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China Buys Into World Oil Pricing.

The July 2012 US$15.1bn purchase by China's offshore oil and gas producer CNOOC of Calgary-based Nexen Inc, Canada's sixth-largest independent oil explorer and producer, marks the biggest foreign acquisition ever by a Beijing-owned company. CNOOC has agreed to buy all Nexen's outstanding common shares at US$27.50 cash per share, nearly a 62% premium over what the stock was trading at before the announcement. Total cash to be paid for Nexen's common and preferred shared will reach US$15.1bn. The firm's current debt of $4.3bn will remain outstanding. The transaction was to close in three to six months. But CNOOC will thus have a say in world oil pricing (see below).

The deal showed how China had learned from earlier debacles - and not just Chinese ones - including an attempt by Australian miner BHP Billiton to buy fertiliser maker Potash Corp for $39bn in 2010, a deal killed by the Canadian government.

The Nexen buy is a triumph for CNOOC, China's third-largest oil firm, which was forced in 2005 to abandon an $18.5bn deal for Unocal due to opposition from the US Congress over sovereignty issues. It may also signal a new direction in Chinese purchases of foreign oil interests. Nexen operates the North Sea's Buzzard oilfield, the biggest contributor to the Forties oil blend, giving it access to trading which sets the price for the Brent blend of light/sweet crude oils.

Brent is a marker for world crude oils, meaning the Chinese will have some role in global oil trade - no matter how big or small. Now it is Dated Brent that sets the value of paper WTI, a light/sweet crude oil marker which does not trade outside the US, rather than the other way round which used to be the case a few years ago.

The fact the deal was for a full take-over of the company rather than the purchase of a minority stake surprised many, since Chinese firms had preferred the latter course in order to calm such objections. Analysts at Nomura argued that CNOOC lacked the operational expertise to improve Nexen's slow production growth, pointing to the range of the Canadian company's assets from oil sands and shale gas to deep-water projects in the Gulf of Mexico and in the radically different conditions of the North Sea. It also operates conventional exploration and development projects in South America, offshore West Africa, and in Yemen.

The Chinese made many concessions during the talks. Among these were agreements that CNOOC make Calgary the head office of its North and Central American operations, list on the Toronto Stock Exchange, and retain Nexen employees. The final decision whether to approve the deal had to be made by Canada's Industry Minister Christian Paradis, in line with the Investment Canada Act.

Most of Nexen is less of a Canadian "national champion" than other energy firms, since its assets were mainly outside Canada.

CNOOC had tested the waters with Nexen by buying Opti Canada in July 2011, which was a 35% partner in Nexen's $6.1bn Long Lake oil sands project in Alberta. Sinopec was also in the Canadian market in July, acquiring 49% of Calgary-based Talisman Energy's Talisman Energy (UK) Ltd (TEUK), which operates in the North Sea, for $1.5bn. The TEUK acquisition will produce a JV in which Sinopec will appoint key managerial personnel while TEUK will operate the assets. China's Sinopec Group, of which Sinopec is a unit, is an integrated energy and petrochemical giant, while Talisman is an oil and gas E&P firm. Talisman's current operations stretch from North America to the North Sea in one direction and to South-East Asia in the other.

In particular regarding CNOOC's purchase of Nexen, the critical market intelligence on the supply situation in the North Sea which the Chinese will obtain would be one of the most valuable results of the transaction: Brent the marker for world crude oils.

Robert Campbell writes that CNOOC will now be able to play the Brent crude oil futures market more efficiently, in addition to having the right to participate in discussions over how prices for various North Sea benchmarks are calculated. This means that China is moving in the direction of ceasing to be merely a price taker and will gain access to information about what drives short-term price shifts that influence its import costs. It may thus also be able to influence the rules of the futures price-setting game.

The deals are also part of the Chinese firms' continuing their worldwide search to purchase or otherwise acquire energy technology. Important in this profile is technology for exploiting shale-gas deposits, as well as the shale-gas reserves themselves. For this purpose, Chinese companies have focused on North American firms, which have developed the techniques perhaps furthest.

In 2011, Chinese state-owned enterprises spent nearly $18bn buying oil and gas companies around the world, of which nearly one-third, or $5bn, was disbursed in Canada's resource sector. In October 2011, Sinopec paid $2.2bn in its largest foreign acquisition of the year in order to acquire the Canadian firm Daylight Energy Ltd, thus gaining access to Canadian shale-gas reserves.

PetroChina had bid $5.4bn for Encana Cutbank Ridge gas assets but decided in June 2011 to withdraw that offer after negotiations with the company failed. That did not mean PetroChina lacked any interest. Earlier in 2012, just before Canadian PM Stephen Harper visited Beijing, PetroChina completed acquisition of 20% in a British Columbia-based shale gas project of Shell. No sum was specified for the acquisition, but news reports cited a figure of more than $1bn.

PM Harper helped prime the way for the Nexen take-over by stressing in February that Canada needed more foreign investment to help develop its oil sands, and by telling the Chinese he wanted to sell more oil to Chinese and Asian markets.

US politicians attribute that move towards diversification as a result of President Barack Obama's November 2011 postponement of a decision on the construction of the Keystone Pipeline, which would have fed multiple US refineries in the Mid-West and Texas Gulf Coast with product from Alberta's Athabasca oil sands. The Canadian move to build a pipeline from there westwards to British Columbia's Pacific Ocean coast gained momentum from then.
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Publication:APS Review Oil Market Trends
Geographic Code:1CANA
Date:Aug 13, 2012
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