Sept/Oct 2012

China’s oil sands

CNOOC bids US$15.1 billion for Nexen

By Anna Reitman


Nexen and the Chinese National Offshore Oil Corporation (CNOOC) have been partners in the Long Lake oil sands project since 2011, when CNOOC bought out Nexen’s partner OPTI Canada. Now, the Chinese state-owned enterprise is set to gain a stronger foothold in Al­berta with the recently announced US$15.1 billion cash acquisition of Nexen, which also has operations in the North Sea, the Gulf of Mexico and offshore Nigeria.

It will be the largest overseas acquisition to date for China’s increasingly bold public enterprises, and will boost proven reserves by approximately 28 per cent to over four billion barrels and production up by approximately 23 per cent to about 1.1 million barrels of oil per day. And while Long Lake and Syncrude accounted for just one fifth of Nexen’s production in 2011, bitumen and synthetic oil make up the bulk of the company’s proved and probable reserves.

During a conference call on July 23, Nexen’s CEO Kevin Reinhart told investors that CNOOC’s strong balance sheet means projects will get much needed capital. In other words, Nexen has desirable assets and CNOOC has lots of cash to develop them – the bid valued Nexen shares 61 per cent higher than their closing price on the NYSE.

CNOOC chief executive Li Fanrong said, “We are in Canada to invest, to be a good employer and in­tend to continue Nexen’s com­mit­ments to the environment and com­­­munities just as we do in our own operations throughout the world.” In Long Lake, for example, the companies offer a youth scholarship program.

When asked if any divestitures were planned, Fanrong said simply, “No.”

Other assurances from Fanrong include servicing Nexen’s outstanding US$4.3 billion debt, keeping current employees, listing its shares on the TSX and establishing a head office in Calgary to oversee North and Central American operations which will represent a combined US$22 billion of assets after the acquisition.

The next step for the deal is to get regulatory approval. Although initial phone calls were made to relevant ministries immediately before the deal’s announcement, according to a spokesperson, CNOOC will not comment on the government’s ­reaction.

There has been some opposition coming out of the U.S. surrounding the deal, which for some may bring back memories of CNOOC’s failed US$18.5 billion bid for ­Unocal, in competition with Chevron, seven years ago. U.S. Senator Chuck Schumer has moved to block CNOOC’s resulting ownership of Nexen-owned Gulf assets on the basis of a lack of reciprocity. However, only national security concerns could legally stop the transaction and, considering that U.S.-based assets comprise under one tenth of Nexen’s portfolio, such an argument is unlikely to hold up. Almost half of Nexen’s assets are in the U.K.

Malcolm Graham-Wood, an oil analyst at investment firm VSA Capital, pointed out that since the Unocal deal, the landscape has changed considerably.

“North Americans need inward investment,” he said. “Recently, Exxon did a deal with Rosneft which allowed the Russian company to share assets in the U.S. That opens the floodgates. How can the U.S. stop CNOOC coming in and buying up assets?”

CNOOC has already completed two large shale deals with Chesapeake Energy, without regulatory or political ­resistance.

And although neither directly related nor likely to stop the deal from moving forward, recent actions by the U.S. Securities and Exchange Commission cast a shadow on the announcement when the U.S. markets regulator obtained an emergency order to freeze a firm’s assets, alleging insider trading in Nexen shares immediately before the acquisition announcement.

The complaint is against Hong Kong-based Well Advantage, controlled by Zang Zhi Rong, who also controls another company that the Commission says has a “strategic cooperation agreement” with CNOOC.

Such headlines are anathema to large cross-border transactions already exposed to political risk, but Graham-Wood believes this acquisition is a “done deal.”

“CNOOC is buying at the top end of the range and, if it goes well, there will be more,” said Graham-Wood. “Outside of Canada too, media and brokers have identified companies which might be next, such as African explorer Tullow Oil, which could end up being a US$20 billion deal.”

He added that China’s investment is advantageous to Canada in particular because of a prevailing long-term investment mindset. If the oil price dips, he explained, CNOOC is unlikely to backtrack on development just because oil sands oil is expensive to produce.

Nexen is not CNOOC’s only presence in Canada. It has a 14.2 per cent stake in the oil sands through MEG Energy and a 60 per cent stake in a conventional oil and gas play in the Yukon via Northern Cross. CNOOC is the third largest oil company in China and the largest offshore oil producer.

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