Canada Greenlights CNOOC’s Purchase of Nexen
Last Friday, the Canadian government approved China’s biggest overseas energy acquisition, a $15.1 billion takeover of Nexen Inc. (NYSE: “NXY”) by CNOOC Ltd. (NYSE: “CEO”). State-owned CNOOC is China’s largest offshore driller, while Nexen is a Calgary based independent energy company that operates in Canada, the United Kingdom, and the United States, and offshore West Africa, Colombia, and Yemen. Nexen is the second-largest oil producer in the U.K. North Sea.
In July of this year, CNOOC announced its deal to buy Nexen amidst concerns that the deal might not be approved by the Canadian authorities, even though it had the full support of the Nexen board. As recently as last Friday morning, it was still unknown as to whether Canada’s announcement, which was scheduled for 5:15 that afternoon, would be a “yes” or “no” for CNOOC, or “something in between.” In order to make the deal as palatable as possible, CNOOC had gone out of its way to reassure management and the Canadian government that Nexen will remain a Canadian company. CNOOC said that it would list its stock in Toronto, keep Nexen’s employees and make Calgary its North American headquarters.
Canada’s approval of the Nexen deal suggests that countries around the world are now falling into two distinct camps: those that welcome investment by China and Chinese companies, and those that don’t. The United States appears to be falling into the latter category, while Canada, the African continent and other resource rich countries appear to be quite open to strengthening economic ties with China.
Washington’s ambivalent attitude towards Chinese investment began in 2005 when CNOOC was forced to withdraw its $18.5 billion bid for Unocal due to political opposition to the deal. Despite the fact that 70 percent of Unocal’s proven oil and natural gas reserves were in Asia and the Caspian region at the time, U.S. lawmakers were concerned about a Chinese state-owned company gaining control over an “American” oil producer. Citing national security concerns, the Obama Administration has blocked a Chinese funded wind energy project in Oregon and U.S. lawmakers have effectively blackballed Huawei and ZTE, China’s two largest manufacturers of telecommunications equipment, from expansion in the U.S. already this year.
Most recently, lawmakers are expressing concern about the potential acquisition of A123 Systems, Inc. (OTC Markets: “AONEQ”) by Wanxiang, a large, privately owned Chinese auto parts maker. The fact that A123 has had two contracts, only one of which is still active, to develop batteries for the U.S. Air Force has apparently given rise to the lawmakers’ security concerns. The two contracts are worth about $4 million.
Meanwhile, the Nexen deal is only the latest in a string of deals that Chinese energy companies have done in Canada. Last year, CNOOC took its first step into the oil sands sector with its $2.1billion acquisition of Opti Canada. Other big Chinese investments in Canadian oil sands include Sinopec’s $4.7 billion purchase of a stake in Syncrude in 2010, and PetroChina’s $1.7 billion purchase of a 60 percent stake in two projects belonging to Athabasca Oil Sands Corp in 2009.
In addition to Canada, virtually all of the countries on the African continent are finding a good business and investment partner in China. With a population of 1.0 billion and a Gross Domestic Product of $1.7 trillion, African countries provide a ready market for Chinese goods, and the resource rich continent already supplies one-third of China’s oil requirements. Two-way trade between China and Africa will likely top $200 billion this year, and in 2011, China’s direct investment in Africa was $14.7 billion. China has invested in 49 of the 54 countries that make up the African continent.
In November of last year, Sinopec acquired an 80 percent stake in Pecten Cameroon Co., and China Nonferrous Metal Mining announced plans to invest $2 billion in Zambia to expand operations and begin construction of infrastructure facilities. In February, China National Material Group Corporation Ltd. completed construction of a $1 billion cement plant in Nigeria, and CNOOC announced plans to invest in a $1.5 billion refinery in the Lake Albert rift basin in Nigeria. An estimated 2,180 Chinese companies, many of them privately owned, are doing over 7,800 projects in Africa currently.
Along with its historical relationships with communist bloc countries like Russia, China has reached out and developed two important economic allies in Canada and Africa over the past 10 years. By using its economic might and the country’s position as a major consumer of natural resources, China is steadily increasing its orbit of influence globally. As its economy continues to grow, China will become the most important economic ally for nearly every country in the world. Ultimately, it will be impossible to avoid doing business with Beijing.