With the fiscal cliff in the forefront of the minds of American investors, many small yet significant stories are not making it to the front pages of websites and other financial publications. One of those stories is a deal between Canadian oil and gas producer Nexen (NYSE:NXY) and China National Offshore Oil Corporation, or CNOOC (NYSE:CEO).

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About Nexen
Nexen might be an energy producer based in Canada but it has a global reach. It is the second largest offshore oil producer in the North Sea, it produces 36,000 barrels each day in the West African Atlantic Ocean and it is one of the largest leaseholders in the Gulf of Mexico with more than 100 prospects yet to be drilled. About 70% of Nexen's revenue will come from offshore drilling.

However, Canada keeps a watchful eye on Nexen's oil sands development. According to Nexen, there may be as much as 1.7 trillion barrels of oil in the oil sands with much of that on Canadian soil. This development is responsible for 112,000 Canadian jobs and expected to grow to 500,000 in the next 25 years, some don't even require degrees.

The Deal
The deal, announced July 23, 2012, and subject to approval by agencies in multiple countries, was for CNOOC to purchase Nexen for $15.1 billion. As soon as the deal became public, it caught the attention of people all over the world, and many began to analyze the acquisition announcement. The implications were many and varied.

First, Canada has been vocal about its desire to limit the amount of resources that are foreign owned. Canadian Prime Minister Stephen Harper is concerned about two potential trends: first, the apparent economic decline of the United States, traditionally Canada's largest buyer of goods as well as biggest investor. Second, Harper is concerned about the growing footprint that foreign government controlled companies - specifically those from China - are leaving on North America.

The idea that a large Chinese energy provider, in this case, the largest independent offshore oil and gas producer in China, would seek to take over a Canadian company that controls a large amount of the oil sands, is a clear manifestation of his two fears.

Nobody knows what led Canadian authorities to approve this deal despite their misgivings about foreign investment. The long held standard under the Investment Canada Act (ICA) is that an agreement like this has to be a net gain for Canada. This allows Canadian officials to insist on stipulations. According to The Huffington Post, they may ask that CNOOC incorporate in Canada and move its headquarters there. Alternatively, officials might require that a set number of board members be Canadian residents.

The United States and Britain
This agreement is not only a Canadian concern. The United States and the United Kingdom cite national security issues that come from investments in oil and gas from a foreign company, especially a Chinese controlled company, having jurisdiction over vast amounts of energy resources. The U.K. has already signed off on the deal, but before its finalization, the U.S. must give approval. So far, it has not.

It all rests in the hands of a little known group called The Committee on Foreign Investment in the United States, headed by U.S. Treasury Secretary Timothy Geithner. The committee, much like in Canada, has the power to impose controls that keep U.S. oil interests from becoming a national security concern.

The U.S. will not provide rubber stamp approval of this deal. Not only does the U.S. have a history of a more guarded approach to these types of agreements than Canada, they have blocked CNOOC acquisitions before - as recently as 2005. Earlier this year, a house committee urged companies not to do business with Chinese telecommunications firms due to the possibility of spying.

The Bottom Line
The deal between Nexen and CNOOC has cleared hurdles in the U.K. and Canada but the U.S. has not yet given its support, and that support is far from certain. National security concerns may block the deal that would give CNOOC control of large amounts of energy interests in the U.S. and Canada. This deal could either be a huge success or a huge disaster.

At the time of writing, Tim Parker did not own any shares in any company mentioned in this article.

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