By Chester Dawson
CALGARY--The North American headquarters of China National
Offshore Oil Corp. said Tuesday it would cut about 13% of its
workforce due to the slump in global oil prices, raising questions
about terms of the Chinese state-owned company's accord with the
Canadian government.
Cnooc said wholly-owned Canadian unit Nexen Energy ULC would
reduce its 3,200-strong workforce by 400 jobs, including 340 in
North America and 60 working for its British unit, to deal with
falling revenue from a more than 50% drop in crude prices compared
with mid-2014. It also said it would reorganize key business units
and slow development on a new oil-sands project in northern
Alberta.
"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," Nexen Chief Executive Fang Zhi
said.
Nexen joins a growing list of companies in Canada and the U.S.
that have cut jobs and capital spending amid a plunge in oil prices
to six-year lows. But unlike most of its Calgary-based peers, the
midsize oil and gas producer operates under a series of business
terms agreed to with the Canadian government.
Canada has long welcomed foreign investment to help it develop
its energy and mining resources, but the Cnooc deal triggered a
much broader government review because of its size and Cnooc's
status as a state-owned enterprise. The $15.1 billion takeover,
which was announced in 2012, gave the Chinese a long-sought
foothold in North America, including Nexen's oil-sands assets in
northern Alberta and offshore production in the Gulf of Mexico and
North Sea.
The terms that Cnooc agreed to abide by have never been fully
publicly disclosed by either Ottawa or Beijing. But in Nexen's 2012
annual sustainability report, the company said Cnooc "made a
commitment to retain Nexen's management and employees."
Nexen made waves in Calgary a year ago when it replaced Kevin
Reinhart as chief executive and appointed Mr. Fang, a Beijing-based
Chinese engineer with 30 years of experience at Cnooc. Mr. Reinhart
had previously served as Nexen's chief financial officer and helped
to engineer the buyout.
A Nexen representative said the company hasn't violated the
pact, which he declined to detail. "What I can tell is that we are
fully compliant" with the terms of the acquisition, said chief
spokesman Quinn Wilson.
A spokesman for Canadian Industry Minister James Moore, whose
job involves enforcing the country's foreign-investment rules, said
the government was reviewing Nexen's job cuts to "ensure
compliance" with the undertakings Cnooc made to Ottawa at the time
of the takeover's approval in late 2012.
In an internal memo to Nexen staff dated Tuesday and viewed by
The Wall Street Journal, Mr. Fang said the decision to cut jobs
"was not made lightly" and reflected Cnooc's long-term commitment.
The memo said core business units would be reorganized, such as
combining Nexen's oil sands and North American shale gas and oil
operations into one group. It also said Nexen would be
"centralizing" a number of functions, including finance, planning
and human resources, but didn't provide further details.
Mr. Fang said that he would visit Nexen's various offices
world-wide from mid-April to explain the changes as part of a
"company-wide roadshow."
Since the purchase closed in 2013, Cnooc appears to have had
difficulty integrating Nexen smoothly. Industry experts say the
company has struggled to boost productivity at its main oil-sands
operation, Long Lake; and J.P. Morgan said recently Cnooc could
face write-downs of more than $5 billion related to its acquisition
of Nexen.
The company's chief spokesman Mr. Wilson said production at Long
Lake has gone "exceptionally well" and that capital investment
won't decline sharply from pre-takeover levels, despite Nexen's
plans to trim spending 26% to 35% in line with a Cnooc-wide
directive. "Even with the reductions we have seen in our capex
budget, it is still very comparable to what we saw in the
three-year period" before the takeover, he said.
Long Lake won approval from the Alberta provincial government to
begin commercial production in 2003, but didn't start up until
2007. The project has encountered a number of technical glitches
that have pushed back production and raised costs. It produces
46,000 barrels a day.
Cnooc first became involved at Long Lake in 2011 when it bought
a bankrupt company called Opti Canada Inc., which owned 35% of the
project, for 2.1 billion Canadian dollars ($1.65 billion). It took
full control of the project with the purchase of Nexen, which owned
the remaining 65% stake.
In December, Nexen said it started up production at another
oil-sands site in northern Alberta with a capacity of 20,000
barrels a day. That project, known as Kinosis 1A, received approval
from Alberta's energy regulator in 2012 and construction began last
year.
Cnooc said it has regulatory permits to produce as many as
70,000 barrels a day at Kinosis. Another site, called K1B, has been
under early development, but the company said Tuesday that it would
slow all engineering and design work on that project.
Both Long Lake and Kinosis extract heavy oil embedded in
underground deposits of sand using injections of high-pressure
steam into horizontally drilled wells. This so-called in situ
technique, also known as steam-assisted gravity drainage, accounts
for about half of all oil-sands production in Alberta.
Paul Vieira contributed to this article.
Write to Chester Dawson at chester.dawson@wsj.com
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