9B17M005

CNOOC ENGAGES WITH CANADIAN STAKEHOLDERS1

Professor Klaus Meyer and Alexandra Han wrote this case solely to provide material for class discussion. The authors do not intend
to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other
identifying information to protect confidentiality.

This publication may not be transmitted, photocopied, digitized, or otherwise reproduced in any form or by any means without the
permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights
organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western
University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) [email protected]; www.iveycases.com.

Copyright © 2017, CEIBS (China Europe International Business School) Version: 2017-01-11

In 2013, China National Offshore Oil Corporation (CNOOC) acquired Canadian oil exploration company
Nexen for US$15.1 billion in the largest-ever acquisition abroad by a Chinese company.2 For the Canadian
public, the acquisition was controversial from the outset, and CNOOC experienced unfamiliar public
scrutiny during the process of approval by the Canadian and U.S. authorities.

After the deal was completed, Nexen’s operations were not smooth. Operating costs exceeded budgets, and,
when the oil price sharply declined, Nexen came under considerable pressure because its exploration sites
were primarily in high-cost locations, such as Canadian oil sands. Consequently, Nexen had to handle
challenging questions from its Chinese owners and other interested parties. In July 2015, Nexen was in the
news again because a pipeline leak spilled five million litres of oil emulsion in a remote area.3 Then, after
that media storm had settled, in January 2016, a worker died and another was hospitalized after an explosion
in an oil cracker facility.4 Nexen’s management team had to respond to media enquiries but also faced
broader questions regarding its internal processes and its corporate strategy.

CHINA’S QUEST FOR RESOURCES

In 2010, the Chinese government started promoting a “going-out strategy” of encouraging large enterprises
to invest overseas to access resources, technologies, and markets. Energy security was of particular concern
because the fast-growing Chinese economy was increasingly dependent on imported energy and other
natural resources.5 At the time, global oil markets experienced volatile but generally high price levels due
to increasing demand from emerging economies. The benchmark West Texas Intermediate (WTI) index
averaged at $94 per barrel, while the Brent index averaged at $111 per barrel.6 China imported oil from
Russia, the Middle East, and Africa, but with rising demand at home, it was looking elsewhere to secure its
resource needs.

As Chinese resource companies were looking to secure access to natural resources around the world, they
found Canada a potentially attractive business partner due to its rich natural resources, energy security, and
advanced science and technology. Moreover, an operation in Canada could potentially access not only rich
Page 2 9B17M005

natural resources but also professional management and experienced staff. 7 At the same time, Canada
offered a relatively stable political environment and was thus considered “a safe place to invest.”8

CHINA NATIONAL OFFSHORE OIL CORPORATION

The CNOOC Group was established in 1982 under the central government of China, focusing on the
exploration and development of oil and gas, especially in offshore China and overseas. In 1999, the CNOOC
Group established CNOOC Ltd. in Hong Kong as its international holding company (see Exhibit 1).
CNOOC Ltd. was listed on the Hong Kong (stock code CNOOC) and New York (stock code CEO) stock
exchanges in 2001, raising $1.25 billion in the initial public offering.9 By the end of 2015, five subsidiaries
of the CNOOC Group had gone public: CNOOC Ltd., China Oilfield Services Ltd., Offshore Oil
Engineering Co., Ltd., China BlueChemical Ltd., and Shandong Haihua Group Co., Ltd.10

CNOOC Ltd. first attracted international attention in 2005, when it bid to take over the Californian oil and
gas firm Unocal for $18.6 billion but later withdrew its bid due to political opposition in the United States.
Its first major acquisition in the United States came in 2010, when CNOOC paid $1.08 billion for a 33 per
cent stake in the Eagle Ford Shale Project in Southwest Texas, jointly owned with Chesapeake Energy
Corporation.11

CNOOC Ltd. achieved major breakthroughs in both shallow and deepwater exploration, and its reserve
replacement ratio reached 112 per cent in 2014, with net proven reserves of 4.48 billion barrels of oil
equivalent (BOE) and production of 1.18 million BOE per day (b/d).12 In 2015, the CNOOC Group climbed
to 72nd place in the Fortune Global 500, with total assets of ¥1,164.2 billion. It had become one of the
largest oil and gas producers in China, and had diversified in related industries such as oilfield development,
the refining and marketing of petroleum, and power generation.13

In 2011, the CNOOC Group published its “Second Leap Forward Development Strategy.” Its strategic
objective was to grow the core oil and gas business by accelerating growth in liquefied natural gas (LNG)
and coalbed methane (CBM) and by expanding oilfield professional services, petroleum sales, and oil trade.
In addition, CNOOC aimed to develop related businesses, such as oil refining, chemicals, financial services,
and alternative energy. Its ambition was to become a globally leading energy company by 2030. The plan
envisaged doubling oil and gas production within a decade, and tripling annual output from 2010 levels by
2030. At the same time, CNOOC committed to corporate social responsibility, aiming to become a role
model as a responsible national oil company.14

NEXEN AND LONG LAKE OIL SANDS

Nexen originated from Canadian Occidental Petroleum Ltd. (CanOxy), an oil and gas producer
headquartered in Calgary since 1971. In the 1980s and 1990s, it acquired oil and gas exploration projects
in the Gulf of Mexico, Yemen, and the North Sea. Renamed Nexen in 2000, it launched several ambitious
investment projects, notably the Buzzard offshore facility in the British North Sea and Long Lake oil sands
exploration in Alberta, Canada.15 In the early 2000s, Nexen was one of the most admired companies in
Alberta, respected not only for its technological prowess but also for its environmental responsibility and
its employee care.

