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China's Feeling Buyer's Remorse on Canadian Oil Company Purchase?

Back in February, China’s state-owned oil company CNOOC finalized a deal to purchase the Canadian oil sands firm Nexen. At the time, many in Beijing hailed the move as a triumph for China.

China has been relentless in its pursuit of foreign sources of oil as it tries to meet its ever-growing energy demand; when CNOOC tried to buy the California-based firm Unocal back in 2005, it wasn’t prepared for the political backlash and public outcry in America that eventually scuppered the deal. The Chinese petroleum behemoth learned from this mistake, developed its soft power in Canada prior to its bid for Nexen, and was understandably pleased when it closed the merger for $15 billion.

Only a few months later, however, the Nexen purchase is looking more and more like a mistake. Or as an industry insider put it for Reuters: “For CNOOC, the closing of the [Nexen] deal marked the end of euphoria, and the beginning of pain.” Reuters reports:

The central problem, analysts say, is that in a global energy industry transformed by the shale gas revolution in North America and elsewhere, CNOOC overpaid. And it underestimated the risks of monetizing the landlocked oil-sands and shale-gas assets in Canada that account for 75 percent of Nexen’s proven and probable reserves.

The deal may be emblematic in a different way than its boosters think. Critics of China’s decade-long overseas resource-buying binge believe state-owned companies have wasted huge chunks of the money—because deals were done for political, not commercial, reasons.

Technical problems in one of Nexen’s biggest plays are further dampening China’s hopes for the Canadian alliance. Compound that with the fact that Canada’s oil sands still lack a pipeline to bring the heavy crude to market, and there are plenty of reasons for Beijing to be downright dour about the move.

But despite the protestations of CNOOC executives, these kinds of acquisitions are not guided—at least not entirely—by the demand to make a profit. China has become well-versed in writing off short-term losses for longer-term goals: thanks to the Nexen deal, for example, CNOOC’s proven reserves jumped by 30 percent. And then there’s the experience CNOOC gets by working alongside a firm already well-versed in oil sands extraction. China has heavy oil of its own and can learn a lot from Canada’s engineers.

Beijing didn’t find Nexen in the bargain bin, but it satisfies a real and growing need. And, for now, China seems willing to pay a premium for energy security.

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