The CNOOC Takeover of Nexen: Net Benefit to the 1%

Many Canadian opposed to CNOOC taking over Nexen are reluctant to say so lest they be labelled economically naive or xenophobic.   I’m neither so let me tell you why my spidey senses are tingling:

#1 CNOOC is a state owned entity

The China National Offshore Oil Corporation is a state-owned oil company.  Its president is appointed by the government.  China’s government has an appalling reputation in human rights and environmental protection.

CNOOC says not to worry.  It will create a Canadian subsidiary (let’s call it CNOOC-Canada) which will be bound by Canada’s health, safety and environmental laws.  This is good because nothing focuses an executive’s attention more sharply than the prospect of jail time.  But words are cheap…and in this case don’t address the fact that the executives directing CNOOC-Canada strategy reside in China, well beyond the reach of Canadian laws.

Remember Sinopec, another Chinese state-owned entity?  Sinopec battled the Alberta courts right up to the Supreme Court of Canada to avoid prosecution for 53 health and safety violations arising from the deaths of two temporary Chinese workers and injuries to four others.  Sinopec’s argument:  it had no presence in Canada.*

Sinopec was ultimately unsuccessful but the case wasn’t a complete loss.  It laid out a blueprint for a smart lawyer to do a better job of insulating a Chinese state-owned entity from its Canadian subsidiary so that Chinese state-appointed executives will have a stronger immunity argument the next time around.

Bottom line:  CNOOC’s commitment to comply with Canadian health, safety and environmental laws is meaningless when CNOOC’s “directing minds” are safely tucked away in China.

#2  Why does CNOOC want to own 100% of Nexen?

China invested $18 billion in the Canadian oil and gas industry in the last 2 years by buying minority interests in Canadian companies.  This time it’s going for the whole enchilada.  Why?  Because that’s the only way China can lock up OrCrude and Buzzard.

OrCrude is a technology that improves productivity and reduces the cost of oil sands operations.  Nexen has the exclusive right to OrCrude technology in Canada and most of the world—a worthwhile prize.

Buzzard is a mid-sized oil field resting under the North Sea about 60 miles northeast of Aberdeen.  It plays a decisive role in setting global oil prices.**Nexen holds a 43% stake in Buzzard and is its operator—another worthwhile prize.

Bottom line:  The only way to capture the crown jewels is to buy the company that owns them.

#3 What is the “net benefit” to Canada?

CNOOC needs Investment Canada approval in order to complete the takeover.  This means convincing  Investment Canada and Mr Harper that the takeover is a “net benefit” to Canada.   

A “net benefit” is defined as one that improves the Canadian economy, boosts productivity, creates  jobs, uses services, doesn’t negatively impact competition in Canada, contributes to our ability to compete globally and is compatible with Canadian industrial, economic and cultural policies.  Pretty comprehensive, eh?

Well,  I’m hard pressed to see how the takeover of a Canadian company by a company owned by the Chinese government will be a net benefit to Canada.

Nexen isn’t on the brink of bankruptcy—it was one of the few energy companies to report an increase ($109 million) in year-over-year cash flow this quarter—so the CNOOC takeover won’t save Canadian jobs or add Canadian jobs.  In fact if CNOOC adopts the Sinopec model it will import temporary Chinese employees to work in here.  Zero benefit to Canada.

As a state-owned entity CNOOC has unlimited access to government financing.  This gives CNOOC a competitive advantage over Canadian energy companies who access financing through the debt and equity markets and enhances CNOOC’s ability (not ours) to compete here and abroad.  Zero benefit to Canada.

CNOOC promised to list CNOOC-Canada’s shares (now valued at $15 billion) on the Toronto Stock Exchange.  So instead of investing in Nexen, a Canadian company, we can now invest in Communist China.  Furthermore, CNOOC-Canada’s profits, in the form of dividends, will flow back to the Chinese government, not to Canadian shareholders.  Zero benefit to Canada.

So what am I missing?  To paraphrase Hal Kvisle, ex-CEO of TransCanada Pipelines, it’s the share price premium stupid.   OK, I took some liberties there, what Mr Kvisle actually said was “The point is there’s this huge premium to the share price.  It’s a huge infusion of capital into the Canadian financial system—we’re selling the company for a great return for the shareholders and I think the net benefit to Canada is right there.  It’s obvious and it’s financial”. *** 

Well, Mr Kvisle, the last time I looked the word “shareholders” was not synonymous with the word “Canada”.

So I will join Conservative MPs Rob Anders and Ted Menzies to urge Industry Minister Christian Paradis and Prime Minister Harper to turn down CNOOC’s takeover of Nexen.  At first I felt I was in strange company but then I looked around and saw NDP MPs Tom Mulcair and Peter Julian right there beside me.  Won’t you join us?

