CNOOC’s Nexen Bid Doesn’t Pass the ‘Net Benefit’ Smell Test

China National Offshore Oil Company bid 15.1 Billion dollars last week for Canada’s eight largest oil producer Nexen. The friendly bid offers a 60% premium on Nexen’s pre-offer stock price and was further sweetened with assurances of a new head office for the Chinese company’s North and Central American divisions in Toronto as well as an eventual listing of the company on the Toronto Stock Exchange.

Much of the talk surrounding the deal has had to do with the possibility that the deal may be blocked under the Canada Investment Act, which states that all foreign investment over 300 million must pass a ‘net benefit’ test before being approved. Such discretionary government powers have only been used twice to block deals in the past. MacDonal Dettwiler and Associates, a Canadian satellite-imaging firm, was the first firm to be saved from takeover based on national security concerns. BHP Billiton’s hostile takeover bid for Potash Corp of Saskatchewan was blocked by what can only be described as economic nationalism.

After an initial outcry from both Potash Corp’s management and the public in Saskatchewan BHP sweetened it’s then 39 Billion dollar offer by promising to continue any pre-existing community investments and reneging any potential tax breaks it would be eligible for following the takeover. That wasn’t enough to convince the political establishment in Regina.  For some reason the public outcry against the CNOOC bid is much more tame this time around.

Maybe the facts that Nexen is only the eight largest Canadian oil producer and that half its producing assets are foreign makes the pill easier to swallow for corporate nationalists. Also, assurances of heightened employment levels thanks to the new head office might endear CNOOC to Canada’s corporate and political elite. This time however Canadian corporate cheerleaders may actually have something tangible to worry about.

BHP Billiton is a commercially focused enterprise bent on squeezing out profit from all its assets. With BHP already building the world’s largest potash mine in Saskatchewan, any corporate or engineering synergies the company could have squeezed out of the takeover would simply have led to more labour productivity gains in the short run and more corporate profits to tax in the long run. The profit motive and BHP’s long track record in commercial ventures assured Canada both the those benefits. CNOOC’s bid for Nexen insures neither.

CNOOC has no efficiencies or productivity gains to offer, as it has never operated a steam assisted gravity drainage mine in the oil sands before. As a matter of fact we have no assurances that the company is a commercially minded institution as the Chinese have a longer track record of promoting its political interests than its commercial interests. A small example for the record is China’s financing of a new National Stadium in Costa Rica for no other reason but to make buddy buddy with the political class there. No one in Canada really understands what motivates the Politburo in Beijing, and since CNOOC is controlled by that same Politburo, why should Canada trust such sensitive and strategic assets such as the oil sands to them? As another example of the shadiness of China’s intentions, it is reported by Canadian security services that there may be as many as a thousand Chinese corporate spies passing on industrial secrets from Canada to China. China’s aggressive self-centeredness doesn’t stop there.

China has long had a policy of trying to secure energy assets to help feed its industrial base back home. In almost every commodity market China is one of the largest players, ever attempting to ratchet up the best deal so that its manufacturing base can wipe out the international competition. As far as we are concerned China may yet be willing to operate natural resource companies at a loss in order to bump up its local industries profitability. This has long been the case of the Chinese steel sector operating at a loss to bolster Chinese manufacturing competitiveness.

With such a history and the potential for direct trade in oil between China and the oil sands should Enbridge’s Northern Gateway get approval, it isn’t far fetched to imagine Chinese energy traders attempting to manipulate prices so as to reduce profits from their Canadian divisions, thus contributing less taxes to Canada and more profits to China. While this scenario is speculative many industry insiders wouldn’t be surprised to hear it.

There also remains the issue of environmental record. Chinese companies aren’t especially well known for green track records. Canada’s environment is prized by its citizens, and it is doubtful that Canadians would really trust a government backed company from the worst polluting country in the world.

Whether it be for national security reasons, environmental concerns, Canada’s commercial and economic interests, it would seem that everything points towards the necessity of prohibiting foreign government backed companies from buying up our strategic national assets. Canada did a great disservice to itself when it refused BHP Billiton’s bid for Potash Corp. We let our petty corporate nationalism get in the way of a deal that would have attracted financial and human capital to our country. We smudged our image as a trading nation open for business. Today for the sake of protecting that image we have spoiled, we are readying ourselves to accept a bid that is short on benefits and long on potential risks.

Canada already looks like the scared kid unwilling to dip more than a toe in the swimming pool of big business, and we may look it more so after blocking CNOOC. If the reasons for such a use of the ‘net benefits’ test are properly articulated and China is called out for its only half hearted adoption of capitalism, everyone outside of Beijing will understand and accept such a decision.