Positioned midway between Russia and China, Kazakhstan has the highest proven oil reserves anywhere in the Caspian Sea region and is regarded as one of the most important potential sources of new crude oil supplies to world markets.

The state-run CNPC, spurred by soaring Chinese demand for petroleum, won a key victory when a court in Canada gave approval on Wednesday to CNPC's purchase of the Canada-registered firm PetroKazakhstan for a price of 4.18 billion dollars.

The deal was a setback for Lukoil, which had petitioned a court in the Canadian province of Alberta to block the acquisition on grounds that Lukoil had a preemptive right to take full control of Turgai Petroleum, a subsidiary jointly owned by Lukoil and PetroKazakhstan.

CNPC's purchase of PetroKazakhstan included the latter's 50-percent stake in the Turgai venture with Lukoil, and the Chinese company has shown little sympathy for Lukoil's assertion that the sale of PetroKazakhstan means Lukoil has automatic entitlement to the other half of Turgai.

But it was only on the eve of the Canadian court decision that Lukoil unveiled its true aims in the saga, announcing that it was prepared to match CNPC's bid for PetroKazakhstan, which produces 150,000 barrels per day, or around 12 percent of oil production from Kazakhstan.

"Lukoil wants to be a leader in international oil projects in Kazakhstan, but CNPC has just given it some stiff competition," explained Valery Nesterov, an energy analyst with the Troika Dialogue investment firm in Moscow.

Lukoil, currently in the process of paying two billion dollars for the firm Nelson Resources, which pumps one percent of Kazakhstan's oil, has served notice that it will continue to fight to take take its stake in Turgai from 50 percent to 100 percent.

The Russian firm has already launched legal procedings on the same issue with the Stockholm court of arbitration.

CNPC, which was forced at the last minute to agree to cede one-third of the shares in PetroKazakhstan to the Kazakh government which wants to retain control of the country's strategic energy assets, has taken a dim view of the moves by Lukoil and has launched a counteroffensive.

The Chinese company has said it is prepared to go to court to demand preemptive rights of its own to a 50 percent stake in the North Buzachi oil field under joint development by Nelson Resources and CNPC.

"Nelson takes the position that no such preemptive right exists in the current circumstances," the company said in a statement on Friday.

Analysts said there was more than meets the eye to the CNPC counter-attack.

"What CNPC is doing is a response to the actions of Lukoil," Nesterov said. "You could call it blackmail."

He noted however that while the government of Kazakhstan is "politically and historically closer to Russia, and is wary of China," it nonetheless believes that "its interest lies in a diversification of investments and export routes."

At present, the only pipeline that carries Kazakh crude to the world market is that of the Caspian Pipeline Consortium (CPC), which transits through Russia.

But the launch next year of the Atassu-Alashanku pipeline will reduce this dependence by providing a route for export of Kazakh oil directly to China.

Kazakhstan currently produces around 1.3 million barrels per day of crude and the government plans to raise that to 3.5 million barrels per day by 2015.

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