Does CNOOC pose a security risk for North America?

By:
Kanika SaigalEuromoney Skew
Published on:

A recent report by the US House Intelligence Committee has warned that Chinese telecommunications companies Huawei and ZTE pose security threats to the US and therefore should be barred from making acquisitions in the country. Does Chinese oil company CNOOC pose a similar threat?

Concerns about Chinese investment in the US have hit the headlines in the past couple of weeks, after a report published by the US House Intelligence Committee was crystal clear in its opposition to Chinese companies acquiring US assets on the grounds of national security.

In February 2011, Chinese top telecommunications equipment manufacturers Huawei and ZTE expressed interest in entering the US market, prompting the committee to launch a thorough investigation into the potential national security risks of such a move.

In summary, the committee strongly recommended that:

 “The Committee on Foreign Investment in the United States (CFIUS) must block acquisitions, takeovers, or mergers involving Huawei and ZTE given the threat to US national security interests. Legislative proposals seeking to expand CFIUS to include purchasing agreements should receive thorough consideration by relevant Congressional committees ...

“Based on available classified and unclassified information, Huawei and ZTE cannot be trusted to be free of foreign state influence and thus pose a security threat to the United States and to our systems.”

However, the line between legitimate investment and US concerns for national security has spilled over into Canada, where China National Offshore Oil Corporation’s (CNOOC) proposed $15.1 billion dollar acquisition of Canadian oil company Nexen has not been welcomed with open arms.

CNOOC offered $27.50 in cash for each Nexen share, which represents a 66% premium on the stock’s 20-day average share price before July 23, when the bid was announced. However, while the proposed bid is supported by Nexen’s shareholders, with 99% voting in favour of the acquisition, there is still widespread opposition to the deal from the Canadian public as well as US government officials, especially as the takeover would give CNOOC control over Nexen’s assets in the Gulf of Mexico.

And the proof is in the data. In a recent survey conducted by Abacus Data, it was found that a large majority of Canadians oppose the takeover of Nexen by a state-owned Chinese company:

 “Overall, two in three Canadians surveyed (69%) said that the federal government should reject the deal while 8% said the government should approve the deal. 23% were unsure of what the government should do.”

While at the same time:

 “The survey found that awareness of the deal increased only marginally from 43% in August to 47% this month. Awareness was highest in Alberta (63%), among Canadians aged 60 and over (59%), and among market watchers or those who said they follow the stock market very or somewhat closely (71% and 72% aware).”

As Lysle Brinker, director of energy equity research at IHS, says:

The public in Canada, whether or not they are educated about the deal, is very much against the acquisition. The government will need to convince the masses this is the right thing for the country to do.” 

Senator Chuck Schumer and Congressman Ed Markey have publicly stated their opposition to the deal in an open letter to treasury secretary Timothy Geithner. After the complaints, CNOOC now also faces a review by the CFIUS to examine the national security implications on the US to foreign takeovers.

While opposition is widespread, the extent to which the deal will pose a security threat for the US is questionable. Writing in Foreign Policy, Erica Downs, an academic at the Brookings Institution, says:

Nexen ... does not possess the technical capabilities that CNOOC needs to operate in the deep waters of the South China Sea. The Canadian firm is a newcomer to deep-water exploration and production. It does not own any drilling rigs and relies on outside contractors to perform most of the technical work involved in exploring and developing its acreage in the Gulf of Mexico – contractors that CNOOC could legally hire anytime it wants. In any case, the geological differences between the Gulf of Mexico and the South China Sea limit the portability of US-gained expertise.”

Whether real or imagined, CNOOC’s bid for Nexen has manifested itself into a security concern for the US and Canada. The Canadian government has extended its review of the proposed deal by 30 days, which means November 9 is the next deadline for a government decision. Under Canada’s takeover law, transactions must have a domestic net benefit to win approval.