Oil sands were considered an attractive alternative source of energy in view of rising oil prices and new
extraction and refining technologies that became available in the early 2000s. However, they were also
controversial, as environmental groups criticized the contamination of the land caused by the extraction of
Page 3 9B17M005

oil from oil sands. Nexen’s Long Lake project, about 75 kilometres south of Fort McMurray in Northern
Alberta, applied new technologies that reduced the environmental impact of oil sand extraction by steam-
assisted gravity drainage (SAGD) processes that reduced carbon emissions and by the use of mainly
recycled water.16 In 2003, Long Lake received regulatory approval and in 2006, construction of the facilities
was completed. In 2007, the injection of steam into the well pads began; in mid-2008, SAGD bitumen
processing started; and, in 2009, production of premium synthetic crude oil began. 17 In 2009, Nexen
acquired an additional 15 per cent interest in the project from its partner Ormat Process Technologies Inc.
(OPTI), increasing Nexen’s ownership stake to 65 per cent and taking operational responsibility for the
project.18

However, the project encountered technical problems and engineering missteps from the outset and failed
to meet production targets. Rather than the projected 280,000 b/d, Long Lake produced only 30,000 b/d in
2011.19 Some problems arose from the nature of the oil deposits: uneven deposits interspersed with shale
made penetration more difficult, leading to vast variation in ore quality across locations. Moreover, high
water saturation levels made the oil sands at Long Lake hard to tap. Other problems arose from technical
incidents that caused costly delays in the construction.20 For example, Nexen skipped the conventional on-
site pilot project and instead moved directly to a large-scale commercial operation. Thus, wells were drilled
close to the site’s base plant to save time and money, but the wells quickly became saturated with water
and were far from the richest deposits of crude, requiring more steam than planned. This increased
construction costs from an initial project budget of $2.6 billion to more than $6.1 billion by 2007.21

Due to its focus on locations where the extraction of oil was technologically challenging, Nexen’s operating
costs were much higher than those of other major oil exploration companies. In 2011, Nexen pumped about
200,000 b/d at a cost of $20.84 per BOE. In contrast, CNOOC’s average cost per BOE was $9.01, somewhat
lower than that of Chinese competitors PetroChina ($11.54) and China Petroleum & Chemical Corp
($15.43). Global competitors faced similar cost conditions at $9.44 for Exxon Mobil and $10.78 for Royal
Dutch Shell.22

OPTI, Nexen’s partner, ran into financial difficulties as a consequence of the challenges at Long Lake. By
2011, it had $2.8 billion of debt and not enough cash on hand to meet even its 2011 interest payments.23
Moody’s cut its ratings on some of OPTI’s debt to Caa-3. At this stage, CNOOC took over OPTI, thereby
acquiring an equity stake in the Long Lake project.24

The poor performance of the Long Lake project undermined Nexen’s financial performance, and its stock
price dropped 20 per cent from 2009 to 2012. In January 2012, Marvin Romanow stepped down after 13
years as chief executive officer (CEO). Chief Financial Officer Kevin Reinhart was appointed as interim
CEO.25 In 2012, the performance deteriorated further as net income fell to $333 million, down 53 per cent
from the previous year.26 The poor financial performance led to speculation that Nexen would become a
takeover target.

POLITICAL CONTROVERSY

In July 2012, CNOOC Ltd. made an offer to acquire Nexen for $15.1 billion ($27.5 per share) in cash, a
premium of 61 per cent over the previous day’s trading price.27 Nexen offered advanced technology and
expertise, which Chinese companies were seeking to use both at home and throughout their increasingly
global operations. In addition to the oil sands operations, Nexen had assets in offshore production and
reserves in the North Sea, the Gulf of Mexico, Western Africa, and Yemen, which would help CNOOC to
diversify its asset portfolio geographically.28
Page 4 9B17M005

However, completion of the deal depended on approval by the government of Canada. The Canadian
foreign takeover law required investors to demonstrate a “net benefit” for the nation. This review was a
serious matter: in October 2012, the government rejected a bid of $5.2 billion by Petroliam Nasional Berhad
(Petronas), Malaysia’s state-owned oil company, for Progress Energy Resources. CNOOC also needed
approval from authorities in the United States because of Nexen’s assets in the Gulf of Mexico, and from
authorities in the European Union and China.29

Having learned from the Unocal experience in 2005, CNOOC hired professional advisors in Canada to
support it during the process. CNOOC signalled early to key policy-makers that it intended to make a major
deal so they were not surprised and would not make early media statements based on insufficient
information. CNOOC also worked early and proactively on the commitments it would make to demonstrate
the net benefit to Canada, the criterion established in Canadian foreign investment law.

The Canadian government under Prime Minister Stephen Harper of the Conservative Party actively
encouraged foreign investors. Harper saw it as a “national priority” to boost economic growth by
diversifying exports away from the U.S. market and selling more resources to Asia.30 Similarly, Alberta
Premier Alison Redford considered the CNOOC–Nexen deal as “an important investment for Alberta and
for Canada.”31 For a long time, the United States had been Canada’s only major customer, yet in the 2010s,
oil production was increasing in the United States. At the same time, Canada lacked the capital to develop
its natural resources alone and needed overseas investment.

For these reasons, the business and investor community generally viewed the deal favourably. However,
among political commentators in Canada, the CNOOC–Nexen deal triggered lively debate. People were
concerned not only about the ownership of Canadian natural resources by a foreign state-owned enterprise
(SOE), but also about doing business with a company owned by a non-democratic state. For example,
opposition leader Thomas Mulcair of the New Democratic Party expressed reservations:

We’re very concerned about the potential sale of a strategic Canadian asset, not only to a foreign
enterprise, but one that is wholly controlled by a foreign government that doesn’t follow the same
market rules as Canada . . . . The question is how can it be in Canada’s interest, how can it be of a
net benefit to Canada, to sell a strategic natural resource to a corporation that is wholly owned by
a foreign country?32

A public opinion poll suggested that 58 per cent of Canadians believed the government should block the
Nexen takeover.33 Members of Parliament for the governing Conservative Party reported letters from voters
calling for rejection of the deal, and they heard reservations in conversations with their own supporters.
One Conservative member of Parliament speaking to the media on condition of anonymity summarized the
sentiments: “On paper, it looks like a good exchange that will bring wealth and growth to this area. . . .
However, the other side of the coin is the fact that it is a state-run enterprise, a government-owned company.
That’s what’s causing the apprehension.”34

An expert on Canadian foreign investment law, top-tier government official Paul Boothe, assessed the
situation:

