Monday, 24 September 2012

Why CNOOC wants Nexen

Ever since the CNOOC deal for Canadian oil company Nexen has come to light, debate has raged on about selling the company.  While most of the arguments have been based on a distrust of the Chinese government, as well as a state owned company owning highly coveted Canadian resources, I looked into the economic reasons as to why it would be bad not only for Canada but every oil producing nation in the world.

Firstly, let me say the point that a CNOOC purchase would be a security threat to North America is moot.  An oil producing company, employing Canadians, with the majority of it's executive positions in Canada, filled by Canadians, would pose not much of a threat to Canada, and with Nexen likely to axe all operations in the U.S, that problem is solved.

Now firstly, CNOOC is aiming for Nexen because China has a voracious appetite for resources.  In the immediate short term, the oil sands are means to meet China's growing need for energy to keep pace with it's economy which has grown at an astonishing rate over the past 20 years.  The primary argument from proponents of the deal has been that when south of the border growth is a measly 1-2% annually, and increasing calls for more protectionist policies are being heard across the country, the future lies across the ocean in  Asia, and Prime Minister Stephen Harper, despite a belated start, has taken these calls to heart.  China is now a priority for trade with Canada, along with India, the European Union and South America.  Initially this has consisted primarily of Chinese injections of capital into Canadian companies, primarily in the resource sectors.  Recently, however, there has been a flurry of acquisitions of projects and entire companies, not just in Canada, such as the McKay River oil sands project and Talisman Energy by state-owned Chinese firms.  Nexen is the biggest oil company yet that the Chinese government wishes to acquire, and it is a major player in the Athabasca oil sands, a title that is the cause of all the debate surrounding the potential sale of the company.

With all that said, this is all the public line, what everyone is being told.  Chinese capital, through Chinese companies, will create jobs because they will fund infrastructure to ship resources out of the country to Asia. Now the one glaring hole in all of this is that Nexen has two primary projects in the Alberta Oil Sands, the Long Lake and Horn River projects.  After this what is left to be done?  Nothing in the Gulf of Mexico seeing there is no appetite for Chinese investment in the U.S, at least when it comes to resources.  The answer is at home.  The proven reserves in all of Nexen's current projects equates to a measly 6% of proven oil reserves within China.

Now this is why the CNOOC, and by extension the Chinese Government need Nexen.  China already has one of the largest middle classes in the world, and their ranks are due to be vastly increased as more and more Chinese are lifted out of poverty and into a consumer class with voracious appetite for cars, consumer electronics and generally things that require power.  In a world with more people competing for rapidly dwindling resources, it's only natural that China would move to secure plentiful energy supplies in stable regions where acquisition would face little risk of expropriation (Argentina and the Repsol fiasco) or disruption (Syria, South and North Sudan).  All of this is great, but not many countries (stable ones at least) are not so willing to give up energy assets they view as strategically important, and China would prefer to keep money at home if possible, and this is where the domestic reserves come into play.  Large shale gas fields, sizable offshore reserves, and oil in the north of the country all account for what is a sizable energy play in China, in the hands of what essentially is a government backed oligopoly between three state owned company.  Now the Chinese have little if any experience in extraction of resources, while that seems to be an age-honoured tradition in Alberta, so who better to learn from?  Essentially the game plan is to buy an under performing Canadian company with projects that will be able to satisfy China's short-term energy needs while providing domestic companies such as  CNOOC but also Sinopec and China National Petroleum Corp. the expertise that they require to extract China's vast resources.  While yes, CNOOC has promised to keep it's current staffing numbers as well as expand jobs at the head office, which will remain in Calgary, not to mention list stocks on the TSX, is that really of net benefit to Canada?  That's all arbitrary stuff that while yes important, are things prerequisite to getting the deal approved by shareholders, plus a healthy premium of course.  Compare all this to what we are giving away, and then all of the offerings pale in comparison to the potential loss.

 Now don't think for one second I'm saying that Nexen as a company is of strategic value to Canada, but what it does enable China to do once it is out of our hands is not to great benefit to us.  Sure, they'll be exporting the oil produced by Nexen in the Oil Sands to China, but not for long, maybe even as short as 10 years.  proponents of the deal argue that the exporting of oil will create jobs, but will they increase Nexen's levels of investment in the Canadian market? No, they've promised to maintain current levels, all because they can afford to do so, despite it not really being in their long term interests.  And where does all this profit go?  Straight into the coffers of China's Energy Ministry, from which it will be put into their sizable war chest to fund their acquisition spree, and the development of domestic reserves so that China will not depend on countries like us for oil.  That is like saying Wal-Mart opening up shop in India is for the net benefit of the majority of India.  Yes, it's good business for the suppliers, real estate developers and other retailers set to benefit from the droves of people streaming into these new Wal-Mart anchored shopping malls, but the multitude of small business owners that India is home to suffer, and the benefit to consumers is negligible considering how cheap most consumer products in the country are already.  Back to Nexen, one must notice that the loudest proponents of the deal are the ones who will walk away with fatter wallets after or soon after the transaction is completed, including shareholders, executives, and other oil companies who view this case as being the signal to open the floodgates when it comes to foreign investment in our Oil Sands.  What I'm concerned is that will Canadians be ensured access at a reasonable price to their own resources?  Will Canadian values be maintained and respected?  Will this deal be beneficial to the average Canadian?

These are questions we must leave to the federal government to decide, and I'm not too sure either as to whether it will get passed or not.  What I do think we should do is this;  If this was our water we were selling, under these very same conditions and promises, would it be good for us?  In a world reliant on fossil fuels, and one where we will probably depend on it for years to come, it is essential we do exactly what the Chinese are doing and ensure we have a reliable supply to fossil fuels while we work on solutions and alternatives which are beneficial to everyone.  And this doesn't only mean we protect our oil reserves and ensure they remain in Canadian hands, we ensure the necessary infrastructure is in place to refine, ship and distribute it.  Whatever the government decides, I hope it's in the interests of EVERY Canadian and not jsut a select few people.  

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