The recent purchase of Nexen (NYSE:NXY) by a Chinese oil and gas company has unleashed the typical torrential flood of nationalism in the United States that is usually associated with this type of acquisition. This reaction is especially puzzling considering that Nexen is a Canadian oil and gas company with only minor operations in the U.S.

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The Deal
On July 23, 2012, CNOOC Limited (NYSE:CEO) announced the purchase of Nexen for $27.50 per share in cash. The price represented a premium of 61% over the price of Nexen on the previous day.

Who is CNOOC Limited?
CNOOC Limited is an oil and gas company headquartered in Hong Kong and is a subsidiary of the China National Offshore Oil Corporation, a state-owned enterprise of the People's Republic of China.

SEE: A Guide To Investing In Oil Markets

Nexen Assets
Nexen reported production of 207,000 barrels of oil equivalent (BOE) per day in the second quarter of 2012 and proved reserves of 900 million BOE. The company's assets are spread mostly across Canada, the U.S., the United Kingdom and West Africa.

More than 50% of Nexen's production comes from the North Sea, with the Buzzard development being the principal source of this production. Another 30% of production is generated from projects in Canada, including the oil sands and several other areas. Nexen also owns a 20% interest in the Usan field located offshore of Nigeria and expects net production from here to eventually reach 36,000 barrels per day.

United States' Assets
Nexen reported production of 16,000 BOE per day from the U.S. in the second quarter of 2012. Despite the low production from here, the company has stakes in several projects with significant potential. Nexen owns 20% of the Appomattox prospect, operated by Royal Dutch Shell (RDS-A, RDS-B). The company does not expect first oil production from here until 2017 or 2018, but estimates that the discovery has gross contingent recoverable resources of 215 million BOE.

SEE: Oil And Gas Industry Primer

Political Response
The political response in the U.S. to the deal was immediate and predictable with several politicians calling for the Obama Administration to block the deal. The opposition is focused on the royalty relief that Nexen has on some leases in the Gulf of Mexico, which may be covered under the Deep Water Royalty Relief Act. This law was passed in 1995 to "promote development" in the Gulf of Mexico when oil prices were much lower.

Edward Markey, a congressman from Massachusetts, called the deal a "massive transfer of wealth" in a letter to Treasury Secretary Timothy Geithner. Geithner is chairman of the Committee for Foreign Investment in the U.S., which is charged with reviewing the National Security implications of foreign investments in U.S. companies. Markey urged Geithner to block the purchase unless Nexen agreed to waive its royalty relief or sell the leases.

It's difficult to believe that the ownership of a relatively insignificant amount of oil and gas assets in the Gulf of Mexico by a company controlled by the Chinese government will threaten the national security of the U.S. Will the Chinese government use an oil and gas platform to stockpile ammunition and mass troops prior to an invasion of the Gulf Coast?

The Bottom Line
The opposition to a minor purchase of U.S. assets by a foreign government makes good headlines but little sense in the global world that we live in. Investors should consider that excess cash flow earned by foreign companies is recycled into our economy through the purchase of goods and investment in U.S. treasury securities. The final item to consider is that the Chinese may be buying oil and gas assets at a generational peak in commodity prices, and repeating the same mistake that Japan made when buying marquee U.S. real estate assets in the late 1980s.

At the time of writing, Eric Fox did not own shares in any of the companies mentioned in this article.

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