The Case for China's Canadian Oil Grab
China’s $15.1 billion bid to acquire Canada’s Nexen oil company threatens to turn China into an owner rather just a major buyer of Canadian oil, and prompts a surge in nationalist rhetoric that is attempting, misguidedly, to bring up the question of sovereignty.
China knows that nationalism and ideology will play a major role in whether the Nexen purchase goes through. As such, China’s CNOOC is offering Canada a very attractive deal, to wit, a 61 percent all-cash premium for Nexen.
For the same reason, CNOOC is offering to establish a headquarters in Nexen’s administrative territory, Calgary, Alberta, as well as to retain Nexen management, among other things designed to make the deal innocuous. CNOOC has also been treading slowly and cautiously, first testing the waters by purchasing Nexen oil sands.
It’s not the first time a Chinese acquisition has stirred up the nationalist sentiments in North America. In 2005, CNOOC bid to acquire California-based , causing a furor in Washington and talk about national security. The acquisition would have made sense for China, as Unocal’s resources are largely in Asia. But of course nationalism and ideology tend to trump common sense, so it was a no go for the “communists.” Instead, Chevron acquired Unocal.
But let’s not talk “sovereignty” here. A paltry 28 percent of Nexen’s assets are in Canada. Most of the company’s assets are in the North Sea, the West African coast and the Gulf of Mexico. Nexen is also a rather small player in Canada in comparison with other Canadian oil majors. And certainly if Canada is willing to sell it off, it can’t be such a significant player in the energy industry.
China is, of course, very interested in diversifying its energy portfolio as it presently depends on foreign oil for more than 50 percent of its domestic consumption. CNOOC’s global strategy has seen the company pursue a number of acquisitions in North and South America. According to the International Energy Agency (IEA), Chinese energy firms have made some $48 billion in acquisitions from in 2009 and 2010, up from only $2 billion from 2002-2003.
And China’s interests in Nexen are strongly focused on technology, particularly offshore deep-water drilling technology. While China has an estimated 1,300 trillion cubic feet of shale gas reserves, it does not have the necessary technology to retrieve it, according to the US Energy Information Administration.
A better outlook on the potential acquisition deal has nothing to do with “sovereignty” and comes from the Financial Post, and an interview with Reynold Tetzlaff of PriceWaterhouseCoopers in Canada.“Then we aren’t just saying we are open to international investment, we will prove that international investors can make real investments in Canada’s oil and gas space,” Tetzlaff was quoted as saying. “People who are investing in oil and gas in Canada will then think there is maybe even more potential in our industry because we can achieve some more upside through international acquisitions.”
This should be the reality, and indeed, investors should be asking whether this is a prime time to invest in Canadian oil. Instead, we are distracted by the red herring of “sovereignty,” which is a challenging leap to make for an oil company whose main holdings are actually foreign. The reality unfortunately is that Western publics are taught to fear China and to view acquisitions such as the potential CNOOC-Nexen deal as geopolitical rather than pragmatically economical.
China is no stranger to this mode of thought, and unlike in 2005 it has made some smart moves to ensure that this deal will be easier for a Western public to digest. Despite these efforts, sovereignty is still the talk of the day, but the deal is more likely than not to go through.
By Jen Alic of Oilprice.com
-This story originally appeared on Oilprice.com.