How America Lost Canada To The Chinese

After 1949 when the Communists defeated the Nationalists for control of China, the mournful refrain from Washington, D.C. was “Who Lost China?” This arrogant display of superpower Cold War finger pointing ended with a number of careers destroyed and an unfair smear on the U.S. State Department that in some ways has never been entirely eradicated.

In today’s highly-charged political climate, it will come as no surprise when some U.S. politicians come down hard on the Obama Administration for what will no doubt be described as driving Canada’s energy sector into the arms of China:

Cnooc Ltd. (883)’s $15.1 billion cash takeover bid for Nexen Inc. (NXY) signals a Canadian shift toward China and away from the U.S. as the nation’s traditional oil and natural-gas partner and main export market.

Canada’s oil sands reserves, the third-largest recoverable crude deposits in the world, were developed in part by U.S. money as companies such as California’s Richfield Oil Corp. brought technology to extract bitumen from boreal peat bogs half a century ago. Now, for the first time, a Chinese company will own and operate oil-sands crude production as well as Nexen’s shale-gas assets in British Columbia, along with leases in other parts of the world.

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Chinese oil producers have turned more frequently to Canada after political opposition in the U.S. derailed Cnooc’s $18.5 billion bid for Unocal Corp. in 2005, and after TransCanada Corp. (TRP)’s Keystone XL pipeline route south to Texas was blocked by President Barack Obama’s administration last year. (Bloomberg)

The Nexen deal is important for two reasons. First, it potentially represents some absolution for CNOOC, which is best known in foreign investment circles as the company which botched the 2005 U.S. UNOCAL takeover, not taking into account American politics and the need for a public relations strategy. As the Nexen deal will require regulatory approval in several jurisdictions, we will see what lessons CNOOC has learned from the failed UNOCAL bid.

Second, as Bloomberg points out, the deal represents a further shift by Canada away from the U.S. towards China. Another deal involving Sinopec and Talisman Energy was announced yesterday as well, and there have been other recent transactions, including CNOOC’s takeover of Nexen partner Opti Canada.

Why is this happening? The simple answer is that Canada is one of the world’s largest energy suppliers, and rapidly-growing China is willing to pay a premium in the sector to diversify its holdings into a country that is politically stable. China realized years ago the political risks it was facing in the Middle East and set out to remedy the situation. It has succeeded.

How important is this strategy to China? CNOOC’s bid for Nexen’s shares apparently represented a 61% premium. Nexen had to be pleased with that. And China isn’t just getting oil for its money. If the deal goes through, CNOOC would also get some very attractive technical expertise, including know-how related to shale-gas extraction.

Canada’s traditional partner in this area has been the U.S., whose interest in Canadian development has been on the wane. Factor in the decision to reject the Keystone Pipeline project because of American environmental concerns, and China is starting to look better and better to the Canadians.

If this investment trend continues, assuming that Ottawa approves the Nexen deal, perhaps in a few years we will all be talking about the new U.S. “Canada Pivot” policy. In the meantime, you can be sure that critics of the controversial Keystone Pipeline decision, particularly Republicans with ties to the oil and gas industry, will use this deal to beat up on President Obama.