A few months ago, The Economist magazine opined that the defining battle of the 21st century would not be between capitalism and socialism, but between different versions of capitalism – market capitalism on the one hand and state-owned enterprises (SOEs) on the other.
If that is so, the battleground has now shifted to Canada’s oil sands.
To be clear, I do not have a horse in this race. I personally favoured a Canadian outcome for Nexen. Its assets lay in the shop window for months, arguably years, but no Canadian energy company emerged to buy them.
Instead, CNOOC, one of the world’s largest SOEs, has stepped forward with a blockbuster offer. This transaction represents the largest outbound Chinese deal to date and has been carefully insulated to provide commitments for Canadian investment, Canadian jobs, a Canadian hemispheric headquarters and a Canadian domiciled public listing.
This proposed acquisition should not come as a surprise. If anything, it is remarkable that the Chinese have taken this long to move on the strategic opportunity represented by Canadian energy assets in a weakening commodity cycle.
This day has been coming for some time. In 2008, I was industry minister when the subject of SOEs and the oil sands first surfaced. At the time, Canada was comfortably asleep. In fact, the best briefing materials available then were publications like The Economist.
In the face of that policy vacuum, we moved to protect Canada’s interests by releasing guidelines on SOEs that emphasized the need to adhere to North American market principles and standards of governance and accountability. More importantly, we amended the Investment Canada Act to reinforce the “net benefit” test, and Ottawa later introduced a national security test. Critics of those reforms argued that they were vague and ambiguous. They are – they were intended to be and that is exactly how they should stay.
Those reforms now afford the Prime Minister (and there should be no doubt that this will be his decision) all of the requisite flexibility to protect and advance Canada’s interests. For his part, as he has quite properly noted publicly, no one should make any assumptions about what the outcome will be.
So, what should he do?
The geopolitical context is important.
First, the Canadian government is in the midst of taking our strategic partnership with China to a new and more important level. This is essential to our future economic well-being.
Most significantly, while we were slow to realize it, a country that has only one customer for its most valuable export is in constant peril, even if that customer is your best friend. U.S. President Barack Obama has reinforced just how significant that risk is.
So the Prime Minister’s hands are somewhat tied by the need to move forward in the definition of our “strategic partnership” with China. It would be a bad time to turn back, even though this partnership requires improved definition and, above all else, reciprocity.
Second, we have repeatedly signalled to the Chinese that Canada is “open for business” – their business. The CNOOC offer carefully responds to Canada’s open and repeated entreaties, and there is none of the amateurism surrounding this transaction that characterized the U.S. Unocal debacle of 2005.
Third, Nexen’s assets are neither the largest nor the best in the Canadian oil sands. They are world-class, and it would be naive in the extreme to think that this is anything other than the first in a relentless series of acquisitions. We will certainly reach a point where the sheer quantum of non-Canadian ownership, and particularly SOE ownership, of our oil sands assets will become a question of public policy. But that is tomorrow’s issue.
Today, however, the most important contextual factor is that Canada is a small country with big ambitions and a massive resource base and we need foreign capital to realize our potential. On an asset basis, we are the wealthiest people in the world – barely one half of 1 per cent of the world’s population occupying more than 15 per cent of the world’s land mass and owning a disproportionate share of almost any commodity that matters. Even the most cursory examination of Canadian history highlights our genius in attracting foreign capital to develop our resources – from the time of the fur trade to the successes of the TMX.
The bottom line is that we cannot turn our back now, and given the geopolitical context and the relative insignificance of the assets in question, this would be a bad time to stop. Fundamentally, we must remain open for business, especially to our strategic partners, and the Chinese are among those partners.
On that basis, and on the basis that CNOOC will be held tightly to account under the “net benefit” test, this transaction should be approved.
This transaction does represent the beginning of a series of significant events for Canada, for China and for the United States. We will need to gauge our response carefully and to use this transaction to our advantage in the recalibration of what reciprocity means in our strategic partnerships with China and the United States.
The Nexen transaction is certainly not the defining moment in the 21st century battle between different versions of capitalism. But the forces are massing and the field of battle includes the oil sands.
Jim Prentice is senior executive vice-president and vice-chair of CIBC, and a former industry minister.