CNOOC-Nexen deal seen helping China’s South China Sea thrust

Posted on August 3, 2012


The $15 billion bid by China National Offshore Oil Corp (CNOOC) to buy Canada’s Nexen, Inc will help the Chinese state giant gain the expertise to drill in deep, disputed waters of the South China Sea without rel ying on ris k-averse foreign firms.

The acquisition of Nexen — which faces reviews by both the Canadian and U.S. governments — will not be an instant game changer, however, because deepwater technology will take years for China to master, say experts on China’s energy sector.

CNOOC, parent of Hong Kong-listed CNOOC Ltd, has emerged as a key component of China’s strategy to bolster its claims to nearly the entire South China Sea. The vast body of water, believed to hold rich oil and gas reserves, is also claimed in part by Vietnam, the Philippines, Taiwan, Brunei and Malaysia.

China’s policy has also included diplomatic pressure aimed at keeping the 10-member Association of South East Asian Nations (ASEAN) divided over the sea dispute; the establishment of a city government and military garrison at Sansha city in the Paracel Islands; and more assertive patrols of cont ested seas .

The intensifying squabble in waters that carry $5 trillion in annual trade drew a statement of concern on Thursday from Washington, which officially is neutral on the dispute.

“The nations of the region should work collaboratively and diplomatically to resolve disputes without coercion, without intimidation, without threats, and without the use of force,” said Patrick Ventrell, a State Department spokesman.

CNOOC become more deeply involved in China’s South China Sea strategy in late June when it invited foreign firms to bid on oil blocks that overlap territory being explored by Vietnam. Earlier CNOOC unveiled the Haiyang Shiyou (Offshore Oil) 981 rig, China’s first domestically made ultra-deepwater rig.

The CNOOC tender drew a protest from rival Vietnam’s Petrovietnam, and most analysts expect that international majors — private Western firms who monopolize the technology to drill in deeper water — will shy away from investing in contested waters.

“They may actually go so far as to buy the bids themselves to see what the Chinese are up to, but I think companies are very, very leery of getting involved in areas that are so hotly disputed,” said Bonnie Glaser, a China expert at the Center for Strategic and International Studies, a Washington think tank.

“This is more a statement that the Chinese are making, rather than a serious expectation that there will be any real international bidding,” she told reporters in a conference call.

This is where the Nexen deal offers China the deepwater drilling know-how to move from the shallow or mid-depth waters, where CNOOC is already drilling, to deeper waters in areas where its claims overlap with Vietnam and others.

“There’s plenty of deep water to be explored, but a lot of it has been off-limits because of the disputes,” said Mikkal Herberg, research director of the Energy Security Program at the National Bureau of Asian Research, a Seattle institute.

“They think about this very specifically — having their own capabilities so they can drill where they want without international partners,” he said of China’s oil industry.

Nexen, Canada’s 10th biggest oil company, has oil sands operations in the Canadian province of Alberta, shale gas in the province of British Columbia and extensive exploration and production holdings in the North Sea, Gulf of Mexico and offshore West Africa.

With the Nexen acquisition comes deepwater fields in the Gulf of Mexico that would bring with it expertise in managing complex operations and technology that, once assimilated, would extend CNO OC’s rea ch in the South China Sea.

The deal would give CNOOC — an $89 billion company with oil and gas assets in Indonesia, Iraq, Australia, Africa, North and South America, as well as China — “normal, competitive technology that all major oil companies need … with an overlay of Beijing strategic interest,” said Herberg.

The capacity to set up and maintain stable rigs in 5,000-10,000 feet of ocean water and drill 10,000-18,000 feet deep in sediment, would not come overnight, experts said.

“Unlike refining and petrochemical technology, you can’t simply just buy this technology (and use it). If you do not have experience you will have problems,” said Kang Wu, managing director of consultancy FACTS Global Energy in Honolulu.

“They still need foreign technologies — that’s the basic status. If they want to acquire everything they still need five or ten more years,” he added.

Herberg, a 20-year veteran of the oil industry, noted that the Western majors have been going deeper and deeper over 15 to 20 years of trying.

