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Tristan Oil is at the epicentre of seismic changes to laws governing oil and gas exploration in Kazakhstan, reports Debtwire. Amendments to subsoil laws can now be applied retroactively to contracts signed months or years before.
The impact of all this change – the ground beneath foreign investors’ feet is beginning to shake, said two lawyers and a tax expert. A government proxy, KazMunayGaz (KMG), is circling Tristan’s assets for potential purchases that could theoretically result in change of control puts of outstanding bonds but would more likely be resolved through an amendment process, said one London-based fund manager.
Tristan Oil operates the Tolkyn and Borankol fields in Kazakhstan’s Pre-Caspian basin via companies called Tolkynneftegaz (TNG) and Kazpolmunay (KPM). The Kazakhstani government waived its pre-emptive purchase rights to the Tolkyn field in 2007 but now contends that an ownership transfer in 2003 violated those rights.
This is not an isolated incident. Last year, 100 of the 900 subsoil contracts granted by the Ministry of Energy and Mineral Resources (MEMR) were withdrawn at the Kazakhstani government’s behest, said Timur Yuldabayev, an Almaty-based lawyer at the firm Grata. Most contracts were pulled because the users were not adhering to contractual obligations such as capital investments, he added.
Tristan Oil had to resubmit documents to the MEMR by 25 March and expects to discover the fate of its TNG subsidiary by end-April, said a source familiar with the situation. The Tolkyn and Tabyl oilfields operated by TNG contribute around 70% of Tristan Oil’s reserve base volumes and generate 60% of its revenue.
The most recent amendment to Kazakhstan’s subsoil law came into force on 13 February and stipulate that existing contracts are no longer exempt from legislative changes, said a second lawyer in Almaty. The alterations also pave the way for state-controlled KMG to hold at least a 51% stake in all new oil exploration and production contracts, the lawyer added.
Further proposals could allow KMG to obtain field rights without participating in tenders. Taken as a whole, the latest language appears to establish KMG as a necessary partner for any international oil company doing business in Kazakhstan, he said.
KMG is already eyeing Tristan Oil assets. At a presentation for investors in mid-March, it listed TNG and KPM as potential acquisition targets. The MEMR has said it will cancel TNG’s subsoil use contract with respect to the Tolkyn field if Tristan Oil’s documents do not satisfy the ministry.
The subsoil license for TNG assets does not expire until 2018 but the letter received from the MEMR was short and does not indicate a price at which the government might want to exercise its pre-emptive rights, said the source familiar with the situation.
Tristan Oil’s bond indenture specifies that if the borrower or its two main operating subsidiaries undergo a change of control, holders of the notes are entitled to 101% of the principal. But the USD 420m note trades near 30 – up almost 100% in recent weeks – and KMG might seek to amend the change-of-control language instead.
“That would be a possibility and it would reduce the immediate financing requirement,” said the fund manager. “Alternatively, if KMG’s interest is serious it could even be buying the bonds at current levels to lower the overall cost of the acquisition.”
Given that the assets are all in Kazakhstan, it would be difficult for any bond holder to enforce rights under US securities law.
Can you dig it?
The idea of pre-emptive government rights to buy strategic assets in Kazakhstan dates back to 2004 and is executed through the sovereign wealth fund Samruk-Kazyna, said the second lawyer. Pre-emptive rights in the oil and gas sector are exercised by Samruk-Kazyna’s energy subsidiary, KazMunayGaz. A special committee is appointed to study relevant cases and includes representatives of the MEMR as well as the tax, justice and economy ministries.
The pre-emptive rights clause was legalized 15 october, 2005 and it didn’t take long for the Kazakhstani government to exercise its newly enshrined rights. Eleven days later CNPC (China National Petroleum Corporation) acquired Petrokazakhstan, a Canadian oil company focusing on Kazakhstan. KMG purchased 33% of Petrokazakhstan in July 2006, increasing its stake to 50% a year later, according to company information.
In October 2007 Kazakhstan’s upper house of parliament approved subsoil law allowing the government to change or break contracts, the lawyer said.
Oil endgame
If the MEMR decides not waive its pre-emptive rights to TNG later this month, Tristan Oil will have little choice but to talk to KMG about an offer, noted a source close to the situation. “Tristan Oil will probably continue negotiations with KazMunayGaz and see what it comes out with,” he added.
Losing the Tolkynneftegaz license would constitute an event of default on Tristan Oil’s USD 420m bond, as reported. Tristan is working closely with its legal advisor, US-based firm Covington & Burling, said the source familiar with the situation.
Tristan Oil was formed in 2006 to issue bonds jointly guaranteed by Kazpolmunay and Tolkynneftegaz. The original proceeds were designated for the repayment of existing TNG debt and to fund a shareholder distribution, as well as for working capital and general corporate purposes.
A USD 300m bond was placed in 2006 and Tristan Oil tapped the issue for an additional USD 120m in 2007. The USD 420m bond was arranged by Jefferies and has traded recently in a 15-18 context but last week was bid at around 25 before popping to 30 this week.
Tristan Oil is rated ‘B3’ by Moody’s and ‘B+’ by Fitch. Moody’s placed the company on review for possible downgrade on 15 January and on 18 February downgraded by one notch its ‘B2’ rating for Tristan Oil and its senior secured notes.
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