The US$15 billion purchase by China-based offshore oil and gas producer CNOOC of Calgary-based Nexen Inc, Canada’s sixth-largest independent oil explorer and producer, marks the biggest foreign acquisition ever by a Chinese company.
CNOOC has agreed to buy all Nexen’s outstanding common shares at US$27.50 cash per share, nearly a 62% premium over what the stock was trading at before the announcement. Total cash to be paid for Nexen’s common and preferred shared will reach US$15.1 billion. The company’s current debt of $4.3 billion will remain outstanding. The transaction will close within three to six months.
Canadian analysts said the deal shows how China has learned from earlier debacles – and not just Chinese ones – including an attempt by Australian miner BHP Billiton Ltd to buy fertilizer maker Potash Corp for $39 billion in 2010, a deal killed by the Canadian government.
The Nexen acquisition is considered by some analysts an especial triumph for CNOOC, the country’s third-largest oil company, which was forced in 2005 to abandon an $18.5 billion for US-based Unocal due to opposition from the US Congress over sovereignty issues. It may also signal a new direction in Chinese purchases of foreign oil interests. Nexen operates the North Sea’s Buzzard oil field, the biggest contributor to the Forties oil blend, giving it access to trading that sets the price for Brent crude.
The fact that the deal is for a full takeover of the company rather than purchase of a minority stake surprised some observers, since Chinese firms have lately preferred the latter course in order to calm such objections.
Analysts at Nomura also argued that CNOOC lacked the operational expertise to improve Nexen’s slow production growth, pointing to the range of the Canadian company’s assets from oil sands and shale gas to deepwater projects in the Gulf of Mexico and in the radically different conditions of the North Sea. It also operates conventional exploration and development projects in South America, offshore West Africa, and in Yemen.
The Chinese side are reported to have made a number of concessions during the negotiations. Among these are agreements that CNOOC make Calgary the head office of its North and Central American operations, list on the Toronto Stock Exchange, and retain Nexen employees.
The final decision whether to approve the deal has to be made by Canada’s Industry Minister Christian Paradis, in conformance with the Investment Canada Act. Analysts noted that most of Nexen is viewed as less of a Canadian “national champion” than other energy firms, since its assets are mostly outside Canada.
CNOOC had already tested the waters with Nexen by buying Opti Canada in July 2011, which was a 35% partner in Nexen’s $6.1 billion Long Lake oil sands project in northern Alberta.
China’s Sinopec was also in the Canadian market this week, acquiring 49% of Calgary-based Talisman Energy Inc’s Talisman Energy (UK) Ltd (TEUK), which operates in the North Sea, for $1.5 billion.
The TEUK acquisition will produce a joint venture in which Sinopec will appoint key managerial personnel while TEUK will operate the assets. China’s Sinopec Group, of which Sinopec is a subsidiary, is an integrated energy and petrochemical company, while Talisman is an upstream oil and gas company. Talisman’s current operations nearly span the globe, stretching from North America to the North Sea in one direction and to Southeast Asia in the other.
A Reuters analyst notes, concerning these acquisitions but in particular regarding CNOOC’s purchase of Nexen, that “the critical market intelligence on the supply situation in the North Sea that CNOOC will obtain” may be one of the most valuable results of the transaction. North Sea Brent serves as an important benchmark for global oil prices.
Robert Campbell writes that CNOOC will be now able to play the Brent crude oil futures market more efficiently, in addition to having the right to participate in discussions over how prices for various North Sea benchmarks are calculated.
This means that China is moving in the direction of ceasing to be merely a price taker and will gain access to information about what drives short-term price shifts that influence its import costs. It may thus also be able to influence the rules of the futures price-setting game.
The deals are also part of the Chinese firms’ continuing their worldwide search to purchase or otherwise acquire energy technology. Important in this profile is technology for exploiting shale-gas deposits, as well as the shale-gas reserves themselves. For this purpose, Chinese companies have focused on North American firms, which have developed the techniques perhaps furthest.
In 2011, Chinese state-owned enterprises spent nearly $18 billion buying oil and gas companies around the world, of which nearly one-third, or $5 billion, was disbursed in Canada’s resource sector.
Last October, Sinopec paid $2.2 billion in its largest foreign acquisition of the year in order to acquire the Canadian firm Daylight Energy Ltd, thus gaining access to Canadian shale-gas reserves. PetroChina had bid $5.4 billion for Encana Corp’s Cutbank Ridge gas assets but decided in June 2011 to withdraw that offer after negotiations with the company failed.
That does not mean PetroChina lacks any interest. Earlier this year, just before Canadian Prime Minister Stephen Harper visited Beijing, PetroChina completed acquisition of a 20% stake in a British Columbia-based shale gas project of Royal Dutch Shell Plc. No sum was specified for the acquisition, but news reports cited a figure of “more than $1 billion”.
Harper helped prime the way for the Nexen takeover by stressing in February that Canada needs more foreign investment to help develop its oil sands, and by telling the Chinese that he wanted to sell more oil to Chinese and Asian markets.
US politicians have attributed this move towards diversification as a result of President Barack Obama’s November 2011 postponement of a decision on the construction of the Keystone Pipeline, which would have fed multiple US refineries in the Midwest and Texas Gulf Coast with product from Alberta’s Athabasca oil sands. The Canadian move to build a pipeline from there westwards to British Columbia’s Pacific Ocean coast has gained momentum since that time.