* CNOOC wants deepwater expertise to drill in South China
* U.S. Gulf oilfields a small part of Nexen's reserve base
* Acquisition of U.S. assets still needs Washington approval
* Some U.S. politicians have voiced national security
* Sources say failure to win U.S. approval would not sink
By Charlie Zhu and Michael Erman
HONG KONG/NEW YORK Dec 13 CNOOC Ltd's
purchase of Canadian energy producer Nexen Inc may
prove to be bittersweet if U.S. regulators block the Chinese
state-run oil company from taking over Nexen's oilfields in the
Gulf of Mexico.
CNOOC won a major coup last week by securing Ottawa's
consent for the $15.1 billion deal, China's largest ever
overseas acquisition, but the company is still waiting for
approval from the U.S. government.
While the Gulf assets are just a fraction of Nexen's reserve
base and production, they would give CNOOC a foothold in the
world's premier deepwater oil province from which to acquire the
technical know-how to drill in the contested South China Sea.
"The Nexen prize is the hi-tech ultra-deepwater drilling
tech," said a person familiar with CNOOC's business strategy,
adding that the Gulf of Mexico assets were "one of the key
reasons that they are buying Nexen".
Approval from Washington is also important to CNOOC as it
wants to be endorsed as an acceptable operator in the United
States after American politicians blocked its high-profile bid
for Unocal in 2005, according to another source.
A rejection would not sink the entire deal -- CNOOC is ready
to buy Nexen excluding the U.S. assets, people familiar with the
situation told Reuters. But it would be a major blow to CNOOC's
An acquisition of the Gulf of Mexico assets would make CNOOC
the operator of deepwater producing assets for the first time,
giving it the prized opportunity to grasp the expertise it
desperately needs to realise its production target.
China, the world's largest energy user, is already relying
on imports for more than half of its oil needs. The country has
long hoped to expand deepwater exploration in the South China
Sea as onshore production growth sags.
CNOOC, which derives nearly all its domestic output from
shallow waters, has vowed to build deepwater capacity of 1
million barrels of oil equivalents per day by 2020, more than
doubling the company's total production.
Buying Nexen -- most of whose reserves are oil sands and
shale gas in Canada and crude oil in the North Sea -- would mark
a "material entry into the Gulf of Mexico" and an "increase in
access to deepwater expertise", CNOOC said in a July
presentation after it announced its bid for Nexen.
As the Committee on Foreign Investment in the United States,
or CFIUS, examines whether the deal presents any threats to
national security, a handful of U.S. politicians have voiced
concerns. One issue the committee will examine, CFIUS experts
say, is whether Nexen's assets are too close to sensitive U.S.
Senator James Inhofe, soon to be the top Republican on the
Senate Armed Services Committee, told Reuters on Tuesday that he
hopes CFIUS forces CNOOC to divest the assets.
"It's the same as it would be when I object to their
presence in our borders in California, or the Panama canal --
they're not our reliable ally," Inhofe said.
Under U.S. law, CFIUS operates in complete secrecy and it is
not known when it may make a decision or which way it is
leaning. CNOOC has declined comment on the review and Nexen had
no immediate comment.
CNOOC was forced to abandon its $18.5 billion bid for
California-based Unocal in 2005 because of bitter opposition on
sovereignty grounds from U.S. lawmakers. The rebuke influenced
its bid for Nexen, and it carefully prepared for the review
processes it would face.
Some energy analysts and investment bankers not involved in
the transaction say they believe the U.S. government would
approve the deal, perhaps with some agreements on who operates
the rigs, as CNOOC is just buying a relatively small portfolio
in the Gulf.
Nexen produced 22,000 barrels of oil equivalent per day in
the region in 2011, less than 2 percent of overall Gulf of
Mexico production. The Gulf accounts for around 10 percent of
Nexen's production and 5 percent of its proved and probable
reserves, according to recent company statements.
Foreign oil and gas companies are very common in the Gulf
both as operators and lease owners -- Royal Dutch Shell
and BP Plc are the two largest oil producers there.
Brazil's state-controlled Petrobras also has a
substantial position in the Gulf.
Analysts and bankers also pointed to the approval of recent
acquisitions of minority stakes in some U.S. onshore oil and gas
assets by CNOOC and China's Sinopec Group, parent of Asia's
largest refiner Sinopec Corp .
"I am going to toss the coin and say look, given Canada has
approved, it is more likely now the U.S. will approve," said
Simon Powell, head of Asian oil and gas research at CLSA in Hong
But CFIUS standards can often be murky. For instance, a
privately owned Chinese company was blocked in September from
building wind turbines close to a Navy military site used to
test unmanned drones in Oregon.
SOUTH CHINA SEA AMBITION
As China's energy demand soars, CNOOC and other state
Chinese oil firms like Sinopec Group have been venturing into
deepwater projects in partnership with global oil majors such as
Total and Shell in west Africa and offshore
Brazil in the last few years.
But the Chinese firms mostly play a minority, passive role
in such projects, with limited access to deepwater exploration
and production know-how and hence with lack of exposure to the
entire operational process.
That leaves an acquisition as the other route to acquiring
new technical expertise.
"What they could learn in the Gulf of Mexico could be
deployed back into the domestic, South China Sea exploration in
terms of best practices in the longer term," said Gordon Kwan,
head of energy research at Mirae Asset Securities in Hong Kong.
CNOOC launched its first ultra-deepwater rig earlier this
year and it is drilling south of Hong Kong in an area within
Industry watchers expect CNOOC will eventually move the $1
billion rig to explore in deeper and more oil-rich waters
further south in the South China Sea, where China, Vietnam, the
Philippines, Taiwan, Malaysia and Brunei have overlapping
The deepwater area of the South China Sea remains untapped,
largely because tensions between rival claimants have made oil
companies and private rig-builders reluctant to explore
contentious acreage well away from sovereign coastlines.
Rich hydrocarbon resources are believed to lie below the
centre and south of the South China Sea, which is in the
Estimates for proven and undiscovered oil reserves in the
entire sea range from 28 billion to as high as 213 billion
barrels of oil, the U.S. Energy Information Administration said
in a March 2008 report.
That would be equivalent to more than 60 years of current
Chinese demand, under the most optimistic outlook, and surpass
every country's proven oil reserves except Saudi Arabia and
Venezuela, according to the BP Statistical Review.
Chinese state media have called the South China Sea "the
second Persian Gulf".
CNOOC also hopes to use the acquisition of Nexen to form a
foundation for growth in the Gulf of Mexico, analysts say.
Currently, it just owns a minority stake in a deepwater joint
venture project with Nexen in the Gulf and some relatively small
assets divested by Norway's Statoil in 2009.
Its deepwater capabilities should also benefit from Nexen's
projects in the North Sea.
Nexen has 43 percent of the Buzzard oilfield in the North
Sea, Britain's largest pumping about 200,000 barrels per day.
They are not deepwater projects but CNOOC can learn how to
deal with harsh weather -- expertise also key for CNOOC to
expand its deepwater footprint, analysts say.
"You learn how to conduct drilling in extreme weather. It is
not deep water but it is harsh weather," said Mirae's Kwan.
(Additional reporting by Roberta Rampton in Washington and Bill
Powell in Shanghai; Editing by Alex Richardson and Tiffany Wu)