A Reenergized Deal

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  China National Offshore Oil Corp.(CNOOC), a Chinese state-run oil giant, is running for acquisition of Nexen Inc., a debt-ridden transnational Canadian oil company.
  CNOOC announced in late July that it has entered into an agreement to buy Nexen for$15.1 billion. If completed, the deal will be the largest Chinese acquisition of an overseas company to date.
  It marked another attempt by CNOOC to buy a major oil company in North America after its failed bid to acquire Californiabased oil producer Unocal seven years ago. Vehement political opposition from the United States in light of concerns over national security caused the Unocal purchase to fall through. As Nexen holds assets in Canada, the United States and Britain, the new deal should also be subject to regulatory approval in those countries.
  However, compared with the failure seven year ago, observers are more optimistic about the CNOOC-Nexen deal as it has come along at the right time, with generous terms that will benefit both sides in the long run. But they also pointed out potential hurdles.
  “By far, the Canadian side is very active and has shown great interest in the deal as it will help the export diversification of Canadian energy resources,” said Jia Xiudong, a senior research fellow on international affairs with the China Institute of International Studies.
  Dong Chunling, a researcher on energy issues with the China Institutes of Contemporary International Relations, said,“With adequate funding and a broad market, the Chinese oil producer has the ability to take over Nexen. It could promote the development of Canada’s energy sector.”
  Sprint again
  In 2005, CNOOC made an $18-billion bid for the U.S. gas company Unocal. Although it offered a much higher price, the Chinese firm was forced to quit after U.S. lawmakers denounced it as a threat to national security.
  “This time is different,” said Jia. “Though Nexen has assets in the United States, it is an independent Canadian company. Therefore, the barriers from the United States are much lower.”
  “Canada is rich in energy resources. The country has more oil and gas than it needs but it faces energy export difficulties as its biggest oil importer, the United States, postponed a major oil pipeline from Canada to the United States not long ago,” Jia said to Beijing Review. “So, Canada is in need of diversifying its oil export markets and attracting more foreign investments.”
  In light of the coming general election, U.S. President Barack Obama again put on hold plans for the Keystone XL pipeline project at the beginning of the year. The pipeline, from Canada’s Alberta to the coast of Texas, would double exports of Canadian tar sands oil into the United States and transport it to refineries on the coast of the Gulf of Mexico and ports for international export.
  Ottawa was disappointed with the decision of Washington and began to turn to Asia for energy export. Earlier this year, Canadian Prime Minister Stephen Harper’s visits to China, Japan and South Korea were seen as a prelude of its new strategy.
  Under the circumstances, Chinese energy enterprises with adequate funding resources such as CNOOC have become attractive potential partners for Canadian energy cooperation, said Jia.
  “Nexen is under severe debt problems and needs urgent financial aid. Meanwhile, it has already had successful cooperation with CNOOC on several occasions before the acquisition,” Dong said.
  CNOOC has been a major investor in Canada in recent years, with a total investment of $2.8 billion in the country since 2005. CNOOC and Nexen have worked together on the Long Lake oil sands project. The two also formed a joint venture to drill deepwater wells in the Gulf of Mexico in 2011.
  “CNOOC has made Nexen a very tempting offer this time,” Dong added. The $27.5 per share offered by CNOOC in the deal represents a premium of around 60 percent to Nexen’s recent stock price on the New York Stock Exchange. Additionally, the Chinese oil giant said Nexen’s current debts of approximately $4.3 billion will remain outstanding.
  The company also promised to establish Calgary as the headquarters of its North American and Central American operations and retain Nexen’s existing management team and staff. Its shares will be listed on the Toronto Stock Exchange, and the new firm will continue research into tar sands in Alberta.
  The transaction, expected to be finalized in the fourth quarter, has received the unanimous approval of the two companies’ boards of directors. Lu Bo, Deputy General Manager of CNOOC, said the bid to buy Nexen is normal market behavior and the company will strictly follow market procedures in the acquisition process. The company is confident about completing the deal.
  “The most basic point is that the two sides freely agreeing to make this deal is a good thing. It is how market economies should work,” said Derek Scissors, a senior research fellow on Asian economics with the Heritage Foundation, a conservative think tank based in Washington, D.C.
  “Blocking the Unocal deal was a mistake. As with Nexen, CNOOC’s bid for Unocal was freely agreed to. Its rejection by the U.S. government merely caused CNOOC to invest elsewhere. American participation in Chinese investment was delayed a few years,” he said.
  
  A positive sum
  “The deal is poised to benefit both sides. For the Canadian side, Sino-Canadian energy cooperation would help to stimulate Canada’s employment and its economic recovery,”Dong said.
  The generous terms offered by CNOOC to Nexen could not only solve the current problems of the Canadian company but will also strengthen its capacity in energy development, Jia said. What’s more, the deal will help Canada to greatly expand its energy exports.
  Nexen, as one of the major Canadian oil producers, has 2 billion barrels of proven and probable reserves. It has a substantial operating business in the Alberta oil sands and also operates in Britain’s North Sea, the Gulf of Mexico in the United States and West Africa’s Nigeria.
  Jia said, “If the deal is completed, CNOOC’s reserves will exceed 10 billion barrels, which will greatly promote its strength and expand its market share. The case will also lay a good foundation for Chinese enterprises to enter Western markets en masse and help to eliminate the shadow caused by the Unocal deal.”
  “The acquisition reflects our strong belief in Nexen’s rich and diverse portfolio of assets and world-class management and employees. This is an exciting opportunity for us to build on our existing joint venture relationship with Nexen in Canada and to acquire a leading international platform in the process,” CNOOC Chairman Wang Yilin said.
  “Besides increasing its profitability, the acquisition of Nexen will help CNOOC to acquire expertise in deep-sea oil exploration and shale gas extraction,” Dong said.
  China has huge reserves of shale gas and other unconventional fuels. The key problem is in developing ways to better exploit these resources.
  Currently, the deal is still under review by the governments involved, but observers believe their interest in the stable investment China brings will outweigh concerns.
  For political reasons and the interests of some oil producers, there remain voices that are against the deal in the United States. Western media reports say some of the same U.S. politicians who voiced opposition to the Unocal deal, including Senators Charles Schumer and James Inhofe and Representative Edward Markey, have already lined up against the Nexen one.
  “The deal won’t form any challenge for U.S. national interest or national security. The United States should not worry so much about overseas investments by Chinese companies operating in the global market following market rules,” Jia said.
  Dong said, “U.S. assets only account for 10 percent of Nexen’s total assets. Even if acquisition was rejected by the U.S. Government, it might still be carried out by stripping those assets, which could have a negative effect on the U.S. economy and employment.”
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