When you look at what they’ve said about their plans in terms of investment, in terms of
employment, in terms of governance, in terms of social things like corporate responsibility—all of
those things are consistent with the criteria in the Investment Canada Act. . . . [However,] there are
some bigger questions: Should we have state-owned enterprises investing in Canada? How much
from a certain country? How much from China? . . . In my view, those are discussions about the
Page 5 9B17M005

rules themselves rather than discussions about the application of the current rules for this particular
deal.35

Similarly, scholarly observers interviewed by the media varied in their assessment. For example, China-
born economist Duanjie Chen of the University of Calgary’s School of Public Policy argued that

Chinese SOEs are unlike Crown corporations in Canada in that they do not operate on market
principles. It should not be allowed to become an instrument in China’s distorted and often
disreputable drive toward global hegemony. Chinese government use of state-owned enterprises
has contributed to lower priority on human rights, the environment, social justice, and corporate
rectitude.36

In contrast, Yuen Pau Woo of the Asia Pacific Foundation called Chen alarmist in her criticism, saying:

The government should treat all foreign companies operating in Canada equally. I’m sure we can
find examples of malfeasance of Chinese SOEs, but we can probably find examples in the private
sector as well. The real question is—do we have the ability in Canada to either prevent that from
happening or impose remedies . . . for say polluting a fresh source of water? The answer surely is
yes.37

On the Chinese side, CNOOC remained publicly optimistic throughout the approval process. The Chinese
authorities described the deal as a litmus test for how open Canada was to Chinese investment, particularly
from state-owned companies and those in the resources sector. Chinese diplomats suggested that rejecting
the deal might cause a serious rumple in the Canada–China relationship, with a negative impact on future
Chinese investment in Canada.38 CNOOC made extensive commitments to demonstrate the net benefits of
the deal, including the following: (1) half of all board and management positions were to be held by
Canadians, (2) the employment level would be maintained for at least five years, (3) Nexen’s headquarters
would remain in Calgary, (4) CNOOC itself would be listed on the Toronto Stock Exchange, and (5)
CNOOC would continue Nexen’s social responsibility and investment plans.39

Because of the public controversy, the Canadian government extended its review of the deal twice. 40
Eventually, Prime Minister Stephen Harper approved CNOOC’s takeover of Nexen on December 8, 2012.
At the same time, the Canadian government announced that it would prohibit future acquisitions by state-
owned companies in the oil sands industry barring exceptional circumstances. This new policy made foreign
investment in the Canadian natural resource sector more difficult. However, Stephen Harper emphasized
that “foreign state-owned business will still be welcome to acquire minority stakes and enter into joint
ventures with Canadian businesses.”41

After the Canadian and European approvals, the deal had one final hurdle—approval by the Committee on
Foreign Investment in the United States (CFIUS), which was necessary due to Nexen’s assets in the Gulf
of Mexico. This approval was finally received in February 2013; according to media reports, CNOOC
agreed to surrender operating control of assets in the Gulf of Mexico to accommodate U.S. national security
concerns.42

THE INTEGRATION OF CNOOC AND NEXEN

With the completion of the deal, CNOOC’s worldwide oil production increased by 20 per cent and its
reserves by 30 per cent, and it gained access to state-of-the-art shale gas and deepwater expertise. 43
Page 6 9B17M005

Following the agreed conditions, CNOOC retained the top management team and the workforce of Nexen.
Kevin Reinhart, who had been CEO of Nexen since January 2012, continued as CEO, while Li Fangrong,
CEO of CNOOC, became non-executive chairman. Other members were Barry Jackson, Thomas O’Neill,
and William Berry.44

The initial post-acquisition strategy envisaged Nexen as a fairly autonomous subsidiary. In a media
interview in February 2013, Li Fangrong said:

Basically we are not changing anything. Nexen has been proven to be a very successful company.
Why would we change it? I am not expecting to change the way Nexen manages the business. So
basically, everything stays as usual, other than that Kevin now reports to me, and before he reported
to the board. From time to time, we will have interaction between here and the Beijing
headquarters.45

However, at a strategic level, CNOOC recognized the need to improve the financial performance of Nexen
while stabilizing its workforce. CNOOC president, Yang Hua, announced, “The company is to integrate
the planning, finance, exploration, and development departments of the two companies over the next three
or five months.”46

The integration started in March 2013 with the delisting of Nexen from the New York Stock Exchange. In
May, CNOOC started to partly repay a $6 billion short-term bridge loan it had used to finance the
acquisition by selling $4 billion of corporate bonds in the biggest dollar-denominated offering from Asia
outside of Japan. The premium CNOOC paid was 35 basis points less than on similar-maturity securities it
had issued in 2012.47 In September 2013, CNOOC Ltd. began trading on the Toronto Stock Exchange,
fulfilling a condition of its acquisition of Nexen.48 CNOOC exceeded its production target for 2014 with a
net production of 4.4 billion BOE and an average daily net production of 1.1 million BOE—a 20.6 per cent
increase over the previous year. With the contribution of Nexen, CNOOC’s reserve replacement ratio
reached 327 per cent.

CNOOC integrated some aspects of Nexen through its foreign capital operation system, technology sharing,
and cultural integration. CNOOC established an independent office for overseas health, safety, and
environment management and introduced its global crisis management system to Nexen, which included
coordinated emergency response teams and joint emergency drills. Information technology systems were
connected through an information-sharing platform and a special network connection between Beijing and
Calgary for live telephone conversations, video meetings, email address list integration, and safe transfers
of large files.49

In the area of social responsibility, CNOOC continued Nexen’s community projects in Canada, the United
Kingdom, and the Gulf of Mexico. In 2013, CNOOC donated $3.1 million to support community
infrastructure and flood relief projects in Canada. Employees of Nexen contributed 1,900 hours of post-
disaster reconstruction and volunteer services.50

HONEYMOON OVER?

