London’s Investor Battle Steps Up Over Kazakhstan’s Oil Riches

London’s Investor Battle Steps Up Over Kazakhstan’s Oil Riches

As Britain tries to charm former Soviet republic, a cautionary tale emerges.

Trade minister Greg Hands leads a charm offensive in Kazakhstan’s capital Astana today on a mission to drum up business for the City of London in the post-Brexit era.

But the Square Mile’s recent experience of companies from the former Soviet republic could serve as a salutary tale for minority shareholders considering investing in firms from exotic locales. The most high-profile case was scandal-struck miner Eurasian Natural Resources Corporation — once branded “more Soviet than City” by ousted director Ken Olisa.

But another example uncovered by the Standard might also give investors — and Hands himself — pause for thought. When a Kazakh oil company came to London promising potential investors thousands of barrels of oil a day in 2011, with the price of crude riding high, City firms smelt an easy route to serious riches. The company, Tethys Petroleum, had former Tory Cabinet minister Peter Lilley on its board, adding Establishment lustre to its credentials.

Blue-chip names piled in with the money they were investing on behalf of pension savers. Big players such  as JPMorgan Asset Management  and Capital Group took stakes in  the company.

But, six years on, with Lilley long gone, the game is well and truly over. A few weeks ago, Tethys delisted its London shares after they lost 98% of their value, blaming the oil-price plunge. Now Tethys, which maintains a listing in Canada, is facing mounting investor anger and a shareholder spat in London over an emergency fundraising drive and allegations of missing oil supplies, which some investors say lost them a fortune.

The share deal

In November last year, Tethys was facing a serious cash squeeze and needed extra investment. So its chairman, former Goldman Sachs banker Bill Wells, whose Pope Asset Management is also the biggest Tethys shareholder, brought in two new backers, Winston Soosaipillai, a British fuels importer based in leafy Weybridge, Surrey, and Kazakhstan-based Medgat Kumar, to shore the business up.

They each bought a 9% stake in shares, plus warrants to buy another 10.9%. As part of the deal, it was agreed that Wells’ Pope Asset Management subsidiary would have the option to swap two loans to Tethys into shares which would take Pope and its affiliates to more than 30% (the right has not yet been exercised).

The transactions saved Tethys for another day — but also angered shareholders, who say their stakes have been unfairly diluted. “I do not believe Wells has paid any attention to the rights of shareholders,” said one. “He’s disregarded everyone. In my opinion, we’ve been treated very badly.”

Tethys fell from a value of C$240 million when it floated in London to C$13 million when it delisted in May. Critics have privately accused the company of delisting from London to escape regulatory scrutiny.

Tethys said the claim its original shareholders have been squeezed out was “incorrect”, and added that the two-pronged deal was approved at a shareholders vote and that the shares of the new investors had been sold to them at a premium over the market rate. “It is inappropriate to say it is unfair when approved by the other shareholders,” it said. The London listing, it claimed, was dropped because it was “unnecessarily expensive”, pointing out that Tethys remains listed in Toronto under Canadian securities law.

The “missing” oil

Angriest of all the investors in Tethys is its second-biggest shareholder, Olisol Petroleum, which previously worked with Tethys in Kazakhstan and co-owns a big oil terminal with the group.

The pair have fallen out over a proposed investment by Olisol in Tethys in 2015. Part of the spat involves an allegation from Olisol that Tethys was breaking a deal to supply an Olisol subsidiary with oil. Amid the swirl of claim and counter-claim, Olisol is convinced the oil produced by Tethys is going to another business, called Prax-AK, instead of itself.

This oil, Olisol says, was the same crude it paid for “as early as in 2012”. Lawsuits are flying in all directions, with Tethys claiming it is suing Olisol for alleged breach of contract and issuing erroneous press information.

Sources close to disgruntled Tethys shareholders suggest that Prax-AK is a joint venture between a seriously well-connected Kazakh businessman, Islambek Salzhanov, and — wait for it — Soosaipillai, one of the two new Tethys investors brought in by Wells. Why does Olisol think Prax-AK is getting its oil? Because Salzhanov himself was quoted in a recent interview as saying that his company Altyn Kyran (note the AK initials) was involved in a joint venture called Prax-AK to buy oil from Tethys’ AralGas division.

And how can Prax-AK be linked to Tethys’ new shareholder Soosaipillai? Because Soosaipillai is a shareholder and director of numerous companies called Prax, and the investment vehicle he used to invest in Tethys was called “Prax Pte”.

When the Standard questioned Soosaipillai about the situation, lawyers acting for his Prax Petroleum said they could not comment fully because of “confidentiality”. But Prax Petroleum said that Prax-AK was not set up to take oil away from the Olisol subsidiary “in any way” and that, as a public company, Tethys acted in accordance with the rules. It added that “as far as [Prax] was aware” the oil supply deal between Tethys and Olisol’s subsidiary stopped because the Olisol business was allegedly in breach of its contract. Meanwhile, Altyn Kyran did not respond to a request for a response to Salzhanov’s comments.

Soosaipillai has since sold his investment in Tethys to another investor, according to regulatory filings, adding to the intrigue. The blue-chip investors and board members may be gone — but the Tethys saga keeps swirling. And the episode proves one of the oldest adages in the City, which Greg Hands will know well from his career in the Square Mile before politics: caveat emptor.

London Evening Standard