Taking Over Nexen

The China National Offshore Oil Corporation’s (CNOOC) bid to acquire Nexen is a large and complex proposal. Canadians should call for a more thorough and transparent review than other foreign takeovers have received under the Investment Canada Act. A preliminary outline of possible costs and benefits follows.

The Downside: Chinese Consumer Interests

A company like Nexen aims to sell oil and gas for the highest possible prices to maximize profits. The risk is that CNOOC, which is owned by the government of a large energy consumer, also has an interest in supplying these resources to the Chinese economy at lower prices.

There is nothing nefarious about a publicly-owned enterprise striking a balance between profits and consumer interests. Canadian provincial electric utilities do the same thing by selling power to their home consumers below market prices.

However, Canada’s predominant interest in the oil and gas industry is as a producer. Lower export prices would subtract from our trade balance, resource royalties and tax revenue.

Of course, if CNOOC started shipping conventional oil from Canada to China for less than the world price, that might be relatively easy to detect and remedy. But there is no established “market price” for trans-Pacific shipments of bitumen or liquified natural gas. By acquiring Nexen, CNOOC may gain leverage to influence those prices downward.

My 2005 paper, “Crouching Beaver, Hidden Dragon: Policy Implications of Chinese Investment in Canadian Resource Companies,” explored these issues in greater detail.

The Upside: Head Office and Investment

The promised benefits for Canada are CNOOC making Calgary its North American headquarters and investing more in Canadian resource development. However, CNOOC’s chief executive has said that “the company is not planning to increase the number of employees in Calgary” and “will only commit to maintaining Nexen’s current capital expenditure plan.”

That is apparently good enough for the Alberta government, which is publicly applauding the deal. However, it’s worth noting the uneven distribution of costs and benefits across provinces. Alberta is the potential beneficiary of having CNOOC’s North American operations headquartered in Calgary.

But as I point out in today’s Globe and Mail, Nexen extracts a substantial portion of its Canadian natural gas from Saskatchewan. It is also expanding shale-gas extraction in BC. Neither Saskatchewan nor BC would benefit from a possibly larger head office in Calgary, but both would be exposed to the risk of CNOOC underpricing their resources. Saskatchewan’s government has been conspicuously silent on the proposed takeover.

Letter to the Editor (Page A10):

Your editorial (Nexen Takeover Must Be Good For Canada – July 24) states that the resources “belong to the Crown in the right of Alberta.” In fact, the company has as many wells in Saskatchewan as Alberta.

In particular, Nexen acquired the former SaskOil after this Crown corporation was privatized. The resources still belong to the people of Saskatchewan, but ownership of the production assets has drifted from the provincial government to a foreign government – perhaps not what the apostles of “privatization” intended.

Erin Weir, Economist, United Steelworkers

UPDATE (July 26): Interviewed in today’s Regina Leader-Post (page D1) and Saskatoon StarPhoenix (page C5).

UPDATE (July 27): Appeared on last night’s Lang & O’Leary Exchange.