Sun, May 04, 2003 page12

• What's Buffet doing sinking his teeth into opaque PetroChina

  Berkshire Hathaway shareholders must be curious to know what the money maven has in mind by raising his company's stake in the oil giant to 9 percent

  • NY TIMES NEWS SERVICE
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  Why is Warren Buffett betting on China's largest oil company?

  That is a question that perplexed investors were asking after Berkshire Hathaway, Buffett's Omaha, Nebraska, investment company, increased its stake last week in PetroChina, the sprawling oil company controlled by China's central government. Berkshire Hathaway currently controls more than 9 percent of PetroChina's publicly traded shares, or about 1 percent of the company as a whole.

  The investment, disclosed in a filing with the Hong Kong Stock Exchange, was a notable departure from Buffett's previous approach to investing outside the US, and it has aroused considerable interest in China's fast-evolving oil industry. Before the PetroChina foray, Buffett mainly preferred to tap the economic potential of developing countries by investing in American companies, like Coca-Cola and Gillette, with extensive operations abroad.

  "Like most large Chinese companies, PetroChina doesn't have a good reputation for being transparent," said Marc Faber, a Hong Kong-based investment adviser. Still, Faber said he made a case to Buffett last year that many Asian stocks were undervalued, and that Buffett showed interest when the two men spoke at an investment conference at Jacob Rothschild's estate in Buckinghamshire, England.

  "If I were to play oil around the world, I'd go to Russia, where the reserves are stronger than China's," said Faber. "But it's not like he's playing a basket of 50 different Indonesian stocks. Maybe he realizes the 90s were unusual for the multinationals, in that there will be more local competition going forward, particularly in Chinese oil."

  Such is the interest in Berkshire Hathaway's PetroChina investment that some attendees at the company's annual shareholder meeting yesterday had plans to ask Buffett, nicknamed the Sage of Omaha because of his knack for spotting undervalued companies with sound management, about what it is that he sees in a company still under the tight control of China's Communist government.

  While the PetroChina issue is expected to come up, shareholders who attended yesterday's meeting may have also raised more pressing questions, including criticism of the makeup of Berkshire Hathaway's board, which counts Buffett's wife and son among its members.

  A unit of the China National Petroleum Corp, Petrochina pumps about two-thirds of the oil and natural gas produced in China, where rising demand for energy and growing imports have made the country the third-largest oil consumer after the US and Japan. PetroChina came into existence three years ago, when it was spun out of its parent company in an initial public offering. BP bought about one-fifth of the company's publicly traded shares in the offering, representing about 2 percent of the company as a whole.

  Since then, China has restructured its oil industry in far-reaching ways. PetroChina now manages most domestic operations, including exploration in the large Daqing field in the northeast; it also has interests in more than 12,000 gas stations. China National Petroleum, the parent company, is aggressively moving forward with oil and gas ventures in Sudan, Peru, Azerbaijan and other countries. PetroChina has also sought to flex its muscles abroad, with ventures in Indonesia and elsewhere and a proposal to build a pipeline linking Russia and China.

  It would seem out of character for Buffett, an outspoken advocate of transparent management practices, to place a bet on a company in what is apparently so opaque a sector. But the central government's firm grip on China's oil industry may actually be at the heart of the PetroChina's appeal.

  "Buffett's not betting on PetroChina becoming the next Shell or BP, though that may be their ultimate ambition," said Philip Andrews-Speed, an expert on China's oil industry at the University of Dundee in Scotland. "He's betting against energy-sector liberalization in China."

  The expectation that Beijing will shield PetroChina and its Chinese peers from foreign competition adds to hopes that China, as it industrializes, will remain one of the fastest growing energy markets for years to come.

  Deborah Bosanek, Buffett's assistant, declined to comment on Berkshire Hathaway's PetroChina stake, but she said in a telephone interview that she expected Buffett to field questions from investors and reporters on the matter this weekend.
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