Nexen vs. Unocal: Why it's different for CNOOC this time around

Written by Aveek Sarker, Student Fellow at the Carl Vinson Institute of Government

In July of last year, the Chinese National Offshore Oil Corp. (CNOOC), China's largest offshore oil and natural gas explorer, announced that it had agreed to pay $15.1 billion in cash to acquire Canada's Nexen Inc. in what would amount to the largest foreign takeover by a Chinese company to date. This announcement brought to memory the company's failed $19 billion bid for a California-based petroleum exporter, Unocal Corp., in 2005.

While CNOOC has learned a great deal since Unocal, there are a number of fundamental differences between the two deals that warrant consideration. In its 2005 bid CNOOC was competing with Chevron Corp., a U.S. company, for control of Unocal, while the bid for Nexen was a negotiated deal that was uncontested and had the full support of the company's board of directors. CNOOC had additionally gone out of its way to reassure management and the Canadian government that Nexen would remain a Canadian company. CNOOC stated its plans to list its stock in Toronto, retain Nexen's existing employees, and make Calgary its North American headquarters. Furthermore, the Nexen transaction involves a company from a "consuming" country (China) purchasing a company from a "supplier" country (Canada). In contrast, Unocal involved a company from a "consuming" country (China) purchasing a company in another "consuming" country, in this case the United States.

In the case of Nexen, the interests of the two countries involved can easily be seen as aligned, while it's much more difficult to see alignment in the Unocal deal. In Unocal, the countries represented by the companies involved are in direct competition for access to petroleum reserves. The leadership of large consumption-based economies such as the United States and China are understandably concerned about their country's ability to have continued access to the natural resources needed to support their growing markets and industries. Supplier countries like Canada have large reserves of natural resources but relatively smaller populations and economies. They are thus most concerned about finding long-term, stable markets for their products. Developing and selling more of their natural resources is their preferred model for development.

Canada has the world's third largest oil reserves - more than 170 billion barrels - after Saudi Arabia and Venezuela. Daily productino of 1.5 million barrels from the country's oil sands is expected to increase to 3.7 million by 2025. Finding a reliable market for this output is one of Canada's key concerns, and developing China as a long-term investor is a prime objective.

Moreove, CNOOC has an incentive, as well as the financial wherewithal, to accelerate development of the oil sands as well as Nexen's Canadian shale gas prospects, boosting investment and tax revenues in the country. In this context, it's easy to understand why the Nexen deal was approved.