Nexen’s US Gulf oil fields key to CNOOC’s deepwater ambitions

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Updated 14 December 2012

Nexen’s US Gulf oil fields key to CNOOC’s deepwater ambitions

HONG KONG: CNOOC Ltd’s purchase of Canadian energy producer Nexen Inc. may prove to be bittersweet if US regulators block the Chinese state-run oil company from taking over Nexen’s oilfields in the Gulf of Mexico.
CNOOC won a major coup recently by securing Ottawa’s consent for the $ 15.1 billion deal, China’s largest ever overseas acquisition, but the company is still waiting for approval from the US government.
While the Gulf assets are just a fraction of Nexen’s reserve base and production, they would give CNOOC a foothold in the world’s premier deepwater oil province from which to acquire the technical know-how to drill in the contested South China Sea.
“The Nexen prize is the hi-tech ultra-deepwater drilling tech,” said a person familiar with CNOOC’s business strategy, adding that the Gulf of Mexico assets were “one of the key reasons that they are buying Nexen.”
Approval from Washington is also important to CNOOC as it wants to be endorsed as an acceptable operator in the United States after American politicians blocked its high-profile bid for Unocal in 2005, according to another source.
A rejection would not sink the entire deal — CNOOC is ready to buy Nexen excluding the US assets, people familiar with the situation said. But it would be a major blow to CNOOC’s deepwater ambitions.
An acquisition of the Gulf of Mexico assets would make CNOOC the operator of deepwater producing assets for the first time, giving it the prized opportunity to grasp the expertise it desperately needs to realize its production target.
China, the world’s largest energy user, is already relying on imports for more than half of its oil needs. The country has long hoped to expand deepwater exploration in the South China Sea as onshore production growth sags.
CNOOC, which derives nearly all its domestic output from shallow waters, has vowed to build deepwater capacity of 1 million barrels of oil equivalents per day by 2020, more than doubling the company’s total production.
Buying Nexen — most of whose reserves are oil sands and shale gas in Canada and crude oil in the North Sea — would mark a “material entry into the Gulf of Mexico” and an “increase in access to deepwater expertise,” CNOOC said in a July presentation after it announced its bid for Nexen.
As the Committee on Foreign Investment in the US, or CFIUS, examines whether the deal presents any threats to national security, a handful of US politicians have voiced concerns. One issue the committee will examine, CFIUS experts say, is whether Nexen’s assets are too close to sensitive US military areas.
Senator James Inhofe, soon to be the top Republican on the Senate Armed Services Committee, said this week he hopes CFIUS forces CNOOC to divest the assets.
“It’s the same as it would be when I object to their presence in our borders in California, or the Panama canal — they’re not our reliable ally,” Inhofe said.
Under US law, CFIUS operates in complete secrecy and it is not known when it may make a decision or which way it is leaning. CNOOC has declined comment on the review and Nexen had no immediate comment.
CNOOC was forced to abandon its $18.5 billion bid for California-based Unocal in 2005 because of bitter opposition on sovereignty grounds from US lawmakers. The rebuke influenced its bid for Nexen, and it carefully prepared for the review processes it would face.
Some energy analysts and investment bankers not involved in the transaction say they believe the US government would approve the deal, perhaps with some agreements on who operates the rigs, as CNOOC is just buying a relatively small portfolio in the Gulf.
Nexen produced 22,000 barrels of oil equivalent per day in the region in 2011, less than 2 percent of overall Gulf of Mexico production. The Gulf accounts for around 10 percent of Nexen’s production and 5 percent of its proved and probable reserves, according to recent company statements.
Foreign oil and gas companies are very common in the Gulf both as operators and lease owners — Royal Dutch Shell and BP Plc are the two largest oil producers there. Brazil’s state-controlled Petrobras also has a substantial position in the Gulf.
Analysts and bankers also pointed to the approval of recent acquisitions of minority stakes in some US onshore oil and gas assets by CNOOC and China’s Sinopec Group, parent of Asia’s largest refiner Sinopec Corp.
“I am going to toss the coin and say look, given Canada has approved, it is more likely now the US will approve,” said Simon Powell, head of Asian oil and gas research at CLSA in Hong Kong.
But CFIUS standards can often be murky. For instance, a privately owned Chinese company was blocked in September from building wind turbines close to a Navy military site used to test unmanned drones in Oregon.
As China’s energy demand soars, CNOOC and other state Chinese oil firms like Sinopec Group have been venturing into deepwater projects in partnership with global oil majors such as Total and Shell in west Africa and offshore Brazil in the last few years.
But the Chinese firms mostly play a minority, passive role in such projects, with limited access to deepwater exploration and production know-how and hence with lack of exposure to the entire operational process.
That leaves an acquisition as the other route to acquiring new technical expertise.
“What they could learn in the Gulf of Mexico could be deployed back into the domestic, South China Sea exploration in terms of best practices in the longer term,” said Gordon Kwan, head of energy research at Mirae Asset Securities in Hong Kong.
CNOOC launched its first ultra-deepwater rig earlier this year and it is drilling south of Hong Kong in an area within Beijing’s ambit.
Industry watchers expect CNOOC will eventually move the $1 billion rig to explore in deeper and more oil-rich waters further south in the South China Sea, where China, Vietnam, the Philippines, Taiwan, Malaysia and Brunei have overlapping territorial claims.
The deepwater area of the South China Sea remains untapped, largely because tensions between rival claimants have made oil companies and private rig-builders reluctant to explore contentious acreage well away from sovereign coastlines.
Rich hydrocarbon resources are believed to lie below the center and south of the South China Sea, which is in the disputed zone.
Estimates for proven and undiscovered oil reserves in the entire sea range from 28 billion to as high as 213 billion barrels of oil, the US Energy Information Administration said in a March 2008 report.
That would be equivalent to more than 60 years of current Chinese demand, under the most optimistic outlook, and surpass every country’s proven oil reserves except Saudi Arabia and Venezuela, according to the BP Statistical Review.
Chinese state media have called the South China Sea “the second Arabian Gulf.”
CNOOC also hopes to use the acquisition of Nexen to form a foundation for growth in the Gulf of Mexico, analysts say. Currently, it just owns a minority stake in a deepwater joint venture project with Nexen in the Gulf and some relatively small assets divested by Norway’s Statoil in 2009.
Its deepwater capabilities should also benefit from Nexen’s projects in the North Sea.
Nexen has 43 percent of the Buzzard oilfield in the North Sea, Britain’s largest pumping about 200,000 barrels per day.
They are not deepwater projects but CNOOC can learn how to deal with harsh weather — expertise also key for CNOOC to expand its deepwater footprint, analysts say.
“You learn how to conduct drilling in extreme weather. It is not deep water but it is harsh weather,” said Mirae’s Kwan.


