Capital Markets Transparency and
Security: The Nexus Between U.S.-China Security Relations and
America's Capital Markets
CASE STUDIES
Prior to 1997, the most well known example of perceived "bad
actors" in the markets could be found in the context of
the South African anti-apartheid campaign of the early 1980's.
Recalling the expanded definition of "bad actors" provided
earlier (e.g., including companies whose business activities
help aid -- and/or generate revenue streams for -- rogue regimes),
it was effectively argued that those companies doing business
with the South African government were helping underwrite that
country's racist policy of apartheid. Due to public pressure
exerted by non-governmental organizations (NGO's), U.S. pension
and mutual funds and commercial banks began divesting the stock
of -- and terminating lending to -- those entities that had significant
business ties with South Africa to devastating effect. U.S. and
other Western firms also rapidly severed ties with the government
in response to the stock sell-offs as South Africa was designated,
in a relatively short period of time, a pariah state by the global
financial community as well as among many Western governments.134
More recent cases involving the clash of national security
and human rights and the markets demonstrate an evolution of
NGO activism from utilizing isolation and public censure to pressure
companies in the case of South Africa to a more surgical activism
approach designed to strike at the financial heart of the targeted "bad
actor." It is this latter, more sophisticated NGO strategy
that formed the basis for three recent case studies on the nexus
between national security/human rights and the capital markets:
1) Gazprom's 1997 U.S. bond offering; 2) the CNPC/PetroChina
New York Stock Exchange listing and IPO of 2000; and 3) the ongoing
Talisman Energy Inc. divestment campaign.
Gazprom
The debate that ultimately derailed Gazprom's proposed $3 billion New York
bond offering in the fall of 1997 -- and, indeed, the larger issue of whether
foreign firms that underwrite or otherwise contribute to the financial strength
of potential adversaries should be allowed to issue securities in the U.S.
-- was framed by Senator Sam Brownback (R-KS) in a letter to President Clinton
on October 3, 1997. According to the Senator,
"Potential adversaries of the United States and companies like Gazprom which
engage in activities harmful to the U.S. cannot and should not expect the privilege
of raising funds in our markets."135
At issue was Gazprom's involvement in a consortium led by France's Total that
had signed a $2 billion agreement to develop Iran's so-called South Pars offshore
natural gas fields. The investment was determined to be in violation of ILSA,
(the U.S. Iran-Libya Sanctions Act, 104-172; 50 USC 1701), which was enacted
to discourage foreign investment in Iran's energy sector due to that country's
ongoing terrorist-sponsoring activities.136 The
act is triggered by an investment in Iranian energy development in excess of
$20 million (or $40 million in Libya) and authorizes the President to impose
a range of financial and other sanctions against foreign energy firms that
violate the statute.137
At the outset of the announced deal, two primary concerns commanded the attention
of lawmakers. The most pressing of these reflected the logic that underpinned
the legislation during its formative stages. As former Senator Alfonse D'Amato
(R-NY) and Rep. Benjamin Gilman (R-NY) stated in a letter to the President
at the time:
"Money is fungible. Investments in Iranian energy release funds for expenditure
elsewhere, and help generate an expanding revenue stream that will support the
growth of Iranian power."138
In addition, many in Congress feared that a decision to waive sanctions against
Total, Gazprom and Malaysia's Petronas (the third firm that made up the consortium)
would both undercut U.S. efforts to halt Iran's support for international terrorism
and send a debilitating signal to other foreign energy companies that this
law was merely a "feel good" exercise for U.S. policy practitioners.139
While those on Capitol Hill and in the Administration debated the wisdom of
an Executive Branch decision to undertake a thorough review before acting,
Gazprom's scheduled $3 billion U.S. bond offering in the same window as its
investment in Iran came into focus.140 Of
primary concern was whether U.S. investors should be helping finance Gazprom's
activities in Iran -- a move which certainly violated the spirit, if not the
letter, of ILSA. Technically, some also questioned whether a company in violation
of U.S. law could legally tap the U.S. debt and equity markets.
Former Senator D'Amato and Rep. Gilman highlighted these issues and, more broadly,
helped frame the debate regarding the efficacy of financial sanctions in a
letter to Vice President Gore. It stated,
"In view of Gazprom's recent very large tax payments to the government and
its extensive need for capital to modernize its domestic and Euro gas networks,
where would it find the resources to fund this natural gas contract?"141
Attention to the offering was further heightened by requests of former Banking
Committee Chairman D'Amato to hold hearings on the prospective bond offering.
