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).

Guide To Oil And Gas Plays: We've got your comprehensive guide to oil and gas shales in North America.

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.

Related Articles
  1. Products and Investments

    Cash vs. Stocks: How to Decide Which is Best

    Is it better to keep your money in cash or is a down market a good time to buy stocks at a lower cost?
  2. Investing News

    Who Does Cheap Oil Benefit? See This Stock (DG)

    Cheap oil won't benefit most companies, but this retailer might buck that trend.
  3. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  4. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
  5. Investing News

    Today's Sell-off: Are We in a Margin Liquidation?

    If we're in market liquidation, is it good news or bad news? That party depends on your timeframe.
  6. Investing News

    Bank Stocks: Time to Buy or Avoid? (WFC, JPM, C)

    Bank stocks have been pounded. Is this the right time to buy or should they be avoided?
  7. Stock Analysis

    Why the Bullish Are Turning Bearish

    Banks are reducing their targets for the S&P 500 for 2016. Here's why.
  8. Stock Analysis

    How to Find Quality Stocks Amid the Wreckage

    Finding companies with good earnings and hitting on all cylinders in this environment, although possible, is not easy.
  9. Stock Analysis

    The Top 5 Platinum Penny Stocks for 2016 (PLG, XPL)

    Examine five penny stocks in the platinum mining business that investors may wish to consider adding to their investment portfolios for 2016.
  10. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
Trading Center