Trump advisers urge delisting of US-listed Chinese companies that fail to meet audit standards

Updated 07 August 2020

Trump advisers urge delisting of US-listed Chinese companies that fail to meet audit standards

  • Growing pressure to crack down on Chinese companies that avail themselves of US capital markets but do not comply with rules
WASHINGTON: Trump administration officials have urged the president to delist Chinese companies that trade on US exchanges and fail to meet US auditing requirements by January 2022, Securities and Exchange Commission and Treasury officials said on Thursday.
The remarks came after President Donald Trump tasked a group of key advisers, including Treasury Secretary Steve Mnuchin and SEC Chairman Jay Clayton, with drafting a report with recommendations to protect US investors from Chinese companies whose audit documents have long been kept from US regulators.
It also comes amid growing pressure from Congress to crack down on Chinese companies that avail themselves of US capital markets but do not comply with US rules faced by American rivals.
“We are simply leveling the playing field, holding Chinese firms listed in the US to the same standards as everyone else,” a Treasury official told reporters in a briefing call about the report.
The US Senate unanimously passed legislation in May that could prevent some Chinese companies from listing their shares on US exchanges unless they follow standards for US audits and regulations.
Democratic Senator Chris Van Hollen, who sponsored the bill described the recommendations as “an important first step,” but said that “without the added teeth of our bill, this report alone does not implement the requirements necessary to protect everyday American investors.”
The administration’s recommendations, if implemented via an SEC rulemaking process, would give Chinese companies already listed in the United States until Jan. 1, 2022, to ensure the US auditing watchdog, known as the PCAOB, has access to their audit documents.
They can also provide a “co-audit,” for example, performed by a US parent company of the China-based affiliate tasked with auditing the Chinese firm. However, companies seeking to list in the United States for the first time will need to comply immediately, the officials said.
A State Department official told Reuters the administration plans soon to scrap a 2013 agreement between US and Chinese auditing authorities to set up a process for the PCAOB to seek documents in enforcement cases against Chinese auditors.
China said on Friday that the two countries have “good cooperation” in monitoring publicly listed firms.
“The current situation is that some US monitoring authorities are failing to comply with their obligations, and what they are doing is political manipulation — they are trying to force Chinese companies to delist from US markets,” foreign ministry spokesman Wang Wenbin told a media briefing.
The PCAOB has long complained of China’s failure to grant requests, giving it scant insight on audits of Chinese firms that trade on US exchanges.
The report also recommends requiring greater disclosure by issuers and registered funds of the risk of investing in China, as well as mandating more due diligence by funds that track indexes and issuing guidance to investment advisers about fiduciary obligations surrounding investments in China.
The moves come amid rising tensions between Washington and Beijing over China’s handling of the coronavirus and its moves to curb freedoms in Hong Kong, among other issues.