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Lehman, Lee & Xu - China Oil and Gas in the news

The China Law News keeps you on top of business, economic and political events in the China.
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In the News

China looks for resources in stable regions

CNOOC Ltd's US$15.1 billion bid for Canada-based oil producer Nexen Inc highlights China's strategy of seeking energy security by diversifying its sources from politically unstable regions to stable areas.

Analysts at Sanford C. Bernstein said North America, where unconventional hydrocarbons have triggered a significant increase in mergers and acquisitions, is likely to be the key focus area for Chinese M&A activity in the next couple of years, given the low risk and long-term growth potential.

The Middle East and North Africa have dropped down in the rankings, where geopolitical risks are a major concern.

"Chinese companies remain uncomfortable with assets where there is significant exploration risk or uncertainty," Bernstein said.

The Nexen deal, announced on Monday, could be China's largest overseas acquisition. It tops the US$14 billion paid for a 12 percent stake in Anglo-Australian mining giant Rio Tinto by Beijing-based Chinalco and US partner Alcoa in 2008.

For CNOOC, China's dominant offshore oil and gas producer, it marks the second attempt at taking over a major North American energy company. In 2005, CNOOC's US$18.5 billion bid to buy California-based Unocal Corp failed due to intense US political opposition.

Some investors worried that CNOOC may be overpaying for Nexen. The offer represents a 61 percent premium to the target's last traded price on July 20. CNOOC shares dropped 4 percent to HK$14.82 (US$1.9) in Hong Kong on Tuesday. They closed at HK$14.80 yesterday.

The company is struggling to boost production after oil spills last year led to the closure of its major field offshore in northeastern China.

Analyst Fei Wu at BOCOM International wrote in a note that the timing of the takeover bid was positive for CNOOC because Nexen's share price had slumped recently on temporary factors such as softening crude prices.

Don't prejudge

The acquisition, already endorsed by Nexen's board, is subject to approval by regulators in Canada, China and also in the US and the UK, because some of the Canadian oil producer's assets are in the Gulf of Mexico and in the North Sea.

CNOOC, which said it expects the deal to close sometime in the fourth quarter, has crafted a strong case for a successful review from the Canadian government.

It includes plans to establish Calgary as its North and Central American headquarters, retain all Nexen's current management and employees and enhance capital expenditure on Nexen's assets.

The Beijing-based company also said it will seek to list its shares on the Toronto Stock Exchange and honor all of Nexen's local community and social commitments.

Canadian Prime Minister Stephen Harper said his government will carefully scrutinize the bid in terms of its net benefit to Canadians.

"Nobody should prejudge the government's decision," Harper said.

Fang Zhi, president of CNOOC's international division, told the Wall Street Journal in Calgary a few hours after announcing the Nexen deal on Monday: "We feel welcomed. And we learned how to earn a social license to operate here."

The same day, China Petrochemical Corp, or Sinopec Group, said it would pay US$1.5 billion for a 49 percent stake in Calgary-based Talisman Energy Inc's UK unit.

Sinopec is China's second-largest oil producer and largest refiner.

China, the world's second-biggest oil consumer, is showing itself relentless in the quest for more energy sources to fuel economic growth. Chinese oil majors plan to double overseas production in the next five years.

Evaluation system

On Tuesday, China's National Development and Reform Commission said the nation will "proactively" seek investments in natural resources overseas to secure long-term energy and mineral supplies.

China's top planning agency said it will provide guidance for such investments and help establish an evaluation system to reduce risks for exploration projects.
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Edward Lehman 雷曼法学博士
Managing Director 董事长

LEHMAN, LEE & XU China Lawyers
Co-Founder with Russell Brown LehmanBrown International Accountants

Lehman, Lee & Xu is a top-tier Chinese law firm specializing in corporate, commercial, intellectual property, and labor and employment matters. For further information on any issue discussed in this edition of China Oil and Gas Lawyers Alert or for all other enquiries, please e-mail us at mail@lehmanlaw.com or visit our website at www.lehmanlaw.com and Mongolia www.lehmanlaw.mn.

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© Lehman, Lee & Xu 2012.
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