CNOOC Said to Cede Operating Control of Nexen’s U.S. Gulf Assets

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March 2, 2013

Nexen’s Aspen platform in the Gulf of Mexico. Photo courtesy of Nexen Inc.

By Rebecca Penty and Sara Forden

(Bloomberg) — Cnooc Ltd., China’s largest offshore oil and natural gas producer, was barred from controlling Gulf of Mexico oilfields under U.S. terms for its $15.1 billion takeover of Nexen Inc., people familiar with the matter said.

In its purchase of Calgary-based Nexen, Cnooc acquired about 200 deep-water leases in the Gulf with reserves equivalent to about 205 million barrels of oil, one of the largest holdings in the Gulf, according to Nexen’s website. The state-owned Chinese oil explorer surrendered operating control of those assets to quell U.S. national security concerns, said two people familiar with the agreement who asked not to be named because the terms aren’t public.

Related: Is CNOOC Buying Into the U.S. Gulf of Mexico?

The U.S. requirements for Cnooc contrast with approvals for state-owned companies including Norway’s Statoil ASA and Brazil’s Petroleo Brasileiro SA to control drilling and production in the Gulf. The U.S. is restricting Chinese transactions when the investment targets are close to military installations or have access to certain kinds of technology. Growing concerns over intellectual property theft and cyber attacks also have fueled scrutiny of Chinese acquisitions.

“The United States is uncomfortable with the character of the Chinese government, which it sees as extending to Chinese state-influenced companies,” Loren Thompson, chief operating officer of the Lexington Institute, an Arlington, Virginia-based research group, said in a phone interview yesterday. “The Chinese are very sensitive about parity in economic relations,” and may retaliate with stronger protections for Chinese companies against U.S. competition, Thompson said.

CFIUS Conditions

Nexen said on Feb. 12 it had received approval from the Committee on Foreign Investment in the United States, known as CFIUS, for its takeover by Cnooc without specifying conditions, which it said are confidential.

Cnooc will still own the assets and be allowed some general oversight, as well as to collect revenue from the properties, according to the people and an e-mail reviewed by Bloomberg sent by Nexen to its employees.

The “most significant” term of Cnooc’s agreement with the U.S. committee was its transition to non-operator from operator, Peter Addy, the president of Nexen’s U.S. unit, wrote in an e- mail to employees on Feb. 20, which was seen by Bloomberg.

“In the coming months, we will devote our attention to identifying and developing procedures to remove Nexen from its role as an operator,” Addy wrote in the e-mail.

Deciding Power

The word operator is an industry term to describe who has responsibility for decision-making on a project.

Patti Lewis, a spokeswoman for Cnooc’s Nexen unit in Calgary, declined to comment on the specifics of the CFIUS approval. Steven MacKinnon, a spokesman for Cnooc based in Ottawa, also declined to comment.

Cnooc “remains committed to investing in growth projects in the U.S. Gulf of Mexico and we’re confident our business there will be a viable component of our company for the long term,” Lewis wrote in an e-mail yesterday.

Holly Shulman, a spokeswoman for CFIUS, declined to comment, saying by law information filed with CFIUS may not be disclosed to the public.

The U.S. is officially open to Chinese investment, a position that has been affirmed by President Barack Obama and senior administration officials. However, national security issues increasingly “are presenting challenges in transactions involving Chinese acquirers,” according to a study published by Covington & Burling LLP in December.

Malicious Hardware

An October House Intelligence Committee report raised concerns about the counterintelligence and security threat posed by Chinese telecommunications companies doing business in the U.S., and urged the government to block transactions by Huawei Technologies Co. and ZTE Corp., China’s two largest phone- equipment makers, citing concerns that the Chinese government could install malicious hardware or software in U.S. telecommunications networks.

In September, Obama barred a Chinese-owned company from building wind farms near a U.S. Navy base in Oregon, the first time in 22 years a president has blocked a transaction as a national security risk. CFIUS previously had blocked at least three transactions that would have resulted in Chinese companies gaining control of assets near military facilities.

Resolving Threats

“This kind of agreement is a well-established method that has been used in putting together transactions involving Chinese entities that ensures there are no location or technology issues that could threaten national security and allow the investment to go forward,” said Ivan Schlager, who heads the CFIUS practice for Skadden, Arps, Slate, Meagher & Flom LLP in Washington and wasn’t involved in the transaction.

Nexen controlled platforms in the near-shore West Delta oilfield within 50 miles of the U.S. Naval Air Station Joint Reserve Base at Belle Chasse, Louisiana, southeast of New Orleans.

“You do have U.S. national security installations around the Gulf of Mexico,” said Erica Downs, a fellow at the John L. Thornton China Center at the Brookings Institution who has studied the international expansion of Chinese companies. “If I had to put money on something, that’s probably what CFIUS was concerned with and that’s consistent with other concerns CFIUS has had about other Chinese investments.” Downs is a former energy analyst at CIA.

Expanding Reserves

The purchase of Nexen, which operates in Canada’s oil sands, the U.K. North Sea and offshore West Africa, will add 20 percent to the Chinese company’s production and 30 percent to reserves, Cnooc Chief Executive Officer Li Fanrong said on Feb. 27.

The transaction, closed Feb. 25, spurred the Canadian government to say future acquisitions in the oil sands by state- owned foreign companies would be rejected barring “exceptional circumstances.” Cnooc’s previous attempt to gain control of U.S. oil and gas assets also failed, as the company abandoned its bid for Unocal Corp. in 2005 after facing political opposition in Washington.

The U.S. assets in the Nexen deal, including leases for which Nexen held a stake but did not control output, produced the equivalent of about 15,600 barrels of oil in 2012, about 8 percent of Nexen’s total output for that year, according to the company’s annual report.

Sales Possible

The terms are a “slight negative” for Cnooc, because they probably will force it to seek partners to operate the existing production Nexen had controlled, as well as any exploration on its leases, John Stephenson, a vice-president and portfolio manager who helps oversee C$2.8 billion ($2.73 billion) at First Asset Investment Management Inc. in Toronto, said in a phone interview yesterday.

CFIUS is an interagency committee headed by Treasury Secretary Jacob J. Lew that reviews the national security implications of transactions that could lead to a non-U.S. citizen controlling a U.S. business.

The panel has allowed some recent Chinese deals including Dalian Wanda Group’s $2.6 billion purchase of AMC Entertainment Holdings Inc. to create the world’s biggest cinema owner in May. In August, China’s largest auto-parts maker Wanxiang Group Corp, bought A123 Systems Inc., a maker of lithium-ion batteries for electric cars, even with facing criticism from congressional Republicans.

BGI-Shenzhen, a Chinese operator of genome-sequencing centers, won CFIUS approval in December to buy Mountain View, California-based Complete Genomics Inc., for about $117.6 million.

Copyright 2013 Bloomberg.

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