An assistant to Buffett said one week ago that the Berkshire Hathaway chairman did not have time to respond to written questions. But in a rare open letter to his shareholders in February, Buffett said that Berkshire would retain its financial holdings in PetroChina. It was PetroChina's parent company, CNPC, he said, that had oil operations in Sudan. And the subsidiary, he said, bore no responsibility for the actions of its parent.
"We have seen no records that indicate PetroChina has operations in Sudan," Buffett said in his letter to shareholders. "The controlling shareholder of PetroChina, CNPC, does do business in Sudan. CNPC is 100% owned by the Chinese government, and its activities may logically be attributed to the government of China. [But] subsidiaries have no ability to control the policies of their parent."
Nonetheless, Buffett has allowed a shareholder resolution challenging the PetroChina holdings to be placed on the agenda for Berkshire's annual meeting Saturday in Omaha.
Critics have said Buffett was ignoring his ability, as PetroChina's largest outside shareholder, to pressure CNPC and the government of China into ending the support it provides for the genocide by its oil dealings with Sudan and by providing arms to the Sudanese government and blocking U.N. efforts to stop the killing in Darfur.
By investing in PetroChina, Buffett signaled that the status quo in Sudan was acceptable, said Timothy Smith, president of the Social Investment Forum, an association of more than 600 financial institutions, research companies and foundations.
"There is no morally neutral ground," Smith said. "If Mr. Buffett doesn't want to divest his shares from PetroChina, he should use his considerable prestige and leverage as an investor to demand that the genocide be stopped."
Though the critics agree that PetroChina operates only outside Sudan, they say the company's intimate ties to CNPC raise serious questions about separation between the two.
In 1999, when CNPC proposed a public stock offering to raise cash to expand its operations, concerns about the company's business in Sudan, which is subject to U.S. sanctions as a sponsor of terrorism, caused CNPC to cancel the sale. Instead, it sold stock in PetroChina, a newly created subsidiary that CNPC promised would not operate in Sudan and would be separated from its parent by a legal and financial firewall.
But critics say the firewall is paper-thin.
Ten of PetroChina's 13 directors or officers serve in similar jobs for CNPC, according to the companies' websites, and CNPC owns nearly 90% of PetroChina, according to a filing with the U.S. Securities and Exchange Commission — giving it unilateral control of PetroChina's "policies, management and affairs."
PetroChina inherited $15 billion in CNPC debt, some derived from its Sudan oil operations, and gave 10% of the proceeds from the initial public stock offering to CNPC, partly to increase operations in Sudan. Much of PetroChina's profit goes to CNPC — PetroChina's second-largest customer and largest supplier. Moreover, PetroChina has twice proposed buying CNPC's assets in Sudan, according to the Standard, a leading financial newspaper in Hong Kong.
PetroChina — the fifth-largest public oil company in the world measured by market capitalization — is by far CNPC's largest subsidiary. It took over most of the parent company's domestic operations and many of its foreign holdings.
The ties between CNPC and PetroChina were well-known when Buffett disclosed his first stake in PetroChina in September 2002, near the height of the public concern over government atrocities in southern Sudan. He built up his holdings by April 2003, with war in southern Sudan still raging and the Darfur conflict well underway.
Since then, PetroChina's share price has risen about sixfold, making it one of Berkshire's more lucrative investments.
Buffett's fame and credibility often push up the value of his major holdings, and the pattern seems to be true with PetroChina. In the three months before his large PetroChina stake was disclosed, only 14 major institutional investors purchased PetroChina shares. But in the three months after, 49 did so. PetroChina's share price also rose sharply immediately afterward.
The Buffett seal of approval may have encouraged stock sales and share increases that boosted CNPC's capital reserves and its ability to invest in Sudan and elsewhere, experts said. "He always seems to win," said Charles Elson, chair of the Center for Corporate Governance at the University of Delaware. "And people follow."
Little wonder. Since 1965, according to company records, Berkshire shares rose an average of 21.4% annually, beating the Standard & Poor's 500 stock index 36 out of the last 42 years, often by wide margins.