Whereas during the initial stages of the bond controversy the issue was predominantly
the activities of Gazprom in Iran, this request broadened the scope to include
the destabilizing activities of Gazprom's home government, Russia.142 In
seeking hearings on Gazprom, Senators Brownback and Jon Kyl (R-AZ) wrote:
"It is our view that the efforts of Russian entities to provide missile
and nuclear technology to Iran are incompatible with Russia's goal to fund activities
via this [Gazprom] convertible bond offering or future bond offerings in our
debt markets."143
Within weeks of the Total announcement, press reports had shifted their focus
on the ILSA violation almost exclusively to the Gazprom bond offering. By mid-October
1997, Congressional scrutiny and a number of national opinion editorials and
articles had helped catalyze a legal review of Gazprom's fundraising efforts
by the Executive Branch.144
Although the ILSA statute did not include the denial of access to the U.S.
debt and equity markets in its menu of optional Presidential sanctions, Senators
D'Amato, Brownback and Kyl had succeeded in expanding the debate to include
this critical point.145 As Senator D'Amato
stated in a lengthy speech introducing hearings on this matter on October 30,
1997,
"Should foreign companies engaged in activities which violate U.S. laws
and undermine our policies be allowed unrestricted access to our capital markets?
Should Russian companies that are providing missile aid to Iran or financing
gas deals with them be able to seek financing in our markets...? Should the United
States just sit back and allow Gazprom to do business as usual?
I don't believe so. Gazprom should not be entitled to do business on the basis
that all is well and that we have an unrestricted free capital market, because
the fact of the matter is that their conduct is in blatant violation of our
law..."146
The final blow to Gazprom's borrowing strategy in the U.S. bond market was
likely dealt in the course of this hearing and a second Senate Banking session
on November 5, 1997. Although these hearings sought to address both Gazprom's
$750 million in Export-Import Bank loan guarantees and its scheduled bond offering,
the tone for the day was set early on when members of the committee made clear
that denying Ex-Im credits only to see Gazprom raise considerably more funds
on Wall Street seemed to represent a "bridge too far." While a complete
review of the hearings are beyond the scope of this report, a number of statements
made at the October 30 session merit reference.
"Senator D'Amato, the message of the day is simple: We know Iran is aggressively
pursuing a nuclear weapons program. U.S. agencies and institutions should not
underwrite companies willing to generate profits for Tehran to buy or build that
bomb." -- Senator Mitch McConnell (R-KY)147
"Now, I'd like to say right at the outset that this is not a case of being
out to get Russia or to prevent U.S. companies from doing business with Russia.
That is not the intent at all. Gazprom's investments in Iran and Libya, however,
and its attempts to fund these activities on the U.S. market are a matter of
national security and one which, if nothing else, needs to be brought to the
attention of the American people who might invest in these companies. We're talking
about U.S. investors in Iran and Libya via Gazprom." -- Senator Sam Brownback148
"Gazprom is a centerpiece of Russian hard currency earning structure and
is very closely linked to the Old Guard Russian leadership... However, Gazprom
is short on the cash it needs to get the South Pars project up and running. And
in an act of sheer gall, the company is planning to get U.S. investors to pay
for this by selling convertible bonds on Wall Street." -- Senator Sam Brownback149
"Though Gazprom claims the funds will be raised and go towards other projects,
the fact is that the income will free up cash for South Pars. This convertible
bond -- as well as others planned in the amount of some $6 billion [over the
next two years] -- will ensure that Gazprom is able to continue with impunity
its activities, some of which pose serious threats to U.S. national security
interests. Such bonds will also provide the company with new investors who will
have a vested financial interest in opposing sanctions or international penalties
in the future." -- Senator Sam Brownback150
"Essentially, the matter boils down to this: Should American investors fund
Iranian ballistic and nuclear missile development? And of course the answer is "No." And
yet that is essentially the deal that Gazprom will be offering to unsuspecting
American investors when it launches its bond next month." -- Senator Sam
Brownback151
"...A Russian state-owned firm is insulting the U.S. by openly defying our sanctions laws against Iran. Then they come to Wall Street saying, "Can we use your deep pockets to help us finance this deal?" Well, Wall Street's deep pockets are simply the mutual funds and pension funds of this country. Why should America's small investors and retirees finance the development of Iran's natural gas reserves? And when it boils back down to it, that's exactly who's doing it." -- Senator Lauch Faircloth152
"Why should we finance projects for our enemies? I cannot
understand anybody with any common sense wanting to be part of
this deal. I think Wall Street should say "No" to the
deal, and if they do not, then I think we should block it by
legislation." -- Senator Lauch Faircloth153
Less than two weeks after the Banking Committee convened these two sets of
hearings, Gazprom withdrew its $3 billion bond offering from the U.S. debt
market. The company and its Wall Street investment bank cited "market
conditions" as the official explanation for the withdrawal. Nevertheless,
the company tapped the European syndicate loan market under the same "market
conditions" roughly three weeks later to raise the $3 billion at a higher
interest rate and shortened maturity schedule.154 More
importantly, a number of unwitting Americans likely did not end up underwriting
a company partnering with a terrorist-sponsoring state and in violation of
U.S. law.
