At the risk of sounding boastful, we told you so. Our Outlook 2012 issue last January predicted that Canada would have a Unocal moment—that a state-controlled Chinese oil company would make a bid for a large-cap Canadian energy company. We said it would be friendly. We even hinted that Nexen Inc. was among the likeliest candidates.
Sure enough, China National Offshore Oil Company announced a $15.1-billion deal to take over Nexen on July 23. This is a whopper, in the same league as CNOOC’s US$18-billion bid for American oil company Unocal in 2005. But while Congress blocked that deal, leading to a painful loss of face for the Chinese and a long hiatus where there wasn’t much deal flow in North America, this one is likely to go through.
The first reason is that Nexen needs rescuing. Despite a big discovery in the Gulf of Mexico and continuing cash cows in the North Sea and Yemen, its biggest asset, the Long Lake oilsands project, has never produced even half its planned capacity of 70,000+ barrels a day since starting up in 2009. Part of that was the failure of a technology meant to generate steam by burning residual bitumen (Nexen resorted to the more tried and true natural gas fuel last year). Part of it was a resource reservoir that has proven to be of lower quality than expected. Combine that with natural gas assets savaged by low gas pricing, and Nexen was barely treading water.
The second reason is Nexen is not a one-of-a-kind company like PotashCorp (whose takeover was blocked by Industry Canada in 2010) or, for that matter, Unocal. Ottawa signaled it was OK with state companies taking over Opti Canada (partner with Nexen at Long Lake) and Daylight Energy. In the past, it’s also allowed Abu Dhabi state firm Taqa to take over PrimeWest Energy and Northrock Resources, a total spend of about $7.5 billion, so the government ownership isn’t necessarily a stumbling block.
Of course, Nexen has assets in a number of countries that will undertake their own reviews of the deal, possibly resulting in selective divestitures.
But CNOOC—which was the same failed suitor for Unocal—has laid the groundwork this time, offering a 61% premium for Nexen shareholders, promising to make Calgary its headquarters for the Americas and listing on the TSX.
It also gives the Harper Conservatives a prod with which to speed up the approval of the Keystone XL pipeline in the U.S. Nothing says “use it or lose it” like a huge Chinese resource buy in the oilsands.