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Prominent members of the U.S. Congress have urged the Obama administration to block the transfer of Nexen’s Gulf of Mexico offshore leases to CNOOC. (Nexen)
Prominent members of the U.S. Congress have urged the Obama administration to block the transfer of Nexen’s Gulf of Mexico offshore leases to CNOOC. (Nexen)

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Political storm brews in U.S. over Nexen deal Add to ...

CNOOC Ltd. is encountering a political backlash in the United States over its proposed takeover of Nexen Inc. that could force the Chinese state-owned company to divest Nexen assets in the Gulf of Mexico to win approval for the deal.

Prominent members of the U.S. Congress have urged the Obama administration to block the transfer of Nexen’s offshore leases to CNOOC, both for national security reasons and on the grounds that some of the leases were issued under a mid-1990s incentive program that offered royalty-free production in exchange for drilling in deep water.

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“I think it is extremely unlikely that the U.S. government would approve the transfer of a zero-royalty lease to another government,” Gordon Giffin, a former U.S. ambassador to Canada, said in an interview Wednesday. Mr. Giffin is a member of the advisory board of the Canada-U.S. Business Council and serves on several Canadian corporate boards, including Canadian Natural Resources.

Mr. Giffin said a political brawl in the U.S. over the Nexen deal could complicate Ottawa’s calculus as it considers whether to give the deal its blessing. CNOOC has won approval from Nexen shareholders for its $15.1-billion offer and is now awaiting a decision from the federal government on whether the deal is of a net benefit to Canada.

The Chinese company also faces a review by the Committee for Foreign Investment in the United States (CFIUS), a group headed by Treasury Secretary Timothy Geithner that examines national security implications of foreign takeovers.

The former ambassador made his comments after Democratic Congressman Edward Markey released a letter to Interior Secretary Ken Salazar, urging him to block the transfer to CNOOC of five Nexen leases that that were acquired from 1995 to 2000 under the Deep Water Royalty Relief Act. As well, four Republican Senators have come out publicly against the deal, arguing it would compromise U.S. security interests to have a company controlled by Beijing operating in the Gulf of Mexico, in close proximity to key American energy infrastructure.

Nexen gets only about 12 per cent of its overall production from the Gulf of Mexico, with 8,000 barrels of oil per day and the equivalent of 14,000 barrels of oil per day in natural gas. But it is also one of the largest leaseholders in the region and has pointed to the Gulf as a “critical component” of its growth strategy.

Analyst Michael Dunn of FirstEnergy Capital said he doesn’t expect the U.S. will block CNOOC from acquiring Gulf of Mexico assets, noting that, for the vast majority of the leases, Nexen is a minority partner and not the operator. He also noted CNOOC and other Chinese state-owned companies have been allowed to invest in joint ventures in U.S. shale gas and tight oil plays.

But he said a modest divestiture of assets that Nexen operates would not have a great impact on the overall deal.

CNOOC is no stranger to American political opposition. It aborted a 2005 bid for California-based Unocal Corp., following an uproar in Congress about the proposed takeover. But given the Chinese investments in previous onshore joint ventures, the company was expecting a smoother ride with its Nexen bid.

Mr. Markey has been among the most vocal opponents of the deal, and last week focused on the five leases that Nexen can develop without royalties under a scheme that was meant to attract investment to the ultra-deep offshore in the mid-90s when oil prices were low. CNOOC should either renegotiate the leases, or lose them, he said.

“The United States has a duty to its taxpayers to prevent this transfer of wealth to the Chinese government,” Mr. Markey’s spokeswoman said Wednesday.

Nexen spokesman Pierre Alvarez said the five leases in question account for only 4,500 barrels of oil equivalent per day in production. “It’s a very small percentage of our Gulf of Mexico portfolio,“ he said. CNOOC has taken the position that the takeover does not amount to a transfer of leases since it would be acquiring the company rather than its individual assets.

But the Chinese company is also face a broad attack from some Republicans, led by Oklahoma Senator James Inhofe.

“Approving the acquisition of Nexen by CNOOC would, without exaggeration, be handing over these valuable and critical areas of U.S. sovereign territory to a corporation majority-owned and controlled by the Chinese government,“ Mr. Inhofe wrote in a letter to Treasury Secretary Geithner earlier this month.

Follow on Twitter: @smccarthy55

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