The New York Times offered a slightly different perspective on the withdrawal: "Facing
extraordinary pressure from Washington, a major Russian partner in a project
to explore for natural gas in Iran today postponed a bond offering to raise
up to $3 billion."155
China National Petroleum Company/PetroChina
During the summer of 1999, reports surfaced detailing China's growing ties
with Sudan. As referenced earlier, China's burgeoning energy requirements have
led Beijing to secure overseas energy supplies on an accelerated basis, concentrating
its efforts on a number of countries that are generally off-limits to U.S.
oil companies (i.e., terrorist-sponsoring states).156 In
the case of Sudan, China's flagship oil company, China National Petroleum Company
(CNPC), had already invested some $1.5 billion in Sudan's energy sector and
had reportedly allocated billions more for oil exploration and development.
The PRC government had also reportedly committed some $15 billion over an unspecified
period of time to Khartoum for "infrastructure development."157
CNPC's investment had secured the company a forty percent stake in Sudan's
Greater Nile Petroleum Operating Company (GNPOC), the country's primary energy
exploration and development consortium. In addition to building two wells and
an oil refinery, CNPC helped design and build a critical one-thousand-mile
pipeline linking Southern reserves to a northern refinery and export terminal.
According to published reports, the company undertook these projects at virtually
no profit in exchange for the drilling rights to more than 40,000 square kilometers
in southern Sudan.158
With China's assistance, the export of Sudanese crude became operational in
August, 1999. Within a short time, the country was generating millions of dollars
in revenues. In many African countries, this type of progress would be touted
as a success story. In Sudan, however, these significant revenue flows raised
new concerns for the international human rights, religious freedom and national
security communities.
The reasons are clear. Sudan is engaged in an eighteen-year war of oppression
that has claimed the lives of some two million -- mostly African Christians
and animists in the South -- and displaced over four million.159 Khartoum
is reportedly the only government in the world today engaged in chattel slavery.160 It
repeatedly, and deliberately, targets hospitals, churches, schools and other
civilian targets in bombing raids.161 Moreover,
the U.S. Commission on International Religious Freedom, U.S. Catholic Bishops,
the Holocaust Museum and the U.S. House of Representatives have formally described
Khartoum's policies as "genocidal."162
In 1997, President Clinton imposed broad economic sanctions against the extremist,
Islamic regime in Khartoum citing, "sponsorship in international terrorism,
its efforts to destabilize neighboring countries and its abysmal human rights
record."163 Indeed, the country was
cited for its terrorism-sponsorship by the State Department in its "Patterns
of Global Terrorism 2000." According to the report, "Sudan, however,
continues to be used as a safehaven by members of various groups, including
associates of Usama Bin Ladin's al Qaida organization, Egyptian al-Gama's al-Islamiyya,
Egyptian Islamic Jihad, the Palestine Islamic Jihad and HAMAS. Most groups
use Sudan primarily as a secure base for assisting compatriots elsewhere."164
Rather than serving as a springboard to peace and prosperity for the long-suffering
people of Sudan, many activists correctly feared that the new revenues would
enable Khartoum to increase the tempo and lethality of its war efforts and
dismiss attempts to broker peace.165 These
fears were validated when Agence France Presse quoted Sudan leader Hassan al
Turabi as revealing that the oil revenues would "be used to finance new
factories to produce tanks and missiles."166 In
addition to intensifying the brutality and scope of its campaign, Khartoum
has consistently resisted efforts to negotiate with Southern opposition since
oil exports came online. As the Washington Post observed in November 1999,
"Now, however, peace hopes have been buried by the recent completion of
an oil pipeline, promising $200 million a year or more in revenues. Rather than
negotiate, the north declares that it will use its new oil wealth to stock up
on military gear and win a victory on the battlefield...Once it has control of
these [yet unexploited oilfields], it will purchase yet more tanks and missiles."167
On September 6, 1999, the Investor's Business Daily reported that CNPC was
planning to list on the New York Stock Exchange (NYSE) and Hang Seng.168 It
was estimated that the company would raise some $10 billion through an equity
float, making it the largest overseas offering in the history of the NYSE.169 Almost
immediately, non-governmental organizations expressed deep concern at a U.S.
