The sale of Nexen has many shades of grey, but does not represent a major strategic pivot towards China, nor will it jeopardize Canada’s relationship with the United States or be deleterious to the goal of North American Energy independence.
The Nexen sale is fundamentally about the assets they hold and retaining domestic control over capital. The size of the CNOOC interest in the Alberta Oil Sands has been distorted, and given their domestic petroleum consumption, China has every right to be aggressive. The long game for Canada is about increasing production capacity levels and abating consumption in order to ensure a strong market position in the sale of petroleum products while satisfying domestic demand.
The myth of North American energy independence, put to the foreground by the debate over the Keystone XL Pipeline, is that it cannot be achieved solely through increased drilling alone. Energy security is based on the premise that domestic control of petroleum assets (whether they be located in North America or abroad) satisfies anticipated domestic demand.
The U.S. consumes 18.9 million barrels of crude oil and petroleum products per day, while only producing just over 5.6 million barrels per day. Canada produces 3.6 million barrels per day, with the oil sands accounting for 1.3 million. Taken together, the NAFTA countries currently fall 6.8 million barrels per day short of supplying the U.S. market alone. At current levels of consumption, North American production would need to almost double to quench our collective appetite.
Enter CNOOC and Nexen. Nexen currently owns the Long Lake project and a 7% stake in the Syncrude venture in the Athabasca Tar Sands. At peak, possible production at Long Lake is 72,000 barrels of oil per day, or 5% of total Oil Sands production. In terms of proven total reserves, the Long Lake Project holds approximately 2 billion barrels, which could feed China’s current domestic consumption for approximately 226 days. Nexen’s value for CNOOC, which already owns a 35% stake, is in its assets in the North Sea, Gulf of Mexico, offshore West Africa and Columbia that account for 70% of its current production.
In contemplating the sale of Nexen for North American energy independence it must be noted that of proven and probable reserves in Canada, Nexen holds less than 1%. The quandary for the Canadian government was relinquishing domestic control of the capital invested in all Nexen projects to CNOOC. Nexen’s shareholders, ripe to benefit from an offer 60% over market price, are not all Canadians after all. More than half of Nexen’s shares are held by foreign investors who will benefit equally from the purchase.
CNOOC has learned from the mistakes of an attempted 2005 purchase of the American petroleum producer Unocal. The deal, scrapped by the U.S. Congress, cited security concerns and a lack of reciprocity for American companies looking to do business in China. Fast forward to 2012, and the Nexen purchase reportedly hinges on Chinese commitments to approve major Canadian investments from the Bank of Nova Scotia and Manulife Financial, list on the Toronto Stock Exchange, keep the Nexen name and CSR programs already in place, and retain staff and management of global assets operationally in Calgary to ensure appropriate revenues and royalties accrue to the Canadian government.
Moreover, approval of the Nexen purchase should not be read as abandoning security commitments to the U.S., or as a threat to Canada’s security itself. Canada-U.S. security cooperation when it comes to China remains extremely close, evidenced by the Canadian invocation of a “national security exception” that would exclude the Chinese firm Huawei from helping build a new secure government network, in response to a U.S. Congressional report warning of spying on the part of the Chinese telecom. The two countries recently launched a cyber security project overseen by Public Safety Canada and the US Department of Homeland Security aimed at protecting digital infrastructure. With this cooperation in place, past fears of Chinese espionage and technology acquisition in the petroleum industry appear to have subsided.
Ultimately, achieving the goal of energy independence will not hinge on ceding 1% of proven and probable Canadian reserves. From the U.S. perspective, it may in fact be productive to allow China to purchase Nexen. Canada, hoping to double it’s production capacity, needs 200 billion in investment to do so and with production expanding in the United States Asia is the logical market. Expanded production capacity, in contributing to the global market for petroleum, will make supply more available at a lower
cost. New customers for unrefined oil in Asia also means new potential suppliers outside of the politically volatile Middle East, and thus less risk of a price shock.
If combined with consistent strategies of abatement, such as incentives to slow the rate of growth in consumption, foreign investment provides the vehicle for expanding energy infrastructure necessary to meet security goals in the petroleum market. Simply put, China needs oil and petroleum products, and China will have to purchase them at market price. Free market countries like Canada and the United States may not like dealing with SOE’s, but in expanding production capacity, they represent the most viable alternative. Indeed the largest non-SOE, Exxon Mobil, ranks 14th on the list of proven reserve owners behind a long list of SOE’s. In pursuing Nexen by paying 60% over share value and agreeing to the terms of the Canadian government, China pays the price for an undervalued currency and provides the resources necessary for an expansion of capacity necessary to achieve North American energy security.