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Ethics Rise As Growing Risk Factor

Hong Kong Standard, March 24, 2000

These masks didn't scare away invaders some 50 years ago, but Tibet's plight tends to scare away western investors today. Picture: AP

STORY: PETROCHINA'S prospectus for a US$3 billion (HK$23.4 billion) initial stock sale spends 13 pages explaining risks that would go along with buying the shares.

The discussion of "risk factors," as the document labels them, lasts for thousands of words. It details potential problems associated with the oil, gas and petrochemical company's business, China's oil and gas industry, and "China in general."

Even so, four words that don't appear in this section may influence the decision-making of some US investors more than those that do: Sudan, Tibet, human rights.

PetroChina's state-owned parent company has a $1 billion investment in an oil-exploration venture in Sudan, a country whose government has waged a civil war against rebels for years. The US government prohibited US companies and citizens from doing business with the venture last month.

Because PetroChina owns the parent's domestic businesses, the issue of Tibet _ occupied by China since 1959 _ also hangs over the proposed stock sale. The AFL-CIO has accused the parent of human-rights violations in Tibet, as well as Sudan.

The politics behind the stock sale have already impeded the efforts of PetroChina; its parent, China National Petroleum; and its underwriters, Goldman, Sachs and China International Capital, to attract investors.

Pension funds run on behalf of government employees in New York City, New York state, New Jersey and Kansas said yesterday they wouldn't buy shares in the IPO. The country's largest public pension fund, the California Public Employees Retirement System, made the same decision last month.

"Active divestment efforts" may have put PetroChina under pressure as it seeks to raise money, said Robert Woodard, chief investment officer of the Kansas Public Employees' Retirement System, which oversees $10.5 billion.

This isn't the first time a Chinese oil company has had trouble finding buyers for its shares. Last October, CNOOC withdrew its $2.5 billion IPO after failing to obtain regulatory approval to cut it to $1 billion. The exploration and production unit of China National Offshore Oil, the country's largest offshore oil producer, cited slumping Asian stock markets as the reason for the withdrawal.

Asian markets have bounced back since then, and CNOOC's plan to go public has too. The company wants to follow in PetroChina's footsteps this year. So does China Petrochemical Group Corp, or Sinopec, the country's largest oil refiner.

Both companies may have something to learn from PetroChina's experience so far. For one thing, it's clear that the sins of the parent company are visited upon its units.

CNPC formed PetroChina last November in preparation for the IPO, and plans to list the company on the New York and Hong Kong stock exchanges afterward. The unit owns 63 "enterprises" that operate oil, gas and chemical businesses inside China, according to the prospectus.

The parent company kept control of international units and investments, including the stake in the Sudan venture, managed by Canada's Talisman Energy. The US Treasury Department imposed sanctions on the venture under a 1997 executive order identifying Sudan as a human-rights violator and a supporter of terrorism.

Oil-exploration revenue flowing to the country's government may be a source of funds for the civil war, according to a number of human-rights groups.

For another, the Internet makes it possible for a company's critics to get a worldwide audience for their views. The AFL-CIO established a website called PetroChina Watch to publicize its allegations, including claims that CNPC used forced labor on Tibetan projects and caused environmental damage there.

A report prepared by the union's investment division and sent to institutional investors said "funds and their managers should consider whether this potential investment lies outside of their investment norms."

Finally, it pays to follow the rules and avoid mistakes, such as Goldman Sachs's sending of electronic-mail messages yesterday to big investors before it obtained clearance from the US Securities and Exchange Commission.

Seventy-seven hedge funds and institutional clients in the US received the messages describing the PetroChina sale. Under securities laws, underwriters can't send out anything in writing other than a prospectus.

While PetroChina published the e-mail in a subsequent SEC filing, investors who received it may still ask for their money back if the stock falls after the sale. According to securities lawyers, they have the right to make that claim.

Call it another "risk factor." - Bloomberg


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