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foreign takeovers

The logo of China National Offshore Oil Corp. (CNOOC) outside its headquarters building in Beijing. Over the four months since CNOOC announced its plan to take over Calgary-based Nexen Inc., Ottawa negotiated additional investment undertakings from the Chinese state-owned company.JASON LEE/Reuters

CNOOC Ltd. has committed to spend an additional $5-billion to $8-billion on oil and gas development in North America as part of its deal with Ottawa to acquire Calgary-based Nexen Inc., but the promise is elastic in terms of the time frame and subject to continued high oil prices.

The company will also report annually – though confidentially – to Industry Canada on how it's meeting its Investment Canada undertakings, Xu Xiaojie, an academic who also advised both CNOOC and China's state council on the deal, said in an interview Tuesday.

CNOOC's capital spending is expected to be in addition to the roughly $3-billion a year that Nexen has spent developing its oil and gas properties in recent years.

Under confidentiality provisions of the Investment Canada Act, the federal government cannot comment on the undertakings made by CNOOC in winning approval for its Nexen acquisition – nor on the commitments made by Malaysia's Petronas in exchange for a federal green light on its $6-billion takeover of Calgary's Progress Energy Resources Corp.

The uncertainty surrounding the promised CNOOC spending underscores the difficulty facing Ottawa in ensuring foreign takeovers bring clear and lasting added benefits to Canada.

Over the four months since CNOOC announced its deal, Ottawa negotiated additional investment undertakings from the company, but sources close to the deal say CNOOC was unwilling to commit to a firm time frame on the spending, insisting it needs flexibility to ensure all spending is done on a commercial basis.

CNOOC released a list of commitments on the weekend but did not include the capital spending promises. The commitments include a listing on the TSX for CNOOC Ltd.; an effort to retain Nexen's management and employees; and commitments to support oil sands research and social and community projects now backed by Nexen.

CNOOC has also promised to make Calgary its new headquarters for North and Central America, incorporating Nexen's Canadian and American operations and CNOOC's own $8-billion worth of assets in the hemisphere. While details remain unclear, the Chinese company's additional spending commitments would likely be earmarked for that region, but the undertaking has no time frame attached to it and provides flexibility if commodity prices take a nose dive.

Nexen has assets around the world, including the Long Lake project in the oil sands and acreage in B.C.'s Horn River unconventional gas play, as well as projects in the North Sea, Gulf of Mexico and Yemen. Long Lake has been a particularly troublesome project, with production well below the 70,000 barrels per day that was expected.

Nexen was expected to spend as much as $3.9-billion on capital projects in 2013, funded mainly out of its cash flow, said Andrew Potter, analyst with CIBC World Markets.

Officials from the companies were unavailable to comment.

Prime Minister Stephen Harper announced the approval of the Nexen and Progress deals last Friday, even as he fenced off oil sands producers from future takeovers by state-owned enterprises (SOEs) and raised the hurdles on acquisitions of Canadian companies across the board by such government-controlled firms by putting the onus on them to prove that they operate as commercial entities and not policy arms of their governments.

Mr. Harper said Canada still welcomes investment from state-owned companies, but only as joint ventures or minority interests in the oil sands, and with a clear preference for non-controlling interests to prevail elsewhere in the economy. The Prime Minister said government-owned firms would be allowed to acquire oil sands producers "in exceptional circumstances," but would not elaborate on the meaning of that term.

Chinese officials have reacted coolly to Ottawa's new guidelines.

"I think we need a little bit of time to understand fully the new rules, such as exceptional circumstances, which still puzzle me a little bit," Hou Hongbin, chairman of Sinopec Daylight Energy Ltd. told reporters on Wednesday. Sinopec – one of the triumvirate of international Chinese state oil companies – acquired Daylight for $2.2-billion a year ago.

Mr. Hou said SOEs can still consider further investments in the oils sands in joint ventures, but added that Canada is competing for Sinopec's capital with countries around the world.

"We only invest in commercially oriented projects … all depends on commercial evaluation," he said.

Sinopec Daylight chief executive officer Anthony Lambert said foreign companies may be less interested in joint ventures than in outright acquisitions, because they don't have as much control over projects. With Sinopec's deep pockets, Daylight increased its capital budget to $800-million from $350-million in 2011.

"There are a lot of companies out there with joint-venture models and they aren't doing so well," he said. "I think this thing [the acquisition] allows us to do all of our projects efficiently and correctly, as opposed to a joint venture model."