Oh and by the way, we’re not saying no to foreign investment in the oil sands; we’re saying no to a foreign takeover of the oil sands.

*Financial Post, July 27, 2012

**Daily Oil Bulletin, Aug 9, 2012

***Calgary Herald, Sept 21, 2012, online

 

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7 Responses to The CNOOC Takeover of Nexen: Net Benefit to the 1%

  1. iddybiddyspider says:

    Great post, though I believe that the Occupational Helath and Safety Charges remain to be dealt with in court. The appeals were regarding the right of Canada to even attempt to prosecute this Chinese company. As well, millions of dollars were found to be unpaid to workers and the company claimed to have attempted to make good for that but were unable to find the workers in China.

    • Thanks for the update Iddybiddy. Your comment about the millions of dollars which went unpaid confirms the need to take a good hard look at this transaction. I sent my emails to the Prime Minister and the other MPs this afternoon. I’d love to be a fly (or spider) on the wall when they debate this one.

  2. Carlos Beca says:

    Susan judging by the way this prime minister approaches any problem it is obvious that if it is good for the market he is not going to deliberate on any of the issues discussed in the comments.
    The most interesting to me is that if the situation was the other way around, it would not even be considered. Why is it that we always are so naive to allow anything that seems to hurt Canada. Not only in business but in immigration and everything else. In most countries some of these issues are not even considered for discussion. Mr. Harper has such a obcession against anything public and is constantly undermining the CBC, the old Petro Canada and now that we have a state company owned by China it seems to be ok to consider it? I just do not get it. It borders on the lunatic and demented.

  3. Carlos, I agree. It would be tremendously naive on our part to treat the CNOOC takeover of Nexen as business as usual. CNOOC has offered a 60% premium on Nexen shares. Not only is this premium more than double what is typically paid by an acquiring company, it’s a “knock-out” bid that guarantees that no other company could possibly match the bid–a private corporation’s board would never approve a premium so high. But then again CNOOC is not a typical company. It can afford to offer this “over the moon” premium because it’s a state-owned entity funded by the state treasury.

    I’ve read many articles by people who support of this takeover. After singing the praises of the deal they invariably admit that they find it troubling that CNOOC is state-owned entity. Their solution is to ask CNOOC to confirm that they’ll obey the laws relating to the environment, labour, corporate governance and transparency. We don’t ask non state-owned entities to confirm that they’ll comply with our laws…the fact that they think this is necessary speaks volumes.

    • Carlos Beca says:

      Susan I agree with you but I would not at all be surprised that Harper and company will approve it in the name of ideology. The Chinese know that and that is why the push is on with what you very clearly state is impossible in a regular corporate environment – 60% premium on Nexen shares. This is clearly a carrot in front of what they consider degenerate greedy societies and they know very well what they are doing.

      In my past lives I had an opportunity to deal directly with people of both the Soviet and the Chinese communist party and I know exactly what they think of us pseudo-democrats. I had the great chance of witnessing how these people operate and the respect they have for all these rules that the Harperites think they are going to impose if the deal is allowed. They will do whatever they want and they know as well as I and most of us do that the enforcement system is laughable and they can get around it just like Canadian companies do.
      I can clearly see in my mind what the Chinese leadership is saying about our non-existent care for our own resources and the strength of our own country. I am sure they think that we have no spine whatsoever and you know what? They are right.

  4. Sleel OfWpg says:

    Personally don’t really care about any of the good reasons why this deal shouldn’t go through. I don’t trust the Chinese Gov further then I can whizz uphill into the wind during a blizzard in Manitoba. See no reason to let them strip us of our resources. If it was up to me this not only wouldn’t go through but our trade ties would be getting pulled back too. They repeatedly steal technology and push out counterfeits despite giving their worthless word they wont. Don’t see why their word is any less worthless now. And this is as a conservative voter.
    Rather see us replace India with China in trading terms. Least the profits from the trade wouldn’t be going to modernize China’s military and bolster their ability to make claims in the Arctic, like they think they should be able to. Despite having no part of their nation being anywhere near the Arctic.
    As said above. I don’t trust either China or Russia. At all. Not even a little bit. Regardless of their facades, both are totalitarian states who have no intention of following international agreements beyond lip service.

  5. The point about a lack of trust is a good one. Premier Redford is now pushing the deal–with conditions attached. Obviously even Ms Redford has qualms or she wouldn’t feel the need to impose extra conditions over and above whatever is required under the Investment Canada Act. Add to this the fact that the Globe and Mail reported that 4 out of 10 business leaders nationwide say they’d give stronger support to such a bid if it were made by a U.S. company and you can see the issue. As I said, I’m not opposed to foreign investment, but I am opposed to foreign takeovers by any state-owned entity of Canada’s natural resources. A very wise businessman once told me: you never give up control of the crown jewels. Thanks for your comment Sleel.

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