Explaining CNOOC’s Complicated Canada Deal

For The Diplomat, Hugh Stephens of the Asia Pacific Foundation of China breaks down state-owned CNOOC’s proposed $15.1 billion acquisition of Canada’s Nexen, the latest play by a Chinese state-owned enterprise (SOE) to invest in North American resources. While the Canadian government will likely approve the acquisition, and while Chinese SOE’s will likely continue to use their deep pockets to tap into North American energy opportunities, Hugh writes that CNOOC may still face obstacles:

The Canadian oil industry seems to be generally onside with the acquisition although there are those who caution against allowing SOEs to expand their role. The provincial government in Alberta has likewise shown no sign of opposition, leaving it to the federal government in Ottawa to make the call as to whether or not this investment will bring “net benefit” to Canada. Since the rules for “net benefit” have not been clearly defined, the government has ample scope to either approve or reject CNOOC’s bid, depending on its political calculations. Given Mr. Harper’s overtures to the Chinese, as well as the possibility of the two countries launching free trade negotiations at some point in the future, the chances are good that the takeover will be approved, probably subject to some undertakings regarding maintenance of substantial operations at Nexen’s operations in Calgary. Some commentators have called for Canada to use China’s interest in acquiring more oil, gas and mineral assets in Canada as a negotiating chip in the forthcoming FTA talks, should they be launched.

The bid could face obstacles in the U.S., however, given that Nexen has holdings in the Gulf of Mexico. U.S. Senator Chuck Schumer, a longtime China skeptic, has signaled that he has concerns over Chinese acquisition of U.S. resources and wants the deal reviewed by the same process that persuaded the Chinese to withdraw their Unocal offer. A decision by the U.S. to disallow CNOOC’s acquisition of the Gulf of Mexico assets would force Nexen to divest them.

Meanwhile, all is not smooth sailing for a proposed Northern Gateway pipeline that will have to be built from the oil sands in Alberta through the neighboring province of British Columbia (BC), to a planned terminal on the north Pacific coast, if Canadian oil is to be moved to China or elsewhere throughout Asia. Not only are most aboriginal groups, across whose traditional territories that pipeline will have to cross, opposed, but the BC government has laid out five conditions that it says will have to be met if it is to give its approvals for the pipeline and tanker terminal. One of these is that BC receive a greater share of the benefits of the project, a demand that Alberta premier Alison Redford has flatly rejected. While this inter-provincial standoff continues, there are many other hurdles that must be overcome before Alberta oil finds its way to the west coast, and from there onto China-bound tankers.

In the U.S., meanwhile, Bloomberg reports that regulators have obtained a court order to freeze the assets of traders for allegedly profiting ahead of the announcement of the proposed Nexen acquisition:

Hong Kong-based Well Advantage Limited, controlled by Zhang Zhirong, and other unidentified traders stockpiled shares of Nexen based on confidential information about the deal, the SEC said in a July 27 statement announcing a complaint filed at federal court in Manhattan. The court order froze about $38 million in assets, the SEC said.

Nexen’s stock rose more than 50 percent on July 23 after Cnooc, China’s largest offshore oil and gas explorer, said it would pay $15.1 billion in cash to acquire the Calgary-based company. Well Advantage’s owner Zhang, a billionaire, is the controlling shareholder of China Rongsheng Heavy Industries Group Holdings Ltd. (1101), a Hong Kong-based company that engages in significant business activities with Cnooc, the SEC said.

See also previous coverage of the growing economic relationship between China and Canada, and the eyebrows the relationship has raised within the Canadian intelligence community.