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If you applied Murphy’s Law to the oilsands, the result would look a lot like Long Lake. The oilsands project was predicated on a novel Israeli-developed gasification process intended to reduce the project’s natural gas consumption. Now that natural gas has become dirt cheap, the benefits of this technically challenging approach hardly seem worth the effort. Long Lake’s startup in 2008 was delayed nearly six months, and it has lagged well behind schedule ever since.
The anticipated flood of 72,000 barrels per day turned out to be more of a trickle. (During this year’s first quarter, it reached 34,500 barrels per day.) The cost overruns were horrendous even by Fort McMurray standards. Long Lake is, in short, the Florida swampland of Alberta’s oilsands region. All of which prompts the question: Who’d want to buy it?
On July 23, the China National Offshore Oil Corp. (CNOOC) revealed its offer to purchase all shares of Long Lake’s majority owner, Nexen. It’s prepared to pay dearly: at 61% above the share price, the premium is roughly double the average in Canadian acquisitions. That’s likely sufficient to dissuade others from bidding. (CNOOC is nothing if not determined: it already owns Nexen’s former partner at Long Lake, Opti Canada, having bought that insolvent company last year for $2.1 billion.) Fortunately for CNOOC, Long Lake is actually something of a sideshow: most of Nexen’s assets lie outside Canada—in the U.K., Yemen and the U.S.
China’s appetite for energy and raw materials is voracious. But this overture bears greater significance—as a trial run for possible future investment. If consummated, this would be China’s largest-ever overseas takeover by a considerable margin. It’s also outside China’s traditional hunting grounds in the developing world. The implications for Canada are equally momentous. This might be regarded as a second chance to build a meaningful economic relationship with what has become, by many measures, the world’s second-largest economy.
A few years ago, the federal government reversed what had been an antagonistic stance toward Beijing. This thawing process gained greater urgency following the U.S. government’s decision last year to delay approval of TransCanada Corp’s proposed Keystone XL pipeline, a conduit for oilsands product. Ottawa now worries Canada’s traditional partner is losing enthusiasm for buying and investing in our filthy crude. Canada’s energy sector has also suffered lately from a combination of oversupply and stagnant U.S. demand, resulting in discounted prices. Greg Priddy, an analyst with political-risk consultancy Eurasia Group, noted in a recent commentary that “the Alberta and federal governments, along with the oil and gas sector, broadly support the effort to diversify Canadian energy exports to high growth markets in Asia.”
Although the federal government insists CNOOC’s offer will receive due scrutiny, most observers expect it will be approved. Nexen itself already backs the deal, and the company isn’t regarded as Canada’s top oilsands operator—quite the opposite, really. “We’ve had to work hard to build the relationship over the last two or three years,” says Glen Hodgson, chief economist at the Conference Board of Canada. Kiboshing this deal, he says, “clearly would not advance that.” Conversely, “if this deal goes well,” observes Yuen Pau Woo, president of the Asia Pacific Foundation of Canada, “it will feed into the comfort level that Chinese have with investment in Canada, and likely will inspire other bids.”
If so, the more important issue is what kind of relationship Canada wants with China going forward. The endless debate over the “hollowing out” of Canada’s business sector is but one symptom of anxieties surrounding our investment relationship with the Americans. But at least the U.S. is proximate to Canada politically, geographically and culturally. The same cannot be said for China. We’d be dealing with state-owned enterprises, beholden to a Communist government and bearing a distressing penchant for stealing intellectual property. The government’s human-rights practices also offend western sensibilities. Expanding our investment relationship with China invites a host of daunting, unfamiliar challenges. We should pursue it nonetheless.
Things didn’t pan out well the last time a Chinese company bid for a sizable western oil company. In late 2004, CNOOC made overtures to Unocal, which produced primarily in Asia but also the U.S. The Financial Times leaked word of the negotiations early the following year, well before CNOOC even issued a formal offer. American oil giant Chevron pounced, pointing out CNOOC’s Communist backing and China’s controversial human-rights record. Chevron swanned off with the prize.
For the rest of this article, please go to the Canadian Business Magazine website: http://www.canadianbusiness.com/article/94928–cnooc-s-bid-for-nexen-a-sign-of-china-s-future