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Deal on teeter-totter CNOOC offer for Canada’s Nexen attracts growing doubt; Harper insists public opinion, assurances of economic reciprocity, needed By Gary Park For Petroleum News
Hard to believe, but state-owned energy giant CNOOC is being squeezed from several sides, including within its own operations, as it awaits shareholder and government approval its US$15.1 billion takeover of Canada’s Nexen.
China National Offshore Oil Corp., China’s biggest offshore oil and natural gas producer, has slashed its dividend by 40 percent in response to a 19 percent drop in first-half profits, is grappling with a drop of 4.6 percent in production following a big oil spill in China’s Bohai Bay and doing all it can to conserve cash ahead of its biggest foreign acquisition.
And, if that’s not enough, Canadian Prime Minister Stephen Harper has delivered a clear message to CNOOC that government approval of the transaction is far from a slam dunk, while senior officials at a conservative Canadian think tank raise concerns about having a corporation controlled by the Chinese government set up shop in Canada.
Harper told reporters that public opinion and assurances of economic reciprocity between Canada and China will be important issues as his government decides whether to ratify the deal.
Poll shows opposition He said that although Canada has “significant and growing investment” in China, public opinion will play a role in the verdict.
A poll by Canada’s Sun newspaper chain showed 57 percent of respondents were opposed and only 9 percent were in favor, but fewer than half were even aware of the proposed transaction.
“This I a significant transaction with significant implications for the Canadian economy, both today and in the long term, and I think those considerations need scrutiny and they need some clear long-term policy direction,” Harper said.
“Our government will take the time we have to properly scrutinize this transaction and decide that it will only go ahead if it is in the best long-term interests of the Canadian economy. That will be measured across a range of considerations.”
Canadian law requires that a foreign takeover of a Canadian corporation must show evidence of a “net benefit” to Canada.
Natural Resources Minister Joe Oliver said earlier this year that any long-term strategic relationship with China would have to be based on “mutual respect, reciprocity and equality.”
Other uncertainties While that angle is mulled over by Canadian foreign investment regulators, there has been a hint of uncertainty within other circles over the deal.
Gerry Angevine, senior economist, and Fred McMahon, vice president of international policy research, with the independent Fraser Institute, made the case that although CNOOC is traded on the New York and Hong Kong stock exchanges it remains owned by the Chinese government and its top executives are members of China’s ruling Communist party.
Thus, they said, if the deal goes through Nexen would be controlled from Beijing, robbing it of the incentive that drives private corporations to provide competitive returns for shareholders, “whereas state-owned companies are guided by political objectives such as ensuring access to fuel supplies to support economic growth in the home nation.”
They said “takeovers by state-owned companies are simply not in the best interest of Canadians, given the long sorry record of such companies.”
Simon Power, head of Asian oil and gas research at the brokerage and financial services firm CLSA, suggested the market will be split during the rest of 2013 between those who “think the Nexen deal will go ahead and is a good thing” believing that 2013 will show good earnings per share growth for CNOOC and “those who don’t.”
The deal has been further clouded by a U.S. securities probe of allegations of insider trading.
CNOOC said that Nexen would boost its proven reserves by 30 percent and production by 20 percent, but it also faces the challenge of monetizing potential reserves at the Nexen-controlled Long Lake oil sands project — already 35 percent owned by CNOOC — which has been crippled from the outset by various operational setbacks.
On the upside, Nexen would give CNOOC access to both technology and operating experience to develop China’s own bitumen, heavy oil and shale oil deposits.
“Through the transaction we will be able to expand our overseas business and resource base, enhance our presence in Canada, the Gulf of Mexico and Nigeria and enter the resourceful U.K. North Sea,” said CNOOC Chief Executive Officer Li Fanrong.
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