After a promising start, CNOOC soon ran into a variety of challenges in its new Canadian operations;
operating costs were exceeding budgets, especially at Long Lake, while a plummeting oil price undermined
the financial viability of high-cost oil exploration projects. Thus, the financial performance of the CNOOC
Group suffered from Nexen’s cost structure. While oil and gas sales grew by 15.4 per cent, costs rose even
faster. Consequently, net profits declined 11.4 per cent, primarily due to increasing operating and
Page 7 9B17M005

exploration costs, and a decreasing oil price. By the end of 2014, production climbed to 1.18 million b/d
(an increase of 5.1 per cent) of which Canadian production accounted for 5.3 per cent. However, operating
expenses increased ¥31.2 billion, of which operating expenses in Canada accounted for 19.8 per cent.51
Despite huge investments, Nexen could not be turned around, and in 2015, Nexen’s operational loss
widened to ¥2.1 billion (all data calculated from Exhibit 2).

Nexen’s financial challenges got worse when crude oil prices plunged from $110 per barrel in early 2014
to less than $60 at the end of the year (see Exhibit 3). Throughout 2015, the price remained low due to
concerns over global economic prospects and an excess global supply of crude oil. In 2015, the WTI crude
oil price averaged $48.67 per barrel, and the Brent crude oil price averaged $52.32 per barrel. 52
Consequently, CNOOC’s consolidated net sales slipped by 33 per cent to ¥146.6 billion in 2015. The
Canadian subsidiary was even more affected, with net sales dropping by 53 per cent to ¥5.0 billion.53
However, Nexen was not the only one that suffered; the Alberta oil industry experienced massive
downsizing. Some foreign operators shut down their entire extraction activities and laid off most of their
employees, leading to a sharp increase in unemployment in the province.

In 2012, CNOOC had bought Nexen for $15.1 billion when the oil price was high. Yet, by 2015 many of
its assets were worth far less, and CNOOC faced a write-down estimated to be at least $5 billion.54 With an
oil price of $50, the exploration of the oil sands—a relatively high-cost source of oil—was no longer
financially attractive. Analysts of BMO Capital Markets estimated that Nexen’s supply costs, a measure of
break-even price plus a return on capital invested, were $76.5 per barrel and, at its Long Lake project, as
high as $188.50.55

ATTEMPTING A TURNAROUND

The oil price slump and high operating costs forced a rethinking of CNOOC’s global operations. CNOOC
headquarters in Beijing reviewed all aspects of business, reduced capital spending, and took more direct
control of Nexen. In particular, the business development unit was centralized in Beijing to enable better
coordination of investments around the world.56

However, this plan led to tensions between CNOOC leaders in Beijing and senior management in Canada,
who intended to continue running Nexen as an autonomous business unit. Consequently, in April 2014,
Reinhart was replaced by Fang Zhi, an executive vice-president of CNOOC with a career of 30 years in the
company, who had played an instrumental role in negotiating the Nexen acquisition in 2012 and served on
Nexen’s board of directors.57 Moreover, in November, Nexen dismissed four vice-presidents of its finance
division. 58 CNOOC had originally committed to the Canadian authorities to keep 50 per cent of the
leadership team Canadian, yet this commitment needed to be reassessed due to the changing market
environment.

In 2015, to adapt to these changing market conditions, CNOOC strengthened cost control, promoted
regional development of oil and gas, and pushed cutting-edge offshore engineering, drilling, and production
technologies to operations. In a press release, Nexen announced the layoff of 340 employees in North
America and 60 in the United Kingdom. Canadian politicians called for close scrutiny of CNOOC’s
compliance with its commitments made to the Canadian government, and Nexen stated that it was “fully
compliant with all of its Investment Canada undertakings” (see Exhibit 4).

CNOOC cut operating expenses around 9 per cent group-wide and 30 per cent in Canada. Operating
expenses per BOE decreased 20.9 per cent to $9.55, while exploration expenses were reduced by 14.1 per
Page 8 9B17M005

cent to ¥9,973 million.59 Capital expenditures were reduced by 30 per cent to ¥67.7 billion in 2015, and
were expected to be cut further to no more than ¥60 billion in 2016.60 Since 2013, Nexen’s headcount had
been reduced by about 300 from an original 3,000 employees.61

SAFETY AND ENVIRONMENT INCIDENTS

On July 15, 2015, Nexen discovered a pipeline leak that spilled about 315,000 barrels (five million litres)
of heavy crude mixed with sand and water near its Long Lake facility.62 The leak was from a brand new
pipeline about 40 kilometres south of Fort McMurray in a rural area surrounded by boreal forests. Initial
investigations suggested that the leak began sometime between June 29, when crews finished cleaning the
pipeline, and July 15, when a contractor discovered it.63 Nexen activated its emergency response plan and
immediately started a cleanup operation. The Alberta Energy Regulator worked with Nexen from the outset
to ensure the safety of the site and to investigate the cause of the accident.64

On July 17, Nexen invited the media for a tour of the cleanup operations. The site was fenced off during
the cleanup efforts, and plastic eagles had been set up to deter wildlife from the area. About 130 workers
were on the site, working to contain and vacuum the spill. Nexen CEO Fang Zhi publicly apologized for
this incident during the site tour:

It’s disheartening to see the site here, and it is disappointing that this has happened. I therefore
personally apologize for the consequences this may have caused. But our purpose today, really, is
to be open and transparent with the public. Our focus as of now is ensuring the safety of our workers
on the site, minimizing whatever impact on the environment and the wildlife, as well as
understanding the root causes of the incident through investigations.65

Addressing the media, Ron Bailey, senior vice-president of Canadian operations, said, “I’m getting kind of
the sense that people think that we’re being pushed to do unsafe things and . . . I just want to give a little
bit of a personal view on that. I actually believe that CNOOC, by taking us over, has increased our focus
on safety. Right from the bottom of their heart, I can say that.”66

On July 17, the Alberta Energy Regulator (AER) issued an environmental protection order to Nexen to
contain the spill, test for hydrocarbons and chlorides in the affected area, and develop a remediation plan
to reclaim the natural environment. Alberta’s chief energy authority said the spill posed no immediate risk
to humans or wildlife and had not leaked into any bodies of water.67

