China's Oil Investment Is Not a Threat

This July, China National Offshore Oil Corp. (CNOOC), the state-owned giant that dominates exploration and production off China's coast, announced the $15.1 billion acquisition of Nexen, a Canadian oil company with assets in the United States and around the world.

The announcement made surprisingly few waves in the United States, given that, if successful, this transaction would be the largest foreign acquisition by a Chinese company anywhere in the world. But that may be changing as American lawmakers eager to prove their nationalist bona fides get a closer look.

Chinese investments in North America often come under intense scrutiny. After a roughly 18-month investigation, the U.S. House Intelligence Committee warned in a report this week that the Chinese companies Huawei and ZTE, the world's second- and fourth-largest telecommunications-equipment suppliers, respectively, "could undermine core U.S. national-security interests" and recommended that the Committee on Foreign Investment in the United States (CFIUS) block mergers or acquisitions involving Huawei and ZTE. In late September, based on CFIUS's recommendation, President Barack Obama blocked the sale of four Oregon wind farms to Chinese-owned Ralls Corp. in only the second time a sitting U.S. president has prohibited a foreign transaction. Given that CFIUS is currently assessing the national security risks of CNOOC's proposed acquisition -- a process that should take six weeks -- company executives in Beijing are likely paying rapt attention.

Although Nexen accounts for less than 0.5 percent of oil production in the United States, its announced takeover by CNOOC has sparked some congressional opposition. New York Sen. Charles Schumer has asked CFIUS to withhold approval of the transaction until China provides better access to the Chinese market for American companies. Massachusetts Rep. Edward Markey has requested that CFIUS block the deal unless CNOOC agrees to pay royalties on production from two of Nexen's leases in the Gulf of Mexico. And Oklahoma Sen. James Inhofe said in a statement that he has "serious national security concerns with the Chinese government, acting through one of its corporations, purchasing a company that will give it control over significant U.S. oil and gas resources."

The Nexen acquisition is a friendly one; there are no rival bids, and Nexen's board of directors and the company's shareholders have already approved the deal. Mistrust of Chinese companies is prevalent in Washington, however, and the specter of CNOOC's failed 2005 hostile takeover bid for the U.S. oil firm Unocal (now part of Chevron) still haunts the company and its domestic peers. That's too bad, because a larger Chinese presence in the U.S. oil patch could actually be good for U.S. economic and geopolitical interests. Here are four reasons to welcome CNOOC's proposed takeover of Nexen.

1. It gives the United States leverage over Iran.

As Washington has used tougher sanctions to increase the pressure on Iran to curb its nuclear ambitions, U.S. policymakers have grappled with the question of how to elicit more cooperation from China. The U.S. sanctions regime aims to shrink Iran's oil income, which accounts for about half of the Iranian government's revenue, by prescribing penalties for entities that help Iran produce and sell its oil. Getting China on board is challenging not only because Beijing regards sanctions as an ineffective tool of statecraft but also because China has energy ties to Iran: Chinese companies are the largest foreign players in the Iranian oil fields and the largest buyers of Iranian crude, importing an average of roughly 426,000 barrels a day.

One solution is to roll out the red carpet for China's oil companies. Investing in the United States provides them with an opportunity to diversify their portfolios, grow reserves, and gain expertise in shale gas development. Since 2010, CNOOC and its domestic peer, Sinopec, have spent $5.6 billion buying minority stakes in U.S. shale gas projects. And the more China's oil companies are invested in the United States, the more likely they are to refrain from doing business in Iran. After the Unocal debacle, Chinese oil executives are acutely aware of how getting on the wrong side of politics in Washington can doom a deal. They know that CFIUS will review any proposed acquisition that would result in Chinese control of an energy company in the United States and ask about the acquirer's activities in Iran; winding down any activity there would almost certainly be a precondition for approval. China's oil majors are likely to choose the U.S. market over the Iranian one provided they have the opportunity to do so.

2. It won't help CNOOC in the South China Sea.

After CNOOC announced its plans to buy Nexen, the Wall Street Journal and Reuters published articles asserting that Nexen's operations in the Gulf of Mexico would provide CNOOC with deepwater drilling expertise applicable to disputed areas of the South China Sea. This vast body of water, potentially rich in oil and natural gas, is the subject of overlapping claims to territory and maritime rights by six governments, including China's.

The argument is that CNOOC's deployment of its newly acquired deepwater expertise to these areas could increase instability in the region and might prompt other claimants to further entangle the United States in a territorial dispute; therefore, CNOOC's takeover of Nexen is inimical to American interests. CNOOC itself hasn't helped matters. In May, the company's chairman, Wang Yilin, said large deepwater drilling rigs are "mobile national territory" and a "strategic weapon" for developing China's offshore oil industry.

Nexen, however, does not possess the technical capabilities that CNOOC needs to operate in the deep waters of the South China Sea. The Canadian firm is a newcomer to deepwater exploration and production. It does not own any drilling rigs and relies on outside contractors to perform most of the technical work involved in exploring and developing its acreage in the Gulf of Mexico -- contractors that CNOOC could legally hire anytime it wants. In any case, the geological differences between the Gulf of Mexico and the South China Sea limit the portability of U.S.-gained expertise.

3. Nexen's oil will continue to flow to Americans.

Americans worried that CNOOC might ship whatever U.S. oil it pumps on the first slow boat to China can rest assured: All the output from Nexen's U.S. assets will remain in U.S. hands. Under U.S. law, oil companies can only export crude oil with the explicit written permission of the U.S. government, and the government can only give permission if it finds exporting crude oil in the national interest. Consequently, CNOOC will continue to sell Nexen's production to Gulf Coast refineries. The only thing that will change is the name on the barrels.

4. It will signal that the United States is open to investment from Chinese companies.

Chinese executives and officials inside and outside the energy sector took CNOOC's rebuffed 2005 bid as a sign that the United States is hostile to Chinese investment. Many Chinese firms would like to invest in the United States but worry that politics will foil their attempts to enter the U.S. market. If CFIUS approves CNOOC's takeover of Nexen, it will send a strong signal that America is open for business.

Creating a more welcoming investment climate for Chinese firms benefits the United States in at least two ways. First, Chinese companies can provide capital to develop oil and natural gas resources, rebuild infrastructure, and create jobs in the United States. Chinese investments in the United States, which totaled more than $16 billion from 2000 to 2011, support 27,000 U.S. jobs today and could create up to 400,000 U.S. jobs through 2020, according to a study released in late September by the Rhodium Group, a consulting firm.

Second, welcoming Chinese companies to invest in the United States might even persuade China to reciprocate. If CNOOC's proposed acquisition of Nexen gets a green light from CFIUS, it would strengthen the hands of U.S. negotiators pressing China to open wider to U.S. companies. Given the fragile state of the U.S. economy, who could argue with that?