BREAKINGVIEWS-CNOOC’s state control is a paper tiger

Tue Jul 24, 2012 10:32am BST

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

By John Foley

BEIJING, July 24 (Reuters Breakingviews) - Opponents of CNOOC’s (0883.HK) $15 billion bid for Canadian oil producer Nexen NXY.TO will focus on the idea that the Chinese energy major is a Trojan horse for the Communist Party. Similar fears derailed CNOOC’s bid for U.S. producer Unocal in 2005. Such arguments are unhelpful. State ownership is real, but state control is a paper tiger.

CNOOC is 64 percent owned by government-run China National Offshore Oil Corp. Yet of China’s three big oil producers, it’s the smallest and probably most autonomous. While Sinopec (600028.SS) and Petrochina (601857.SS) have ministry ranking within the Chinese power structure, CNOOC does not. By nature, it is more outward facing: its original purpose was to pursue foreign joint ventures, mainly through drawing up Western-style legal contracts.

The state pulls strings, and not transparently. But for oil majors, power is spread thinly, since China lacks a single ministry of energy. Top executives are selected by one body, prices set by another. The State Council broadly sets China’s energy strategy. Intervention tends to take the form of blocking bad deals, rather than forcing transactions or pushing host countries around.

Detractors will still argue that the political links are too close. But Big Oil drives politics as well as the other way around. Oil majors are huge taxpayers. And while the “petroleum faction” that drove the economy under Mao Zedong is now history, several senior leaders spent years in the oil patch. Su Shulin, former chairman of Sinopec, could be one of the rising stars of the next generation of leaders.

Such lobbying power means profitability is no longer an afterthought. When China expanded a resource tax in 2011, oil producers got a simultaneous cut in the special oil levy that left them marginally better off, by HSBC’s analysis. While the links between politics and the pump are tight, the idea that Beijing calls the shots seems simplistic.

True, CNOOC still has a gusher of governance issues. Only four of its ten directors are independent. Minority shareholders get no say over the Nexen deal. But those are less about politics, and more about the risks of investing alongside a big majority shareholder. If anyone should worry about CNOOC it’s minority shareholders, not Western politicians.

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CONTEXT NEWS

- CNOOC Limited, the listed subsidiary of China’s third biggest oil producer, announced an agreed $15.1 billion takeover of Canada-based oil and gas producer Nexen on July 23. Nexen has operations in Canada, the Gulf of Mexico, Nigeria and the UK North Sea.

- The buyer is 64 percent owned by China National Offshore Oil Corp, a state-owned company. CNOOC Limited was established as a company in Hong Kong in 1999, and listed in Hong Kong and New York in 2001.

- Parent company CNOOC was set up in the early 1980s to set up joint ventures for exploration and production with foreign partners. Under the listed company’s rules, the parent is prohibited from competing with CNOOC Ltd directly.

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(Editing by Rob Cox and Katrina Hamlin)

((john.foley@thomsonreuters.com)) Keywords: BREAKINGVIEWS CHINA SOE

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