CNOOC to Buy Canadian Oil Company in US$15 Billion Deal

July 26, 2012 Posted by China Briefing Reading Time: 3 minutes

By Nicholas Clement

Jul. 26 – China’s third-largest oil company, the China National Offshore Oil Corporation (CNOOC), has agreed to pay US$15.1 billion in cash to acquire the Canadian oil company Nexen Inc. If this deal is successful, it will be the largest overseas takeover by a Chinese company. CNOOC is offering US$27.50 a share, which is a 61 percent premium on Nexen’s Friday stock price.

“For Canada, this agreement provides a stable source of investment for the many projects that Nexen operates,” said CNOOC Chief Executive Li Fanrong.

The initial reaction from shareholders has been very positive, with the Nexen board unanimously approving the deal. The deal now has to be given the green light by the Canadian government, which, according to foreign investment laws, has to review any deal that exceeds C$330 million. If the Canadian government determines that the deal is not within the country’s best interests, it can block it. It last exercised this right in 2010 when it stopped BHP Billiton’s US$39 billion hostile takeover of the world’s top fertilizer producer Potash Corp.

It is expected, however, that this deal will be approved as Prime Minister Stephen Harper has been pushing for foreign investment in Canada’s energy sector, especially from China. The only foreseeable roadblock to this deal would be the political ramifications. CNOOC, like its sister companies PetroChina and Sinopec, is heavily influenced by the Chinese government, who holds a majority of its shares. This influence has prevented successful acquisitions in the past, such as CNOOC’s failed bid in 2005 to take over the U.S. energy company Unocal.

Only 28 percent of Nexen’s current production, however, is derived from Canadian operations, which should help the CNOOC deal pass through successfully. The majority of its operations are in the North Sea, the Gulf of Mexico and offshore Nigeria.

“Given Nexen’s strong international diversity, we believe it would be difficult for regulators to oppose the transaction on this front,” said Andrew Potter, an analyst at the Canadian Imperial Bank of Commerce.

This deal is symbolic of China’s increasing foray into North American energy. Chinese oil companies have been the most aggressive in targeting global energy assets in an attempt to feed the world’s second-largest economy. Previously, CNOOC has purchased a stake in Canada’s MEG Energy, a 60 percent interest in Northern Cross, and has recently invested US$2 billion to acquire the oil sands company Opti Canada. Further Chinese acquisitions of Canadian energy assets include PetroChina’s investment of US$4 billion into Canada’s oil sands and British Columbian gas fields, and Sinopec’s investment of US$5 billion to acquire Canada’s Daylight Energy as well as a US$2.5 billion joint venture with Devon Energy.

This deal is projected to increase CNOOC’s proven reserves by 30 percent. This is a much-needed boost as it currently has one of the lowest ratios among major oil companies worldwide. Furthermore, in the aftermath of this deal, Sinopec quickly announced that it would buy 49 percent of Talisman Energy’s British unit for US$1.5 billion.

China’s energy interests are now heavily invested into Canada. An important development to watch for will be the U.S. response, as the country may feel uncomfortable with its Asia-Pacific rival operating so close to its borders. Already, Republican senators are planning to introduce legislation that will help battle China’s new acquisition. Nonetheless, this deal is a great boon for Chinese energy acquisitions, and represents a great development in Chinese-Canadian relations.

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