offering that would provide proceeds from American investors for a company
implicated in the horrors of Sudan. As the Casey Institute stated at the time,
"American institutional and individual investors could well find themselves
effectively underwriting a totalitarian government in Africa engaged in the acquisition
of weapons of mass destruction, terrorism, slave trading and a brutal civil war..."170
A similar reaction was registered by those Members of Congress long active
on the Sudan front. In letters to SEC Chairman Arthur Levitt and NYSE Chairman
Richard Grasso, Representative Frank Wolf (R-VA) cited the immorality of the
offering.171 These concerns were echoed by
the U.S. Commission on International Religious Freedom following testimony
by Roger Robinson, former Senior Director of International Economic Affairs
at the National Security Council, regarding the possible tapping of U.S. capital
markets by foreign energy companies to help finance oil development activities
in Sudan and, by extension, provide economic life-support to the reprehensible
Khartoum regime. In a letter to President Clinton dated October 22, 1999, the
bipartisan, Congressionally-mandated Commission wrote:172
"The Commission would like to emphasize one of its recommendations for strengthening
the peace process in Sudan: apply your 1997 Executive Order [levying sanctions
against the government of Sudan] to bar the Chinese government's China National
Petroleum Company and other companies from using the U.S. stock exchanges to
finance Sudan's new oil pipeline."173
Initial non-governmental and Congressional objections to the proposed offering
were not lost on CNPC and its lead U.S. investment bank. Initial public offering
(IPO) proceeds and the potentially hundreds of millions of dollars in investment
bank fees for the transaction were not the only matters of concern. Indeed,
Beijing hoped to use CNPC as a flagship for listing scores of SOE's in New
York in the coming years. Rather than risk political fall-out and possible
U.S. governmental action against CNPC, the company was hastily restructured
to exclude Sudanese and other overseas assets. As the Wall Street Journal reported, "Seeking
to quell U.S. opposition to a fund-raising plan, CNPC will restructure a holding
company it hopes to take public, removing a Sudanese oil venture."174 Within
a few weeks, the world's fourth largest energy company, PetroChina, was born.175
The shedding of its Sudan operations did little to diminish U.S. opposition
to the now-PetroChina offering. Of primary concern was the ownership structure
of the new entity, 90 percent of which was still controlled by CNPC. Of course,
both entities were, at the time, 100 percent owned by the Chinese government.
Due to the fungibility of money, the ownership structure and issues of corporate
governance, it was maintained that CNPC would benefit directly from this offering
and could use some U.S. investor proceeds to advance its operations in Sudan.
These concerns were reinforced when it was determined from the company's SEC
registration statements that the parent company was to receive some 10 percent
of the IPO proceeds directly and that PetroChina would take on roughly $15
billion of CNPC debt, some of which may have been incurred from the company's
Sudan activities. Even were it proved that the IPO proceeds could be effectively
firewalled from CNPC (as asserted by PetroChina's investment bank) and the
debt was not incurred in Sudan, it was difficult to argue that the IPO would
not free up other capital for CNPC that could be used in Sudan. As Nicholas
Lardy observed, "PetroChina could declare a dividend and transfer money
to the parent, and the parent could then use it to develop their reserves in
Sudan.176
Rather than blunting opposition to the listing, an expanding coalition of NGO's
and Members of Congress intensified their activism.177 In
addition to scores of articles being generated by this so-called "PetroChina
Coalition," those in the Sudan community sent a direct plea to President
Clinton signed by over two hundred religious and civic leaders including former
Treasury Secretary William Simon and former National Security Advisor William
P. Clark, urging him to deny U.S. market access to CNPC or a restructured entity.
As stated,
"The [1997 Executive] order should be construed or amended to bar CNPC from
accessing the U.S. capital markets so long as it continues to be a 40% partner
in the GNPOC project, and so long as that venture provides the regime with millions
of dollars in annual revenues."178
As resistance to the PetroChina IPO grew, the Financial Times reported in the
wake of the restructuring that PetroChina would be seeking to raise some $7
billion in its IPO, down from July reports of $10 billion.179 The
broad-based opposition was likewise recognized by the SEC and NYSE, both of
which launched an investigation into PetroChina's planned use of proceeds.
