Buffett Fooling Self on PetroChina's Darfur Ties

Its 'independence' from the Chinese government is a crock.
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I'm not usually a big fan of "divest from..." campaigns. Most of the time, they're as much about feeling good in the West as they are about actually doing good in the Third World.

And they usually rest on dubious economics. If you "divest" from a company involved in something bad, you just sell your shares to someone else, who then collects the profits. The company's activities, and the profits themselves, need not be affected.

But in the case of

PetroChina

(PTR) - Get Report

and the Sudan, the campaigners have a point. And Warren Buffett's defense of his large stake in the PetroChina -- that it has no role in the African nation -- has a big hole in it.

In case you missed it, the Chinese oil company PetroChina is the target of a divestment campaign related to the slaughter currently under way in the Darfur region of Sudan. More than 200,000 people have been murdered there, hundreds of thousands more made homeless, and rape and torture are daily acts of war. The government of the Sudan is, at best, complicit and is at worst directly responsible.

This is a modern holocaust.

Campaigners argue that PetroChina effectively has blood on its hands and that anyone who holds shares in the company, either directly or through a mutual fund, is complicit. (PetroChina is listed in New York and Hong Kong.)

The reason? Its parent company, Chinese state oil company CNPC, is a key player in Sudan.

CNPC, effectively Communist China's oil ministry, is a partner with the Sudanese government in oil ventures there. The Sudanese government depends on these oil exports so it can buy weapons.

The key fact here is that even those defending PetroChina, such as Buffett, admit CNPC's role in Sudan's oil industry. They simply argue that this has nothing to do with PetroChina.

Instead, they say that the company, which was partly privatized in 2000, is only a subsidiary of CNPC and has no control over the parent. Buffett says you should no more blame PetroChina for the Chinese government's activities than you would blame, say, congressionally chartered

Freddie Mac

(FRE)

for the Bush administration.

They also argue that divesting their shares wouldn't have any affect anyway.

Right? Wrong?

You'll hear the emotive stuff elsewhere. Here, I'm only concerned with dry facts. The drier, the better. And everything you need to know is contained in the fine print of PetroChina's latest annual report to the

Securities and Exchange Commission

.

It explains why dumping your shares in PetroChina makes sense.

And why, in this instance, divestment might actually end up doing some practical good.

First things first.

PetroChina's so-called independence from the Chinese government is window-dressing. In Communist China, no state-controlled entities are ever really independent anyway. CNPC is part of the government -- it is, effectively, the Communist Party's oil ministry -- and it owns 88% of PetroChina shares.

It doesn't stop there. The leadership of "innocent" PetroChina turns out to be pretty much the same people who are running Darfur-involved CNPC.

Don't believe me. Believe PetroChina. Just look through the company's latest public filings, and you will realize that most of the people at the top are, or have been for most of their career, CNPC people.

Take the chairman of the board, 60-year-old Chen Geng. Until last November he was also ... the general manager of CNPC. He held both positions from the spring of 2004. Chen has risen through the ranks of the oil and gas industry in Communist-controlled China for nearly 40 years.

Then look at PetroChina's vice-chairman and president, Jiang Jiemin. By amazing coincidence he is also the president and general manager of CNPC (he took over the general manager's role from Cheng last November). Jiemin worked for China's state controlled oil and gas industry for 30 years. As a a deputy provincial governor as well, he is a full-fledged member of the political elite.

Duan Wende, PetroChina senior VP, today combines this job with the role of "assistant to the general manager of CNPC," a role he has held now for six years.

Zheng Hu, a PetroChina director, is a deputy general manager of CNPC. So is Zhou Jiping, who only joined PetroChina after many years as the rising star of CNPC's ... international development operations.

International development operations.

Hmmm ... what's CNPC up to outside China?

Wang Yilin, another PetroChina director, is also a deputy general manager at CNPC. So is Zeng Yukang. Gong Huazhang, another director, is CNPC's general accountant.

The secretary of the PetroChina board, Li Huaiqi, has also spent the last nine years as "Director of the International Co-Operation Department (Foreign Affairs Bureau)" of CNPC.

Liu Hongru, one of PetroChina's "independent" non-executive directors, is a 76-year-old veteran of the Chinese Communist apparatus. Over a long career in the service of the state, his roles included vice governor of the People's Bank of China, deputy director of the State Economic Restructuring Committee, chairman of the Chinese Securities Regulatory Commission and even vice-governor of the Agricultural Bank. He did post-graduate research in "economics" at ... the University of Moscow in the late 1950s.

Other PetroChina senior management also simultaneously hold senior posts within CNPC.

Dick Cheney and the U.S. oil industry have less in common than PetroChina and CNPC. And Warren Buffett, who knows how to read a public filing, knows this full well.

Which makes his public statement, that the two are independent, disingenuous at best. This leads me to the second point: What effect, if any, would divestment have?

You can't prove the future. But you can use logic.

If westerners shun the stock, you would expect that to drive down the price -- or, at the very least, to leave the price lower than it would otherwise be.

Supply and demand.

And that will hit the top management of PetroChina-CNPC right where it hurts: In the wallet.

The reason?

Compensation for all the top people at PetroChina is heavily dependent on the stock price through "stock appreciation rights." Which means that compensation for a lot of the people running CNPC is heavily dependent on the PetroChina stock price.

In the case of Jiang Jiemin, the CNPC president and general manager, 60% of his annual PetroChina compensation is tied to the PetroChina stock price. For chairman Gen it's 70%. For all those PetroChina VPs involved in running CNPC, it's also 60%. Even for PetroChina's department heads it's 50%.

In total, as many as 300 top people at PetroChina get stock-appreciation rights every year. Put simply: The people running CNPC have leverage over the government of the Sudan. And western investors, through their influence on the PetroChina stock price, actually have some leverage over the people running CNPC.

Like I said, I'm usually skeptical of "divestment" campaigns. But this time around, it's pretty hard to argue with it.

In keeping with TSC's editorial policy, Brett Arends doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Arends takes a critical look inside mutual funds and the personal finance industry in a twice-weekly column that ranges from investment advice for the general reader to the industry's latest scoop. Prior to joining TheStreet.com in 2006, he worked for more than two years at the Boston Herald, where he revived the paper's well-known 'On State Street' finance column and was part of a team that won two SABEW awards in 2005. He had previously written for the Daily Telegraph and Daily Mail newspapers in London, the magazine Private Eye, and for Global Agenda, the official magazine of the World Economic Summit in Davos, Switzerland. Arends has also written a book on sports 'futures' betting.