The Return of CNOOCPublished October 16, 2012 in Arabic Knowledge@Wharton
Seven years ago, the China National Offshore Oil Corporation (CNOOC) debuted on the world stage with a thud. When its US$18.5 billion bid for California's Unocal Oil Co. collapsed in 2005, CNOOC became the poster child for the political perils of the U.S. approval process for foreign investments. The specter of a Chinese state-owned oil company owning a key U.S. asset kicked up such a firestorm that CNOOC withdrew its bid, and Chevron Corp. scooped up the deal.
Now, during a U.S. presidential election where China is a lightning rod, CNOOC has launched a high-profile comeback. This time, it is betting on a different outcome for its proposed US$15.1 billion acquisition of Canadian oil company Nexen, Inc. If approved, the deal, announced July 23, will mark the largest overseas acquisition yet by a Chinese company. With its 61% premium offer and promises to maintain Nexen's employees and headquarters in Calgary, CNOOC believes chances for Canadian approval by the end of this year are high.
CNOOC must also gain approval from the U.S., where 10% of Nexen's assets are based. But U.S. tensions with China are mounting. In September, President Obama blocked Chinese company Ralls Corp. from buying an Oregon wind energy company positioned next to a U.S. military installation, and the Obama Administration launched trade complaints against the Chinese solar and wind energy industries earlier in the year. Meanwhile, House Republicans are calling for barring Chinese telecom giant Huawei Technologies from expanding in the U.S. for fear that company would use its U.S. facilities to spy on the U.S.
So far, CNOOC hasn't attracted as much opposition as last time around, though prominent members of the U.S. Congress, including Senator Charles E. Schumer (D-N.Y.), Representative Ed Markey (D-Ma.), and Senator Jim Inhofe (R-Okla.) have spoken out. "Ownership and operation of U.S. business operations by foreign governments via their corporate proxies becomes particularly concerning when critical natural resources such as oil and natural gas are involved," wrote Inhofe and two Republican colleagues in a letter to the U.S. Treasury Secretary, who chairs the U.S. review by the Committee for Foreign Investment in the U.S. (CFIUS).
Whether CNOOC succeeds this time, the riseof Chinese companies, especially in the strategic energy sector, will continue to stir unease, say experts. Since 2002, China's Big Three national oil companies, China National Petroleum Corporation (CNPC), China Petrochemical Corporation (Sinopec), and CNOOC have accelerated purchases of upstream assets abroad as China's energy demands grow, often paying premium prices for properties in countries such as Nigeria, Angola, Iran, Kazakhstan and Sudan. The 2008 global financial crisis has since opened up more investment opportunities in the Americas, and the Big Three now own investments totaling more than $100 billion in more than 50 countries, according to a recent National Bureau of Asian Research (NBR) report.
Many Western politicians and experts fear these companies are stalking horses for Beijing, out to impose Chinese state influence through oil power. For example, in June, CNOOC put up for bid blocks of South China Sea territory claimed by Vietnam. Two months later, CNOOC Chairman Wang Yilin declared: "Large-scale deep-water rigs are our mobile national territory and a strategic weapon." Some experts say that Wang, appointed by the Chinese Communist Party to his new post last year, is making big gestures to please government bosses at the outset of his tenure.
The saber-rattling does little to put to rest Western apprehension about Chinese oil companies' nationalistic intentions.Wharton management professor Marshall W. Meyer says much of the controversy stems from a difference between U.S. and Chinese views of the oil market. To Western oil companies, "oil is a basic commodity that's fungible -- if one country won't sell to another, you can always buy from a third party," notes Meyer. "But for China, oil is a strategic commodity. They believe they have to control these assets because in a crunch, the market won't function," especially when much of China's oil imports pass through the politically sensitive Malacca Straits.
"When a Chinese oil company pays a price that is too high, the U.S. says it's because the company is an arm of the government, while the Chinese company says 'we're just trying to stay in business and make sure the oil flows,'" says Meyer. Mikkal Herberg, a former ARCO executive and now research director of NBR's Energy Security Program and senior lecturer at the University of California-San Diego, agrees: "Just as Washington sees Chinese behavior through a prism of distrust, China sees us as blocking its rise in importance and denying them energy [in order] to contain it."
Yet, manyanalysts say that these companies, keen to climb the learning curve in the global oil business, increasingly are marching to commercial, not political, imperatives, and their association with the Chinese government can be a hindrance to their growth. "Today, you can [view] 80% to 90% of their behavior [to be] what a company of that size in the industry would normally do to compete, and then there's that 10% that has to be responsive to Beijing's politics," says Herberg. According to Edward Chow, a former Chevron executive and now a senior fellow at the Center for Strategic and International Studies, a think tank in Washington, D.C., "As a business matter, being used for other than commercial purposes handicaps majority state-owned companies."