Interestingly, the justification provided for the inquiry by the NYSE was not,
as might be expected, financial in nature. According to the Dow Jones, "NYSE
wants to make sure that CNPC's funds won't be used for [those] countries under
the U.S. sanctions."180
In late January 2000, Sudan activists and religious freedom and national security
advocates took the unusual step of expanding the opposition campaign beyond
the international press and government channels and into the markets themselves.
Seeking to dampen demand for the stock offering in the likely event the IPO
were allowed to proceed, a number of the same signatories on the above-referenced
letter to the President directed their concerns to this country's fifty state
treasurers and the senior managers of over two hundred U.S. pension and mutual
funds. (See Appendix 4.) Their letter to these fund managers included a nine
page list of the names and titles of other recipients.181
Addressing both the PetroChina offering and outstanding U.S. shareholders in
Talisman Energy Inc., a 25 percent partner in the GNPOC, the civic leaders
stated: "We write to urge you in the strongest terms to divest any Talisman
holdings you may have and, should it become available, to avoid the purchase
of "PetroChina" stock." The letter did not only couch its concerns
in moral terms, but raised an important financial argument to eschew the stock
as well. Citing a particularly impressive divestment campaign underway against
Talisman -- which had resulted, at the time, in a roughly twenty percent decline
in Talisman's share price -- the advocates raised the prospect of similar losses
for prospective PetroChina shareholders:182
"It is also likely that PetroChina will face a divestment campaign similar
to the one directed against Talisman if this holding company, or CNPC itself,
proceeds with its multi-billion dollar IPO."183
By most accounts, the letter to fund managers and ongoing press coverage was
having a substantial impact. By February 2000, according to the Washington
Post, the activism had "already helped persuade a number of big U.S. public
pension funds to divest their holdings in a Canadian oil firm associated with
the Chinese in the same oil project."184 The
same article also revealed that "At least two of these public pension
funds are among the largest in the country and have also decided not to participate
in [PetroChina's] stock offering."185
The implications of public announcements by TIAA-CREF, the massive teacher's
pension system, and the California Public Employees Retirement System (CalPERS)
-- America's two largest public pension funds -- that they would eschew PetroChina
stock cannot be overstated. It is almost unprecedented for pension funds to
decline publically to purchase a stock, let alone prior to the company registering
with the SEC.186 Moreover, PetroChina was
to be China's groundbreaking NYSE-listed firm due to its stature and size.
It was attractively priced during a period of rising oil prices and was expected
to be greeted enthusiastically by the U.S. financial community, thereby paving
the way for future listings by other Chinese SOE's.187
As regards the letter, the decision by activists to take aim directly at the "demand
side" of the capital markets may have unwittingly, yet fundamentally,
altered some of the parameters for investment in foreign companies. For the
first time since South Africa, human rights, national security and religious
freedom concerns had emerged as material risk factors in the markets -- an
historically important development. Whether a firm was doing business with
a terrorist-sponsoring state was chief among these new risk elements and heightened
market sensitivities. As Washington Post reporter David Ottaway commented,
"The campaign against the [PetroChina] IPO marks a new direction in the
widening involvement of church and human rights groups in various foreign policy
issues. Now for the first time they have decided to focus on the behavior of
foreign companies registered on U.S. stock exchanges."188
Indeed, by February 2000, the national security, human rights and religious
freedom communities had "broken the code" on the potential impact
of linking finance -- in the form of fundraising in the U.S. capital markets
-- to their respective policy concerns. By doing so, they were helping change
market and SEC calculations concerning risk assessment and management.
The above-referenced delay in the listing of PetroChina caused by more exacting
NYSE and SEC reviews of the prospective offering provided the time needed for
intensified opposition to the company, thereby further affecting PetroChina's
public reception. Beginning in February 2000, the "PetroChina Coalition" expanded
substantially in numbers. The Tibet freedom community, environmental groups
and the AFL-CIO joined the fray in opposition to the offering.189 Together,
these groups could employ a wide range of coordinated activities and techniques
to thwart demand for the IPO and influence U.S. policy-makers and public opinion.
