U.S. Deems Chinese Canadian Energy Purchase National Security Risk

By now, the world is well aware of China's insatiable global search for reliable energy resources to feed its seemingly unstoppable economy. From Sudan to Canada, Chinese energy companies are snapping up assets in order to diversify the country's resources for hydrocarbons.

But those efforts in Canada may be having an unintended "blowback" in the U.S.

What's the problem?

China National Offshore Oil Corp.'s proposed buyout of Canada's Nexen Inc. Nexen Inc., an oil and gas company based in Calgary, Alberta, has worldwide operations including the North Sea, Colombia, the Gulf of Mexico, and Alberta's Athabasca Oil Sands.

State-owned CNOOC Ltd. is encountering a rising political backlash in the United States over its proposed takeover of Nexen Inc. because of Nexen Inc.'s leases in American offshore Gulf of Mexico waters.

The story dates back to July, when CNOOC announced a contract according to which it would purchase Nexen Inc., paying roughly $15.1 billion would for Nexen Inc.'s common and preferred shares, while Nexen Inc.'s current debt of approximately $4.3 billion would remain outstanding.

Why is Congress so concerned?

Well, quite aside from citing "national security," given that China-bashing is currently a hot topic in Washington because of the upcoming presidential election, the U.S. government issued some of Nexen Inc.'s leases under a mid-1990s federal incentive program under the Bush administration Deep Water Royalty Relief Act that offered royalty-free production in exchange for drilling in deep Gulf of Mexico waters.

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During a recent interview with a Canadian newspaper, former U.S. ambassador to Canada Gordon Giffin, a member of the advisory board of the Canada-U.S. Business Council and who serves on several Canadian corporate boards, including Canadian Natural Resources, stated simply, "I think it is extremely unlikely that the U.S. government would approve the transfer of a zero-royalty lease to another government."

Giffin made his observations following the Democratic House of Representatives member from Massachusetts Edward Markey released a letter that he had written to Interior Secretary Ken Salazar, urging him to block the transfer to CNOOC of five Nexen leases that were acquired 1995-2000 under the DWRRA. Piling the pressure on four Republican Senators have come out publicly against the deal, arguing it would compromise U.S. security interests to have a company controlled by Beijing operating in the Gulf of Mexico, close to major elements of the American energy infrastructure.

Not surprisingly, some major players on both Wall Street and in Canada were involved in brokering the deal. CNOOC was advised by both the Bank of Montreal and New York's Citigroup Inc., while Nexen Inc. retained Goldman Sachs and Royal Bank of Canada as financial advisers.

What is undeniable is that the Nexen Inc. takeover has boosted China's presence in Canada's energy markets, surging overall Chinese investment to roughly $49 billion in contrast to the relatively paltry $3.5 billion they've spent in the U.S. acquiring energy assets.

As nationalist U.S. congressmen sound the alarm, CNOOC still has two regulatory hurdles to overcome. First, the purchase will be reviewed by the Committee on Foreign Investment in the United States (CFIUS), under Treasury Secretary Timothy Geithner.

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The Canadian government's Investment Canada Act will be used to determine if the sale is a "net benefit" to Canada and does not pose a National Security Risk in consultation with the Canadian Security Intelligence Service. If the sale is determined by the CSIS to fail that test, then the Canadian government can block the sale.

As for CNOOC's chances in Washington, it should be noted that Republican Senator from Oklahoma and member of the Senate's Armed Services committee, James Inhofe, already has one CNOOC on his belt. In 2005 Inhofe was a leading critic of CNOOC's $18.5 billion bid to buy Unocal Corp. of El Segundo, California, which was purchased by Chevron.

Further north, the picture is more unclear, as the government of conservative Prime Minister Stephen Harper has been assiduously courting Chinese investment in the country's energy sector. Earlier this year, when the Obama administration blocked the implementation of the controversial Keystone XL pipeline, Harper played the "China card" by threatening to sell Alberta's oil sands output to China.

Which brings up an interesting question - what if Washington blocks the deal while Canada approves it?

By. John C.K Daly of Oilprice.com