Leonard Waverman is former dean of Haskayne School of Business, University of Calgary.
The contentious purchase of Nexen Inc. by a division of China National Offshore Oil Corp. is on hold while the federal government decides whether it is of “net benefit” to Canada. But the net benefit test in the Investment Canada Act is vague, and gives Ottawa a great deal of latitude in how to evaluate any transaction.
How should the government view this deal? By examining both the economics and the politics – and in this case, it’s the political benefits that really matter. Here is a breakdown of the issues at play.
KEY ECONOMIC FACTORS
Some will say that Calgary-based Nexen has been poorly managed, and new owners would likely bring in new management. However, we have little history of Chinese state-owned oil firms managing oil assets or operating oil sands plants. If management is the problem, change can be achieved by an activist shareholder. There is no need for a takeover to accomplish this.
Verdict: No net benefit.
Increase in foreign capital
Some suggest that Canada needs this deal because it brings in foreign investment. But the world’s capital markets are bigger than CNOOC Ltd. and more flexible. Smaller firms such as Progress Energy (the subject of a takeover bid by Malaysia’s Petronas) or Athabasca Oil are capital constrained. Progress, for example, is in no financial position to construct a multibillion-dollar liquid natural gas terminal. Athabasca Oil likely could not have raised capital to build a large oil sands facility. But Nexen appears able to raise the debt and equity capital to grow. Certainly, large Canadian companies such as Canadian Natural Resources, Suncor Energy and Cenovus appear to have plenty of access to capital.
Verdict: Limited net benefit
CNOOC has publicly offered to maintain employment in Canada at 80 per cent of current levels for five years. An independent, Canadian-controlled Nexen would likely offer more. Past experience has shown that foreign acquirers will walk away from such promises when the economy gets tough – which is one reason the government is pressing CNOOC for firmer job commitments.
Verdict: No net benefit
CNOOC would make Calgary its North American headquarters. This is a positive, but the total effect on head office employment is unknown and likely small.
Verdict: Limited net benefit
KEY POLITICAL FACTORS
The growing supply of North American crude, and Canada’s inability to get our oil to world markets, forces us to sell it to the United States at a large discount to the world price. The U.S. then uses domestic politics to undercut the benefits to us. Washington’s failure to approve the Keystone pipeline is entirely due to political calculations; the pipeline makes economic sense for both the U.S. and Canada.
We need additional markets outside the U.S. for our reserves of oil and gas. The CNOOC purchase of Nexen would demonstrate to American politicians and U.S. citizens that Canada will not keep turning the other cheek.
CNOOC can ship large volumes of oil to China if, and only if, Canada can increase its oil-transportation capacity to the West Coast. But if a major Chinese oil company were to control a greater proportion of our oil reserves, it will force Americans to recognize the genuine international interest in exporting Canadian oil to non-U.S. destinations.
Verdict: Net benefit to Canada.
Trade relations with China
Canada has belatedly enhanced its political and economic ties with China, and there is a growing two-way investment and trade relationship between the two countries. A rejection of this deal would hamper that progress, curbing Canadian investment in China and Chinese presence in Canada.
It’s important we show the Chinese we are committed to a true long-term relationship with them.
Verdict: Net benefit to Canada
ADDING IT UP
The benefits of the Nexen deal outweigh the risks. The government can, however, say yes to CNOOC while also limiting the scope of involvement by state-owned enterprises in our energy sector. I would establish caps on any single country’s ownership of Canadian resources by state-owned enterprises, and extract as much as possible in promises from Beijing in return for approving the deal – something I am sure the federal government is working on.