Indeed, CNOOC and the other big Chinese oil companies are going through the same maturing process as European national oil companies in the last century, say experts. "China is at the beginning of its journey," says Chow. "It's like Total and Eni in the 1950's and 1960's. The French and the Italians also wanted their oil companies to operate internationally. Why should they trust Anglo-Saxon companies to supply them forever?" As for nationalistic intents, he says: "We seem to forget our own history. Did we not support the overthrow of Tehran as a condition of U.S. companies breaking into Anglo Persian monopoly? Using political position to gain advantage for companies is not something Asia invented." The shedding of government control is a gradual process, he adds. "If you look at the progression of Western companies, or say, Petronas of Malaysia, it took a while to get out from under shadow of government and to operate professionally at international standards."
Leading the Charge
Of China's three big national oil companies, CNOOC is positioned to lead the charge out of that box, say experts. In 2004, then CNOOC chairman Fu Chengyu said his company's goal was to become a globally competitive oil firm. Established in 1982 to explore and produce China offshore oil, CNOOC's mandate was to partner with the likes of Exxon Mobil, Royal Dutch Shell, Chevron and BP to learn the offshore oil business and how international oil companies operate. CNPC's was to develop China's continental oil resources, and Sinopec's, to build the domestic oil refinery business. Since the 1990s, the Chinese government allowed the companies to enter others' sectors to provide more market competition.
Because of its DNA, the much smaller CNOOC is the most outward-looking, nimble and entrepreneurial of the Big Three, say experts. "When you do overseas projects, you take a lot of risk, so they have a high risk tolerance," says former Shell executive Ming Sung, now a consultant to CNOOC and chief representative-Asia/Pacific of the Clean Air Task Force, a Boston-based non-profit. "CNOOC can move fast, compared with the standard state-owned enterprise." Herberg agrees: "CNPC and Sinopec are more like government ministries [in the process of] becoming more like companies," while "CNOOC learned from the very beginning [how to operate internationally] and had employees placed inside operations of these other companies doing major work and moving up learning curve."
Over time, CNOOC has acquired know-how from foreign partners, starting with the first successful offshore Chinese gas well that it drilled with ARCO in 1982. More recently, CNOOC teamed up with Shell in 2000 to build and operate a large petrochemical processing complex in Huizhou, Guangdong Province. Just last year, CNOOC launched its first ultra-deepwater offshore oil rig called the CNOOC 981, drilling at depths of about 2,500 meters at the Liwan well near Hong Kong. "Though it's only one rig, it's a sign that CNOOC is closing the gap with the world's leading companies," says Herberg.
Now, Nexen will potentially provide CNOOC with broader exposure to unconventional oil with an oil sands venture in Canada and offshore deepwater properties in the U.S. Gulf of Mexico, and the North Sea. "This will fundamentally change CNOOC if the deal goes through," says Erica Downs, a fellow at the Brookings Institution, a think tank in Washington, D.C. "It will accomplish what [former CNOOC Chairman] Fu Chengyu wanted with Unocal -- that is, to transform CNOOC from a national oil company to a global exploration and production company. In most of CNOOC's overseas projects to date, CNOOC is a passive investor, not an operator. This gives them a much greater operator role."
Says Herberg: "Most companies agree that heavy oil projects are one of the skill sets any large global oil company needs to develop to be competitive, because a larger share of oil globally will be from heavy oil." CNOOC and Sinopec both have also sought exposure to unconventional shale oil and gas with passive investments in U.S. projects of U.S.-based Chesapeake Energy Corp. and Devon Energy Corp., respectively.
All international oil companies strive to acquire upstream assets abroad to maintain reserves and drive profits, says experts. The Chinese companies are no different, but they often pay top dollar as the price of admission. "Every time you have a new entrant, sometimes they're willing to pay for assets at a higher price than you," says Chow. "Why should a country go with you if you will pay the same price as Exxon; might as well go with Exxon."
While political pundits often question Chinese company premiums as evidence of nationalistic motives, says Herberg, "up until five years ago, the big oil majors didn't worry much about that." The reason: "The Chinese companies were mostly picking up small bits and pieces around the world in places that U.S. oil companies couldn't go because of sanctions in Sudan, Iran, Syria and Burma, or small, speculative ventures in really high-risk, unknown areas," he notes. "That's gradually changing, as Chinese companies have become more competitive and are going after higher-quality assets, in some cases head-to-head with the international oil companies." Now, the global oil giants are finding ways to benefit from Chinese companies' low-cost capital and labor, teaming up in ventures where the majors themselves contribute specialized drilling technology know-how, says Herberg. CNPC and BP are developing Rumaila and other oil fields in Iraq, for example.CNOOC partners include France's Total in Nigeria, Total and Britain's Tullow Oil in Uganda, and Canada's Husky Energy in Indonesia, notes Downs of the Brookings Institution.
Over time, it may be in the interest of China's Big Three to get out from under Beijing's thumb to operate more freely as profit-seeking corporations, say experts. Until then, the trust deficit between the U.S. and China ensures continued scrutiny of CNOOC and Chinese national oil companies as they expand abroad.