Canada has given the "all clear" for the China National Offshore Oil Corporation (CEO) to purchase upstream oil and gas developer Nexen (NXY), a company with reserves in Canada and the Gulf of Mexico (among other places) and, perhaps more important, some interesting capabilities in shale oil and oil sands. CNOOC's interest begins with the reserves but the long-term value of Nexen lies in its oil sands capabilities. China has an estimated 14.5 billion barrels of oil locked up in oil sands, a quantity that is over twice the nation's proven conventional reserves. Even with the technological hurdles, the value of Nexen to China and its energy security would be huge.
CNOOC faces one last hurdle: the Committee on Foreign Investment in the United States (CFIUS). That body has not been particularly kind to Chinese companies of late, and it has come under fire at home for an approval process that is opaque by Washington standards. There are still those in Congress and industry who flatly oppose any Chinese investment in U.S. fossil fuel assets or reserves. What this decision will come down to is how well CNOOC has laid the groundwork.
Regardless of the outcome in Washington, the fact that the purchase of what one senior Canadian executive called a "bit player" in the energy business has caused such a stir is an indicator that despite CNOOC's groundbreaking efforts to build goodwill in government and industry, China, Inc. has a long way to go before it is viewed in American capitals with anything but suspicion.
The next bit, though, is the hard part. Building support among like-minded oilmen and politicians with bigger fish to fry is easy. Winning over the growing slice of America that believes the worst about China and state-owned enterprises is going to demand more than schmoozing: a wholesale rethink of corporate behavior is in order.
The formula that CNOOC and its fellow Chinese companies will need to follow when pursuing global mergers and acquisitions begins with the company's actions. How has the company behaved in its operations both in China and abroad? Has it operated in a transparent manner, or has it used its government ownership as a fig-leaf to hide its activities behind a veil of secrecy?
Has the company been fair with its partners? Has it built up a genuinely positive environmental record (one that partners and foreign competitors would agree is world-class)? Does it behave in a high-handed manner, or does it operate with humility? Is it out for long-term cooperation, or does it just want to dismember its acquisitions for a few key personnel, some technology, and its reserves?
Next, the company has to consider its reputation. If it is behaving well, does it get credit for its actions across the full scope of its stakeholders, or do too many people fail to discern a difference between CNOOC and other oil companies? For that matter, is it seen as a company, or is it perceived as little more than an extension of the Chinese government? Is it telling its story to enough of the right people to matter? And, by the way, who are the right people?
M&A success for China's companies abroad - for any perceived interloper, for that matter - rests on cash plus positive corporate behavior plus credit for that good behavior with all audiences. Actions + Reputation + Cash. Anything less leaves a deal dangerously vulnerable.
It will be interesting to see how things progress. CNOOC - and China - have a lot riding on this deal.