Ottawa approves Nexen, Progress foreign takeovers

OTTAWA — The Globe and Mail

Canada's Prime Minister Stephen Harper speaks during a news conference about foreign takeovers on Parliament Hill in Ottawa, Dec. 7, 2012./

(Chris Wattie/Reuters)

Prime Minister Stephen Harper has erected new barriers to investment by state-owned companies, fencing off the oil sands from further control by foreign governments.

Mr. Harper announced Friday that his government has approved two controversial acquisitions by Asian companies of domestic oil and gas producers, but essentially barred state-owned companies from buying some of Canada’s biggest energy companies, such as Suncor Energy Inc. or Cenovus Energy Inc.

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“When we say that Canada is open for business, we do not mean that Canada is for sale to foreign governments,” he told a news conference on Parliament Hill.

With his announcement Friday, Mr. Harper sent a clear and unambiguous statement that Canada will welcome foreign investment on its own terms, even as powerhouse state-owned companies from emerging markets like China increasingly gain sway in the global marketplace.

The new rules, while cheered by industry, marked a dramatic shift away from Ottawa’s traditionally more open policy, which allowed a wave of foreign takeovers in the natural resource sector in recent years.

It is also an abrupt departure from the government’s unqualified wooing of investment from China and elsewhere in Asia, where large resource companies tend to be state-controlled and have a mandate to acquire secure access to energy and other commodities for their countries. Mr. Harper and his ministers have travelled frequently to China in recent years to pursue new commercial relations, but the new hurdles for Chinese investment risk putting a chill on that relationship.

Felix Chee, head of the Canadian branch of China Investment Corp., one of that country’s largest investment funds and an active minority investor in Canadian resource companies, said the news rules could change the tone of business relations.

“This appears to be stringent,” he said. “I am pleased to see the [Nexen and Progress] deals approved. But going forward one would expect Chinese companies to re-evaluate their investment plans in Canada to ensure they can still make desirable investments under the new rules. What remains to be seen is whether the flow of inbound investment from China will be lower.”

The Prime Minister insisted Friday that Ottawa still welcomes foreign investment generally, and even capital from state enterprises but will apply high standards if they seek control of an existing Canadian company rather than merely minority stake or joint ventures. But he said the oil sands account for 60 per cent of the world’s oil production that is not in the hands of national oil companies, and that it is important to ensure it remains out of government hands.

His government approved the $15.1-billion bid by China’s CNOOC Ltd. for Calgary-based Nexen Inc., and the $6-billion acquisition by Malaysia’s Petronas of Progress Energy Resources Corp. as representing a “net benefit” to Canada. The government said both companies made “significant commitments” to operate commercially, to maintain Canadian management and employment levels, and to provide transparency in how they operate. But, under the Investment Canada Act, those undertakings remain confidential unless the companies agree to release them.

Investors around the world have been waiting for months to see how Mr. Harper would handle the takeovers – as have other foreign governments, such as Australia’s, that are grappling with a flood of Chinese capital in search of assets to buy.

Barring state-controlled investors from new takeovers in Canada’s oil sands and making it tougher for these entities to buy assets elsewhere in the country is the latest populist move from a government that has shown it has no qualms about keeping unwanted capital at bay.

“To be blunt, Canadians have not spent years reducing ownership of sectors of the economy by our own governments only to see them bought and controlled by foreign governments instead,” Mr. Harper told reporters.

Mr. Harper and his government have aggressively courted investment from Asia to develop the resource sector, but have now responded to public concerns about the loss of control and pulled back the welcome mat. Some 20 per cent of deals review by Investment Canada last year involved takeovers by state-owned enterprises, up from virtually nil in 2008.

Over the next five years, Ottawa will raise the threshold at which it reviews foreign takeovers by private-sector bidders to $1-billion. But the bar will remain at $330-million for foreign state-owned enterprises. Also, the federal government will consider the degree of control or influence a state-owned enterprise would likely exert on the Canadian business and, similarly, on the related Canadian industry.

Ottawa will also consider the extent to which the foreign government in question is likely to exercise control or influence over the state-owned enterprise acquiring the Canadian business. Mr. Harper said that final criterion is the most important one, and will force Ottawa to differentiate between government-controlled companies like Norway’s Statoil – widely seen as an independent operator – and Chinese firms like CNOOC, PetroChina and Sinopec, which have been major investors around the world.

The approval of the Nexen deal is a major victory for CNOOC and gives the green light to the largest Chinese overseas takeover to date. CNOOC was rebuffed in a 2005 attempt to acquire U.S.-based Unocal Corp., and is now awaiting U.S. approval to acquire Nexen’s Gulf of Mexico assets.

The federal government has said Canada needs $650-billion to finance resources development and that much of that capital will have to come from overseas, where state-owned companies dominate the landscape. Ottawa believes the oil industry will be able to raise sufficient capital to fuel the ambitious growth plans for the oil sands without the need for further foreign acquisitions of existing producers in the sector.

With a report from Jacquie McNish

The new rules

  • State-controlled investors are barred from new takeovers in Canada’s oil sands, to be found to be of net benefit on “an exceptional basis only.”
  • Ottawa will raise the threshold at which it reviews foreign takeovers by private-sector bidders to $1-billion, over the next five years.
  • The bar remains at $330-million for foreign state-owned enterprises.
  • “Free enterprise principles” will be considered in reviews where the investor is owned, controlled or influenced by a foreign state.

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CNOOC Limited
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