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A Nexen rig in the Knotty Head region of the Gulf of Mexico. Political opposition to Chinese state-owned CNOOC Ltd.’s bid for Nexen is on the rise in the U.S., which licenses rigs to operate in the Gulf.

Dave Olecko/Nexen

CNOOC Ltd. is facing a growing political backlash in the U.S. to its acquisition of Nexen Inc.'s Gulf of Mexico assets, a reaction that threatens to punch a hole in the Chinese company's $15.1-billion (U.S.) bid for Calgary-based Nexen.

The Chinese oil producer caused an uproar in Washington seven years ago, when it attempted to acquire California-based oil company Unocal Corp., but retreated in the face of a hostile reception in Washington.

In the Nexen deal, the U.S. government could not block the acquisition, as some members of Congress have urged. But it could force CNOOC to divest Gulf of Mexico assets in U.S. waters that Nexen has described as a "critical component" of its growth strategy, though many analysts believe even that action is unlikely.

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On Monday, Edward Markey, a senior Democrat in the House of Representatives, urged the Obama administration to block the acquisition until it can renegotiate a more favourable royalty scheme with the Chinese state-owned company – or until CNOOC relinquishes its ownership interest in those offshore leases.

Mr. Markey – the ranking Democrat on the House natural resources committee – complained that the U.S. has provided royalty-free production licences to spur offshore activity, and warns against extending that "giveaway" to a Chinese state-owned company.

"I believe this merger could lead to a massive transfer of wealth from the American people to the Chinese government," he wrote in a letter to Treasury Secretary Timothy Geithner, whose department oversees U.S. foreign investment reviews.

"Giving valuable American resources away to wealthy multinational corporations is wasteful, but giving valuable American resources away to a foreign government is far worse: It has the potential to directly undermine American economic and national security."

Late last week, Senator Charles Schumer of New York and Democratic House Leader Nancy Pelosi signalled their opposition to the deal.

Nexen currently produces 14,000 barrels per day of crude from the Gulf of Mexico, or 6.6 per cent of its total 213,000 barrels of oil equivalent. It is a 20-per-cent partner with Royal Dutch Shell PLC in the Appomattox discovery, one of the largest in recent years, and has identified more than 100 exploration prospects.

While its current Gulf of Mexico production is fairly modest, Nexen bills itself as one of the largest leaseholders in the offshore, and a divestiture would rob it of a significant growth opportunity.

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But despite the noise from some members of Congress, the deal is unlikely to run into a serious setback in the U.S., said Greg Priddy, analyst with Eurasia Group, a political risk firm in Washington. Mr. Priddy noted the U.S. government has approved major investments by Chinese firms – including CNOOC and Sinopec – in U.S. shale gas and tight oil fields. However, the Chinese companies have typically limited themselves to minority stakes in those properties.

As well, U.S. oil companies are operating in oil field in offshore China, with Beijing's blessing. Houston-based ConocoPhillips Co. has 52,000 barrels per day of production from China, including a 49-per-cent interest in Bohai Bay, where the company is the operator and recently had a significant spill.

In addition to needing a regulatory green light from Ottawa and Washington, CNOOC would need British government approval to transfer Nexen's licence to operate in the North Sea to itself. The Calgary company is a major producer in the North Sea, with more than half its production coming from the giant Buzzard and nearby fields.

But the British government is keen to attract investment into the declining North Sea field, and is unlikely to rebuff the Chinese.

In Ottawa, the opposition New Democratic Party seized on reports of insider trading around the deal to press for parliamentary hearings into the takeover. However, the NDP has not opposed the acquisition, but instead demands the Conservative government conduct an open and transparent review.

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