Acquisition of oil sands explorer would boost Chinese firm’s reserves 30%

State-controlled CNOOC Ltd agreed Monday to acquire Nexen Inc of Canada in a $15.1 billion cash deal that gives China’s No 1 offshore oil producer direct access to western Canadian oil sands for development.

It is believed to be the richest takeover of a foreign company by a Chinese enterprise.

Monday’s move was followed within hours by news of another deal involving a Chinese buyer and a Canadian energy company. China Petroleum & Chemical Corp, or Sinopec, announced that it will buy 49 percent of Talisman Energy's British unit for $1.5 billion.

The Nexen deal shows Chinese energy companies “are willing to take much greater risks to be operators of more sophisticated enterprises abroad,” Daniel Rosen, of New York-based Rhodium Group, which tracks Chinese overseas investment, told China Daily.

“Whether they are ready to do so successfully would remain to be seen,” he added.

CNOOC, or China National Offshore Oil Corp, noted to the Hong Kong Stock Exchange that its $27.50-a-share for Nexen is a 61 premium to the Calgary-based company’s closing price Friday of $17.06 a share on the New York Stock Exchange.

On Monday, the shares closed up by a steep 51.8 percent, or $8.84, to $25.90.

CNOOC added that it will absorb Nexen’s approximately $4.3 billion in debt. The acquisition has already been approved, unanimously, by each company’s board of directors and will be submitted to CNOOC and Nexen shareholders to consider. It is expected to close during this year’s fourth quarter, according to the Chinese company.

The deal will require the approval of Canadian regulators, who along with national-security concerns in the sensitive energy sector will likely weigh CNOOC’s promise that it will retain Nexen management and all of the company’s employees, list the post-merger company’s shares on the Toronto Stock Exchange and make Calgary the base for its North America and Central America operations and managing Nexen-held assets in Europe and West Africa. (The city, in the province of Alberta, is already home to Nexen’s headquarters.)

“This is a commercial transaction that is friendly and given time will prove for itself that it will bring net benefit to Canada,” Fang Zhi, president of CNOOC’s international division and the lead negotiator with Nexen, said Monday in an interview with Canada’s Financial Post.

Nexen has oil sands operations in Alberta and shale gas in the province of British Columbia as well as exploration and production assets in the North Sea, the Gulf of Mexico and offshore Nigeria. Its average production during this year’s second quarter was 207,000 barrels of oil equivalent per day. CNOOC produces nearly 1 million barrels of oil and gas-equivalent per day, about a fifth of from overseas operations.

In Ottawa, Industry Minister Christian Paradis said the proposed acquisition will be subject to review by the Canadian government.

In a statement posted to his ministry’s website, Paradis said CNOOC has indicated it will soon apply for review under the Investment Canada Act, and that his final decision will be based on several factors including: proposed investment levels; impact on employment and resource processing; planned participation by Canadians in the post-acquisition business; the effect on Canada's productivity, efficiency and ability to compete in world markets; and the “compatibility” of the CNOOC acquisition with Canada’s industrial, economic and cultural policies.

“I understand the Competition Bureau will also conduct a review of the proposed transaction” on antitrust grounds, Paradis said. This was confirmed by Competition Bureau officials, the Wall Street Journal reported Monday.

Canadian regulators review any foreign takeover worth more than C$330 million ($325 million), Paradis noted.

In 2010, led by objections from Prime Minister Stephen Harper, Canada rejected a $40 billion hostile takeover bid for Potash Corp of Saskatchewan Inc by UK-Australian mining giant BHP Billiton Ltd on the grounds that it didn’t provide a “net benefit” to the country.

“For Canada, this agreement provides a stable source of investment for the many projects that Nexen operates, which includes the exploitation of bitumen in Alberta,” CNOOC CEO Li Fanrong told reporters in a conference call hours after Monday’s notification in Hong Kong.

CNOOC has for several years signaled its ambition to buy energy assets abroad. But its plans were thwarted when it attempted to buy US giant Unocal Corp in 2005 for $18.5 billion. That proposal was met with bitter reprisals from political leaders in Washington that led the Chinese company to abandon its bid.

Last summer, CNOOC and Nexen formed a partnership and jointly invested $2 billion to develop oil sands property Opti Canada Ltd on Alberta’s Long Lake. That, along with a separate project with Nexen in the Gulf of Mexico, was like a “courting” process, said CNOOC International’s Fang. He told the Journal in an interview in Calgary that CNOOC became convinced of the long-term strength of Nexen’s assets. The Long Lake project has had operational problems, though the executive didn’t address them.

CNOOC’s first investment in Canada was a 17 percent stake in oil sands developer MEG Energy Inc in 2005.

The oil company, China’s third-biggest producer overall, is now being led by a relatively new chief executive in Li and chairman, Wang Yilin.

The Nexen deal, if approved, will raise CNOOC’s proven reserves by 30 percent, the company said. It currently has only nine years’ worth of proven reserves based on current production.

“CNOOC has been seeking overseas acquisitions, as the domestic reserves are limited. But there have been many limits, things like foreign companies [being] reluctant to sell, price too high. This deal would be quite a success,” Yan Shi, an oil analyst at brokerage UOB Kay Hian in Shanghai, was by Reuters as saying.

Rosen, of New York’s Rhodium Group, said the Cnooc-Nexen deal, if consummated, could steepen the trajectory of Chinese direct investment in the US. Both the volume of transactions and their level of sophistication are likely to increase in any case, he predicted.

“Most of these investments don't require any special sophistication beyond the ability to achieve normal, good corporate governance and to follow the rule of law,” Rosen said. “As those abilities become more standard for Chinese firms, they will cease to distinguish between the US, Canada, Europe or other [Organization for Economic Cooperation and Development] economies.”

Zhang Yuwei in New York contributed to this story.