Conditions likely on bid for Nexen

Ottawa to press Chinese giant on jobs and spending: sources

OTTAWA – CNOOC Ltd. may need to boost investment in Canada to secure government approval for its $15.1-billion takeover of Nexen Inc., according to two people familiar with the Beijing-based company’s plans.

CNOOC may have to make further commitments or accept conditions imposed by Canada, said the people, who spoke on condition of anonymity. Two key areas of negotiation will probably be capital spending and employment, said a person with knowledge of the talks between the company and the government.

Increased investments may boost CNOOC’s cost of operating Nexen at a time when oilsands producers face rising costs, growing North American crude supply and a lack of pipeline infrastructure. In the July 23 announcement of its $27.50 per share bid, CNOOC pledged to follow through on Nexen’s capital spending plans and maintain the company’s employment level and management.

CNOOC, with a market capitalization of $91.4 billion, “is better equipped in terms of capital investment to fund Nexen’s projects than Nexen probably was,” said Michael Dunn, an analyst at FirstEnergy Capital in Calgary. “They’ve got deeper pockets. They’ve got longer time horizons.”

Canada is reviewing the bid under the nation’s foreign-takeover law. Industry Minister Christian Paradis, whose department is responsible for the review, “will take the time required to carefully examine this proposed transaction to determine whether it is likely to be of net benefit to Canada,” Margaux Stastny, Paradis’s director of communications, said in an email from Ottawa.

Peter Hunt, a spokesman for CNOOC in Calgary, wasn’t immediately available for comment. Two calls each to Liu Xiaobiao, CNOOC Group spokesman, and Jiang Yongzhi, CNOOC’s general manager of investor relations, went unanswered.

The opposition has called on the Harper government to hold public consultations on the transaction.

The government will probably approve the purchase, Dunn said, because most of Nexen’s assets are based outside the country and Prime Minister Stephen Harper has made it a priority to expand trade with Asia to increase sluggish economic growth.

The state-owned oil producer may also be asked to accept conditions regarding transparency and financial disclosure, said a person familiar with the matter.

Nexen’s assets aren’t seen as “flagship,” Dunn said in a phone interview.

“Nexen is not Suncor, it’s not Canadian Natural Resources. It’s mostly an international company.”

Nexen’s oil and gas assets include production platforms in the North Sea, the Gulf of Mexico and in Nigeria, as well as oilsands reserves at Long Lake, Alta., where it already produces crude in a joint venture with CNOOC. Those assets produced 207,000 barrels a day in the second quarter, which would boost the Chinese company’s output by about 20 per cent. About 28 per cent of Nexen’s current production is in Canada.

CNOOC said July 23 it planned to acquire all of the common shares of Nexen.

As part of its offer, CNOOC has promised to establish Calgary as the head office of its North American operations, as well as list its common shares on the Toronto Stock Exchange. The company will also “build upon” Nexen’s community and charitable programs, and continue to support oilsands research in Canada, CNOOC said in its announcement.

CNOOC is controlled by state-owned China National Offshore Oil Corp., which indirectly owns 64.4 per cent of the company’s shares.

Nexen plans to spend $2.7 billion to $3.2 billion on capital expenditures this year, including $775 million to $1.1 billion in Canada’s oilsands, the company said in its annual report. Nexen had 3,076 employees at the end of 2011.

While Canada will probably approve the Nexen bid, it may impose conditions, said N. Murray Edwards, chairman of Canadian Natural Resources Ltd.