China Ink

Line in the sand

Canada approves state-owned CNOOC’s $15.1 billion acquisition of oil firm Nexen

Line in the sand

A victory for China Inc?

China Securities Journal thought so. After CNOOC’s humiliating failure to acquire Unocal in 2005, the approval of the Nexen bid showed a “profound transformation” in the international energy sector, it commented. After the financial crisis of 2008, China’s cash-rich companies now have an advantage in buying in the West. The newspaper also thought the deal would break new ground in giving a Chinese energy company 90 tenancies in the Gulf of Mexico, as well as oil assets in the UK.

Securities Daily was also upbeat, saying the acquisition will increase CNOOC’s oil and gas output by almost 23%, taking it close to Sinopec’s levels. Nexen will also bring useful expertise in tapping oil sands and shale gas, in which China has big reserves (see WiC151).

CBN was more circumspect, pleased that the approval showed the Canadian government hadn’t stirred up “nationalist sentiment” against China, but concerned that there would be no similar deals in future. That’s because Ottowa has said future acquisitions of Canadian oil assets by Chinese state-owned firms would be vetoed except in (undefined) exceptional circumstances.

“It seems that CNOOC wins this time, but the way is blocked in future,” comments CBN.

The Nexen deal has been approved, but Reuters suggested that Canada’s Prime Minister Stephen Harper then “drew a line in the sand against any future buys by state-owned enterprises” by promising that Canada’s oil sands – the world’s third largest proven crude reserves – would not be sold to foreign governments again.

News agency the Canadian Press said Harper had been under extreme pressure to nix the deal. State ownership of energy resources is a highly contentious issue, especially as policymakers have spent years getting the Canadian government out of the oil sector via privatisation. In what was described as the PM’s longest news conference in recent memory, Harper said: “To be blunt, Canadians have not spent years reducing the ownership of sectors of the economy by our own governments only to see them controlled by foreign governments.”

In that same briefing Harper was at pains to point to the opportunities in the Chinese economy for Canadian companies, and the need to improve relations with Beijing. If he had vetoed the CNOOC deal, those ties would likely have deteriorated. What has emerged is a grand compromise, or as Professor Warren Mabee at Queen’s University put it: “Harper’s intent on having his cake and eating it too”.

Any other issues?

National Business Daily says the deal is still risky, because of the higher costs of extracting oil sands. Crude sold at more than $80 a barrel will be profitable but below that level Nexen is a “non-performing asset”. China Times also quoted local analysts who believe Nexen is “not cheap” and noting that CNOOC accepted various conditions to get the transaction approved, such as maintaining a major presence in Calgary and keeping a minimum number of Canadians on Nexen’s board.

It’s not a done deal: a final decision on China’s biggest ever foreign takeover rests with the foreign investment panel in the US, where Nexen also owns assets. But Canada’s Globe and Mail seems to think it will go ahead, telling readers: “Now that CNOOC finally owns a piece of Canada, Canadian investors might want to return the favour and own a piece of CNOOC… it trades at 10 times earnings, compared to an average of 21 for its peers… all of that adds up to an intriguing opportunity.”

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