In the wake of federal approval of the sale of Nexen Inc. to China’s CNOOC Ltd. and Progress Energy Resources Corp. to Malaysia’s Petronas, CBC Television reported that Ottawa had allowed the transfer of a “major part” of Canada’s oil and gas industry to foreign governments. Thus began days of over-the-top commentary on the significance of the deals.
But just how important are these companies to Canada’s oil and gas industry?
Let’s start with Nexen. More than 70 per cent of its production comes from the North Sea, West Africa and the Gulf of Mexico. That leaves Canadian production of only 60,000 barrels of oil equivalent per day (boe/d), out of total national production of more than 4 million boe/d.
Canadians who followed the public discourse about the Nexen deal would have gained the impression that the Chinese would gain control of substantial oil sands resources. The reality is that roughly half of Nexen’s small oil sands production is from a minor interest in the Syncrude consortium (which is controlled by others).
The other half, a mere 20,000 boe/d, comes from the problem-plagued Long Lake project that, despite average oil prices of $89 (U.S.) per barrel, has lost money in five of the past nine quarters. New technology, developed by OPTI Canada Inc., combines on-site bitumen upgrading with the generation of energy for the steam-assisted gravity drainage oil-recovery process. But getting these technologies to mesh has proven a huge challenge. After running out of cash in 2011, OPTI sold its 35-per-cent interest in Long Lake to CNOOC for $2.1-billion. Clearly, CNOOC is betting that the operational and technical issues plaguing this project can be resolved.
And therein lies the deal’s advantage to Canada. Nexen shareholders had lost confidence in Long Lake, making it difficult for management to continue financing it. CNOOC brings patient money that could possibly yield a technical breakthrough in the recovery and upgrading of a large portion of Canada’s oil sands.
Similarly, Progress Energy is a small player in Canadian natural gas. The $6-billion acquisition by Petronas comes with plans for a $10-billion liquid natural gas project, raising its total investment in Canada to $16-billion.
Combined, these two acquisitions by foreign state-owned enterprises (SOEs) represent only 2 per cent of Canadian national production, but will provide a great deal of economic benefit.
The Nexen deal injects $15-billion into the pockets of shareholders along with future spending commitments of $6-billion. The Progress deal is part of a $16-billion plan by Petronas to reach Asian markets at a time of falling U.S. demand for Canadian natural gas.
If there were ever two takeovers with so little downside and more economic upside to Canada, I can’t think of them.
Now for the bigger question: What are the chances these deals would be approved under the newly announced policy for SOE acquisitions? The small size of Nexen’s oil sands production, combined with financing of new technology at Long Lake, would easily meet the new “exceptional basis” criteria for oil sands acquisition. The small size of Progress Energy in contrast with the huge size of Petronas’s overall investment plans would also easily clear the higher hurdle for SOE acquisitions.
But then there’s politics. The New Democratic Party has been highly critical of these acquisitions and there were differing views in Conservative cabinet and caucus. Meanwhile, the CBC report shows the importance of communicating facts much more clearly.
Acquisition of larger energy producers by foreign SOEs is now out of the question, but what about purchases by foreign-domiciled private companies? Eighty per cent of global petroleum reserves are held by SOEs, leaving only 20 per cent available to private companies. And 13 per cent of those reserves are here in Canada, making major players such as Suncor, Cenovus and Encana highly desirable targets.
I sense that the SOE debate has fostered an undercurrent of resistance to losing strategically important companies, not only to foreign governments, but to foreigners, period. I hope I’m right.