Some held marches, others pamphleted the headquarters of PetroChina's lead
U.S. investment bank and organized labor initiated a "counter-roadshow" in
the same window that the IPO was being marketed to U.S. fund managers and institutional
investors.190 With combined NGO memberships
totaling as many as 20 million Americans, the PetroChina Coalition, between
February and April, 2000, helped generate hundreds of mainstream, Internet
and other news pieces on PetroChina as well as interventions by Members of
Congress with the SEC and the White House. More importantly, by the time of
the April IPO, over $1 trillion of funds-under-management had announced that
they would not hold PetroChina stock in portfolio.191
The powerful opposition to the PetroChina offering catalyzed increased attention
from Congress in the weeks leading up to the NYSE-listing. Two letters from
Congressional members, each with twenty-five signatures, arrived at the White
House in the first week of April seeking to persuade President Clinton to deny
PetroChina's access to the U.S. capital markets. The first, so-called "Sudan
letter," focused on the flaws inherent in the company's attempts to "firewall" funds
from its parent company, CNPC. According to the letter,
"Your powers should be used to bar CNPC and its surrogate PetroChina from
access to the U.S. capital markets so long as they generate revenues to the Sudanese
regime. The fungibility of money, the scale of CNPC activities in Sudan and the
$15 billion debt PetroChina is assuming from CNPC, thoroughly undermine assertions
that PetroChina is "firewalled" from CNPC's Sudan operations."192
The second, so-called "Tibet letter," focused primarily on Tibet-related,
environmental and labor concerns. Nevertheless, the message to the President
was similarly forceful and direct. It stated:
"Accordingly, we request that you use your authority to block any IPO brought
to the U.S. capital markets by CNPC, and/or PetroChina, until an acceptable use
of proceeds therefore has been assured."193
During this same period, SEC Chairman Arthur Levitt was likewise the recipient
of numerous correspondences regarding PetroChina. In March alone, Chairman
Levitt was contacted on at least three occasions by Members of Congress seeking
two actions by the SEC. The first was to ensure that PetroChina complied fully
with all relevant disclosure requirements. Of particular concern was PetroChina's
proposed use of proceeds, the explicit receipt by CNPC of IPO proceeds and
its use of those funds as well as the disclosure of all material considerations
that could impact on the value of the stock. The second was a request by both
Senator Brownback and Representative Bachus that the SEC effect a ninety-day "cooling
down" period prior to granting PetroChina permission to proceed with the
IPO so that those interested Congressional Members could study the controversial
offering in greater detail. This latter request was declined.194
PetroChina officially filed for entry into the U.S. equity market on February
29, 2000. At the time, the firm still hoped to attract in the range of $5 billion
-- a substantial downsizing from the originally-targeted $10 billion amount.195 Revelations
in the registration statement stimulated yet another round of concerns. Specifically,
it was stated that CNPC would directly receive an unspecified amount of IPO
proceeds. (That amount was later reported to be 10 percent, or some $289 million.)
Similarly, no mention was made in the prospectus of the Sudan controversy,
the effective IPO opposition campaign by the NGO coalition or the planned divestment
campaign against PetroChina publically announced in the letter to fund managers
from Sudan advocates. Given the material financial impact of such a divestment
campaign on Talisman Energy Inc., it could be argued that a similar campaign
would represent a material concern to PetroChina investors.196
Moreover, PetroChina's SEC filings did not reveal that, according to an interpretation
by Treasury's Office on Foreign Asset Controls, were CNPC to transfer IPO proceeds
to its Sudan operations, U.S. investors could be in violation of the U.S. sanctions
regime against Sudan.197 Finally, the prospectus
seemed to validate the principal concern of many of those opposing the IPO,
namely, that PetroChina was entirely controlled and managed by CNPC. As the
Casey Institute referenced in its analysis of PetroChina's SEC filings,
"PetroChina states that ë[China National Petroleum Company's] ownership
share will enable CNPC to elect our entire board of directors without the concurrence
of any of our company's other shareholders."
Lest there be any doubt as to the completeness of CNPC's control of PetroChina,
the prospectus goes on to say that CNPC will be in a position to: ë1)
control the policies, management and affairs of our company; 2) determine the
timing and amount of dividend payments; 3) otherwise determine the outcome
of most corporate actions; 4) cause our company to effect corporate transactions
without the approval of minority shareholders; and 5) CNPC may seek to influence
our determination of dividends with a view toward satisfying its cash-flow
requirements'"198
Notwithstanding the tireless efforts of those in the "PetroChina Coalition" and
concerned Members of Congress or the moral and financial concerns raised by
the PetroChina offering, the company came to market with what was represented
by the New York Times to be "a whimper" on April 6, 2000.199 Despite
what some observers viewed as "firesale" pricing, in its first day
of trading the company's share price fell some $1.25 on the New York Stock
Exchange -- a drop of roughly eight percent.200 According
to the Wall Street Journal Interactive Edition, the trading was sufficiently
disappointing to catalyze a large-scale intervention by PetroChina's lead investment
bank: "However, institutional buying ñ especially from lead underwriter
Goldman Sachs, which piled up the buy orders from the opening bell ñ prevented
the stock from falling further, traders said."201
In the end, the company raised $2.89 billion, over 71% less than it originally
hoped to attract.202 Even the funds raised
were not easy to procure. The public campaign had been so effective that U.S.
