Long way to go for CNOOC after Nexen takeover approval

As Chinese oil conglomerate China National Offshore Oil Corporation (CNOOC) Ltd. prepares to move ahead with the country's biggest ever overseas acquisition, it faces as many challenges as gains.

The Canadian government on Friday approved CNOOC's 15.1 billion-U.S. dollar bid to buy Calgary-based oil and gas producer Nexen Inc., paving the way for a final completion of the long-debated deal.

The takeover will support CNOOC's international drive and diversify its business but also contains political and financial risks, experts said.

The deal is "of strategic importance" to CNOOC's international expansion, said Wang Zhen, an energy expert at the Academy of Chinese Energy Strategy.

CNOOC has said acquiring Nexen's assets will strengthen its presence in Canada, Nigeria and the Gulf of Mexico and allow it to enter the oil- and gas-rich North Sea regions.

Lin Boqiang, a researcher at the Xiamen-based China Center for Energy Economic Research, said the purchase will make up for CNOOC's weakness in onshore explorations and enhance its oil sands and shale gas operations.

As China's largest offshore oil producer, CNOOC operates mainly in seas off China but has assets in Asia, Africa, North America, South America and Oceania, according to company information.

Nexen runs oil sands and shale gas projects in western Canada and conducts conventional explorations primarily in the British North Sea, offshore West Africa and the Gulf of Mexico.

The acquisition of Nexen needs further approvals by other governments involved, including the United States, but even a U.S. rejection, which looks unlikely to happen, will not affect the completion of the overall deal, Wang said.

CNOOC failed to win U.S. lawmakers' support for its 18.5 billion-U.S. dollar bid to buy U.S. oil producer Unocal over national security concerns in 2005.

The state oil giant's move in Canada this time also triggered debates on whether Canadian oil and gas reserves should fall under foreign state control.

Investors and business people supported the deal, which they said will benefit Canada's oil and gas industry by giving it the much-needed capital.

The acquisition proposal was approved by a majority of Nexen shareholders in September, nearly two months after it was brought forward by CNOOC.

However, even after the purchase, CNOOC may still encounter political troubles in Europe for Nexen's assets there, said Shen Yan, general manager of merger and acquisition at CCID Consulting Co., Ltd..

Moreover, CNOOC has somewhat overbid for the deal and has to take over 4.3 billion U.S. dollars of debts from Nexen, making profitability a key aspect to improve after the transaction, Shen said.

The Canadian company saw net income decrease to 59 million U.S. dollars in the third quarter of this year, 85 percent down from the previous quarter, with lower production and higher operating costs, according to its quarterly results.

Future oil price fluctuations may also impact CNOOC's profits. Wang said financially-troubled energy firms being acquired and getting capital will in the long term benefit global energy supply and reduce oil prices.

For China's state oil companies, it remains politically risky to "go global" as their state ownership often raise concerns over national security, said Wang.

Right after the approval, Canadian Prime Minister Stephen Harper told a press conference that the CNOOC-Nexen deal should be viewed as "the end" rather than the "beginning of a trend."

He said his government has "determined that foreign state control of oil sands development has reached the point at which further such foreign state control would not be of net benefit to Canada."

Shen advised encouraging more private firms to engage in overseas acquisitions, especially those of resources firms, to avoid the hassles.

China's leading oil and gas developers spent nearly 20 billion U.S. dollars in 2011 on the purchase of overseas assets, compared with 150 billion U.S. dollars spent worldwide in this sector, according to a report by the Economic and Technology Research Institute of the China National Petroleum Corp. in February.