In a new incident, on August 31, 2015, the AER ordered Nexen to shut down 95 pipelines in Alberta because
pipeline maintenance and monitoring were non-compliant. The new provincial government elected in
spring 2015 emphasized its intention to hold the oil industry accountable for its environmental impact.
Thus, the new minister of energy, Marg McCuaig-Boyd (NDP), said, “The suspension of the pipeline
activity won’t be lifted until the company can fully demonstrate that it can operate safely.”68 Nexen had to
shut down about 9,000 b/d of crude production at its facility at Long Lake until the investigation was
completed and the pipeline was repaired.69 By September 17, Nexen resumed full production (50,000 b/d)
after AER amended its pipeline suspension order.70

On January 15, 2016, an explosion occurred in a hydrocracker facility, which converted tarry oil sands
crude into easier-to-refine light oil at Long Lake. One worker died at the site and another seriously injured
worker was flown to Edmonton to the burn unit of the University of Alberta Hospital.71 The plant was
immediately shut down, and the SAGD facility was set to minimum production rates. A comprehensive
Page 9 9B17M005

investigation was launched by both AER and the Alberta Occupational Health and Safety organization.72
The lost production was estimated to be close to 50,000 b/d.73

HANDLING PUBLIC SCRUTINY

Ever since its bid to acquire Nexen in 2012, CNOOC had faced intensive attention by Canadian
stakeholders, who operated quite differently from what CNOOC was used to in China. The leadership team
of CNOOC-owned Nexen was especially under pressure to engage with a variety of Canadian politicians,
non-governmental organizations, and the media. Following the latest crisis, the top management had to
reassess its strategy and practices of engagement in Canada. Had the handling of recent incidents been
appropriate, or should its communication strategy be changed?

At the same time, questions arose about whether CNOOC’s international growth strategy itself needed to
be adjusted. How could CNOOC change its operational processes to ensure that its health and safety record
did not attract unfavourable media coverage? Should CNOOC cut its losses and downscale its engagement
in Canada and the oil sands industry in particular? Or, should CNOOC refocus its Canadian operations to
use its Canadian assets in a different way?

Klaus E. Meyer is a professor of strategy and international business and Alexandra Han is a research assistant. Both are
at the China Europe International Business School, Shanghai, China.
Page 10 9B17M005

EXHIBIT 1: CNOOC GROUP ORGANIZATIONAL STRUCTURE

The State-Owned Assets Supervision and Administration Commission (SASAC) of

the State Council of the People’s Republic of China

100%

China National Offshore Oil Corporation (CNOOC)

100% Indirect holding

50.53% 51.36% 59.41%

China Oilfield Offshore Oil Overseas Oil & Shandong

China
Services Engineering Gas Corporation, Haihua Group
BlueChemical Ltd. Co., Ltd.
Limited Co., Ltd. Ltd.

100%

CNOOC (BVI) Limited

64.44%
CNOOC Ltd.

100%
100% 100%

China Offshore Oil (Singapore)

CNOOC China Ltd. CNOOC International Ltd.
International Pte Ltd.

100%

CNOOC Deepwater
100%
Development Ltd.
CNOOC Uganda Ltd.
100% 100%
CNOOC Southeast Asia Ltd. OOGC America LLC
100% 100%
CNOOC SES Ltd. Nexen Energy ULC
100% 100%
CNOOC Muturi Ltd. Nexen Petroleum U.K. Ltd.

100% 100%
CNOOC NWS Private Ltd. Nexen Petroleum Nigeria Ltd.

100% 100%
CNOOC Iraq Ltd. Nexen Petroleum Offshore U.S.A. lnc.

100% 100%
CNOOC Canada Energy Ltd. Nexen Oil Sands Partnership

100% 100%
CNOOC Exploration & Production CNOOC Petroleum BRASO Ltd.
Nigeria Ltd.

Source: CNOOC, 2015 Annual Report, accessed August 13, 2016, www.cnooc.com.cn/attach/0/1606121709183861352.pdf.
Page 11 9B17M005

EXHIBIT 2: CNOOC FINANCIAL DATA—2012 TO 2015

(in ¥ million unless otherwise indicated)

2012 2013 2014 2015

Total Canada Total Canada Total Canada Total
Net sales to customers 194,774 8,800 226,445 10,555 218,210 4,981 146,597
Total revenue 247,627 285,857 274,634 171,437
Operating expenses -21,445 -5,794 -30,014 -6177 -31,180 -4,278 -28,372
Exploration expenses -9,043 -112 -17,120 -1,263 -11,680 -712 -9,973
Depreciation, depletion, -32,903 -3,327 -55,512 -6,476 -57,407 -3,163 -72,665
and amortization
Finance costs -1,603 -3,457 -4,774 -6,118
Result of operation 62,715 -722 56,160 -803 62,659 -2,136 21,315
EBIT 90,172 80,851 82,513 17,130
EBIT margin (%) 36.41 28.28 30.04 9.99
Employees (count) 10,063 17,553 21,046 20,585
Net production 935,615 57,534 1,127,967 67,770 1,184,977 58,115 1,358,022
(BOE/day)
Net proven reserves 3,203 803 4,139 820 4,185 835 4,016
(million BOE)

Note: EBIT = Earnings before interest and taxes.

Source: CNOOC, 2012 Annual Report, www.cnooc.com.cn/data/upload/2012nianbao.pdf; CNOOC Limited, 2013 Annual
Report, www.cnoocltd.com/upload/Attach/mrfj/2014/04/2395984295.pdf; CNOOC Limited, 2014 Annual Report,
www.cnoocltd.com/attach/0/1504090826531711217.PDF; China National Offshore Oil Corp., 2015 Annual Report,
www.cnooc.com.cn/attach/0/1606121709183861352.pdf; all accessed July 5, 2016.

