Back in 2005, the China National Offshore Oil Corporation (CNOOC) tabled a huge $18.5 billion offer for the American oil company Unocal. Despite the logic of strategically buying up Unocal for its Central Asian prospects, improving its Shale gas infrastructure and the tempting ‘all-cash’ nature of the buyout, the deal ultimately floundered on the banks of Congress. The red flags were mounted mainly on the grounds of economic security fears of foreign ownership and the lack of reciprocity for U.S. firms in the Chinese market, Handing over strategic energy sources to a foreign investor being the mitigating factor.
On July 23rd of this year, CNOOC offered $15.1 billion for Nexen, a major Canadian company, which was met with strong support from the Nexen board. Yet this is hardly surprising considering the offer represented a 61% premium on its (then) current share price and in terms of providing Canadian leverage in the Keystone pipeline impasse with the U.S. Therefore, in business terms, the deal is done and dusted.
Yet the real battle is political. Has the North American mindset since changedand is it ready to allow China to take up state assets in this manner? To this end, we can give a qualified yes. Firstly, Progress energy has recently been the subject of a mildly favourable takeover attempt by the Malaysian group Petronas. Also, it is not as if China has been resting on their laurels. To date, there has been over $49 billion in Chinese investment in the last few years, following multi-billions deals with Chesapeake Energy and the Oil Sands developer Opti. Furthermore, the Nexen takeover has seen a more streamlined PR approach from CNOOC which has dampened criticism through promises of providing ‘net benefit’ to Canada by retaining staff, keeping the headquarters in Calgary and eventually floating the company on the Toronto Stock Exchange.So far so good.
However, the deal is still on a knife edge. CNOOC does not have the best of reputations with regards to environmental stewardship, and its belligerence in the South China Sea will most likely form the backbone of political protests.
This is an interesting and pivotal M&A deal, which could possibly be the largest Chinese foreign investment in history. Whatever the results of this takeover, it puts into context the juggling act that North American energy companies must make in light of the recession and also for China, they need to prove that they are willing to take a more open role on the world stage. This is an issue that could run and run.
