U.S. likely to give green light to CNOOC/Nexen deal

CNOOC/Nexen deal photo source lexpertblog

The U.S. must understand that, with or without CNOOC, with or without KXL, Canada will eventually diversify its export markets

OTTAWA, ON, and SAN DIEGO, CA – The difference couldn’t be more striking.

In 2005 Chevron was set to buy Unocal for $16.5 billion when the China National Offshore Oil Company (CNOOC) unexpectedly offered $2.0 billion more. Despite the fact that most of Unocal’s assets were abroad, the American public reacted so negatively that Unocal’s board rejected CNOOC’s offer in favour of a slightly increased bid by Chevron.

Last week, Nexen announced that it has accepted a $15.1 billion takeover offer from CNOOC and the Canadian public and political reaction is one of concern, but not alarm. In fact, political outcry in Washington is – no surprise here – more alarmist than in Ottawa.

If approved, CNOOC’s acquisition of Calgary-based Nexen will be the largest foreign acquisition ever by a foreign company in Canada. But CNOOC isn’t just another multinational buying what it perceives to be an underpriced asset.

CNOOC is, in the benign jargon of economists, a state-owned enterprise (SOE). It is owned by the government of the People’s Republic of China.

Should Canadians be concerned that the Chinese government will control an increasing share of the Alberta oil sands? Will these assets be used to fulfil the political or security mandates of the Chinese Communist Party? Will Nexen’s technology and intellectual property be misused?

First, however, the CNOOC/Nexen takeover offer has to go through a double approval process. In Canada, it falls under the Investment Canada Act. And since 10 per cent of Nexen’s assets are in the U.S., the Committee on Foreign Investment in the United States (CFIUS) must approve the U.S. part of the deal.

Over the past five years, China has invested $20 billion in Canada’s energy sector and $8 billion in the United States. With China’s energy demand growing 18 per cent per year, China worries about assuring an increasing supply of energy, and CNOOC is buying Nexen’s proven reserves at $20 per barrel.

The punditocracy in the U.S. and Canada worry that China’s appetite for energy will interfere with our ability to utilize our own natural resources. Politicians on both sides of the 49th parallel will want to use the approval process to extract concessions on market access issues, never an easy proposition, especially with China.

This wariness is countered by a shared need for external financing. The oil sands in Alberta and shale gas in the United States require massive amounts of upfront financing that is too steep for most domestic investors.

While we are the closest of allies, Canada and the United States have divergent energy interests. Canada is a net energy exporter. The United States is a net importer. Canada wants to diversity its markets, while the U.S. wants a reliable supply of imports. Canada will create incentives for its energy companies to diversify their customer base. The U.S. hadn’t even considered the possibility of Chinese competition for Canadian oil.

So how should Canadians and Americans work through these issues?

First of all, Americans need to take a deep breath. Oil from Alberta isn’t going to China whether produced by a Canadian company or a Chinese company – at least not today. There’s no pipeline to the Pacific, and direct exports to China will remain uneconomical until and unless Canada builds a pipeline.

Americans also need to understand that CNOOC’s purchase of Nexen has no connection to Keystone XL. With all due respect to Prime Minister Stephen Harper, the Government of Canada is not nimble enough to have engineered CNOOC’s offer to a private Canadian company as payback for the Obama Administration’s delay on KXL permitting.

What about the Investment Canada Act? With its 2011 acquisition of oil company OPTI Canada., CNOOC is already a player in the oil sands. Industry Canada is unlikely to reject the company on security grounds, and the CNOOC team has prepared a net-benefits case that appeals to decision makers.

And since the U.S. allowed CNOOC to invest more than $3 billion to gain minority stakes in U.S. shale gas production in 2010-11, its acquisition of Nexen’s minority shares in offshore projects is not a game changer. In the end the U.S. is likely to give a green light.

There is a more important issue for the U.S. Americans need to decide if they would rather import oil from Canada or from other parts of the world. And they must understand that, with or without CNOOC, with or without KXL, Canada will eventually diversify its export markets because it is in Canada’s national interest to do so. Let’s add a serious discussion on U.S.-Canada energy relations to the post inauguration to-do list.

By Laura Dawson and Charles Shapiro
Macdonald-Laurier Institute

Laura Dawson is a Senior Fellow of the MacDonald-Laurier Institute and the President of Dawson Strategic, an Ottawa consulting firm. Charles Shapiro, a former U.S. ambassador to Venezuela, is the President of the Institute of the Americas, a public policy think tank at the University of California San Diego.

Troy Media  the Macdonald-Laurier Institute