EXHIBIT 3: CRUDE OIL PRICES—JANUARY 2005 TO JANUARY 2016

Source: Wind Info, “Futures Settlement Price (Continuous) WTI Crude Oil,” Wind Financial Terminal, accessed June 5, 2016.
Page 12 9B17M005

EXHIBIT 4: CNOOC NEWS RELEASE (EXCERPTS)

Nexen Energy ULC announces organizational changes in response to industry downturn

Calgary, Alberta (March 17, 2015)—Nexen Energy ULC (Nexen), a wholly owned subsidiary of CNOOC
Limited, has announced organizational changes that will reduce its North American workforce by
approximately 340 employees. Nexen UK has also initiated a consultation process to adjust its staffing
levels by approximately 60 employees.

“In response to the recent industry downturn that has affected all companies in the energy sector, a decision
was made to conduct a thorough review of our organization to ensure our long-term viability and
sustainability,” said Fang Zhi, Chief Executive Officer of Nexen. “While regrettable, these organizational
changes are necessary to align the company with our reduced capital spending program. We take these
decisions seriously, and all impacted employees have been treated fairly and with respect.”

Nexen remains committed to the health and safety of its employees, contractors, the environment and the
communities where it operates. The company is fully compliant with all of its Investment Canada
undertakings.

Source: “News Release: Nexen Energy ULC Announces Organizational Changes in Response to Industry Downturn,” Nexen,
March 17, 2015, accessed August 31, 2016, www.nexencnoocltd.com/en/AboutUs/MediaCentre/NewsReleases/
News/Release.aspx?year=2015&release_id=AC2705939F6446F692F4AE7F690DD5EF.
Page 13 9B17M005

ENDNOTES
All websites accessed December 1, 2016, unless otherwise indicated.

1
This case has been written on the basis of published sources only. Consequently, the interpretation and perspectives presented in this
case are not necessarily those of the China National Offshore Oil Corporation or any of its employees.
2
Currency amounts are in US$ or ¥. ¥ = RMB = Chinese renminbi. The exchange rates of the RMB to the U.S. dollar were as follows: 0.15712
as of December 31, 2011; 0.15833 as of December 31, 2012; 0.16356 as of December 31, 2013; 0.16251 as of December 31, 2014; and
0.15407 as of December 31, 2015. The end rates for original sources in Canadian dollars (CA$) have been converted to US$ using the following
year-end rates: 1.00312 for 2012; 0.93485 for 2013; 0.85993 for 2014; and 0.72120 for 2015.
3
Chester Dawson, “Canada’s Nexen Directed to Contain Oil Pipeline Spill in Alberta,” Wall Street Journal, July 17, 2015,
www.wsj.com/articles/canadas-nexen-apologizes-for-oil-pipeline-spill-in-alberta-1437162032.
4
Chester Dawson, “Second Worker Dies after Explosion at CNOOC Oil-Sands Plant in Canada,” Wall Street Journal, January 26, 2016,
www.wsj.com/articles/secondworkerdiesafterexplosionatcnoocoilsandsplantincanada1453849665.
5
Isabella Steger, “Chinese Oil M&A—Who’s Next, Where Next?” Wall Street Journal, July 24, 2012,
http://blogs.wsj.com/deals/2012/07/24/chinese-oil-ma-%E2%80%93-whos-next-where-next.
6
“2012 Brief: Average 2012 Crude Oil Prices Remain Near 2011 Levels,” U.S. Energy Information Administration, January 10, 2013,
www.eia.gov/todayinenergy/detail.cfm?id=9530.
7
Steger, op. cit.
8
Yadullah Hussain, “What’s Next?; In Wake of CNOOC’s Buy of Nexen, Energy Relations between China and Canada Are in Early States
of Exploration Mixed with Uncertainty,” National Post, March 8, 2013, Factiva Database.
9
Karen Richardson, “CNOOC’s Shares Advance 18% in IPO, Amid Interest in China-Related Issues,” Wall Street Journal, March 1, 2001,
www.wsj.com/articles/SB983385947968220149.
10
“ [About: Dynamic Board, Official News],” CNOOC, www.cnooc.com.cn/col/col641/index.html.
11
“China Oil Firm CNOOC Buys Texas Assets,” BBC, October 11, 2010, www.bbc.co.uk/news/business-11513424.
12
CNOOC Limited, Annual Report 2014, www.cnoocltd.com/attach/0/1504090826531711217.PDF.
13
“Company Overview,” CNOOC, www.cnooc.com.cn/col/col6141/index.html.
14
China National Offshore Oil Corporation, “2011 Annual Report and Sustainability Report,” April 26, 2012,
