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CNOOC’s Nexen bid: A new test for Harper

Prime Minister Stephen Harper addresses his annual riding association barbeque in Calgary, Alta., Saturday, July 7, 2012

Jeff McIntosh/The Canadian Press

CNOOC Ltd. has carefully tilled the soil in preparation for its proposed $15.1-billion (U.S.) acquisition of Calgary-based Nexen Inc., scaling up its investments in Canadian oil resources as it sought to win Ottawa's confidence.

With the deal announcement Monday morning, the Chinese state-owned enterprise will put to the test Prime Minister Stephen Harper's Asian policy and his government's appetite for investment from a company owned by a Communist regime that the Conservative prime minister used to condemn.

CNOOC has long been building towards this type of takeover. It was the first Chinese company to make a major acquisition in the Canadian oil industry when it purchased a 17-per-cent interest in MEG Energy for $150-million in 2005, and added to its Canadian base last year by acquiring OPTI Canada for $2.1-billion, giving it 35 per cent of key assets like Long Lake.

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But it is dramatically upping the ante with its bid for Nexen, one of the leading Canadian-controlled companies in the oil patch.

Advised by Hill & Knowlton Strategies, CNOOC has made all the right moves to win Ottawa's favor: promising to invest heavily in Nexen's existing assets; gaining support from Nexen board rather than attempting a hostile takeover, vowing to list the Asian giant on the Toronto stock exchange, and promising to make Calgary the headquarters for CNOOC's operations in North America and Central America.

Above all, the company insists it will run Nexen - and indeed all its operations - strictly on commercial principles, rather than as a policy arm of Beijing.

"This is manifestly a commercial entity," said one source close to the company. "It looks, smells, tastes and feels like a commercial entity."

Certainly, the Harper government has courted Chinese investment in the oil and gas industry, both in production and in the pipelines and facilities needed to export energy to Asian.

Still, the federal government will have to grapple with some tough issues before making a determination as to whether the foreign takeover by a Chinese state enterprise represents a "net benefit" for Canada.

When BHP Billiton Ltd. attempted a hostile takeover of Saskatchewan-based Potash Corp., there were prominent calls from within the Calgary oil patch to block the deal, based on the view that Canada needs corporate "champions" - with head offices and local expertise - in key resource sectors.

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In the end, facing pressure from Potash management and Saskatchewan Premier Brad Wall, Mr. Harper's government did kill the BHP deal. At the time, it promised to provide greater clarity on how corporations might be considered "strategic assets" for the country, but never delivered that guidance.

With only a handful of Canadian-owned, global-scale oil companies, CNOOC is arguably taking out a strategic "national champion" with its purchase of Nexen. Alberta Premier Alison Redford will have a key voice on that issue, though no formal role in determining the outcome.

At the same time, Mr. Harper may face pressure from the U.S. to block the bid, especially given that it is an election year in the States. Republicans have already criticized President Barack Obama's decision to block TransCanada Corp.'s Keystone XL pipeline on the grounds it was pushing Canada into the arms of the Chinese and driving Ottawa's commitment to build an oil sands pipeline to the west coast for export to Asia.

While there will almost certainly be political noise over the Nexen deal from south of the border, it is unlikely to determine the fate of the deal.

CNOOC certainly has experience with politically fraught takeovers, having been forced to withdraw an $18-billion (U.S.) bid for California-based Unocal Corp after a backlash.

But it appears confident that its careful tending of the Canadian ground will yield a positive nod from Ottawa.

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Send your questions about CNOOC's bid for Nexen to businesscommunity@globeandmail.com, along with your name, age, city and province. The Globe will pose the best questions to our panel of experts and publish their responses.

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About the Author
Global Energy Reporter

Shawn McCarthy is an Ottawa-based, national business correspondent for The Globe and Mail, covering a global energy beat. He writes on various aspects of the international energy industry, from oil and gas production and refining, to the development of new technologies, to the business implications of climate-change regulations. More

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