The Petronas-Progress saga is about more than foreign ownership anxiety. It’s also about protecting competitive turf.
Last week was busy; one natural gas deal was announced, another denounced. On Wednesday, ExxonMobil made a $3.1-billion move for Celtic Exploration, buoying Canadian oil and gas equities on the news of yet another pawn being taken out by a knight on the B.C. LNG chessboard. However, the game was shaken on Friday when Ottawa rejected the $5.9-billion acquisition of Progress Energy by Malaysia’s Petronas. Next up is the $15.1-billion pending takeover of Nexen by China’s CNOOC, the politically charged ‘elephant in the room.’ If Malaysia’s state-owned oil company is allowed to do its deal on routine terms, it’s difficult to impose far stricter terms on China’s overseas oil and gas arm.
But look the other way; the real antagonist derailing Petronas was, in part, the well-timed ExxonMobil-Celtic deal.
Over the past three years, overt foreign investment into Canada’s oil and gas industry has largely come from Asia, with completed, announced and proposed joint ventures, partnerships and acquisitions have topping $43-billion (including the pending purchases of Progress and Nexen). Most of the recent suppliers of capital have been state-owned oil and gas companies, rather than the free-market western companies that have dominated Canada’s industry throughout its 150-year history.
The prevailing belief was that western buyers – mostly U.S. multinationals – lost their interest in Alberta and B.C. because they were too busy financing the American shale gas renaissance.
Domestic stakeholders, including government, were swayed by the legitimate argument that if free-market enterprises with deep pockets are sidestepping Canada, then the industry must necessarily welcome foreign capital. As well, the state-owned arms of energy hungry countries were willing to pay top-dollar for a piece of Canada’s valuable assets. But converse logic has trumped that thinking. It’s now easier to say: “Why do we need to approve politically-charged state-owned deals if western capital, coming from the likes of ExxonMobil, is now willing to step up and play the game?”
There are many valid issues associated with state-owned enterprises that don’t sit well with Canadian interests. Poor human rights records, corruption, a dearth of democracy and fear of cultural misalignment are just a few. All are good fodder for late-night debate over a Scotch as Canadians and the federal government stumble to figure out what the ownership characteristics of our natural resources should look like in a brutally competitive world.
From a business perspective, the real issue with state-owned money coming into Canada is that sovereign pockets are so deep that they alter the competitive landscape for the longstanding western incumbents. The last thing a Canadian or U.S. multinational wants is frothy equity valuations and cost inflation brought on by outsiders willing to pay top-dollar.
There are half-a-dozen proposals to build LNG terminals with associated pipelines and infrastructure back to the wellheads. Petronas-Progress is one of them. But here’s the reality: only two of the proposals for coastal LNG terminals are likely to get built, and the big domestic competitors know it. In sparsely populated northern B.C. there are labour constraints, geographic limitations and complex issues of social license that will impede a mega-development boom. Like in any emerging business environment with high stakes, those who are first to market will win, and win big. The rest will be shut out. Recognizing that, those that want to get to the coast are already jockeying hard on the ground to elbow out their competitors.
Even if the Petronas-Progress deal comes to life again, last week’s surprise rejection will surely serve to hose down the enthusiasm of state-owned players seeking entry into the fray. As a consequence, the cost of doing business in Canada’s oil and gas industry has just gone down – an outcome that is advantageous for the large domestic incumbents. Yet, it’s far less clear that this protection of competitive turf and cheapening of assets is advantageous to the interests of Canada.
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