www.cnooc.com.cn/data/upload/2011reporten.pdf.
15
“History: Our Story,” Nexen: A CNOOC Limited Company, www.nexencnoocltd.com/en/AboutUs/History.aspx.
16
Claudia Cattaneo, “Hard Lessons for OPTI in the Oil Sands,” Financial Post, February 2, 2011,
www.financialpost.com/Hard+lessons+sands/4213400/story.html.
17
“Long Lake 2010—Subsurface Performance Presentation,” Nexen, March 16, 2011, www.aer.ca/documents/oilsands/insitu-
presentations/2011AthabascaNexenLongLakeSAGD9485.pdf.
18
“Nexen to Acquire 15% Interest in Long Lake Project from JV Partner Opti for C$735MM,” Oil and Gas Investor, December 17, 2008,
www.oilandgasinvestor.com/nexen-acquire-15-interest-long-lake-project-jv-partner-opti-c735mm-453156.
19
Cattaneo, “Hard Lessons for OPTI in the Oil Sands,” op. cit.
20
Ibid.
21
Chester Dawson, “How a Chinese Firm Slipped on Canadian Oil Sands,” Wall Street Journal, July 22, 2015, www.wsj.com/articles/how-
china-slipped-on-canadas-oil-sands-1437616832.
22
Aibing Guo, Benjamin Haas, and Rakteem Katakey, “Biggest China Deal Sours as CNOOC Ratings Hit 3-Year Low,” Bloomberg,
December 14, 2012, www.bloomberg.com/news/articles/2012-12-14/biggest-china-deal-sours-as-cnooc-ratings-hit-3-year-low.
23
Tim Kiladze, “OPTI’s Future Looking Bleak,” Globe and Mail, February 2, 2011, www.theglobeandmail.com/globe-investor/optis-future-
looking-bleak/article587529.
24
Edward Welsch, Paul Vieira, and Yvonne Lee, “CNOOC Sets Canadian Deal,” Wall Street Journal, July 20, 2011,
www.wsj.com/articles/SB10001424052702303795304576457121216529368.
25
Tara Lachapelle and Bradley Olson, “Nexen $3.3 Billion Windfall Signaled with CEO Exiting,” Bloomberg, January 12, 2012,
www.bloomberg.com/news/articles/2012-01-12/nexen-3-3-billion-windfall-signaled-with-ceo-exiting-real-m-a.
26
Nexen, Annual Report 2012, www.nexencnoocltd.com/~/media/Files/ResponsibleDevelopment/2012/GRI/Nexen-2012-AIF-p40.ashx.
27
Nelson Ching, “CNOOC Buys Nexen in China’s Top Overseas Acquisition,” Bloomberg, July 24, 2012,
www.bloomberg.com/news/articles/2012-07-23/cnooc-to-buy-canada-s-nexen-for-15-1-billion-to-expand-overseas.
28
Roberta Rampton and Scott Haggett, “CNOOC-Nexen Deal Wins U.S. Approval, Its Last Hurdle,” Reuters, February 12, 2013,
www.reuters.com/article/us-nexen-cnooc-idUSBRE91B0SU20130212.
29
Katia Dmitrieva and Theophilos Argitis, “CNOOC-Nexen Deal ‘Moving Along’ as Canada Develops Policy,” Bloomberg, November 28,
2012, www.bloomberg.com/news/articles/2012-11-27/cnooc-nexen-deal-moving-along-as-canada-develops-policy.
30
Andrew Mayeda and Greg Quinn, “Canada Approves Both CNOOC-Nexen, Petronas-Progress Deals,” Bloomberg, December 8, 2012,
www.bloomberg.com/news/articles/2012-12-07/canada-approves-both-cnooc-nexen-petronas-progress-bids.
31
“Premier Redford Says Investment Approvals Good Business Decision,” Alberta Government, December 7, 2012,
www.alberta.ca/release.cfm?xID=3340577C29444-E5C1-B22E-658F664C3A0F153D.
32
“CNOOC’s Nexen Bid: Shareholders Approve $15.1bn Deal,” BBC News, September 21, 2012, www.bbc.co.uk/news/business-
19671219.
33
Online survey of 1,000 people taken October 10 to October 11, 2012, by Angus Reid Public Opinion. Rebecca Penty and Jeremy van
Loon, “Nexen Jumps on CNOOC Takeover Optimism,” Bloomberg, December 2, 2012, www.bloomberg.com/news/articles/2012-12-
03/nexen-jumps-on-cnooc-takeover-optimism.
34
Heather Scoffield and Stephanie Levitz, “CNOOC-Nexen: Takeover Decision Pivotal for Harper Agenda,” Globe and Mail, December 4,
2012, www.theglobeandmail.com/report-on-business/industry-news/energy-and-resources/decision-on-cnooc-nexen-takeover-pivotal-for-
harper-agenda/article4905299.
35
Ibid.
36
Julian Beltrame, “Foreign Takeovers: Canada Should Reject Chinese State-Owned Companies, Report Argues,” Huff Post Business
Canada, June 6, 2013, www.huffingtonpost.ca/2013/06/06/foreign-takeovers-canada_n_3398082.html.
37
Julian Beltrame, “Report Urges Halt to Future Chinese Takeover of Canadian Firms,” Globe and Mail, June 6, 2013,
www.theglobeandmail.com/report-on-business/industry-news/energy-and-resources/report-urges-halt-to-future-chinese-takeovers-of-
canadian-firms/article12396821.
Page 14 9B17M005

