Backed by a massive trade surplus and bulging overseas currency reserves, and fuelled by a voracious appetite for commodities, China has launched one of its largest foreign takeover bids to date, aiming to control a Canadian oil giant.
China National Offshore Oil Corporation (CNOOC) wants to buy Calgary-based Nexen for $15.1bn, a premium 60 per cent above the company’s listed value, in a deal analysts say Canadian regulators are likely to approve, despite opposition from some US politicians.
James Inhofe, a Republican from Oklahoma, has “serious national security concerns” over the bid, while Charles Schumer, a Democrat from New York, said China’s “blatant disregard for US intellectual property rights makes this transaction even more concerning”.
Canada is the largest foreign supplier of oil to the US and Nexen has operations in the Alberta tar sands, one of the world’s largest petroleum deposits, along with international investments in Africa, the Gulf of Mexico, the North Sea and the Middle East.
Regulators from the Canadian government, led by Prime Minister Stephen Harper, a Conservative who hails from Alberta and has close ties to the oil industry, are currently mulling whether the takeover deal represents a “net benefit” to Canada. It is unclear when exactly a decision will be announced.
In search of stability
China is the world’s second largest oil consumer, according to the CIA, burning about 9.4 million barrels per day in 2011.
“Over the past couple of years, the boom in unconventional extraction has made North America the centre of the mergers and acquisitions world,” Erica Downs, a former CIA energy analyst, now with the Brookings Institute, told Al Jazeera. “Canada and the US are increasingly where these companies want to be.”
In the short-term, China needs energy – and Nexen, one of Canada’s ten largest oil companies, has an ample supply, producing some 213,000 barrels of oil equivalent per day. The deal would increase CNOOC’s reserves by 30 per cent, company officials told the Reuters news agency when the takeover plan was announced in late July.
Nexen’s Canadian assets in the tar sands, where oil is often mined rather than pumped, are far more expensive to access than conventional crude. But companies such as CNOCC are willing to pay an extra premium for energy which comes from a politically stable western country such as Canada.
“It’s no secret that geostrategic instability affects most oil exporters,” Gordon Houlden, director of the University of Alberta’s China Institute, told Al Jazeera. “The Chinese got burned in Libya [after rebels ousted Gaddafi’s government and the Chinese lost their contracts].”
“They got badly burned in Sudan with the break-up of the country [most of the oil is in South Sudan while China had signed deals with the former government in the north] and there are questions over Iranian production because of sanctions and the risks of war,” he said. “The premium for security is reasonable.”
With 175 billion barrels of recoverable crude, Canada has the world’s third largest proven oil reserves, behind Saudi Arabia and Venezuela, according to the CIA. Producing oil from Canada’s tar sands requires an oil price of more than $50 per barrel to be profitable, according to Shell and other energy companies.
Extracting one barrel of oil from the tar sands produces three times more greenhouse gas emissions than conventional crude, leading conservationists to oppose the China takeover plan, as it is likely to mean increased production and investment in one of the world’s most environmentally harmful fuel sources.
“A Chinese owned company is going to want pipelines [to the Pacific coast],” said Gordon Laxer, director of the Parkland Institute, a left-leaning think-tank in Edmonton. “I don’t think Canada should be increasing tar sands production, we should be capping and phasing it out,” he told Al Jazeera.
Two controversial pipeline proposals – the Northern Gateway spearheaded by the energy giant Enbridge and the Kinder Morgan pipeline – are hoping to bring Canadian oil to Asia, but environmentalists and some indigenous groups are battling to stop them.
“As a world power, much like the Americans, the Chinese want diversity in their energy sources,” Laxer said.
China’s ocean ambitions
“China controls more than $3.1tn in official currency reserves, an unprecedented amount for any country”
– The Financial Times
Over the longer term, some analysts believe Beijing is eyeing Nexen’s deep water drilling technology in order to cement its claims to prospective offshore oil deposits in the disputed South China Sea.
The region could contain as much as 213 billion barrels of oil, according to Chinese studies, making it a geopolitical prize comparable with Saudi Arabia. Most of this potential for oil is deep under water.
In May, China’s first deep-water drilling rig, CNOOC 981, began operations in the South China Sea. It can operate at a maximum water depth of 3,000 metres, which is a significant improvement over past Chinese technology, but still less than the capacity of major western energy firms.
“The deep sea component is one of many attractive components of Nexen to CNOOC,” Houlden said, calling the acquisition “one of the ways” for the Chinese to add to their capacity.
The US government will review if China’s ownership of Nexen’s offshore assets in the Gulf of Mexico – accounting for 14,000 barrels of oil per day, or 6.6 per cent of the company’s production – poses a national security risk.
Above and beyond any particular concerns about technology, some politicians are worried about firms backed by the Chinese state going after hard assets.
US debt conundrum
China controls more than $3.1tn in official currency reserves, an “unprecedented amount for any country” The Financial Times reported earlier this year. With a trade surplus of $160bn in 2011, the country has money to spend.
Previously, this money had been invested in US treasury bonds – buying US government debt – but Chinese officials have repeatedly warned that increasing US debt levels and political paralysis in Washington are making debt investments less appealing.
But China cannot sell its investments in US Treasury Bonds without causing the value to drop. As the biggest holder of the asset, any moves away from US debt would hurt China, which would be left holding a bag of worthless paper. “Just a few words from China that they wished to divest or even to stop purcashing T-Bills would hurt them [both China and the US] very much,” Houlden said. For the time being, China is likely to keep buying US debt, while attempting to slowly shift reserves into other properties.
Trying to convert investments in treasury bills into hard assets in western countries hasn’t always been easy. Canadian officials blocked a takeover attempt by an Australian firm on mining giant Potash Co last year, saying it would not be beneficial to Canadians. In 2005, CNOOC attempted to buy the US oil company Unocal for $18.5bn, but regulators blocked it on national security grounds.
State and corporate power
CNOOC’s operating structure is considered murky by some analysts. Its divisions are traded on international stock markets and the company has pledged to keep Nexen listed on the Toronto Stock Exchange (TSX). The firm traded on the TSX is apparently a subsidiary of a bigger corporation which is owned largely by China’s government, allowing the company to secure financing with low interest rates often unavailable to its competitors.
“There are lots of state owned companies operating in the tar sands, none of them are Canadian”
– Gordon Laxer, Parkland Institute
“Chinese companies have a lower cost of capital and a lower cost of inputs,” Downs, the former CIA analyst, said. “Secondly, they do not pay anywhere near the same amount of money in terms of dividends to shareholders as western publicly traded companies.”
With Chinese state firms, it is often unclear where national interests end and corporate interests begin, worrying some western capitalists.
“In the past 10-15 years we have seen these companies emerge as increasingly powerful actors vis-à-vis the Chinese government,” Downs said. “There has been a devolution of power away from the state to these powerful firms,” she said, adding that top executives in major companies are still appointed by the Chinese state.
The majority of the world’s oil and gas reserves, some 75 per cent of total global production, are controlled by state owned companies. The big names of the oil game: Shell, Exxon, BP and Total are small players compared with Saudi Aramco, Russia’s Gazprom and Petroleos de Venezuela. Canada and the US are some of the only places where foreign firms can directly buy upstream petroleum access.
“There are lots of state owned companies operating in the tar sands,” Laxer said. “None of them are Canadian.” If anything, the power of Chinese state capitalism should give Canadian policy makers pause in how they govern their own oil sector, where critics say finite and highly polluting resources are not managed for the public good.
Follow Chris Arsenault on Twitter: @AJEchris