Tuesday, April 17, 2007

Warren Buffett, PetroChina, and Sudan

I previously mentioned Warren Buffett as a capitalist with a good heart. He very, very good at making money, but he doesn't seem all that interested in having a lot of it, having given most of his wealth away.

He still runs Berkshire Hathaway, an insurance conglomerate that collects insurance premiums and invests in publicly traded companies, and companies that are bought outright. In light of the continuing genocide in Sudan, one of those investments is potentially problematic: Petrochina.

According to Marc Gunther at a Fortune article posted on CNN, Berkshire Hathaway owns 2.3 billion shares of Petrochina, a subsidiary of China National Petroleum Corporation (CNPC), which is 88% state-owned.

CNPC has significant operations in Sudan, and a major stake in Sudan's national oil consortium. 70-80% of Sudan's oil revenues go to its military, which is linked with the Janjaweed militia, the ones conducting the genocide in Darfur. China also gives Sudan weapons and political backing.

Petrochina isn't a black and white issue, although it is well on the side of black. The Sudan Divestment Task Force says that China's oil assets in Sudan are "an undeniable and well-documented enabler of Khartoum's genocidal policy in Darfur." Additionally, China has stalled UN Security Council votes by (of all people) the US and the UK to apply stricter sanctions to Darfur. Already, 2-400,000 people have been killed, and millions have been displaced. And rape has been used as a weapon of war by the militia.

Harvard University rarely does this, but its endowment has divested its stake in Petrochina. They believe the case for divestment is "persuasive." The public outcry surrounding divestment campaigns can shame companies into changing their behavior. Additionally, concerned shareholders can bring their concerns to management.

However, even companies based in democracies are not required to listen or act on shareholder concerns. No board or CEO has been ousted because the company does business with a tyrannical or genocidal regime. And China is no democracy. The government is completely unconcerned with the welfare of the Darfurians.

However, the Chinese government is not invulnerable to pressure. Gunther writes,
To his credit, Buffett has responded publicly (his response is available for download here, as a PDF file) to the divestment campaign and he has welcomed debate at the annual meeting - although he is under no obligation to do so. This is in contrast to Fidelity Investments, which remains a target of a divestment drive.

In Buffett's response, he argues, first, that PetroChina itself has no holdings in Sudan and that it does not control CNPC. "Subsidiaries have no ability to control the policies of their parent," he says.

He goes on to say that CNPC cannot "withdraw" its assets from Sudan since its assets consist of oil in the ground and the fixed infrastructure to transport and refine it. Should China sell those assets to the Sudanese government, the government would still be able to sell its oil on the world market. "Proponents of the Chinese government's divesting should then ask the most important question in economics, 'And then what?'" Buffett writes.

It's a fair question. Here are two possible answers. The first is that Sudan would try to buy out the Chinese, although the Khartoum government is already in deep debt. A second possibility is that other major investors in Sudan's oil, the state-owned oil companies of Malaysia and India, would step in. Either way, severing the economic ties between China and Sudan would have a significant benefit. As the Sudan Divestment Task Forces writes in response to Berkshire's response:

"The sale of CNPC's Sudan assets would remove China's economic incentive to enable Sudan's ongoing genocide. Even short of forcing divestiture of its Sudan assets, pressure on CNPC is likely to change China's approach towards Sudan diplomacy, especially given how highly China prizes its Sudan oil assets."

In truth, China is unlikely to divest, even under pressure from Berkshire. But the Chinese have shown lately that they may be vulnerable to pressure. A high-ranking Chinese official recently traveled to Darfur and urged the Sudanese government to accept a United Nations peacekeeping force. He appears to have done so after Hollywood activists - notably Mia Farrow - threatened to link the 2008 Beijing Olympics to the genocide. Film director Steven Spielberg, who is making a movie about the Olympics, also condemned the genocide in a letter to President Hu Jintao of China.

So Buffett could, at a minimum, engage in discussions with PetroChina. He could ask that PetroChina and CNPC to use their influence to ask Sudan to allow in peacekeepers. He could speak to the Indians and the Malaysians and ask them to work with him. If all of that fails, he could then sell the stock - noisily.

Warren Buffett is, after all, much more than one of the world's great investors. He is a decent, generous man of unquestioned integrity. When he speaks, much of the world listens. He now has a platform to speak on behalf of victims of genocide. Why not take it?

In any case, prayers are due for the leaders of China.

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