The state run Chinese oil enterprise (CNOOC) seems set to purchase the Canadian oil and gas company, Nexen. The three links below provide a lot more information, although I don’t believe the answers to my questions need any more background.
If the CNOOC bid gets federal approval (which depends on the deal being of “net benefit to Canada” according to the Canadian Industry Minister), I have two questions (and apologize for their parochial nature):
If, one day, the price of oil rises to, say, 300 percent of its current level, could a CNOOC-owned Nexen sell oil to China at a steep discount, far below market prices? (i.e. to support the homeland’s economy)
More generally, can a Canadian oil and gas company choose to whom they sell and at what price (recognizing that it may be irrational from a strictly financial perspective)? More specifically, if oil/gas prices skyrocketed and/or global supplies were extremely limited, can the government force the company not to export its oil/gas (i.e. force them to sell it within Canada), or export the oil/gas only if there is no domestic buyer?
I think it possibly could, but the backlash would be enormous, which would lead to…
The Canadian government makes the laws of the country. If there were popular support to nationalize companies or industries, it could certainly do so. There may be international outrage and it may run counter to international agreements such as the free trade agreement with the United States, but the Canadian government could absolutely do so. Same with export limits or other coercive legislation. Canada has already had export limit legislation in place on natural gas as recently as the mid-1980s.
Also, in the case of private companies, shareholders would bring down the leadership of any company that sold its product at an extreme discount unless there was a clear long-term strategy for doing so (i.e. gaining market share).
So, to continue, given the constraints as you’ve indicated, is there any reason to worry about “foreign ownership” of this or any other company so long as it’s freely traded?
Sure, there is a reason to be concerned about foreign ownership of natural resources, food supplies, etc; however this needs to be balanced with foreign investment and job creation.
This is why federal approval is required. It’s going to be a tough call on this one.
So long as royalties are paid based on the market price of oil, why would we care if a CNOOC-owned Nexen sold oil to China on the cheap - and is there even any relevance to what price a state-owned entity sells something to the state for? Seems to me that it’s just an entry in a ledger somewhere.
This is true, but there’s a couple nuances. First, a key point is that it is a state-owned entity shipping to a state. Shareholders in a public company would certainly sit up and take notice if the company was selling its product at a massive discount.
Secondly, if CNOOC starts sending all its product back to China with no opportunity for Canadian firms to buy or sell it, that may raise some hackles in terms of market fairness. I don’t know it would breach any ‘free market rules’, but it would certainly diminish its social license to operate.
If I understand correctly, that means the government(s) would be happy, but, in terms of oil prices wouldn’t that place domestic users at a disadvantage? If yes, then, as to “would we care?” I would.
It doesn’t really place you at a disadvantage any more than China buying oil on the open market and subsidizing domestic gas prices. In the one case, the Chinese government takes a financial hit equal to the difference between market price and subsidized domestic price, and in the other case the Chinese government takes an identical financial hit due to the opportunity cost of “selling” at the arbitrarily set low price vs. selling at the market price.
Now it’s possible that royalties are currently structured as a % of listed selling price rather than as a % of the current market price, but that’s a couple pieces of provincial legislation away from being fixed if it’s an issue.
Three points, aside from the point already made about royalties:
But you’ve already posited the company is selling the oil to China. In the grand scheme of things it’s not going to make much of a different to a consumer in Brockville that someone in Beijing’s getting a discount on the price of gas.
The other thing is that we must remember that oil is a fungible resource. It’s not as easy as it sounds to give one particular consumer a “break” on oil. If the customer in Beijing is buying cheap Chinese oil, he is therefore not buying oil that was pumped out of Saudi Arabia, or Norway, or Borneo. More of THAT oil is now available on the world market, and so the price of oil drops. When it comes to a totally fungible resource, it’s very difficult to give a discount to some people without giving a discount to everyone.
The possibility of this happening is so preposterously miniscule that it really isn’t worth the concern. It would be an insanely stupid thing to do for a dozen or more reasons; aside from all the political problems, for one thing, no matter how CNOOC wants to price their oil, they still have to pay their Canadian workers the going wage, which is going to be a shitload more money if the price of oil triples. As it is the wages in Canada’s oil indutry are crazy high. It doesn’t do CNOOC, or China, any good to sell themselves cheap oil but lose their shirts paying $75 an hour to the Canadians who would be extracting it.
Also, selling yourself cheap oil has its own economic problems… which is why Canada doesn’t do it anymore.