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WASHINGTON (Reuters) - The U.S. government should block a bid by China's state-owned CNOOC (0883.HK) for the U.S. assets of Canadian oil firm Nexen NXY.TO unless the merged company agrees to pay royalties on all oil drilled offshore, or spins off the properties, Representative Edward Markey said on Monday.
Markey, a Democrat, is the second U.S. lawmaker to formally ask for conditions on CNOOC's bid for Nexen, which has about 10 percent of its assets in the U.S. Gulf. Opposition from some factions in Washington has added a modicum of uncertainty as CNOOC tests Canada's tolerance for such a large transaction.
The $15.1 billion deal has raised some hackles in Washington, but the opposition has been muted compared to 2005, when CNOOC tried to buy U.S. oil company Unocal, withdrawing its bid after a political uproar.
By law, the U.S. government examines foreign investment in sensitive U.S. assets such as energy for national security issues, and has the power to block deals or require modifications such as divestitures.
Nexen holds at least two leases issued under the 1995 Deep Water Royalty Relief Act, said Markey, the top Democrat on the House of Representatives' Natural Resources Committee, who has long criticized companies that have benefited from a royalty loophole in the law.
In a letter to Treasury Secretary Timothy Geithner, who leads the investment review panel, Markey said Nexen has not paid royalties on 32 million barrels of oil and 34 million cubic feet of natural gas drilled in the U.S. Gulf of Mexico through May 2012.
"Giving valuable American resources away to wealthy multi-national corporations is wasteful, but giving valuable American resources away to a foreign government is far worse: it has the potential to directly undermine American economic and national security," Markey said in the letter.
The U.S. Interior Department offered royalty relief to oil companies when energy prices were significantly lower as a way to encourage more drilling in deep Gulf waters.
But in 1998 and 1999, the department forgot to include language putting a price threshold on the relief that would have limited the waiver to times when oil prices were low.
A spokesman for CNOOC declined comment on the issues raised by Markey, saying only that the company was working on regulatory filings and aims to cooperate with governments overseeing the deal. A Nexen official was not immediately available for comment.
Markey said letting a Chinese government-owned company take over drilling leases that benefit from the loophole could lead to "a massive transfer of wealth" to China from U.S. taxpayers that should be examined by the Committee on Foreign Investment in the United States (CFIUS).
House Democratic Leader Nancy Pelosi has also urged the panel to thoroughly review the deal.
On Friday, Democratic Senator Charles Schumer told Geithner the United States should use CNOOC's bid as an opportunity to demand changes to China's foreign investment policies.
Once CFIUS receives the detailed information on the deal, it will conduct a national security review expected to take 75 days.
Republicans on Capitol Hill have stopped short of asking the government to block the deal, and have used it to highlight their arguments for expanded U.S. drilling and a quick approval for the long-delayed Keystone XL crude oil pipeline, which would deliver oil to Texas refineries from Canada's oil sands.
Nexen's shares on the New York Stock Exchange fell 27 cents to $25.54 on Monday, down 3 percent from the closing price on the day the companies announced the friendly deal one week ago. CNOOC has offered $27.50 per share in cash.
Additional reporting by Jeffrey Jones in Calgary and Ayesha Rascoe in Washington; Editing by Will Dunham and Fred Barbash