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Nexen shale gas rigs in the Horn River Basin at Dilly Creek, B.C. CNOOC Ltd.’s bid for Calgary-based Nexen has reopened the debate over foreign ownership and state-owned enterprises. (David Olecko/Nexen)
Nexen shale gas rigs in the Horn River Basin at Dilly Creek, B.C. CNOOC Ltd.’s bid for Calgary-based Nexen has reopened the debate over foreign ownership and state-owned enterprises. (David Olecko/Nexen)

China goes corporate with bid for Canadian oil Add to ...

So far the CNOOC bid has not set off a political firestorm in Canada. Oil patch sources say the industry mood is nervously supportive of the deal, but officials would look less kindly on a foreign buying spree aimed at major domestic companies such as Suncor or Canadian Natural Resources Ltd.

That reaction is a reflection of the increasingly sophisticated and politically astute approach Chinese officials have taken in recent years, after some glaring missteps in previous takeover attempts.

CNOOC has carefully built an operating partnership with Nexen, won the support of the company’s board with a fat premium on the offer price, and made key commitments that specifically address Ottawa’s “net benefit” requirement for approving foreign takeovers.

Chinese SOEs have been pursuing global resource developments for more than a decade, at first in Africa, and then in South America, Australia and Canada, but have usually invested in undeveloped properties or minority positions as non-operating partners.

In reviewing the CNOOC deal, Ottawa will look for commitments that the company will operate in Canada in a strictly commercial fashion.

But critics suggest the Harper government has failed to erect a clear screening mechanism that would inform both Canadians and offshore investors what level of foreign acquisitions would be acceptable, and under what circumstances. And they point out the government has neglected to demand reciprocity, with the same right for Canadian companies to acquire Chinese assets as CNOOC and other SOEs have here.

CNOOC chief executive officer Li Fanrong said he’s puzzled that there should be any doubt that his company’s acquisition of Nexen will benefit Canada by bringing much greater financial heft to its oil sands properties, while locating CNOOC’s headquarters for North and Central America in Calgary. And he vehemently rejects the view that CNOOC, like other Chinese state-owned enterprises, are agents of the Communist government in Beijing.

“Every decision we make is based on whether we can provide value to our shareholders,” Mr. Li said in an interview after the deal was announced Monday. “We are purely a commercial entity.”

GROWING INDEPENDENCE

CNOOC is a publicly traded subsidiary of Chinese National Offshore Oil Corp., which is wholly owned by Beijing. The parent company owns 64 per cent of the international subsidiary, whose shareholders include heavyweights like the Blackstone Group LP. (The New York-based fund has recently received $500-million (U.S.) in capital from China’s foreign bank, which holds massive currency reserves.)

Mr. Li’s assertion of independence is backed by a number of western analysts, including the International Energy Agency, the Paris-based advisory body to developed countries. In a report last year, the IEA concluded the three leading Chinese state oil companies – CNOOC, PetroChina and Sinopec – have gained considerable independence from the government department to which their parent companies formally report, and that their investments have been driven by commercial interests.

A series of papers released this year by the Canadian Council of Chief Executives and Canadian International Council reached similar conclusions. The leading oil companies are “profit-driven to their core,” and are urged by their own government to “compete, compete, compete,” wrote Margaret Cornish, a former executive director of the Canada-China Business Council and now chief representative of the Calgary-based law firm Bennett Jones LLBs in its Beijing consulting office.

Ms. Cornish said major Chinese firms market their oil wherever they can get the best price, rather than – as many critics fear – simply sending the crude to their home markets. And she said they rely on financial markets and their own balance sheets to fund acquisitions and operations.

In another paper, Georgetown University professor Theodore Moran assessed the security risks from Chinese state-owned investment, and concluded there is little concern when SOEs go after publicly traded resources companies that have little market power and no access to sensitive government information.

(As it was negotiating with CNOOC over a possible deal, Nexen met in April with Richard Fadden, director of the Canadian Security Intelligence Service. Neither side will discuss details of that meeting.)

In an interview, Prof. Moran said Chinese state ownership is not without its risks, adding that, through such firms, Beijing has been attempting to get control of the world market in rare earth metals that are critical for high-tech manufacturing. However, he said Chinese investment in the oil and gas business is generally regarded as a positive, even by the American government which is keen to see additional supply brought on to the global market.

But a U.S. congressional watchdog warns that Chinese firms remain tools of Beijing’s effort to secure global resources for its growing economy.

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