Editorial Comment

Nexen Sale

I’m no expert on high finance; however, one doesn’t need to be Warren Buffet to understand a bad deal from a good one. From my perspective, the deal to sell Nexen Oil to the China National Offshore Oil Corporation, (CNOOC) is definitely bad for Canada. Having said that, however, I would guess that, since the offer is over 60% richer than the company is valued at, it will ultimately gain the approval of the many governments that have a say in it. Money speaks extremely loudly in the corridors of power at the best of times. With the planet in the grip of a world-wide economic funk, having a $15 billion cash injection into the energy sector for the affected governments doesn’t just speak, it positively shouts. Even NDP leader Tom Mulcair didn’t shoot the purchase concept down out of hand. His main concern appeared to be allegations of insider trading which has already dogged the sale. A number of Hong Kong businessmen have already had their assets frozen as a result of making large purchases of Nexen stock immediately prior to the Chinese offer and then selling it  all at the premium price.
 With Nexen being offered at $1.60 on the dollar, it may seem like a deal far too rich to pass up, but here are some of the reasons we should all view this deal with suspicion.
 First is the concern that the three Chinese companies, CNOOC, Sinopec and CNCP, who are involved in a veritable world-wide buying spree of energy assets, are not private businesses operating on a level playing field with the competition. These companies have the financial might of the Chinese treasury behind them. Although it will boost the price of virtually all oil companies as a result, it may over-price them, so only those willing to pay an extra 60% will be able to afford them; in other words, only the Chinese government. They have far more money than even the oil companies.
 Another problem with selling this company to a government, instead of to another company, is that in the event of legal disputes involving sovereign nations, as opposed to privately owned foreign companies, conflict resolution mechanisms are very different. As an extension of the Chinese government, their oil “companies” aren’t bounded by the same laws of our land that govern every other energy firm; such things as performance requirements and protection from regulatory expropriation to name but two. Instead of being under the watchful eye of the Canadian legal system, these companies, being owned by a foreign power, would be under the jurisdiction of an investor-state dispute settlement mechanism that is far more lenient than what every other company faces.
 Another concern with the Nexen sale is China will have a huge stake in, not just our own Alberta oil sands, but also US deep water fields in the Gulf of Mexico, Britain’s North Sea oil apparatus, in addition to conventional oil and shale resources in West Africa. Although the Chinese are happy to pay top dollar for the precious oil from these productive sites; driving their insatiable, growing oil demand, but more importantly, they are buying the technology and expertise to learn how to exploit their own sizeable shale-gas and offshore oil deposits. Oil industry insiders have claimed the know-how is even more valuable than the oil and gas reserves they’ve been aggressively acquiring. Besides cutting edge technologies, though, China will end up with something else near and dear to them; profits.
 Many speculate the Chinese will continue selling oil to the same customers Nexen had been, rather than diverting it to their own supply channels. Given the price of oil is set for all countries; it makes economic sense to source it from your closest supplier. With transportation costs already significant, China will only divert oil that is feasible to do so.
 Many industry analysts claim a major negative to the deal is the lack of reciprocity. The Chinese would never let another nation own a stake in CNOOC, for example. The Chinese are very careful about making sure foreign investors in their companies never have controlling interest in those businesses. Even the poster boy for capitalism, the US, has limited CNOOC and Sinopec to a maximum 20% in recent acquisitions of shale-gas interests in Colorado and Wyoming. These US purchases were a much more subtle play in the American market than their failed attempt to buy the US oil company Unical for $18.5 Billion in 2005. That sale was ultimately blocked by the State of California for some of the same reasons given for blocking it here.
 Yes, Canadians want to profit from our natural resources and attract foreign investment. It’s vital to our economy. What Canadians don’t want is to be bought up bit by bit by another nation. Placing limits on foreign acquisitions for essential resources to less than a majority stake is not announcing to the world we are closed for business. What we are telling the world is that we value our energy security too much to sell off controlling interest in companies in that sector to other nations.
 There is another issue, too, that must be mentioned and that’s the poor optics of the sale to Canadians. Besides the arguments already listed, Canadians are generally distrustful of doing business with China. We are uncomfortable about bargaining with a government that demonstrates wholesale indifference to human rights abuses, environmental mismanagement and trademark invasion. Much discussed conjecture of state-sponsored, hi-tech doping of Chinese Olympic athletes doesn’t help us feel this is a trustworthy nation, either. Should we make deals with a government that props up the leaders of both Syria and North Korea; effectively allowing their citizens to die needlessly? Except for our love of their money, we probably wouldn’t consider the deal at all.

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