By: Reid Whitten
On February 25, 2013, the Chinese state oil company, CNOOC, closed a $15.1 billion deal to take over Canadian oil company, Nexen. Along with interests in the Canadian oil sands of Alberta and offshore production in west Africa and the North Sea, CNOOC will acquire more than 200 drilling leases in the Gulf of Mexico, a primary source of U.S. oil. According to Nexen, its existing assets in the area include facilities producing more than 15,000 barrels of oil per day in 2012, with notable exploration potential for future growth.
Many Americans are deeply concerned that foreign ownership of strategic U.S. resources could leave the country vulnerable, without its own vital supplies and infrastructure. In part to respond to such concerns, in 2007, the U.S. government enacted the Foreign Investment and National Security Act (FINSA), which established more stringent rules for the formal investigation and review of foreign companies acquiring certain U.S. businesses and/or assets.
The Committee on Foreign Investment in the United States (CFIUS or the Committee) is the body tasked with investigating and reviewing transactions in which foreign companies, particularly foreign government-owned or –controlled companies, seek to obtain assets deemed critical to U.S. interests. Chaired by the U.S. Treasury Department, CFIUS is an inter-agency committee including heads of the departments of State, Defense, Commerce, Energy, and Homeland Security. CFIUS is faced with the challenge of balancing a need for foreign investment in the U.S. economy against national security concerns over foreign-ownership of U.S. ports, pipelines, or other resources. A report on the latest CFIUS report to Congress can be found here.
On September 5, 2012, CNOOC announced that it had filed its paperwork with CFIUS, and the review was expected to take 75 days, to account for the fact that CNOOC is controlled by a foreign government. The confidential review process is designed to protect business secrets of the applicant company and to protect national security information inherent to the review. There are rarely leaks, and even attorneys and commentators close to the process do not have visibility into its uncertain workings. Therefore, by November 2012, there was speculation that the deal would not pass review as the 75-day mark came and went. The year closed, and CNOOC announced that it would close the deal in Q1 of 2013 at the earliest, but only pending CFIUS approval.
In February 2013, CFIUS gave its approval to the CNOOC acquisition of Nexen. Although the Committee does not release its findings to the public, Nexen’s leases in the Gulf are now reportedly being altered. Under the new lease arrangements, Nexen will remain the primary operator of the leases, while the owner of the contracts, CNOOC, will collect most of the profit and finance much of the costs. Nexen declined to comment for confidentiality reasons, but the timing of the lease changes points to a CFIUS approval conditioned on such amendments.
In other cases, foreign investors were not so fortunate. When Huawei, a Chinese information and communications company, sought to buy intellectual property assets from 3Leaf Systems in the United States, the deal raised concerns with the U.S. Department of Defense. Huawei was asked to file for CFIUS approval and the Committee recommended that the President block the transaction. Huawei divided its interest as a result. When Chinese-owned Ralls Corporation purchased four windfarms near a Navy flight test area and began constructing wind turbine generators, CFIUS invited Ralls to submit a filing for its purchase. As discussed in this blog, when Ralls stated it would sell the windfarms, CFIUS prohibited the sale without government approval, then ordered that Ralls divest its interests. As reported here, Ralls has since brought suit against the administration and several agencies involved.
The opaque CFIUS process leaves the alchemy of obtaining approval for such purchases a mystery. A comparison between CNOOC’s effort and Huawei’s and Ralls’s unsuccessful purchase attempts gives some indication, however, that foreign investors may do best to ask permission, rather than forgiveness when they make purchases that might come under CFIUS scrutiny. The Nexen purchase illustrates that, with patience and transparency, foreign companies may be able to purchase resources in the United States at a time when many U.S. assets are relatively affordable but still hold great potential growth.