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CNOOC answers the question: 'What's next?'

By Zhang Yuwei | China Daily | Updated: 2013-04-16 07:58

CNOOC answers the question: 'What's next?'

From left: CNOOC CEO Li Fanrong, Nexen CEO Kevin Reinhart and CNOOC Chairman Wang Yilin celebrate the signing of the $15.1 billion deal in Calgary. Provided to China Daily

The acquisition of Canada-based Nexen is a big step to diversify geographically while boosting oil and gas reserves, reports Zhang Yuwei from New York.

In an auditorium in late February at the headquarters of oil and gas company Nexen Inc in Calgary, Alberta, two Chinese oil company executives sat on the stage. In front of them, more than 1,000 people, who the day before were employed by Nexen. Now they worked for the two men on the stage who oversee the third-largest oil company in China. And the question on their minds was, "What's next?"

The two CNOOC Ltd executives were Chairman Wang Yilin and CEO Li Fanrong.

To the gathered employees, about one-third of Nexen's workforce, Li gave them answers: Nexen will remain autonomous; CNOOC will keep Nexen's head office in Calgary, retain the some 3,000 employees at their current salaries, list shares on the Toronto Stock Exchange and continue Nexen's community and charitable programs.

The meeting was the first introductory session by CNOOC (China National Offshore Oil Corp) for employees from Nexen, which became a wholly owned subsidiary of CNOOC in a $15.1 billion deal - the largest overseas acquisition by a Chinese company ever.

"It was well received," said a Nexen employee who attended the town-hall session, describing it as "exciting and interesting."

Industry experts see the Nexen deal as a major step by CNOOC to diversify geographically, which Chinese oil and gas companies have been doing since 2009 by purchasing assets in the Middle East, North America, Latin America, Africa and Asia.

The acquisition will increase CNOOC's oil production by about 20 percent, which was between 341 million and 343 million barrels oil equivalent in 2012, and reserves by 30 percent, said CEO Li.

"The move certainly helps CNOOC become more geographically diversified," said John Licata, founder and chief energy strategist at New York-based Blue Phoenix Inc, an independent energy-research company.

"But now that the company gains a footprint in new areas, management needs to explore how best to build upon existing relationships to further enhance and foster even more business opportunities in these regions."

"CNOOC has the opportunity to roll up its sleeves and maximize Nexen's ability to break down heavy oil through technological advancement," he said.

"CNOOC needs to beef up exposure to clean fuels, especially since coal is still rather dominant in China, so while the Nexen deal makes sense, the company needs to not make the same mistakes as the US and become too focused on one or two energy sources."

The largest overseas acquisition by a Chinese company was first announced in July. Canadian regulators approved it in December.

In February, the Committee on Foreign Investment in the United States (CFIUS), which reviews sensitive deals by foreign investors in the country, signed off on the deal's part involving Nexen's assets in the Gulf of Mexico.

"The one-year acquisition process was filled with hardships," CNOOC Chairman Wang recently told the Shanghai Securities News.

"Its success has big significance and value to the company."

Kevin Reinhart, an 18-year Nexen veteran who had served as interim CEO for the company since January 2013, remains in charge. Nexen formed a new board chaired by Li, and with members from both companies, including Reinhart.

CNOOC's keeping Nexen autonomous is one of the main reasons the company's workers aren't anxious about the takeover, said Reinhart.

Nexen's oil-sands assets in Canada, the United Kingdom, the North Sea and offshore West Africa will be managed from its Calgary headquarters, as will about $8 billion worth of CNOOC's North and Central American assets, said Patti Lewis, Nexen's spokeswoman.

"For Nexen, it means immediate growth," said Lewis. The Chinese company's financial backing and other support will allow Nexen to "realize the full potential of its opportunities."

"Both companies share many of the same goals and values," she said. "I think our two cultures will help to reinforce each other and make the combined company an even better one."

CNOOC will seek to retain Nexen's current management team and employees and will provide compensation that is not less than what it was before the transaction, Lewis said of the commitments.

The Chinese offshore oil producer also has agreed to build on Nexen's existing community and charitable programs, particularly to First Nations (Canada's indigenous peoples) and local communities.

CNOOC - the world's largest dedicated exploration and production company by market capitalization - will absorb Nexen's $4.3 billion debt.

CNOOC's CEO Li said the deal is worth the price.

"We did not overpay for it, but, rather, we paid the right price," Li told the Shanghai Securities News, adding that the asset is in accordance with CNOOC's "long-term strategy, and the price conforms to the level of the industry."

The two companies had formed a relationship before they announced the deal. In 2011, CNOOC acquired Opti Canada Inc, Nexen's partner in the Long Lake oil-sands project. That year, the two set up a joint venture in the Gulf of Mexico, which gave CNOOC a working interest in up to six deep-water exploration wells in the Gulf.

CNOOC's Li said following the Nexen acquisition that the company will focus on developing the "full potential of Nexen's resources" and will refrain from any big deals in the oil patch "in the very short term". He said that CNOOC won't develop shale gas in the near future as some speculated.

