The Education of China’s Oil Company

Reuters has a lengthy and detailed account of “China’s largest foreign acquisition in modern Chinese history,” state-owned oil giant CNNOC’s $15.1 billion purchase of Canadian Nexen Inc. The successful acquisition comes eight years after CNOOC’s failed bid to take over Unocal, which was blocked following fierce political opposition in Washington. Yet now that the deal has been done, questions are being raised about possibilities for its long-term success:

But as deftly as it was done, it is now anything but clear that the Nexen acquisition was wise for CNOOC’s constituents – the Chinese government and shareholders in the publicly traded company.

As one company insider told Reuters: “For CNOOC, the closing of the deal marked the end of euphoria, and the beginning of pain.”

The central problem, analysts say, is that in a global energy industry transformed by the shale gas revolution in North America and elsewhere, CNOOC overpaid. And it underestimated the risks of monetizing the landlocked oil-sands and shale-gas assets in Canada that account for 75 percent of Nexen’s proven and probable reserves.

The deal may be emblematic in a different way than its boosters think. Critics of China’s decade-long overseas resource-buying binge believe state-owned companies have wasted huge chunks of the money – because deals were done for political, not commercial, reasons. [Source]

Read more about CNOOC and China’s overseas investments, via CDT.