By G. Bin Zhao
Unlike CNOOC’s failed bid in 2005 to buy Unocal, its proposal to acquire
Nexen has considerably more chance of success, and, on the whole, a
deal would benefit both China and Canada.
China National Offshore Oil Corp announced last month that it was proposing to buy Canada-based Nexen in a US$15 billion deal. This caused quite a stir in Canada, with the domestic mainstream media reporting it widely. By contrast, the response of the Chinese media and public appears rather muted.
Perhaps the Chinese have become insensitive to the ambition of their rich and powerful state-owned enterprises to conquer the world, or perhaps the torrential rains in Beijing the previous weekend gave people a more sober view of national strength; they recognise perhaps that there is a need to do more locally to build a powerful nation. So far, the mainstream attitude in Canada’s financial and media sectors on the acquisition and the prospects for government approval is optimistic, but it is difficult to judge whether the conservative government, led by Prime Minister Stephen Harper, will prevent the sale or not. After all, the Canadian government has many
considerations when making its decision. First, Canada determines whether or not it should approve a large foreign acquisition based on the important but ambiguous “net benefit” principle, which gives the Harper government plenty of room for interpretation.
In 2010, the Canadian government blocked BHP Billiton’s attempt to acquire the fertiliser company Potash Corporation at a price of US$40 billion. The reason was that it could not be demonstrated that there would be practical benefits for Canada. However, in contrast to BHP Billiton’s hostile acquisition, which faced significant opposition from the beginning, thereby making it easy for the Canadian federal government to block the transaction, CNOOC has received active cooperation from Nexen. It is expected that at least the provincial government will not oppose the deal.
Second, whether the acquisition is approved in one country is also determined by economic and political interests, not to mention other factors. The high-priced proposal by CNOOC to acquire Nexen has won the support of shareholders and the management team. CNOOC has also promised to establish Calgary as the head office for its North and Central American operations, to retain the current management team and employees, to increase future capital investment, and to list its common shares on the Toronto Stock Exchange. CNOOC has clearly tried to make its offer of economic benefits attractive, but it is unclear whether these concessions will have an impact on political factors.
Third, Nexen in Canada and Unocal in the United States are both important energy companies, so we have to ask, since the United States said no to CNOOC’s bid to take over Unocal in 2005, why would Canada agree to a similar proposal? Although CNOOC has drawn some lessons from its failed attempt to acquire Unocal, and its strategies have definitely improved, from the Canadian perspective there is no essential difference between the two attempts.
Perhaps the benefits that CNOOC, as a stateowned company, can bring to Nexen and Canada are worth considering. These are benefits in addition to financial and market advantages. Since 2009, Chinese companies have invested about C$16 billion (HK$124 billion) in Canada, a figure which is quite small compared to the proposed offer of US$15 billion for Nexen.
China is Canada’s second-largest trading partner and third-largest export market; trade volume between the two countries reached US$47.5 billion in 2011; both bilateral trade and investment have developed very quickly in recent years. In January, the US formally rejected an oil pipeline construction project proposed by Canada, which was expected to export 700,000 barrels of Canadian crude oil to the United States each day, an incident which caused a great deal of shock in Canada. In early February, Harper visited China, and he indicated that strengthened co-operation in oil and gas has become an important option for Canada after hitting the wall in the US.
In the current period of global economic malaise, the Canadian economy is very stable compared with that of other developed countries’, but its resource- and energy-based economic structure faces severe challenges due to falling demand. In this context, the huge foreign investment by CNOOC in its bid for Nexen should be attractive to the Canadian government and the energy industry.
If the Harper government approves the acquisition, the deal will have great significance. Not only will it encourage Chinese enterprises to continue investing in Canada, promoting Canadian economic and trade co-operation, but it will also have far-reaching implications for long-term development of a strategic Sino- Canadian partnership. Roger Martin, Dean of Rotman School of Management at the University of Toronto, has written that if Canada approves the acquisition of Nexen, to be fair, the Canadian acquisition of equivalent Chinese enterprises should also be automatically approved.
I have previously called on Ottawa to strengthen financial co-operation with Beijing, allowing direct exchange between the Chinese renminbi and the Canadian dollar, and gradually establishing an offshore renminbi market in Toronto. Canada has some of the world’s most robust large banks and financial institutions, and China may consider appropriately relaxing business development controls for Canadian financial institutions in China and supporting the development of offshore renminbi business in Toronto.
G. Bin Zhao is Executive Editor at China’s Economy & Policy