China corners Canadian energy assets

Bullish CNOOC offers US$15.1 billion to takeover Nexen, but still faces federal foreign investment and competition reviews

Gary Park

For Petroleum News

China’s hungry stable of state-owned oil and natural gas companies made a meal July 23 out of global assets held by two-Calgary based companies for a combined US$16.6 billion.

Sinopec struck a deal to acquire 49 percent of Talisman Energy’s United Kingdom division for US$1.5 billion, normally a headline-grabbing deal, but not on a day when CNOOC announced a friendly offer of US$15.1 billion to turn Nexen into a footnote in Canadian history.

Talisman will remain operator of the North Sea unit which produces 63,000 barrels of oil equivalent per day and plans to use US$500 million of the proceeds to buy back shares.

The transaction is expected to close by the end of the year, pending regulatory and government approvals.

CNOOC, China’s largest offshore oil producer, did what many observers had anticipated, especially given Nexen’s failure to give interim Chief Executive Officer Kevin Reinhart the permanent title after moving him into the post early this year and following CNOOC’s C$2.1 billion takeover of OPTI Canada in 2010 to gain a 35 percent interest in the Long Lake oil sands project operated by Nexen.

If the transaction gets all the necessary shareholder, regulatory and governments green lights and closes in the fourth quarter, CNOOC will pick up a large bundle of global assets in return for an all-cash offer of US$27.50 a share, a 66 per cent premium to the 20-day volume weighted average for the company.

In the second quarter, Nexen produced 213,000 boe per day from 900 million boe of proved reserves.

But not everything is in peak running order, notably Long Lake which has had a brief, troubled history, never reaching more than half its design capacity of 72,000 bpd.

Nexen has also had it with UK government taxes in the North Sea; delays in the Gulf of Mexico after BP’s Macondo well blowout; a costly offshore well in West Africa; and the loss of a production-sharing agreement with the Yemen government.

CNOOC claims it “brings greater financial capacity to better realize the full potential of Nexen’s significant resource base.”

“We are in Canada to invest”

It is also by far the largest offer by a state-owned company in Canada, surpassing the recent C$5.5 billion bid by Malaysia’s Petronas for Progress Energy Resources.

But the deal has still to clear Canada’s foreign investment and competition regulators.

Top executives of the two companies — CNOOC chief executive officer and Nexen’s Reinhart — told a conference call there have been preliminary discussions with the Canadian government.

But Reinhart said “we don’t want to comment on the nature of those conversations at this point.”

He said commitments by CNOOC as part of the takeover proposal “were ones that CNOOC thought about and generated themselves and made those proactive steps.”

Canada’s Industry Minister Christian Paradis said the proposed acquisition is subject to review under the Investment Canada Act, which requires proof of a “net economic benefit” to Canada and probably by the federal Competition Bureau to determine whether the deal would result in a “substantial lessening or prevention of competition.”

He said CNOOC has indicated it will soon file an application for a foreign investment review.

CNOOC has agreed to a termination payment of US$425 million to Nexen if the transaction does not meet Chinese regulatory conditions.

In laying the groundwork for its negotiations with Ottawa, CNOOC said Calgary will become the head office for its North and Central American operations, which include assets valued at US$8 billion, and to grow Nexen’s existing assets in Europe, West Africa and South America.

To meet Canada’s “net economic benefit” threshold, CNOOC also promised to retain Nexen’s current management team and employees; list CNOOC on the Toronto Stock Exchange; and meet its obligations to holders of Nexen’s C$4.3 billion debt.

“We believe the transaction provides a number of significant benefits to Canada and to Nexen,” Li said. “Simply put, we are in Canada to invest.”

Other than Long Lake, Nexen’s major Canadian interest is in British Columbia’s Horn River shale gas play, where it is operator with 60 percent along with Japan’s Inpex at 32.8 percent and Japanese engineering firm JGC Corporation at 7.2 percent. The JV plans to explore and develop the prospect and examine LNG export opportunities.