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.

Canada's Party Caucus Round-Up: Liberals Open Up the Leadership Vote; NDP Plots for 2014; Conservatives Push Trade Agreements and Voice Concern Over China's Acquisition of Nexen Conditions

By Keith Edmund White

Two of Canada's national parties--the Liberals and NDP--are wrapping up caucus meetings today, with the Conservatives on deck to chart of their paraliamentary strategy for the next year.  In short, the Liberals are looking for a leader; the NDP is trying to keep their lead in the polls; and the Conservatives are pushing a economic strategy emphasizing energy and trade-liberalization while they can still hold onto power.

Now's the season for Canada party conferences.  For the out-of-power Liberals, their ongoing three-day meeting is dominated by an internecine leadership battle.  Of particular note:  the Liberals will be releasing today the voting rules for their April leadership race, which will expand the voting base to non-dues paying Liberal "supporters."  Why is this important?  When you change the rules of the game, results tend to change too.  Clearly, the Liberals are trying to ensure whoever their leader is, they'll enjoy a boarder base of popular support.  Whether this gets Liberals back in power--or even back as the official opposition--has yet to be seen.

On the other hand, the NDP--as the official opposition--will be focusing on how to challenge the Conservative's agenda, and how to prepare for an election they suspect will occur in Fall 2014.  The PQ's victory in Quebec's provincial elections could complicate NDP efforts hold on the seats they won in Quebec last year.

And then there are the Conservatives, who's caucus meeting will focus on policy details.  The Hill Times (subscription--but try the free trial) reports that the planned takeover of Alberta's Nexen, Inc.--an oil and natural gas generator--by the state-controlled Chinese Company Cnooc is getting the Conservative's attention.  Naturally, as Canada's #1 energy purchaser, America is watching too--and hoping to use the planned purchase to push China to (1) allow U.S. companies to buy Chinese companies, (2) make U.S. foreign investment in China easier, and (3) enforce intellectual property infringements.

From The HillTimes:

The “high stakes” CNOOC-Nexen deal will be one of the Conservative Party’s top priorities when the caucus meets for a half-day session on Sept. 17 on the Hill, says a political insider. 

“This is the largest acquisition ever in Canada by an offshore state-owned enterprise, and this kind of thing always generates some degree of debate and or unease,” Earnscliffe Strategy Group principal Yaroslav Baran told The Hill Times in an email. “You can bet there will be discussion about this—all the different angles, from populist sentiment to reciprocity to the market signals that the final decision will send.”

Industry Minister Christian Paradis (Mégantic-l’Érable, Que.) said last week in a statement that he will take the time needed “to carefully examine CNOOC’s proposed acquisition of Nexen Inc. and determine whether it is likely to be of net benefit to Canada.”

And for the U.S. perspective, MarketWatch.com reports:

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 of the most interest to me, is the Conservatives push for additional free trade pacts.  From The HillTimes:

Mr. [Yaroslav] Baran, who previously worked as a Hill staffer to the government House leader, said the Conservative Party policy planks such as economic management, international trade, and resource development will also likely be topics of discussion for the party in the lead up to the fall legislative session.

“The new catchphrase is that trade is the new stimulus,” Mr. Baran noted, identifying the progress on the Canada-EU free trade agreement and the Trans-Pacific Partnership as key priorities for the government this fall.

“Diversifying trade relationships has been a key government objective over the past six years, with nine free trade agreements concluded to date—albeit with smaller countries—and [more than] 50 other negotiations underway,” he said.

This trade focus is important, especially when viewed through the Canada-U.S. bilateral relationship.  Pushing a resource-heavy strategy incentivizes Canada to implement policies that help the natural resource trade, which can disadvantage Canadian manufacturers.  Furthermore, the Conservative push for ever more trade-pacts could speed up the declining--but still very dominant role--American contribution to Canada's GDP.

In any case, the likely election in 2014 will bring with it a big question of economic policy:  Can Canada's manufacturing sector compete on the world stage, and--if so--should Canada return to a more balanced monetary and trade policy to support it?  And, if Canada does so, could that lead to decline in the resource-heavy trade that has supported Canada through the last decade?  Or will the NDP--pushing a "balanced" approach to Canadian economic growth--for the first time ever take control of Parliament and successfully navigate Canada through economic waters--that in the long-term--don't look all that smooth.