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Why the Nexen-CNOOC Deal Will Spur More Energy Deals

Sunday, 9 Dec 2012 | 8:00 PM ET
Canada
Jeffrey Coolidge | Photodisc | Getty Images
Canada

Canada insists that it will allow no further deals by Chinese state-owned enterprises after approving a $15.1 billion acquisition of Canadian energy firm Nexen by China's CNOOC. Experts say watch this space.

They believe there will be more deals in the energy sector simply because Canada needs the investment to develop its vast oil resources.

China's biggest ever foreign takeover finally got the go-ahead from Canada on Friday, but the country's Prime Minister Stephen Harper said Canada will in future restrict state-owned enterprises to minority stakes in Canadian enterprises except in "exceptional circumstances".

The remarks may just be talk, analysts say, adding that Canada may have no choice to allow further foreign involvement in its resources sector because the country needs $657 billion in investment to develop its natural resources sector over the next decade alone.

"That's definitely playing to a domestic audience," Glenn Maguire, principal and chief economistwith Asia Sentry Advisory, said, referring to Harper's comments. "When we look at the energy resources, not just in Canada, but also in the U.S. and Australia, shale, oil reserves, oil-sands, these are incredibly expensive resources to develop. Canada needs $650 billion to fully exploit and extract its oil reserves."

Speaking to CNBC Asia's "Squawk Box," he added: "Canada really needs to open up its capital controls, capital borders to those regions and countries which are cash rich. And that's clearly China and the rest of Asia."

Friday's decision followed months of heated debate in Canada about how much of the energy sector, a key strategic asset, should be controlled by other nations. Canada boasts the world's third largest proven oil reserves, after Saudi Arabia and Venezuela, with most of it found in oil sands.

Nexen is involved in oil sands in Canada and offshore production operations around the world. The Nexen acquisition by CNOOC, short for China National Offshore Oil Corporation, gives it control of Nexen's 43 percent stake in the Buzzard oil field in the North Sea, off the Scottish coast.

Transparency Worries

The bid by CNOOC, China's third-largest oil company, has also sparked concerns about transparency within Chinese companies among some politicians in Canada.

According to Damon Vickers, managing director of brokerage Damon Vickers & Co., such concerns will not stand in the way of future investment by Chinese firms not only in Canada but in other countries as well.

"I think you can expect an awful lot more of this," Vickers told CNBC, said referring to merger and acquisition deals in the energy sector.

"Transparency is fine and well, but China is sitting on tremendous capital reserves. They need to invest it, they need resources. Nations are hard-strapped for cash, particularly the western nations. We're going to see more takeovers of oil companies, paper companies, metal companies,all around the planet."

CNOOC's Nexen acquisition follows other smaller deals in Canada by Chinese state-owned oil firms. Last year, Sinopec, a unit of China's second-biggest oil firm, paid $2.2 billion for Daylight Energy, a Canadian conventional oil and natural gas company. In 2010, Sinopec paid $4.65 billion for a stake in the Syncrude oil-sands project in Alberta. Also last year, CNOOC bought oil-sands producer OPTI Canada for $1.2 billion.

The latest acquisition by CNOOC will only make it easier for the Chinese government to invest overseas, said Maguire.

"We are still in a global environment where cash and funding are sparse in the developed economies, and cash and funding is rich in the developing economies," he said.

"You really are going to see that flow of funds from emerging economies - Asia and China in particular – into the developed economies. Merger and acquisition activity is going to be one of the major conduits for it," he added.

At the same time, China may increasingly be seen as a partner rather than a competitor to oil-producing nations, said Neil Beveridge, senior oil analyst with Sanford C. Bernstein. The "extremely efficient" manner that CNOOC has handled the deal and made concessions may also bode well for future mergers and acquisitions by Chinese firms, he added.

"Rather than been seen as a competitor, it's now seen perhaps as a partner," Beveridge told CNBC Asia's "The Call." "Oil is at $110 per barrel, the world needs a lot of investment so blocking Chinese companies from investing overseas really doesn't help any energy-consuming country."

CNOOC has promised to keep Nexen jobs in Canada and make the company its base for its American operations as part of the agreement.

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