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Encouraging signs from Ottawa led CNOOC to pursue Nexen bid

A logo of the China National Offshore Oil Corp (CNOOC) tops its headquarters in Beijing.


When CNOOC Ltd. executive Fang Zhi arrived in Ottawa from Beijing in late March for meetings about the company's recent oil sands investment, he had a larger prize in mind: Calgary-based Nexen Inc.

Shepherded by lobbyists from Hill & Knowlton, Mr. Fang met with deputy ministers from Natural Resources Canada, International Trade and Industry Canada, which houses the agency that reviews foreign investment.

In those sessions, he made it clear the CNOOC had plans for more ambitious acquisitions in Canada – without getting specific. While he did not receive an explicit green light, federal officials gave him encouragement that the country welcomes foreign money in the resource sector.

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Those conversations gave Mr. Fang and CNOOC, the offshore oil giant controlled by the Chinese government, the confidence to negotiate a groundbreaking $15.1-billion (U.S.) takeover deal for Nexen that would dramatically increase the participation of Chinese state-owned companies in Canada's oil and gas industry.

No longer content with minority stakes or acquiring nearly-bankrupt firms like OPTI Canada, CNOOC set its sights on a viable but struggling, large independent oil and gas producer.

Nexen has major reserves in the oil sands, and operations across the globe, particularly in the North Sea. Should it succeed in winning Ottawa's blessing – as many analysts expect – CNOOC will rewrite the rules for Chinese state-owned companies as they seek to gain access to Canada's vast resource base.

For Prime Minister Stephen Harper, the deal represents a major test of his China policy, in which he has actively courted investments from companies owned by a regime he used to deplore.

CNOOC's proposed takeover of Nexen is "delicate," said Oliver Borgers, a lawyer for McCarthy Tetrault. It's not simply an acquisition of one publicly traded firm by another, but a takeover coming from a company owned by a "an important and powerful and rich regime."

Still, it would be "really hard for [Mr. Harper] to say no when he's just gone on all these trade missions to China to promote investment in this country," said Oliver Borgers, a lawyer with McCarthy Tetrault. "This is a really good time to get a deal that otherwise faces certain challenges."

The prime minister and his cabinet have travelled frequently to China and hosted Chinese officials here as they sought to open fast-growing Asian markets to Canadian energy exports, and attract investment needed to develop those resources. Natural Resources Minister Joe Oliver met with Mr. Fang in Ottawa last fall. The minister's message is always the same: Canada needs foreign capital to develop its resources and welcomes investment from Chinese state-owned companies, as long as they conduct themselves as commercial entities and not arms of the government.

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"This deal represents a very sophisticated, mature transaction," said Peter Harder, a former deputy minister in Foreign Affairs and president of the Canada-China Business Council.

"It has passed some of the hurdles that other transactions brought to the fore, and appears to be a win-win."

CNOOC is promising to boost investment in Canada's oil patch, though it has made no firm commitment to do so. For now, the company will only commit to maintaining Nexen's current capital expenditure plan, though it may well have to negotiate a more substantial undertaking with Investment Canada to prove its acquisition represents a "net benefit" to Canada.

"We believe Nexen has a lot of opportunities and we have the ability to accelerate those opportunities through enhanced capital development project," CNOOC Ltd. chief executive Li Fanong said in an interview. In the short term, however, he said CNOOC would pursue Nexen's existing plans.

However, CNOOC has made two key promises: to list its shares on the Toronto Stock Exchange, and to make Calgary its headquarters for all CNOOC activities in North America and Central America. He added, however, that the company is not planning to increase the number of employees in Calgary.

CNOOC clearly learned the lessons of failed transactions, including its own aborted attempt to acquire U.S.-based Unocal Corp. in 2005, and BHP Billiton's failed bid for Saskatchewan-based Potash Corp. In the Potash deal, Saskatchewan Premier Brad Wall emerged as a major opponent. However, the Alberta government on Monday welcomed the CNOOC-Nexen deal.

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One key difference was the acceptance of the Nexen board, and the fat premium CNOOC was willing to pay for the shares – measures that virtually assure there will be no resistance by investors to the deal.

Chinese companies have been cautiously searching for years for a major resource acquisition that would win market and political support.

In 2005, CNOOC's ambitious $18.5-billion (U.S.) bid for Unocal Corp. became a political lightning rod for U.S. frustrations with China's restrictive trade practices. That same year, China Minmetals ran into political headwinds in Canada when it made an aborted bid to acquire mining giant Noranda Inc. for about $5-billion.

Since then, Chinese acquirers and investment funds have pursued a deliberate strategy to build a track record in Canada by acquiring local resources companies with predominantly foreign resource assets, or as investors in cash-poor targets.

Chinese takeovers of Canadian based companies Addax Petroleum Corp. or PetroKazakhstan Inc. went almost unnoticed because their assets were based offshore.

One of China's largest state funds, China Investment Corp., opened its North American office in Toronto after it earned huge returns by investing $1.7-billion in Teck Resources in 2009 when it was struggling with debt payments.

Last year, CNOOC pulled oil sands developer OPTI Canada from bankruptcy proceedings with a $2-billion acquisition. The rescue investments earned China goodwill in Ottawa and the oil patch, giving CNOOC confidence that a major takeover bid would not encounter significant opposition.

Send your questions about CNOOC's bid for Nexen to, 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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