* Chinese oil firm pounced when Nexen CEO left in January
* CNOOC learned from BHP-Potash, Unocal experiences
* Chinese started lobbying early, put in concessions
* Methodical approach, JV lay groundwork for biggest deal
By David Ljunggren, Denny Thomas and Michael Erman
July 25 When Canada's Nexen Inc fired
its CEO in January, an oil giant on the other side of the world
sprang into action.
Nexen had been on the wish list of Chinese state oil company
CNOOC Ltd for five years. The removal of CEO Marvin
Romanow was just the opening the Chinese needed to make their
move, according to sources familiar with the situation.
By the Chinese New Year later that month, CNOOC had hired
BMO Capital Markets and Citigroup Inc as
financial advisers, according to these sources. That kicked off
negotiations culminating on Monday with a deal to buy Nexen for
$15.1 billion, the biggest foreign acquisition ever by a Chinese
The agreement is a triumph for China's third-largest oil
company, which had to abandon its $18.5 billion bid for
California-based Unocal in 2005 because of bitter opposition on
sovereignty grounds from U.S. lawmakers, and shows how far the
Chinese have come as dealmakers on the global stage.
It also feeds China's demand for resources to sustain an
economy that despite six quarters of deceleration still grew at
7.6 percent in the second quarter, and will give it a platform
from which to grow further in Canada's energy sector.
Interviews with people familiar with the Nexen deal reveal
CNOOC heeded lessons from the Unocal debacle. It also closely
studied Australian miner BHP Billiton Ltd's failed $39
billion bid to buy fertilizer maker Potash Corp in 2010
- a deal killed by the Canadian government - as it methodically
went about laying the groundwork for the Nexen deal.
Among its tactics was the establishment of a joint venture
so it could become familiar with the target and its assets, as
well as the way of doing business in North America. Importantly,
it quickly started building relationships with governments in
the countries where Nexen operates, including Canada, the United
States and Britain, the sources said.
CNOOC, which offered a 61 percent premium to Nexen's Friday
stock price, already has interests in Canada - including oil
sands operations in Alberta, and shale gas in British Columbia -
as well as extensive exploration and production holdings in the
North Sea, Gulf of Mexico and offshore West Africa. Nexen,
Canada's sixth-largest independent oil explorer and producer,
also operates in the Gulf of Mexico, Colombia, the North Sea,
Yemen and offshore West Africa. [ID: nL2E8IN53S]
A big step for China is that the Nexen offer is for the
entire company. In the wake of Unocal, many Chinese buyers have
chosen to buy stakes in overseas companies rather than attempt
"It's partly the valuation, partly an evolution of the
Chinese mindset. You couldn't do this deal a year after Unocal,"
one of the sources familiar with the deal said. "They had to
have made the smaller steps in the meantime that made everyone
comfortable that they knew how to behave responsibly, operate
effectively, treat employees well."
Nexen spokesman Pierre Alvarez declined to comment on how
the deal came together, saying the company will provide details
in its information circular to be sent to shareholders in about
a month. A CNOOC media official said Nexen had been a partner of
the company for years, declining to comment further on the deal.
Despite its size, the deal may prove to be only a small step
in China's ambition to acquire resources and technology. In the
West, and particularly in the United States, there is still
suspicion about sales of major assets to Chinese companies
because of Beijing's controlling influence in the nation's
corporate sector and anti-China sentiment among some lawmakers.
Although some experts and people familiar with the
transaction expect the Canadian government to approve the deal,
that could change if popular sentiment suddenly turned against
Pulling off a similar deal in the United States is also
likely to remain a pipedream for Chinese buyers.
"My guess is that they continue to be wary of investments in
the United States and concerned that they might either be
blocked or subject to conditions that may be complicated for
them," said William Reinsch, president of the National Foreign
Trade Council, a U.S. business association focused on
international trade and investment issues. "I wouldn't take it
as a given that (Canada) would simply say yes and move on."
CNOOC stepped up its pursuit of Nexen after Canadian Prime
Minister Stephen Harper visited China in February and said he
wanted to sell more oil to Chinese and Asian markets. Canada has
also stressed the need for more foreign investment to help
develop its oil sands.