38
Leslie Hook and Jack Farchy, “Chinese Group Awaits CNOOC-Nexen Verdict,” Financial Times, December 7, 2012,
https://next.ft.com/content/3fea09c0-403d-11e2-8f90-00144feabdc0.
39
Theophilos Argitis and Andrew Mayeda, “CNOOC Said to Agree on Canada Demands for Nexen Takeover,” Bloomberg, November 21,
2012, www.bloomberg.com/news/articles/2012-11-20/cnooc-said-to-agree-on-canada-demands-for-nexen-takeover; Mayeda and Quinn,
“Canada Approves Both CNOOC–Nexen, Petronas-Progress Deals,” op. cit.
40
Aibing Guo, “CNOOC–Nexen Decision Is Probable by December 10, Ambassador Says,” Bloomberg, November 6, 2012, accessed
August 7, 2016, www.bloomberg.com/news/articles/2012-11-05/canada-s-dec-10-cnooc-nexen-review-the-last-ambassador-says.
41
Andrew Mayeda and Greg Quinn, “Canada Toughens Oil Sands Investment Rules as Nexen, Progress Takeovers Approved,” Bloomberg
News, December 7, 2012, http://business.financialpost.com/news/energy/nexen-progress-canada-oil-sands-state-owned-firms.
42
Rebecca Penty, “CNOOC Wins Final Approval for $15.1 Billion Nexen Buy,” Bloomberg, February 13, 2013,
www.bloomberg.com/news/articles/2013-02-12/cnooc-wins-final-approval-for-15-1-billion-nexen-buy; Rebecca Penty and Sara Forden,
“CNOOC Said to Cede Operating Control of Nexen’s U.S. Gulf Assets,” Bloomberg, March 2, 2013,
www.bloomberg.com/news/articles/2013-03-01/cnooc-said-to-cede-control-of-nexen-s-u-s-gulf-assets.
43
Benjamin Haas and Aibing Guo, “CNOOC Profit Declines on Capital Spending, Slowing Output,” Bloomberg, March 22, 2013,
www.bloomberg.com/news/articles/2013-03-22/cnooc-profit-falls-on-capital-spending-slowing-output-growth.
44
Euan Rocha, “CNOOC Closes $15.1 Billion Acquisition of Canada’s Nexen,” Reuters, February 25, 2013, www.reuters.com/article/us-
nexen-cnooc-idUSBRE91O1A420130225.
45
Claudia Cattaneo, “Nexen Chief Kevin Reinhart to Be Replaced by CNOOC Executive Fang Zhi,” Financial Post, April 23, 2014,
http://business.financialpost.com/news/energy/nexen-cnooc-kevin-reinhart?__lsa=944b-a27c.
46
“CNOOC Faces More Challenges after Key Overseas Acquisition, Say Expert,” Global Times, February 27, 2013,
www.globaltimes.cn/content/764597.shtml.
47
Kristine Aquino and Charles Mead, “CNOOC Raises $4 Billion in Biggest Asian Dollar Bond Since 2003,” Bloomberg, May 2, 2013,
www.bloomberg.com/news/articles/2013-05-03/cnooc-raises-4-billion-in-biggest-asian-dollar-bond-since-2003.
48
Aibing Guo, “CNOOC Wins Approval to Trade Shares on Toronto Stock Exchange,” Bloomberg, September 16, 2013,
www.bloomberg.com/news/articles/2013-09-17/cnooc-wins-approval-to-trade-shares-on-toronto-stock-exchange.
49
CNOOC Limited, Annual Report 2013, www.cnoocltd.com/upload/Attach/mrfj/2014/04/2395984295.pdf.
50
Ibid.
51
CNOOC Limited, Annual Report 2014, op. cit.
52
“Short-Term Energy and Winter Fuels Outlook,” U.S. Energy Information Administration, accessed July 31, 2016,
www.eia.gov/forecasts/steo.
53
China National Offshore Oil Corp., 2015 Annual Report, www.cnooc.com.cn/attach/0/1606121709183861352.pdf.
54
Claudia Cattaneo, “CNOOC Ltd Eyes US$5-Billion Writedown at Nexen after Announcing Major Investment Cuts,” Financial Post,
February 3, 2015, http://business.financialpost.com/news/energy/cnooc-ltd-eyes-us5-billion-writedown-at-nexen-after-announcing-major-
investment-cuts.
55
Dawson, “How a Chinese Firm Slipped on Canadian Oil Sands,” op. cit.
56
Cattaneo, “Nexen Chief Kevin Reinhart to Be Replaced by CNOOC Executive Fank Zhi,” op. cit.
57
Ibid.
58
SinoCast Energy Beat, “Nexen to Dismiss 4 Vice Financial Presidents,” Factiva Database.
59
China National Offshore Oil Corp., 2015 Annual Report, op. cit.
60
MarEx, “CNOOC Announces 2016 Business Strategy,” Maritime Executive, January 19, 2016, www.maritime-
executive.com/article/cnooc-announces-2016-business-strategy.
61
“Nexen Shuts Down Long Lake Project over Regulatory Failure,” The Globe and Mail video, 3:20, posted by “BNN Video,” September
2, 2015, www.theglobeandmail.com/report-on-business/video/video-nexen-shuts-down-long-lake-project-over-regulatory-failure/article
26193058.
62
Dawson, “Canada’s Nexen Directed to Contain Oil Pipeline Spill in Alberta,” op. cit.
63
“Huge Alberta Pipeline Spill,” YouTube video, 3:22, posted by “CBC News,” July 17, 2015, www.youtube.com/watch?v=LVSy8N5IEt4.
64
“Alberta Energy Regulator: Nexen Spill Clean-Up Well under Way,” The Globe and Mail video, 2:16, posted by “BNN Video,” July 17,
2015, www.theglobeandmail.com/report-on-business/video/video-alberta-energy-regulator-nexen-spill-clean-up-well-
underway/article25553658.
65
“Nexen CEO Personally Apologizes for Consequences Pipeline Rupture ‘May Have’ Caused,” The Globe and Mail video, 1:53, posted
by “CP Video,” July 23, 2016, www.theglobeandmail.com/report-on-business/video/video-nexen-ceo-calls-pipeline-failure-disappointing-
on-visit-to-site/article25634592.
66
“Nexen Says Alberta Oil Spill Began as Early as June 29,” CTVNEWS, July 22, 2015, www.ctvnews.ca/canada/nexen-says-alberta-oil-
spill-began-as-early-as-june-29-1.2481186.
67
“Nexen Long Lake Pipeline Failure,” Alberta Energy Regulator, www.aer.ca/compliance-and-enforcement/nexen-long-lake.
68
“Nexen, Syncrude Hit by Production Setbacks in the Oil Sands,” The Globe and Mail video, 4:47, posted by “BNN Video,” August 31,
2015, www.theglobeandmail.com/report-on-business/video/video-nexen-syncrude-hit-by-production-setbacks-in-the-oil-
sands/article26161974.
69
The Canadian Press, “Nexen Energy Shuts down Long Lake Oil Sands on Pipeline Suspension Order,” Financial Post, September 2,
2015, http://business.financialpost.com/news/energy/nexen-energy-shuts-down-long-lake-oilsands-on-pipeline-suspension-order?__ lsa=
c009-7015.
70
Reuters, “Nexen Energy’s Long Lake Oil Sands Facility Resumes Full Output,” Financial Post, September 17, 2015,
http://business.financialpost.com/news/energy/nexen-energys-long-lake-oilsands-facility-resumes-full-output?__lsa=c009-7015.
71
Carolyn King and Chester Dawson, “Fatal Explosion Shuts Nexen Energy Facility,” Wall Street Journal, January 15, 2016,
www.wsj.com/articles/fatal-explosion-shuts-nexen-energy-facility-1452912676.
72
Dali Carmichael, “Operations at Nexen Long Lake Suspended Following Fatal Explosion,” Northern Journal, January 27, 2016,
https://norj.ca/2016/01/operations-at-nexen-long-lake-suspended-following-fatal-explosion.
73
“‘Our Thoughts Are with the Families: Chinese Energy Company Nexen Apologises after Explosion at Canada Oil Sands Site,” South
China Morning Post, January 17, 2016, www.scmp.com/news/world/article/1901950/our-thoughts-are-families-chinese-energy-company-
nexen-apologises-after.