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By Andrew Holland on Jul 31, 2012 with 2 responses

Why China’s Purchase of a Canadian Oil Company is NOT Harmful to U.S. National Security

Different Situation Than Attempted Takeover of Unocal in 2005

Last week, the China National Offshore Oil Corporation (CNOOC) tendered an offer to buy Nexen, a smaller, independent Canadian oil company for $15.1 billion. The deal has been approved by Nexen’s board, and the price premium of 61% above the previously-traded share price should be enough to win-over Nexen’s shareholders. It still must pass scrutiny from the government of Canada, and of the United Kingdom and the United States, where Nexen has many reserves.

CNOOC had attempted a takeover of the American oil company Unocal in 2005. Then, a hostile response from the public and Members of Congress forced them to pull-back. Now, however, regardless of some opposition from within the U.S. Congress, the betting is that this deal will pass muster. The opposition in Congress is mostly from the usual suspects like Senator Schumer and Congressmen Markey and Forbes, who are using this as an opportunity to push other issues they have, like market access to China for American exporters or lease rates in the Gulf of Mexico.

Notably absent this time, however, are voices saying that this takeover will harm America’s national security. In 2005, we heard from many people that selling strategic assets to a foreign competitor will undermine America’s security. It was not true then, and it’s even less true today.

I gave an interview to Jim Randle of the Voice of America yesterday, which should air this afternoon. The most important question that I was asked was whether this deal threatens America’s national security. Unequivocally, I answered that it did not.

There are two reasons why I am unconcerned about a Chinese company owning reserves in North America. First, and most importantly, oil is a fungible global commodity. Even if CNOOC diverted all of Nexen’s current production to China (an economically questionable move), American refiners would be able to buy crude oil from any number of other producers around the world. Because we have been so successful in creating a deep and liquid global market for oil, it no longer matters where your oil comes from; as I wrote in a December, 2011 article for The Atlantic, it is essentially all from one bathtub.

Secondly, I do not believe that this acquisition is about securing new reserves of oil. Unlike China’s involvement with companies in African countries like Sudan and Angola, CNOOC is not interested in securing assured supplies of oil for the thirsty Chinese economy with this deal. Instead, CNOOC is seeking access to the technology that allows Nexen to drill in deep offshore regions and extract oil from shale or the Canadian Oil Sands.

China has never had the resource wealth that the United States possesses, much less its northern neighbor, Russia. Its oil fields in Manchuria are notoriously difficult to access, and the fact that it was able to acquire significant production from this region during the 1950s “Great Leap Forward” and the Cultural Revolution of the 1960s was a testament to the skill and determination of China’s early oil producers.

But skill and determination can only get you so far: new technology is needed to access unconventional oil fields. This includes oil off its shores (and in the internationally disputed areas of the South China Sea), and in shale formations like the Tarim Basin in China’s far-west Xinjiang Province. It will also be able to use these technologies to extend the life of older fields like those in Manchuria. CNOOC will learn from Nexen’s engineers and through access to its intellectual property the current state of the art in fracking, horizontal drilling, and other key skills.

Are Companies Selling Our Knowledge too Cheaply?

Finally, the interviewer asked if I was concerned that we were selling our technology too cheaply to the Chinese. I replied that Nexen’s shareholders and board certainly don’t think so — they received a windfall of 61% above the previous value of their stock for the company. We should not begrudge other countries the ability to ‘catch-up’ by emulating our technologies: their growth does not come at the expense of ours. But — it does raise an interesting question about national intellectual property.

We say that education and Research and Development are ‘public goods’ that give advantages to the broader society beyond the value that accrues to the company that funds it — that’s why the government is involved. However, we allow companies to sell that intellectual property at whatever the market values it at. By the same logic, that is undervalued — meaning the Chinese are growing using some of the public Research and Development resources that we’ve given them. V.I. Lenin said “The Capitalists will sell us the rope with which we will hang them.” While I do not think that the Chinese are going to hang us, I do worry that they are getting a bargain on our intellectual property.

  1. By Russ Finley on July 31, 2012 at 10:51 pm

    Money quote:

    …it is essentially all from one bathtub.

    Our oil supply can’t actually be cut off. We can always find a seller. What can happen is that global prices can spike, having the same effect as being cut off, but the effect is felt everywhere around the world. Domestically produced oil reduces trade imbalances, but does not make oil cheaper, or more secure.

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  2. By ruth on November 28, 2012 at 10:35 am

    This drastically concerns me!  We are all aware that China does not care for the environment or the health of those who would be impacted by their making money!  I have many Chinese friends so please don’t take this as racist but as a fact of what we have seen them do in business.  

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