So-Called "North American Energy Independence" and China's Planned Acquisition of Canada's Nexen

By Keith Edmund White

China wants to buy Canadian energy producer Nexen for over $15 billion.  And guess who's Nexen number one buyer?  The United States.  Should this matter?  And does it hold an opprotunity to promote U.S. economic interests in China.  Side-note:  To get a sense of just how big $15 billion is, keep in mind that the New England Patriots are worth a paltry $1.2 billion.  And one more thing:  did you know Canada's very murky "net benefit" rule basically allows the Canadian government to block any instance of foreign investment it doesn't like?  Gotta love the rule of (international trade) law.

Oh the joys of a liberalized trading system.  Is America really more energy independent when it buys Canadian energy?  Sure.  But what happens when the company drilling that energy in Canada is owned by China?

Yup, you heard right.  The government owned Chinese government-owned firm Cnooc is going through Canadian and American governments' reviews of their planned acquisition of Alberta-based energy company Nexen.  If the deal is approved, America will be buying energy based in Canada but profiting China.

This shows just how complicated energy strategy can be in a world where foreign companies--if not foreign countries--can buy companies anywhere in the world.

But, then again, perhaps this purchase is just what's needed to help U.S. industries facing Chinese government resistance to foreign investment and suffering from Chinese-based copyright infringement.

From MarketWatch.com:

Chinese energy giant Cnooc Ltd.’s $15.1 billion deal to buy Nexen Inc. is under increasing political scrutiny in the U.S. even as it faces a long regulatory review in Canada.

“It is rare that we have so much leverage to exert upon China. We should not let this window of opportunity pass us by. At some point, we have to put our foot down over China’s refusal to play by the rules of free trade,” U.S. Sen. Charles Schumer, a New York Democrat, wrote Friday in a letter to Treasury Secretary Timothy Geithner.

Geithner and the Treasury Department chair the Committee on Foreign Investment in the U.S., or CFIUS, an interagency board that reviews deals for national security implications. Cnooc, or the China National Offshore Oil Corp., is a government-owned company.
The deal is subject to CFIUS review because Calgary, Canada-based Nexen has substantial drilling operations in the U.S. portion of the Gulf of Mexico.

It is expected that the Cnooc-Nexen (CA:NXY) deal will be reviewed by CFIUS in Washington and by securities regulators and courts at the federal level in Ottawa, Canada.

But, what about the big question:  is this deal good for the United States?  Well, Christopher Helman argues that there's no un-"lame" reason to reject the deal, and--whatever concerns there might be about the deal--it's going to happen:

From Helman's article Cnooc-Nexen Deal Is Just the Beginning of American Oil and Gas Grab (July 2012):

The only conceivable reason to block Cnooc would be its government connection. Cnooc is publicly traded, but like its sister companies PetroChina and Sinopec, a majority of its shares are held by the government, which wields a heavy hand of influence over multinational acquisitions, especially one so potentially loaded as this.

My point is that if dwindling oil resources was the arguable (but lame) rationale for America’s rejection of the Unocal deal in 2005, there is no basis for that rationale today. In fact, even if all of Cnooc’s $19.5 billion Nexen investment went to acquire North American assets, it would still be a drop in the bucket. Most of Nexen’s 5.6 billion barrels of estimates resources are tied to the oil sands, but roughly 45% of Nexen’s 210,000 bpd of flowing production is in the U.K.’s North Sea waters.

If Canada were to reject Cnooc’s bid it would almost certainly have to block Malaysian state oil company Petronas in its $5.5 billion takeover of British Columbia-based Progress Energy. Don’t count on it.

Canada welcomes this foreign investment, especially in the western provinces, because it wants to diversify its customer base for oil and gas exports. Judging by the Obama administration’s rejection of the Keystone XL pipeline, American consumers seem to prefer importing crude oil from Saudi Arabia and Venezuela than from Canada’s oil sands. No wonder the Canadian government sees the long-term boon of building export terminals on the Pacific coast both for oil and liquefied natural gas.

...

Until the Nexen deal, the two national oil companies with the biggest investments in North America were Statoil, with roughly $20 billion and Korea National Oil Company, with roughly $9 billion.

The foreign land grab for America’s oil and gas has only just begun. Who’s next? Well as I pointed out last month, Sinopec has already been in talks with Chesapeake Energy to acquire acreage in big plays like the Permian Basin. Whether or not Sinopec pulls the trigger will likely depend on how Cnooc’s Nexen deal is received by regulators. Considering that China holds $1.2 trillion in U.S. treasuries, Washington is in no position to say no.

But Helman does omit an interesting legal aspect of Canada's review process.  The Canadian government can review (and block) significant foreign investments in Canada under the Investment Canada Act.  The purpose:  to make sure Canadians benefit from big infusions of foreign investment in Canada.

A critical part of this Act is that a significant foreign investment in Canada must be a "net benefit" to Canada.  If government regulators find that a certain foreign investment in Canada is not, the deal is off.

And what guides this rather powerful tool of government control over the selling of Canadian industries to foreigners?  A very flabby six-prong test that can allow anyone to 'prove' any investment is or is not a net benefit to Canada.  (For those interested, read Canadian economist William Watson's No Rules for Net Benefit Test Financial Post opinion piece.)

So, while this deal may be on track to pass Canadian and American review, what will be interesting to watch is what conditions U.S. and Canadian regulators put on the deal--and how these conditions may be critical to developing America and Canada's trade relationship with China.