Canada gets fund

Canada has been a popular investment destination for major Chinese oil and gas companies. Until the Nexen deal, CNOOC had invested $2.7 billion in Canada since 2005.

With its rich natural resources, the country has attracted an average of $12 billion annually in the past three years, according to the Bank of Montreal. With the Nexen deal, China's investment in Canada will have surpassed $25 billion in 2012, according to the bank, making China the fifth-largest foreign investor.

With a population of slightly more than 1 million, Calgary, situated on Bow River in the south of Alberta, has had many foreign investments in oil and gas projects in particular.

In 2011, Beijing-based Sinopec (China Petroleum and Chemical Corp) bought Calgary-based Daylight Energy Ltd for $2.2 billion. Last year, PetroChina became the first Chinese State-owned firm to wholly own Calgary-based Athabasca Oil Sands Corp for $674 million.

Recently, Sunshine Oilsands Ltd signed an agreement with China Oilfield Services Ltd for cooperation in developing multiple thermal fluid oil-sands exploration technology in Canada.

John Zahary, president and CEO of Calgary-based Sunshine Oilsands, the first Canadian oil-sands listing on the Hong Kong Stock Exchange, said while the CNOOC acquisition of Nexen is big, "it hasn't completely changed things".

"A significant majority of Nexen's assets are outside Canada despite the fact that Nexen is headquartered in Canada," he said. "Thus, the deal doesn't even have as much impact on Canadian oil industry as some smaller deals where the assets are in Canada."

From his office window, Zahary can see Nexen headquarters. After some recent exchanges with CNOOC executives at a local event, he described his new neighbor as "very friendly and eager to be part of the community".

Most of the Chinese investment has come from State-owned enterprises into Canada's natural resource projects, and it has drawn scrutiny and criticism from members of the governing Conservative Party and local environmentalists.

The CNOOC-Nexen deal took about five months for the government of Prime Minister Stephen Harper to review before approving it in December. While recognizing the importance of foreign investment in the country's economy, Harper described the decision as "not the beginning of a trend, but rather the end of a trend".

Some see the deal as a boost for Sino-Canada economic ties.

"The Canadian government approval is significant in that it shows an understanding of the importance of being able to attract capital has in the industry," said Zahary of Sunshine Oilsands.

Peter Harder, president of the Canada China Business Council, which focuses on facilitating bilateral trade and investment, said CNOOC's investment signals the "maturing" of the relationship of the two countries. "This transaction demonstrates a high level of bilateral economic cooperation and speaks to the important role of foreign investment in Canada's energy strategy and the development of Alberta's oil sands," said Harder.

The examination of the acquisition by CFIUS, the US committee that reviews sensitive deals by foreign investors, had sparked speculation among industry experts of a possible denial, but the committee approved it last month.

Many related it to CNOOC's failed attempt for an $18.5 billion bid for California-based energy firm Unocal Corp.

"CFIUS views every transaction separately from a national security perspective and it would not be reasonable to extrapolate from this clearance that another attempt by CNOOC to acquire Unocal (which failed in 2005) would now be approved," said Carl Valenstein, a Washington-based partner with the law firm Bingham McCutchen LLP.

"We are definitely seeing increased Chinese investment in the US, but Chinese investments in critical infrastructure and technology (telecommunications and energy in particular) will continue to be carefully scrutinized by CFIUS and other US agencies," Valenstein added.

Actions defended

CNOOC's Li defended the company's investment - and those by China's State-owned enterprises - early this month at a global energy conference in Houston.

"We are supposedly doing this because we want to haul every barrel of oil back to China, or have other agendas rather than commercial reasons," the CEO said in his first public speech since signing the Nexen deal. "Everyone with knowledge of the global market system can easily figure out that is not true, simply because this notion does not make any commercial sense."

"The only difference with our international peers is I speak better Chinese than the rest of my partners," Li said.

Alberta, where Calgary is located, has some of the largest known reserves of recoverable oil sands in the world, accounting for about 98 percent of Canada's oil reserves, ranking as the world's No 3 in proven crude-oil reserves, according to the Alberta government.

There were 127 operating oil-sands projects in Alberta as of January, five of which are mining.

Ed Whittingham, executive director of the Pembina Institute, a Canadian think-tank that advocates sustainable energy solutions, said that his organization will wait at least one or two years to see what actions will be taken by CNOOC.

Whittingham said Nexen's being "no leader in environmental performance" concerns him and his environmental peers, who believe the oil sands in Canada are "quickly becoming consolidated".

"We don't have any opposition to foreign companies acquiring Canadian ones in order to operate in the oil sands...(but) Any foreign investors should do more than just relying on compliance," he said.

"We need oil-sands operators to go beyond what's required of them by law, go beyond compliance, (to) the truly improved environmental performance, whether it be on land basis, water basis and air basis or climate basis," said Whittingham.

Licata, the New York based energy strategist, said he is encouraged by CNOOC New Energy Investment Co Ltd, a subsidiary founded in 2007 which engages in the development and utilization of renewable and alternative energies, citing it is making "big strides" in the advanced lithium battery and wind markets.

"I would like to see that expand as well as for the company to communicate those alternative energy initiatives better to investors," he said.

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