Nexen Likely An Easier Deal Than Other Chinese FDI

Governments around the world are taking a more critical eye to Chinese direct investment, but CNOOC’s proposed $15.1 billion merger with Canada’s Nexen is likely to get the nod from regulators, regardless of it being the largest Chinese foreign direct investment to date. First, it is an agreed all-cash deal. Second, China’s largest offshore oil and gas exploration company has made a better job than other Chinese firms of wooing Canadian regulators. It says it will base its North American operation in Calgary, including oil sands research, and create jobs there. It has learned the lessons of its failed 2005 bid for California’s Unocal which ran into a wall of xenophobia. Third, CNOOC has a existing joint venture with Nexen in the Gulf of Mexico, so U.S. regulators are less likely to raise concerns about a full takeover.

Nexen, though it has substantial operations in Alberta’s oil sands at Long Lake, and operations in the North Sea, the Gulf of Mexico and in West Africa, needs capital to exploit its assets. Its share price has been weighed down by that, the slump in natural gas prices and a number of production setbacks in Canada and the North Sea, providing an opportune time for the state-owned Chinese energy group to bid. Given the current glut of gas and heavy crude, North American oil and gas assets are relatively cheap, making it likely that other cash-rich investors will follow in CNOOC’s wake. Nor will they necessarily have to pay the rich premium of 61% to Nexen’s market value immediately before the deal was announced that CNOOC is paying.

They will, however, increasingly have to explain how they will be good local corporate citizens, complying with labour laws and creating jobs. Some Chinese state-owned firms, used at home to having Beijing at their back to overcome any such local difficulties and unused to having to deal with lower-level stakeholders such as community groups and labour unions, may find this a painful learning curve. That is proving the case with natural resources acquisitions in Australia. Some may find it just too arduous to make pursing further foreign direct investment worthwhile at any price.