China moved Monday toward its biggest overseas energy acquisition as offshore oil and gas giant CNOOC Ltd announced an agreement to buy Canadian producer Nexen Inc. for $15.1 billion.
The deal faces scrutiny from the Canadian government, which has rejected foreign interest in the past over worries about the country’s natural resources industry.
CNOOC and other big state-owned Chinese energy companies have increased purchases of oil and gas assets in the Americas as part of a global strategy to gain access to resources needed to fuel China’s economy. The companies have moved more carefully since CNOOC tried seven years ago to buy Unocal but was rejected by US lawmakers citing national security fears.
Total acquisitions by Chinese energy firms jumped from less than $2 billion between 2002 and 2003 to nearly $48 billion in 2009 and 2010, according to the International Energy Agency. More times than not, the companies are paying above the industry average to get those deals done.
Indeed, the offer of $27.50 a share is a premium of 60 percent to Nexen’s closing price Friday on the New York Stock Exchange. Shares rose 52 percent in $25.95. CNOOC expects the takeover to be finalised in the fourth quarter of this year, pending government approvals.
Calgary, Alberta-based Nexen operates in western Canada, the Gulf of Mexico, North Sea, Africa and the Middle East, with its biggest reserves in Canadian oil sands. It produced an average of 213,000 barrels of oil equivalent a day in the second quarter of this year.
The acquisition vastly expands CNOOC’s holdings in Canada, where the company has already invested about $2.8 billion.
Nexen has faced numerous challenges over the past few years, most recently the troubled launch of its Long Lake oilsands project in northern Alberta in late 2008. The project has yet to come close to its design capacity of 72,000 barrels of bitumen per day due to a number of operational glitches, though performance has been improving in recent months.
CNOOC already had a 35 percent stake in Long Lake after it took over Nexen’s erstwhile partner Opti Canada Ltd
That previous partnership with Nexen makes CNOOC the optimal buyer for the company, said Sam La Bell, an oil and gas analyst at Veritas Investment Research.
“CNOOC is the natural buyer,” he said. “We view this as full value for the deal. CNOOC already owns a minority position in Long Lake so they’re in the best position to know that asset and what they’re paying for it.”
The companies already also had a strategic alliance that involved CNOOC investments in Nexen offshore wells in the Gulf of Mexico. Nexen says it produced 22,000 barrels of oil equivalent per day in the Gulf in 2011.
Besides oil sands, Nexen is also active in exploring for natural gas in shale rock formations. It owns about 300,000 acres of shale-gas blocks in the Horn River Basin in British Columbia.
The big Chinese oil companies are interested in developing shale-gas technology to find new supplies in China. In the US, where companies have solved the technological challenge of extracting natural gas from shale, a boom in production has meant cheap natural gas for homeowners, businesses, factories and utilities in the US
Canada said the takeover offer will face a review by both its industry minister and the Competition Bureau, an independent law enforcement agency.
Industry minister Christian Paradis said in a statement that he will review how the deal affects investment, employment, production and resource processing in Canada. He said the Competition Bureau will determine if the deal substantially lessens Canada’s ability to compete in global markets.
He did not give a timeline for the reviews.
It will be a tough call for the government, which has to decide whether the deal is a net benefit to Canada as a whole and not just to shareholders, said University of Calgary economist Jack Mintz.
“It’s going to be hugely political,” Mintz said. He said CNOOC prepared its bid with an eye to regulators by offering a 61 percent premium to shareholders and stressing that it intends to keep the Calgary-based management intact.
The last time Canada faced a similar challenge – when Australia-based BHP Billiton Ltd launched a hostile takeover bid for Saskatchewan’s Potash Corp. – the government rejected the deal under pressure from Saskatchewan Premier Brad Wall and corporate players. The Conservative government said the Potash takeover would not bring a net benefit to Canada.
But La Belle said he believes this deal will be approved because it meets the somewhat ambiguous guidelines of providing a ‘net benefit’ to Canada.
“With the net benefit test, you’re looking at whether the asset is strategic for national interests, and it’s hard to argue that this is for Canada, especially with the Long Lake project,” he said.
He said the government will also look at whether jobs will be maintained in Canada and CNOOC said most, if not all jobs will be maintained, and that it will set up its regional headquarters in Calgary, increasing the company’s spending to develop the Canadian company’s energy reserves.
“They’re not offering a lot more than stand-alone Nexen would have done, but they’re also not taking much away, which factors into what the government takes into account in its approval process,” said La Belle.
Wenran Jiang, a senior fellow at the Asia Pacific Foundation of Canada, said the Nexen deal is not the kind of surprise move that startled the US with the Unocal takeover bid. “This one has been incremental and has been, of course, in an environment that’s most likely to go through,” Jiang said, noting that Beijing-Ottawa relations have been warming in recent years.
La Belle, who said the deal will also require US approval, said he doesn’t think this deal will instigate the same concern in the US as Unocal did.
“It’s a very different situation here because the Gulf assets that Nexen has in the US are offshore, and they’re minority interests for the most part, they don’t operate them. There’s no strategic infrastructure, Unocal had a bunch of onshore infrastructure and it was a US company so the difference was selling a US company directly to a Chinese buyer or selling assets that are already held by foreign companies. The assets that Nexen has are already outside of the US,” he said.