"CNOOC would have read very real signals into that... It
would have been very strange for political leaders from
countries at the most senior level to come and ask for
investment and then say 'No'," said a person familiar with how
the deal was forged.
In the wake of Harper's comments, the Chinese firm sought
meetings with senior officials in the federal government and the
government of Alberta to gauge the appetite for a possible
CNOOC, realizing a hostile bid of this size would be
virtually impossible to pull off after BHP's failed approach for
Potash, felt a crucial advantage was that its approach had the
full support of the Nexen board, the sources said.
CNOOC hired Hill and Knowlton for lobbying in Canada and the
United States, and Bell Pottinger in Britain, according to one
source. New York law firm Davis Polk provided legal counsel.
Hill and Knowlton declined to comment. The firm filed its
lobbying disclosure forms in Washington on Monday but listed the
effective date of registration as May 14.
A Bell Pottinger official in the United States did not have
an immediate comment.
"I don't think the problem is whether CNOOC can complete the
deal," said a China-based source familiar with the matter. "The
key is whether CNOOC can successfully consolidate and manage the
new company, whether it can reach its targets over the next five
Canada's official register of lobbyists shows that Michael
Coates of Hill and Knowlton visited the top officials at the
ministries of industry, trade and natural resources in late
March in Ottawa.
Accompanying Coates was CNOOC Vice President Fang Zhi, who
is also general manager of CNOOC International Ltd. Zhi told the
officials that CNOOC thought Canada was an attractive place to
invest, one source said.
Andrew MacDougall, chief spokesman for Harper, said he was
unaware of who Fang might have met in Ottawa and declined to
comment on any aspect of the takeover bid.
Fang, who came away reassured by his discussions, also
visited Alberta for talks with local government officials, the
source said. His presence there drew little attention, since
CNOOC already has properties in the province.
Courtesy calls on behalf of CNOOC and Nexen were made to the
federal and Alberta governments on Sunday, the day before the
deal was announced.
The final decision on whether to approve the CNOOC bid lies
with Canadian Industry Minister Christian Paradis, whose chief
spokeswoman declined to comment. Paradis would make his decision
based on the Investment Canada Act.
Sources said early conversations with policymakers led CNOOC
to propose key concessions, such as making Calgary the head
office of its North and Central American operations and a plan
to list on the Toronto Stock Exchange.
CNOOC has also promised to retain Nexen employees. That may
help to allay fears that might arise, especially given some
Chinese companies have been criticized for having poor relations
with their workforces in places like Africa and Latin America.
One source said it helped that Fang and CNOOC Chief
Executive Li Fanrong both spoke good English and appear to have
a good grasp of Western business ways. In addition to hands-on
top executives, CNOOC has a large and experienced M&A team.
In Nexen, CNOOC also picked a deal that will be more likely
to get support than if it had sought to acquire some other
Canadian companies. Most of Nexen's assets lie outside Canada,
making it less likely that it would be seen as a national
champion falling into Chinese hands.
CNOOC had already formed a joint venture that helped it
evaluate Nexen. In July 2011, it bought Opti Canada, which was
Nexen's 35 percent partner in Long Lake, a C$6.1 billion
steam-driven oil sands project in Northern Alberta.
The project, which started more than three years ago, is
only at about half its 72,000 bpd design capacity and has had
problems extracting enough oil from its early wells to fill the
processing plant. But the project accounts for a large chunk of
Nexen's value, and CNOOC believed that it was of higher quality
than the market thought, one source said.
"It was that experience that enabled them to conclude this
would actually be a good fit," another source said. "They've
been taking their involvement in Canada a step at a time and
you'd want the next step to be determined by what you'd
experienced in the previous step."
With only small operations in the United States, the company
is not likely to meet much opposition to the deal in Washington,
where there is some sensitivity to Chinese investment in
Canadian energy assets because Canada is a major supplier of oil
to the United States.
One U.S. lawmaker, Senator John Hoeven, said on Tuesday he
believes the CNOOC-Nexen deal is a "direct result" of President
Barack Obama's January decision to delay approval of the
Keystone XL pipeline, designed to bring oil from Canada's oil
sands to Texas refineries. Soon after that delay was announced,
Harper was in Beijing and talking about doing oil deals with