Canada Blocks Energy Sale to Malaysia; Is Chinese Deal Next?

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Saying that he is not convinced that a sale of Canada's Progress Energy Resources to Malaysia's state-owned oil company, Petronas, "is likely to be a net benefit to Canada," the country's industry minister rejected the $5.2 billion bid by Petronas for Progress Energy. That was a big deal, but not as big as the pending $15.1 billion offer by China's Cnooc Ltd. (NYSE: CEO) for Nexen Inc. (NYSE: NXY).

The Cnooc-Nexen deal is complicated by the fact that about 10% of Nexen's assets are located in the United States and the U.S. must approve the Cnooc acquisition. There are both Democratic and Republican lawmakers who oppose the deal. Opposition in Canada has also mounted and, given the outcome of the Petronas-Progress deal, there are two ways to look at what will happen with Cnooc.

On one hand, the government figured it could not accept both deals and so it cancelled the smaller one. To approve both sales makes it look like the Harper government is selling off Canadian resources as fast as it can. So, to take the Cnooc deal, the Petronas deal had to be dumped.

On the other hand, it is possible that the rejection is a signal to Cnooc that the government will also reject that firm's offer for Nexen. The message is, "Withdraw the offer now and save face." That's what happened in 2005 when it became obvious that the U.S. would not approve Cnooc's $20 billion bid for Unocal.

Petronas may alter its offer and resubmit it within 30 days. But do not expect any change to the decision. The Canadian and U.S. decisions on the Cnooc-Nexen deal are due next month, after the U.S. elections.

Paul Ausick

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