Tag Archives: Nexen

Nexen a world away from Unocal for CNOOC

CNOOC’s $18 billion bid for Canadian oil and gas producer Nexen is the third China-related deal in recent months to have cleared the Committee on Foreign Investment in the U.S. (CFIUS), the regulatory agency that reviews mergers and acquisitions that could have implications for U.S. national security. BGI-Shenzhen’s bid for Complete Genomics and Wanxiang Group’s for battery maker A123 Systems also got a green light from CFIUS.

Its approval to buy Nexen was the final regulatory hurdle CNOOC needed to clear to close what will be the largest Chinese foreign investment to date. It must seem a far cry from its 2005 effort to buy California’s Unocal. That deal, with fewer security implications for the U.S. than the Nexen deal (the Canadian company has oil rigs in the Gulf of Mexico near U.S. military installations), was shot down by fevered political opposition in Washington, stoked by rival bidder Chevron, without ever even getting as far as a CFIUS review. Lessons learned.

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CNOOC’s Bid For Nexen And The Canada Dilemma

The question before the house is this, is Canada’s relationship with China qualitatively different to its relationship with Malaysia. On the answer to that may well hang the answer to the question, is the Canadian government’s blocking of the $5.2 billion bid by Malaysia’s state oil company Petronas for Canadian gas producer Progress Energy, prologue for the same thing happening to CNOOC’s $15.2 billion bid for Canadian oil producer Nexen.

The Canadian government is walking a tightrope. It is suggesting both that Canada remains open, even welcoming, to foreign investment, and that each particular investment has to be what the country’s finance minister Jim Flaherty describes as ‘correct’. That will be particular true for Canada’s natural resources, which is pretty much the only Canadian assets foreign investors are interested in right now. That such deals are invariably big-ticket numbers only shoves them more firmly into the center of the spotlight of public scrutiny.

The Canadian government has minimized the degree to which the CNOOC bid is politicized by declining to hold a public inquiry. Instead it has given itself until mid-November to assess the bid. It has also promised to outline guidelines for state-owned companies bidding for Canadian firms.

This is all keeping investors guessing about prognosis for CNOOC’s bid. Before the Petronas decision, it was thought that CNOOC would get the nod. Now there are second thoughts. Ottawa has previous when it comes to keeping foreign companies at arms length from Canada’s natural resources. In 2010, it unexpectedly rejected a $39 billion bid by Australia’s BHP Billiton for Potash Corp, the world’s largest fertilizer maker.

On top of that, these are uneasy days for Chinese companies in North America. The U.S. House of Representatives’ Intelligence Committee issued a report earlier this month saying that telecoms groups Huawei and ZTE were a security risk and that American companies shouldn’t do business with them. Canada has expressed similar concerns.

Opponents of the CNOOC bid for Nexen are playing on such security fears.  They have latched onto a description by CNOOC’s chairman Wang Yilin of the company’s deep-water drilling rigs in the South China Sea as “mobile national territory and a strategic weapon”.  The disputed waters of the South China Sea are a long way from the shale sands of Canada, both geographically and politically, but such words travel badly.

The unease cuts both ways. Last Thursday, Superior Aviation Beijing’s planned $1.8 billion purchase of U.S. aircraft maker Hawker Beechcraft fell apart unexpectedly. Hawker’s chief executive rued China-bashing by U.S. presidential candidates for contributing  to the collapse of the talks.

Like Washington, Ottawa faces a dilemma in framing its relations with China, which are of an order different to that of its relations with Malaysia (so our answer to our own first question is, yes). China is an important source of foreign capital as well as a growing customer for Canada’s exports. Ottawa doesn’t have much choice but to engage with its customer. It can do so with a lower intensity of geo-political competition than Washington does. But is still has to engage on the best terms it can get. We expect the CNOOC bid to go ahead, but with conditions imposed.

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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.

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