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Graft Inquiry at CNPC Uncovers Shady Deal

A little-known deal related to an equally little-known, yet highly productive oilfield has come to light as a graft investigation unfolds at oil giant China National Petroleum Corp. (CNPC). A businessman with strong ties to officials is behind the deal, which generated hundreds of million in annual income for its backers, despite little investment.

Workers at CNPC Changqing Oilfield's Wangtai Block in Wuqi County, in the northwestern province of Shaanxi, have speculated the oilfield would be linked to graft since a probe started to rock the company last year.

The Changqing oilfield is the country's second largest, with proven reserves of 3 billion tons as of October 2012. Changqing is a collection of massive oil fields that spreads across the Shaanxi, Gansu, and Ningxia regions. It is the major natural gas supplier to the capital.

The Wangtai Block has appeared in the financial documents of Changqing's No. 3 production plant since 2006, and eighty-eight percent of the block's hundreds of millions of yuan worth of annual income went to a company called Niandai Energy Development Co. (Niandai Energy).

The No. 3 plant is CNPC's third-largest oil production plant. It reported 4.36 million tons of production in 2012.

There are twelve drilling wells in operation in Wuqi County. Workers at the site said eleven of the wells belong to Wangtai. All workers were employees of Changqing, and Niandai Energy only appointed one or two people in charge of monitoring production volume.

Hundreds of meters away from the drilling site is an oil transmission station that handles all oil produced by the Wangtai block and neighboring drilling sites. Four contract workers hired by Niandai Energy record the volume of oil delivered by Wangtai to the No. 3 production plant, based on which CNPC shares revenue with Niandai Energy.

Figures from the No.3 production plant indicate that the Wangtai block includes 310 wells with total daily production of between 380 tons and 450 tons. This means average annual production is up to 150,000 tons, worth about 700 million yuan ($112 million.)

CNPC usually signs a production-sharing contract with its partners in which the partner invests in the early exploration and development facilities and then shares the revenue with CNPC after production starts.

Niandai Energy gets eighty-eight percent of the oil sales revenue generated by the Wangtai wells. But a source close to the situation said the company did not invest in facilities, and the block started stable operation before the partnership.

"They didn't invest in anything," the source said. "What they did is to extend the cooperation contract one year earlier and counted the non-existent revenue sharing for that year as investment. Niandai Energy got the payment settled regularly, but management and operations were mainly conducted by the No. 3 plant."

Niandai Energy closed after the investigation at CNPC started.

Business registration documents show that Niandai Energy was registered in October 2006 in Urumqi, in the northwestern region of Xinjiang. With 50 million yuan ($8 million) in registered capital, the company operated business ranging from technology consulting for oil and gas development to coal mining and logistics.

Niandai Energy was controlled by Cao Yongzheng, but in 2012 control was given to his brother, Cao Yongping.

Fortune Teller

Cao Yongzheng was born in 1959 in Qingdao, in the eastern province of Shandong, but grew up in Xinjiang. He graduated from Xinjiang University in 1982 and later worked as a teacher and editor. Then in 1998 he started his own businesses.

In the 1990s, Cao gained fame for purportedly having unusual abilities that were widely reported in state media. An article published by the official People's Daily in October 1994 said Cao could treat incurable diseases and tell people's fortunes, abilities that helped him garner a circle of followers that included celebrities and officials.

A source close to Cao said he had a close relationship with Li Chuncheng, a former Deputy Communist Party Secretary of Sichuan, and Guo Yongxiang, a former Vice Governor of the province. Both Li and Guo have been investigated by the Central Discipline Inspection Commission since last year.

The source said Cao is close to Zhou Bin, the son of a former top leader. Zhou is currently embroiled in a corruption investigation.

A Beijing businessman said that Cao has very strong connections with high-level officials. In 2011, Cao introduced him to a senior official at the party's Central Politics and Law Committee, which oversees the country's public security matters.

In 2005, Cao partnered with Wang Guoju, a former official at CNPC's Shengli Oilfield, to set up China Niandai Energy Investment Co. in Hong Kong. The company in 2007 and 2008 signed contracts with CNPC to jointly develop oil blocks in Xinjiang and the northeastern province of Jilin.

Cao and Wang have also partnered in movie production and property development businesses.

In July 2013, police inspected Niandai Energy's headquarters in Beijing and froze the company's bank accounts. Cao fled to Taiwan.

The Beijing businessman said Cao was involved in the corruption investigation related to CNPC and "has been detained by authorities."

Another source close to the company said all the assets of Niandai Energy have been seized. "Not only the oilfields, but earnings of all of Niandai Energy's projects," the source said.

Niandai Energy's company documents show that by the end of 2012, its long-term investment totaled 746 million yuan ($120 million.) It had total assets of 1.36 billion yuan ($218 million) and 182 million yuan ($29 million) in liabilities. It had investment earnings of 270 million yuan ($43 million) in 2012.

Changqing and Niandai Energy formed a joint management committee for the Wangtai project. The committee held a meeting in 2010 and senior executives from Changqing and the No. 3 production plant attended.

On June 29, Wu Zhiping, Vice Director of the financial asset department of the No. 3 production plant who attended the 2010 meeting, was detained.

"Most of the contracts for Changqing's cooperation with Niandai Energy were handled by Wu," a source close to the situation said. "Investigators found a huge amount of cash and bank assets after they inspected her home."

Another person who attended the 2010 meeting, Zhang Xingan, the vice head of Changqing's planning department, committed suicide in February near Xi'an, the Shaanxi capital where Changqing has its headquarters. Local police confirmed Zhang's suicide but did not give a reason.

The corruption scandal at CNPC has continued to brew. In late August, four top CNPC managers were detained. Two of them were heads of Changqing. Several days later, Jiang Jiemin, the head of the State-owned Assets Supervision and Administration Commission and former head of CNPC, was also detained. Yan Cunzhang, general manager of the foreign cooperation department at PetroChina Co., was detained by the party's graft fighter in early April.

Sources close to the situation said state auditors arrived at Changqing as early as June to examine the oil development cooperation deals. Inquiries have also involved the oilfield's deal with Zhou Bin.