limau transaction provides a window into the mechanics of what Chinese oil industry officials say is one suspect deal.

Interviews with CNPC officials, searches of company filings and documents related to the agreement reviewed by Reuters show PetroChina Daqing paid for control of a shell company registered in a tax haven, the British Virgin Islands (BVI). This transaction allowed PetroChina Daqing to take over the operation of the three Limau blocks.

Only a trickle of oil has been pumped since the deal was announced in March 2013, according to Chinese and Indonesian oil industry officials with knowledge of the field.


The probes into the Indonesian deals are part of a much wider corruption investigation in China that has sparked the biggest political upheaval since the 1989 Tiananmen protests.

Zhou Yongkang, born in 1942, was a member of China's elite Politburo Standing Committee until his retirement in 2012. A former head of China's feared internal security apparatus, he is now almost certain to become the most senior leader to be prosecuted since the 1981 trial of the Gang of Four, driving figures behind the Cultural Revolution.

On December 6, the official Xinhua News Agency said Zhou had been expelled from the ruling Communist Party. The statement accused him of corruption and leaking state secrets. Zhou's case has been handed to judicial authorities, it said - terminology that usually means criminal charges will follow. It is not known if he has a lawyer.

Zhou built an extensive power base at CNPC as he rose to the top of the oil giant in the 1990s. At least 11 other former top CNPC group officials are under arrest. Two - former CNPC vice president Wang Yongchun and the former head of the group's Indonesian operations, Wei Zhigang - were involved in assessing the Limau investment, according to Chinese oil industry officials. Wang Yongchun was also president of PetroChina Daqing Oilfield.

"The investigations into Wang and Wei are linked to but not limited to the Limau acquisition," said one of the Chinese oil industry officials.

Two months before he was arrested in August last year, Wang said the company was keen to expand in Indonesia, according to the company's website. Wang was quoted hailing the Limau deal as an example of deepening cooperation.

In a November 28 report, the Communist Party mouthpiece, the People's Daily newspaper, confirmed that graft busters were probing Zhou's network in the petroleum industry. It was the first official acknowledgement the CNPC arrests were tied to him.

CNPC has disowned Zhou. "We will never provide shelter for corrupt elements," the company pledged in a statement coinciding with the news of his arrest.

Under former CNPC head Jiang Jiemin, who was arrested last year, the group launched a headlong spending splurge, heeding a political command to secure more offshore oil reserves. In the five years to 2013, the company spent $25 billion on overseas assets and $241 billion on capital expenditure.

Investigators are now scrutinizing the group's domestic and offshore spending on oilfields, oil service contracts and equipment supply deals.

Jiang and Wang Yongchun have been expelled from the party and are under investigation for "taking huge bribes," according to the Central Commission for Discipline Inspection (CCDI). Calls to the Beijing numbers for the CCDI spokesman on the agency's website were not answered.

As is routine in Chinese corruption cases, Jiang, Wang and Wei couldn't be reached for comment nor could their lawyers be identified.

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