institutional demand for the stock was substantially curtailed.203 In
the end, the political cloud over the IPO was sufficient to catalyze a type
of "private placement" of the stock prior to the listing to ensure
the floatation's success.204 Indeed, in addition
to the four Hong-Kong firms (Cheung Kong Holdings Ltd. and Hutchinson Whampoa
Ltd -- both controlled by Li Ka-shing -- as well as Sun Hung Kai Properties
and Chow Tai Fook Nominee Ltd.) that reportedly pledged to purchase some $350
million in PetroChina stock, the company was also forced to extend concessions
in its retail gasoline market to BP Amoco in exchange for the British oil firm's
commitment to take what turned out to be a roughly 20 percent stake (some $560
million).205
Talisman Energy Inc.
Despite clear warnings from Canada's Foreign Ministry (which was concerned
for the safety of Canadian nationals operating in a civil war zone), and over
the objections of non-governmental organizations and church groups (which lamented
the human rights implications of a partnership between a Canadian oil firm
and Sudan's government), Talisman Energy Inc. of Canada (Talisman) acquired
Arakis Energy in 1998, thereby securing a 25 percent stake in Sudan's GNPOC.206 By
so doing, Talisman stimulated one of the most effective divestment campaigns
since South African apartheid.
The moral objections levied against Talisman are similar to those referenced
regarding CNPC/PetroChina ñ namely, the fueling effect of oil revenues
on the Sudanese government's brutal campaign against southern Christians and
animists. It has likewise been argued that the Canadian firm provided critical
Western technology and expertise in developing the central Sudanese pipeline
system that helped bring Sudanese oil -- and attendant revenues -- on-stream.
Unlike CNPC and Petronas, however, Talisman provided -- knowingly or unknowingly
-- "moral cover" for some of the government's actions. Specifically,
Talisman is a Western energy firm domiciled in a country known for its human
rights advocacy. By partnering with Khartoum in the development of oil fields
that had reportedly been cleared through "scorched earth" tactics,
the company seemed to many observers to be sparing the regime even sharper
criticism from abroad.207 This specter became
more troubling to activists as Talisman publically defended its operations
in Sudan, noting that it does not take sides in the conflict.208 The
company's primary argument has been that economic development fuels progress
that will ultimately benefit all Sudanese.209 It
may be argued that this line of reasoning discounts substantially the brutality
and objectives of the Khartoum regime.
Talisman, unlike CNPC/PetroChina, was already listed on the New York and Toronto
Stock Exchanges when the company initiated its Sudan operations. While oil
analysts and others in the financial world initially rewarded Talisman for
its efforts in the energy-rich nation, the company probably did not anticipate
the impact of the wide-reaching and surprisingly effective divestment campaign
that would ensue.210
Although a more detailed review of the Talisman case is beyond the scope of
this report, a brief description of the campaign is merited. In July of 1999,
the American Anti-Slavery Group issued a press release calling for divestment
of Talisman's shares. The next month, Dr. Eric Reeves (see endnote 165) published
an editorial -- which has since been widely republished -- in the Los Angeles
Times laying out the case against Talisman in detail.211
In little more than a year, the divestment campaign had persuaded a number
of significant public pension fund holders of Talisman shares in the United
States to sell. This list includes: the largest private pension system in the
world, TIAA-CREF; arguably the most influential U.S. public pension system,
CalPERS; both the City and State pension funds of New York; the state of Wisconsin;
the Texas Teachers Retirement System, the Presbyterian Church [U.S.]; and the
700,000 share stake of the State of New Jersey.212 Much
like the PetroChina campaign, strong moral- and national security-related arguments
were augmented by significant media attention to Talisman's role in Sudan both
in the U.S. and Canada.
Like most successful divestment campaigns, the negative media attention and
NGO activism took its toll on the Canadian energy company in a number of ways.
