July 23, 2012, 7:08 am25

Chinese Oil Company Bids $15 Billion for Canadian Producer

By MICHAEL J. DE LA MERCED and IAN AUSTEN
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  • Agence France-Presse — Getty Images

  • A China National Offshore Oil Corporation deepwater oil drilling rig at the port of Qingdao, in east China’s Shandong province.

    An oil sands mine in Fort McMurray, Alberta, that is operated by Syncrude, a joint venture of several companies, including Nexen.
    The deposits in northern Alberta of tarlike bitumen are mixed with sand and other minerals.
    The projects use significant amounts of energy and water to dig up deposits and then transform the bitumen into synthetic crude oil while leaving behind large, toxic waste ponds.

    12:37 p.m. | Updated
    China is making its biggest and boldest grab for overseas energy resources yet in a $15 billion deal for a Canadian oil producer.

  • A takeover of Nexen by China National Offshore Oil Corporation, the Chinese state-run oil giant known as Cnooc (pronounced SEE-nook), would give China a number of footholds in the Gulf of Mexico, the Canadian oil sands in Alberta, the North Sea and the waters off Nigeria.

  • The Nexen deal, announced on Monday, is the latest effort by China to amass the natural resources it needs to stoke its powerful engine of growth. In particular, the country’s leadership has been focused on reducing dependence on oil imports, as China consumes some nine million barrels of oil a day, second only to the United States.

    “From China’s point of view, the main issue has been energy security, and it always will be,” Paul Ting, an independent energy analyst, said.

    And for Nexen, which is based in Calgary, the deal will provide an alternative to a stagnant United States market, where prices for Canadian oil have been weak.

    But the transaction, coming seven years after Cnooc abandoned an $18.5 billion bid for Unocal of the United States in the face of heated political opposition to the deal, will be a huge test of whether regulators are now more willing to accept Chinese ownership of strategic assets. Regulators in Canada, the United States and elsewhere will need to sign off on the acquisition.

    Unease over China’s buying spree has lingered since the failed Unocal takeover, dissuading many Chinese companies from bidding for outright control of strategic assets.

    Nearly two years ago, Sinochem, a Chinese chemicals maker, decided against a bid for the Potash Corporation of Saskatchewan, deciding that it could not ease nationalist concerns in Canada.

    (Canadian officials also rejected a $38.6 billion bid by BHP Billiton, the British-Australian mining giant.)

    That has not stopped China from striking a number of deals in North America and Europe, though nearly all have been in the form of minority stakes or joint ventures. Since 2005, Cnooc alone has announced eight partnerships with the likes of Chesapeake Energy and MEG Energy.

    And on Monday, one of Cnooc’s main rivals, Sinopec, agreed to pay $1.5 billion for 49 percent of the North Sea operations of Talisman Energy, another Canadian oil company.

    The Chinese government has also plunged into areas that few private companies would consider worth the risk at the moment, reaching deals with suppliers in Africa and Venezuela.

    China does not directly ship a majority of the oil from its non-Asian production holdings back to its shores, but uses the oil extracted from those areas to trade with others in the oil markets.

    And, perhaps more important, it has been garnering advanced production technologies to better draw oil and gas from nontraditional areas like deepwater fields and hardened rock formations.

    Some analysts, however, have been skeptical of China’s strategy, questioning both the price and quality of some of the country’s deals.
    “It would be a mistake to say it’s been a tremendous success,” Lucian Pugliaresi, the president of the Energy Policy Research Foundation, said.

    Cnooc is paying $27.50 a share for Nexen, 61 percent higher than the Canadian company’s closing price on Friday. To some, that is a significant premium for a company described as something of a fixer-upper.

    Created by combining two Canadian units of Occidental Petroleum in 1971, Nexen has long been plagued by drops in its production, profits and share prices. Before the takeover announcement, its shares traded at about 58 percent of their 2008 high. Last year, its profit fell 37 percent, to $697 million, over the previous year.

    Nexen’s relationship with Cnooc initially developed because of one of its many problems. The Chinese company last year took over OPTI Canada, Nexen’s bankrupt partner in an oil sands joint venture, paying $2.1 billion for its 35 percent holding. That project, at Long Lake, Alberta, has been troubled by production delays and problems.

    Nexen’s production has also been harmed by the political instability in Yemen, which has long been one of its main sources of reserves.

    Analysts at Nomura criticized the deal as “value destructive,” pointing to the potential difficulties of extracting oil from Nexen’s international holdings. “In our view, Cnooc does not have the operational expertise to turn this around,” they wrote.

    Still, Cnooc’s most immediate challenge will be persuading Canada to approve the takeover under its foreign investment laws, which require any deal to be of “net benefit” to Canada.

    Cnooc took pains in its announcement to ease criticism by indicating that it would retain Nexen’s management and staff and that it would make Calgary, Alberta, the center of Canada’s energy industry, its headquarters for operations in North and Central America.

    And Cnooc noted that it had already invested 2.8 billion Canadian dollars in the country.

    Canadian regulators said on Monday only that they were reviewing the Nexen deal. But while the approval process is handled by regulators, the ultimate decision is political.

    “This is really a test moment,” said Paul Evans, the director of Asian Research at the University of British Columbia in Vancouver. “Chinese companies are just getting the sense that doing business in Canada is complicated.”

    Reports about the transaction on the Web sites of Canadian news outlets swiftly attracted an unusually large number of comments — an overwhelming majority of which were negative about the proposal. The opposition New Democratic Party also moved quickly to condemn the deal.

    “Foreign state-owned companies are buying up Canadian natural resources to pursue their own interests, while the Conservative government just sits on their hands,” Hélène LeBlanc, the party’s parliamentary critic on industry issues, said in a statement.

    The government of Stephen Harper, Canada’s prime minister, has softened its earlier opposition to Chinese investments in the country. During his early days in office, Mr. Harper repeatedly challenged China’s human rights record and occasionally snubbed its officials, to the dismay of many in corporate Canada.

    More recently, however, Mr. Harper has dropped that rhetoric and hailed China as a new market for Canadian energy, particularly oil from the oil sands of Alberta. Nearly all of Canada’s oil exports now go to the United States.

    Opposition to the Keystone XL pipeline, which would take oil sands production to the American Gulf Coast, appears to be a factor in Mr. Harper’s recent attempts to solicit China as both a customer of and investor in Canada’s energy sector.

    Under provisions of Monday’s deal, while Nexen cannot actively look for higher bids, it can consider any that other companies make on their own. Cnooc has the right to match any such proposal. If directors of Nexen withdraw their recommendation, the company must pay Cnooc a $425 million breakup fee. But if the deal falls apart because of Chinese regulatory reasons, Cnooc must pay $425 million.

    Chinese Oil Company Bids $15 Billion for Canadian Producer - NYTimes.com