“Getting a couple of these production rigs is not going to leapfrog (China) into a superior technology position. This is a slow, gradual position,” he said.


China, Canada and Oil: A Complicated Calculus

China National Offshore Oil Corporation’s (CNOOC) $15.1 billion bid for Canada’s Nexen energy, a Calgary-based firm with oil assets in the Gulf of Mexico, the North Sea, and in Alberta’s oil sands, is highlighting the pros and cons of State Owned Enterprises (SOEs) investing in North American resources.

Chinese SOEs have long been major players in resource developments in Africa and in underdeveloped countries on China’s periphery like Myanmar and Laos, where their financial and political heft has, more or less, given them carte blanche to do as they please. Their forays into North America has been much less successful, however, with Minmetals move to acquire Canadian mining giant Noranda in 2004 having been defeated as a result of strong public opposition, negative reactions (it was eventually dropped) and CNOOC’s bid for Unocal meeting a similar fate the very next year. But China’s SOEs have learned their lessons and are taking a more sophisticated approach, acquiring minority holdings in several oil sands producers, and preparing the political ground better than in the past.

CNOOC’s bid is helped by the fact that Canadian Prime Minister Harper has been actively courting Chinese investment and markets for Canadian oil and gas. Encouraging Chinese investment in Canada was a central feature of Harper’s last visit to China in February, and since the rejection of the Keystone XL pipeline by the Obama Administration, a facility that would have significantly increased Canadian oil exports to the US, Harper has made a point of saying that Canada is ready to sell its oil and gas to those who want to buy it, a not so subtle invitation to Beijing and other Asian nations.

The Canadian oil industry seems to be generally onside with the acquisition although there are those who caution against allowing SOEs to expand their role. The provincial government in Alberta has likewise shown no sign of opposition, leaving it to the federal government in Ottawa to make the call as to whether or not this investment will bring “net benefit” to Canada. Since the rules for “net benefit” have not been clearly defined, the government has ample scope to either approve or reject CNOOC’s bid, depending on its political calculations. Given Mr. Harper’s overtures to the Chinese, as well as the possibility of the two countries launching free trade negotiations at some point in the future, the chances are good that the takeover will be approved, probably subject to some undertakings regarding maintenance of substantial operations at Nexen’s operations in Calgary.  Some commentators have called for Canada to use China’s interest in acquiring more oil, gas and mineral assets in Canada as a negotiating chip in the forthcoming FTA talks, should they be launched.

The bid could face obstacles in the U.S., however, given that Nexen has holdings in the Gulf of Mexico. U.S. Senator Chuck Schumer, a longtime China skeptic, has signaled that he has concerns over Chinese acquisition of U.S. resources and wants the deal reviewed by the same process that persuaded the Chinese to withdraw their Unocal offer. A decision by the U.S. to disallow CNOOC’s acquisition of the Gulf of Mexico assets would force Nexen to divest them.

Meanwhile, all is not smooth sailing for a proposed Northern Gateway pipeline that will have to be built from the oil sands in Alberta through the neighboring province of British Columbia (BC), to a planned terminal on the north Pacific coast, if Canadian oil is to be moved to China or elsewhere throughout Asia. Not only are most aboriginal groups, across whose traditional territories that pipeline will have to cross, opposed, but the BC government has laid out five conditions that it says will have to be met if it is to give its approvals for the pipeline and tanker terminal. One of these is that BC receive a greater share of the benefits of the project, a demand that Alberta premier Alison Redford has flatly rejected. While this inter-provincial standoff continues, there are many other hurdles that must be overcome before Alberta oil finds its way to the west coast, and from there onto China-bound tankers.

None of this, however, will prevent Beijing from, acting through CNOOC, Sinopec, and other SOEs, using its deep pockets to obtain greater access and control over energy and natural resources in North America, especially in Canada where the political dynamic is more favorable to Chinese interests than in the United States.

The Nexen acquisition, if approved, is likely to be the harbinger of more forays by Chinese SOEs into Canada.

Hugh L. Stephens