For example, Talisman was forced to divert corporate time and energy to defending
both its Sudanese operations and the company's reputation. It reportedly hired
Hill and Knowlton, a public relations firm, to help counter Sudan advocates
in the press and has often had to manage breaking stories from the Sudan front
that, directly or indirectly, linked the company to the horrors on the ground.213 A
number of these reports have indicated that government forces were utilizing
a Talisman-owned airstrip to conduct air raids on civilian targets in the South.214
The real impact of the divestment campaign, however, has been on Talisman's
share price. Due to the sell-off of millions of shares by U.S. and Canadian
financial firms in a relatively short time-frame, the market became, in effect,
temporarily saturated with Talisman securities. By December of 1999, Talisman's
share price was sufficiently depressed by the divestments that the firm was
forced to take the unusual step of executing a share buy-back to boost its
value. As Canada's National Post, quoting Talisman's President and CEO, James
Buckee, noted at the time,
"However, [Buckee] acknowledged the [Sudan-related] criticism has hurt Talisman's
share price and prompted the board to launch the buyback, which is the company's
first. "If there is abnormal pressure on us, as there is at the moment,
then that calls for abnormal responses...To that extent, yes, [the concerns]
have brought that about."215
At the time, the company's stock had dropped from $49 Canadian to some $34
Canadian, representing a loss of some $1.8 billion in market value.
Notwithstanding the $250 million share buy-back, significant profits in 2000
(reflected in a rising share price) and the decision earlier this year to launch
a second buy-back -- also valued in the range of $250 million -- Talisman's
stock remains significantly undervalued in the view of many analysts.216 According
to Dr. Reeves, consensus industry analysis projections indicate that Talisman's
stock will likely trade at a level of roughly three times cash flow projections
per share in 2001.217 By way of contrast,
a healthy multiple for an energy firm such as Talisman (i.e., profit-generating)
would be around five times cash flow projections per share.218 At
minimum, the multiple should be in the range of four times.219
By examining the numbers, it is possible to gain some insight into the financial
impact of the divestment campaign. According to industry analysts, Talisman's
per share cash flow for 2001 should be roughly $22 Canadian. Trading at a depressed
multiple of three, Talisman's Canadian price per share should therefore equate
to $66. At this writing it is trading at around $59. Again, according to the
National Post in December 1999, "[Talisman CEO James Buckee] noted that
the shares are trading at three times cash flow, compared with the normal rate
of five times cash flow. "We should be a screaming buy." he said."220 At
Buckee's multiple of five, the stock should be moving toward a price of some
$110 Canadian. Due, in large part, to a divestment campaign that has eroded
Talisman's public image as well as demand for its stock, it can be stated with
some confidence that Talisman's shares are trading at a discount of between
$29 and $51 Canadian.221
The impact of this type of financial pressure on a company is material. Talisman
is primarily an upstream energy concern that many believe should be utilizing
profits to acquire assets and consolidate its position in the industry. Instead,
the firm has committed roughly $500 million to shore-up an undervalued stock
and, in recent months, announced a $100 million annual dividend designed to
mollify dismayed investors.222 The most telling
figure, however, may be Talisman's total loss in market capitalization which
Dr. Reeves estimates to be approaching roughly $3 billion Canadian as of May
7, 2001.223
At this time, the campaign has focused its attention on Fidelity Investments,
which reportedly owns some 5 million shares of Talisman. For example, beginning
in March of this year, press reports on Talisman began to reference specifically
the Fidelity stake.224 Naturally, should
Fidelity decide to divest a substantial portion -- if not all -- of its Talisman
shares, the pressure on Talisman would intensify further.
In the past few months, Talisman has demonstrated some signs of succumbing
to the pressure exerted by the divestment campaign. Indeed, the Financial Times
recently indicated that the company has taken steps to evaluate a potential
market for its Sudan assets. According to the report,
"PetroChina and Petronas of Malaysia - both partners with Talisman and Lundin
Oil in GNPOC - seem to be the only potential buyers [of Talisman's Sudan stake].
The report mentions the pressure on Talisman from the human rights community
and speculates that the U.S. capital markets sanctions prospect may be keeping
Western buyers at bay."225
Conclusion
The cases of Gazprom, CNPC/PetroChina and Talisman affirm that higher risk
foreign entities, or so-called "bad actors," are attracting -- or
seeking to attract -- funds in the U.S. capital markets. More importantly,
these cases suggest that national security, human rights and religious freedom
have likely become a permanent part of the "material risk" market
landscape. For example, the effective use of such capital markets activism
is becoming better understood by a number of NGO's across the political spectrum.
Moreover, the asymmetrical leverage successfully applied against these companies
has illustrated the sophistication of modern capital markets activism and portends
the expanded use of this type of leverage in the future. The effectiveness
of "capital markets leverage" as well as the systemic and risk-related
issues raised by these cases are the subject of the next two sections of this
report.