Analysis

Winnipeg Free Press - PRINT EDITION

Nexen, Progress Energy are bit players

By: Gwyn Morgan

Posted: 12/21/2012 1:00 AM | Comments: 0

VICTORIA -- In the wake of federal approval for the sale of Nexen to China's CNOOC and Progress Energy to Malaysia's Petronas, CBC television reported the Harper government had allowed the transfer of a "major part" of Canada's oil and gas industry to foreign governments. Thus began days of over-the-top commentary on the significance of the deals. But just how important are these companies to Canada's oil and gas industry?

Let's start with Nexen. More than 70 per cent of its production comes from the U.K. North Sea, West Africa and the U.S. Gulf of Mexico. That leaves Canadian production of just 60,000 barrels of oil equivalent per day (BOE/D), out of total national production of more than four million BOE/D.

Canadians who followed the public discourse would have gained the impression that the Chinese would gain control of substantial oil sands resources. The reality is that roughly half of the Nexen's small oil sands production is from a minor interest in the Syncrude consortium, which is controlled by others. The other half, a mere 20,000 BOE/D, comes from the problem-plagued Long Lake project that, despite average oil prices of $89 per barrel, has lost cash in five of the past nine quarters.

The technology, which was developed by OPTI Canada, combines on-site bitumen upgrading with the generation of energy for the steam assisted gravity drainage (SAGD) oil recovery process. But getting these technologies to mesh together has proven a monumental challenge. After running out of cash in 2011, OPTI sold its 35 per cent interest in Long Lake to CNOOC for U.S. $2.1 billion. Clearly, CNOOC is betting that the operational and technical issues plaguing this project can be resolved.

And therein lies the deal's advantage to Canada. Nexen shareholders had lost confidence in Long Lake, making it difficult for management to continue funding it. CNOOC brings patient money that could possibly yield a technical breakthrough in the recovery and upgrading of the large portion of Canada's oil sands.

Similarly, Progress Energy is a small player in Canadian natural gas, producing just 0.2 out of 14.0 billion cubic feet per day. The $6 billion acquisition comes with plans for a $10 billion LNG project, taking the total Petronas investment in Canada to $16 billion.

Combined, these two state owned enterprise (SOE) acquisitions represent just two per cent of national production, but provide a great deal of economic benefit. The Nexen deal injects $15 billion into the pockets of shareholders along with future spending commitments of more $6 billion, including funding of technological advancement in oil sands recovery and upgrading. The Progress acquisition is part of a $16 billion plan by Petronas to reach Asian markets at a time of falling U.S. demand for Canadian natural gas. If there were ever two takeovers with so little downside and more economic upside to Canada, I can't think of them.

Now for the really important question: What are the chances these deals would be approved under the newly-announced policy for SOE acquisitions? The small size of Nexen's oil sands production, combined with funding of new technology development at Long Lake, should have easily met the new "exceptional basis" criteria for assessment of oil sands acquisition. The small size of natural gas producer Progress Energy, in contrast with the huge size of Petronas's overall investment plans, should also have easily passed the new higher hurdle for SOE acquisitions.

But then there's politics. The NDP has been highly critical of these acquisitions and there were differing views in the government caucus and cabinet. Meanwhile, little was done to counter the grossly exaggerated rhetoric exemplified by the CBC report. The lesson learned for deal proponents is the need to communicate the facts much more clearly. Where else have you read about the true size and scope of Nexen and Progress in comparison to Canada's overall oil and gas industry?

While small acquisitions offering such overwhelming benefits to Canada as the Nexen and Progress deals should qualify under the new policy, I'm happy to see that acquisition of large Canadian-headquartered energy producers by SOE's is now out of the question.

But what about acquisition of Canada's flagship oil and gas producers by foreign domiciled private-sector companies? Eighty per cent of global petroleum reserves are held by SOE's, leaving only 20 per cent available to private companies And 13 per cent of those reserves are here in Canada, making major players such as Suncor, Canadian Natural Resources, Cenovus and Encana highly desirable targets.

Canada should not allow foreign takeovers of such strategically important companies, not only by foreign governments, but by foreigners period.

Gwyn Morgan is a Canadian business leader and director of two global corporations.

Republished from the Winnipeg Free Press print edition December 21, 2012 A12

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