CNOOC to Acquire Nexen — China’s New Relationship With Canada

Before we get to the new relationship status between China and Canada, let’s look at the pulse of today’s oil market.

Last week, many energy companies reported depressed earnings in the second quarter.

Falling oil and (North American) natural gas prices have pulled down revenues, while global energy demand growth has decelerated — and use has declined in some locales.

Look at a household name like Exxon Mobil Corp. Natural gas prices swooned over 50% in the past year, knocking Exxon’s profits down by 22%. Still, this may be a temporary hard spell. With oil price increases in recent weeks — courtesy of tension in the Middle East, and the possibility of an economic improvement in Europe – we could see a rebound in revenue for big oil players like Exxon.

What kind of prices are we looking at?

I’ve had a few media calls, in which reporters ask me what I think is the “right’ price for oil. My view is that oil “ought” to sell in the $90 to $100 range for Brent International, with West Texas Intermediate trading about $10 below that.

These kinds of price levels reflect the value of oil to the world economy, and pay off the major producers and exporters. At the same time, that $80 to $100 range is well above the finding cost for most new oil plays. The price level gives Western oil companies incentive to keep up the pace of drilling and the search for new supply.

With that simple underpinning in mind for the oil market, let’s take a look at last week’s big oil story…

CNOOC Buys Nexen – And The Drama To Ensue…

In case you missed the news, China National Offshore Oil Company (CNOOC) is buying Canada’s Nexen. At over $18 billion (including debt) this deal is one of the largest-ever cross-border acquisitions by a Chinese company — assuming it happens.

This CNOOC play appears to be among the largest energy deals by any Chinese company, although it falls in line with a longstanding effort by China to gain access to energy resources across the globe, from Venezuela to Sudan to Iran and more.

China is now testing the waters in North America, after CNOOC’s failed effort to pick up Unocal in 2005. This is part of China’s search for energy security going forward. And it’s not “just” the oil and gas. That is, China seeks access to world-class levels of exploration and development technology, certainly within the energy industry.

Nexen is a world-class asset, but perhaps not the “best” of the Canadian oil plays. Still, Nexen is sizeable — and the overall deal is nearly comparable to the unsuccessful 2005 Unocal effort, in fact. So Nexen is an exploratory effort by the Chinese, to see if the door to invest big in Canada — for energy, no less — will open up. It helps the Chinese that Western capital markets are broken, and resource share prices are collectively in the dumps. To an outsider that thinks long-term, this is a fire sale.

Here’s another angle. The West (US/Euroland) often criticizes China for fishing in troubled waters — eg, oil from Sudan, or oil from Iran, or minerals from Congo, etc. On this front, China gets harsh criticism due to human rights issues, and other political differences that Western governments have with the regimes in Venezuela and Iran.

Yet if you talk with the Chinese, they’ll tell you that they’re just looking out for their own national needs for energy and minerals. So now, we have China looking to acquire some of Canada’s so-called “ethical oil.” This sets up a moral argument by the Chinese, that they’re doing the right thing by taking over Nexen.

Meanwhile, the Nexen offer dovetails as a test-case for Canadian Prime Minister Stephen Harper’s expressed desire to expand Canada’s resource customer base, away from exclusive energy exports to the US. Is he serious? We’ll find out.

In the end, Canadian law governs the Chinese purchase offer. There’s a legally vague concept of whether or not there’s “net benefit” to Canada. Translation? It’s whatever the PM says it is. The ball is in Mr. Harper’s court.

Canada’s PM Harper has to balance the national interests of Canada for foreign investment, and sustained energy development, with the strategic trade and energy relationship with the U.S. Perhaps it’s time for a beer summit with Pres. Obama?

The fact is that this Chinese run at Nexen is a direct outgrowth of the dustup stirred by Pres. Obama when he deferred the Keystone XL pipeline expansion, earlier this year. That Keystone debate truly kicked over a hornet’s nest.

The Obama policy towards Keystone backed Canada into a diplomatic and energy corner. At the diplomatic level, the Keystone decision was a severe affront to a long-time ally and partner in just about everything. The next question for Canadians was (and remains) whether or not to be held hostage to the geography of the North American interior. Must Alberta’s energy wealth remain stranded from world markets?

In the U.S., Pres. Obama threw his lot in with the environmental movement. At root, Keystone was a “feel good” issue — manufactured by environmental movement fundraisers. Yet it caused Obama to let election-year politics trump long-term U.S. strategic energy concerns. (Of course, any more, every year is election year.)

Thus with the CNOOC run at Nexen, China is calling the bluff.

That’s all for now, stay tuned for more.

Thanks for reading.

Byron King

CNOOC to Acquire Nexen — China’s New Relationship With Canada was originally featured in The Daily Resource Hunter. Check out the newest Daily Resource Hunter research video “The Price of Gas Explained”.

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