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CNOOC seeks to expand influence with Nexen takeover

China National Offshore Oil Corporation aims to expand its global influence with the $15.1 billion takeover

“Think global, act local” has long been a mantra of the environmental movement. Now it is being co-opted by China National Offshore Oil Corporation (CNOOC) as it seeks to expand global influence with its $15.1 billion takeover of Canada’s Nexen.

CNOOC came to Calgary with the promise of billions of dollars in future investments, as high-ranking company officials tried to convince the locals of their good intentions in snapping up one of Canada’s largest international producers.

Included in the deal is the assumption of some $4.3bn in debt, bringing the total value close to $20bn. Nexen’s sagging shares jumped more than 50% on the New York stock exchange, to $25.90, just shy of CNOOC’s $27.50 offer price.

“We intend to be a local company as much as a global one,” said Li Fanrong, its chief executive, who appeared alongside Nexen representatives in Calgary to announce the deal.

Nexen is one of Canada’s largest and oldest energy companies, with a global portfolio spanning the US Gulf of Mexico, the UK North Sea and Africa. Only 11% of its revenues, and barely a third of its production, come from Canada, according to its latest quarterly results released on 19 July. Most of its output comes from Yemen and the North Sea, where it is one of the UK’s largest producers.

Buzzard, Nexen’s major asset in the North Sea, produces more than 200,000 barrels a day (b/d). This makes Nexen a major contributor to Brent production streams that set global oil prices. CNOOC gains access to the benchmark’s inner circle, giving China, the world’s second-largest crude importer, a hedge against market volatility. CNOOC should get good, timely information on movements in the Brent market through its new role as a benchmark producer.

More than that, it is buying wider international exposure, too, with a reach that will extend from North America’s unconventional sector to the Middle East and West Africa. It makes the purchase price look modest. But the acquisition is also a calculated political risk. CNOOC is testing the Canadian government’s openness to foreign state-owned investors – Communist ones – of owning and operating substantial oil and gas assets.

The federal government must deem takeovers of $300 million or more to be a “net benefit” for Canada. And, should it go ahead, the CNOOC deal would be one of the largest foreign takeovers in the country’s corporate history.

The China factor adds some political sensitivity. Canada has previously been an outspoken critic of China’s human rights record, even as it moves to strengthen its trade ties with the country and boost its exports – especially energy – to China.

The Nexen deal offers other benefits too: the Chinese have promised to upgrade bitumen into higher-value light crude oil in Alberta, instead of shipping it for processing to the US; they have pledged to transfer $8 billion in existing assets in the US and central America to a new North American headquarters in Calgary; and plan stock exchange listings in Shanghai and Hong Kong in addition to Toronto and New York.

Upgrading bitumen into higher-priced synthetic crude is an obvious sweetener for the Alberta government, which wants to see more value-added processing of energy resources at home. There were promises, too, about a major research and development programme and big increases in capital spending in Alberta’s oil sands.

CNOOC’s decision to buy Nexen did not come out of the blue. CNOOC was already working with Nexen in the Long Lake thermal oil-sands plant and in 2011 it bought out Opti Canada for C$2.1bn ($2.04bn) to assume a 35% interest in the project.

But the new deal makes CNOOC the first Asian entity to own and operate an oil-sands operation, one integrated with a cutting-edge gasification upgrader, developed by Israel’s Ormat Group.

Long Lake has faced operational problems that have prevented it from reaching full capacity, but that seems not to have deterred the Chinese. The company said it had no plans to divest or cut Nexen’s existing programmes.

However, it’s not immediately clear what the reaction from the US, Canada’s largest trading partner and direct foreign investor, will be. There, a bout of Congressional paranoia in 2005 about the rise of China thwarted CNOOC’s $18.5bn bid for Unocal. Like Nexen, Unocal was an established name with diverse international assets. According to Wenran Jiang, a researcher at the University of Alberta’s China Institute, Unocal was a landmark that prompted China to re-think its North American strategy. Starting with small, incremental steps, it gradually amassed a significant toehold though joint ventures and partnerships with local firms, drawing on their domestic expertise.

Now it is taking the next step, with outright ownership of an entire company, and its largest foreign takeover to date. With the majors already firmly positioned in Canada, CNOOC joins the industry elite. But it also follows a trend: Canada has been keen to court Asian investment in its oil-patch from other state-owned entities, such as Malaysia’s Petronas, which in June paid $5.5bn for Calgary’s Progress Energy.

Canada is also determined to strike back at the US administration over the wrangling surrounding the 800,000 b/d Keystone XL pipeline to the Gulf of Mexico. After Washington’s rejection of Keystone, Canada is, instead, pressing ahead with the 550,000 b/d Northern Gateway line to the west coast. CNOOC’s move would, it appears, be based on a bet that the west coast pipeline will be built.

Thus approval is virtually assured, if only to drive home the point that Canada is determined to diversify markets away from the US. Already, American pundits have accused US President Barack Obama of driving Canada into the arms of the Chinese. It’s precisely the desired response, as far as the Canadian government is concerned.

Nexen and CNOOC officials confirmed that they told federal ministers of the deal before it was announced, but denied that approval is fait accompli. China, though, is unlikely to have made such a bold step without at least some tacit signal to move forward.

In June this year, Alberta’s Premier Alison Redford visited Beijing on a trade mission, and energy was high on the agenda. Her voice will be important in the debate that follows, although the final decision will be taken in Ottawa.

 

CNOOC

Nexen

Formed:

1982

1969

Employees

5,300

3,000

Revenues (2011)

RMB48.84 billion ($7.64 billion)

C$6.5 billion ($6.37)

Headquarters:

Beijing, China

Calgary, Canada

Production (barrels of oil equivalent):

909,000 boe/d

213,000 boe/d

Reserves (proved plus probable):

3.19 billion boe

2.31 billion boe

Stock exchange listing:

Shanghai, Hong Kong, New York

Toronto, New York

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