The attempt by the Chinese National Offshore Oil Corp. (CNOOC) to purchase Nexen Inc. has many attractive features. CNOOC already has a Calgary office and a track record of managing almost $3-billion worth of Canadian energy assets. Although the Chinese government is the majority owner, CNOOC stock is listed in Hong Kong and New York, and the company has independent directors as well as those representing the Chinese government.
This friendly bid, incorporating a hefty premium on the stock price, has been approved by both the directors and shareholders of Nexen. CNOOC is promising to retain Nexen’s staff, as well as the Calgary head office, and to start listing its shares on the Toronto Stock Exchange.
No issue of military technology, of the kind that derailed a U.S. company’s attempted acquisition of MacDonald Dettwiler and Associates Ltd. in 2008, is involved here. And there is no provincial opposition, such as killed BHP’s attempt to buy the Potash Corp. of Saskatchewan in 2010. (The government of Alberta has been sending supportive signals.) Nor has there been any public opposition from the energy industry to the Nexen deal, although there is some concern about the possibility of repeated acquisitions in the future.
Is it, therefore, automatic that Industry Minister Christian Paradis will announce approval after conducting the review required by the Investment Canada Act? Not really. The government can impose conditions, and thus may wish to get more detailed written guarantees of some of CNOOC’s promises, such as maintaining a Canadian head office and employment.
More ominously, political opposition seems to be growing. Some critics are fearful of China’s sometimes troubling role in world politics – supporting North Korea, shielding Iran in its nuclear weapons adventure, quarreling with Japan over the Senkaku/Diaoyu Islands. Yet, it would be hard for China to use CNOOC’s ownership position in Canada to affect our foreign policy and relations with our allies. CNOOC engages in exploration and production, but not transmission and sales. It owns no refineries in China and has no incentive to steer its production that way. It prospers by selling oil in international markets at the best possible price.
A recent Abacus poll reported that 69 per cent of Canadians oppose the acquisition. Some Conservative caucus and cabinet members are known to be skittish about the deal. Without mentioning CNOOC explicitly, CSIS has warned darkly about foreign state-owned enterprises engaging in industrial espionage. The University of Calgary’s Jack Mintz has called for setting limits on acquisitions by state-owned companies because of their economic inefficiency. The opposition parties in Parliament are stirring the pot by criticizing the review process as opaque (which it is).
The critics have genuine concerns, which deserve to be discussed, but I think it would damage Canada’s interests for the Minister of Industry to reject this acquisition. After more than 20 years in which neither Progressive Conservative nor Liberal governments rejected any foreign acquisitions, this would be the third rejection in five years by this Conservative government.
Relations with China would certainly be set back, but the damage would also be wider. It would signal to international investors that any large acquisition, no matter how carefully rationalized in economic terms, can be blocked on the basis of an unpredictable variety of political considerations. Uncertainty means risk, and risk deters investment.
The underlying problem is the lack of clarity in the existing “net benefit” test, which encourages opponents of foreign investment, of whom there will always be many, to raise all sorts of ad hoc arguments. As the Conservative government itself has repeatedly said, this test needs to be revised on an intelligible and principled basis.
Here’s a helpful tip: Rewrite the “net benefit” standard, and put it in the fall budget implementation act, along with revisions to MPs’ pensions. In the meantime, approve the Nexen acquisition and keep Canada open for business.
Tom Flanagan is professor of political science at the University of Calgary and a campaign manager for conservative political parties.