Keith Spence has had a front-row seat to the coming of age of China Inc.
When the Toronto investment banker first arrived in Beijing in the late 1990s, Chinese company and government officials were insecure about their role in the world and were looking for inbound investment to fuel the country’s development.
But over the years, he has watched them conduct international business with growing confidence, with China emerging as an economic colossus courted for its own vast investment clout by western rivals. Along with that confidence, officials also showed an increasing interest in the commodity that serves as the lifeblood for the global economy – oil.
For Mr. Spence, the Chinese appetite for Canadian oil hit home two years ago during a meeting with Chinese potash executives in his Toronto office. Expecting to talk about potential potash investments, the mining financier instead found himself in a discussion about opportunities in Alberta’s oil patch.
“They said, ‘Listen, Keith, we are very interested in making an acquisition in oil and gas. We want an Alberta company, or a company that has some assets in Alberta, and we are looking for ‘x’ amount of barrels in the ground,’ ” said Mr. Spence, whose company, Global Mining Capital Corp., was focused more on mining at the time.
China’s hunt for oil was on full display this week, when state-owned CNOOC Ltd. bid $15.1-billion (U.S.) to acquire Calgary-based Nexen Inc. If approved, the deal would represent the largest foreign takeover by a Chinese corporation.
CNOOC’s proposed takeover of Nexen represents a key milestone in the country’s decade-long effort to “Go Global” and become a fully fledged player in the corporate world, competing alongside private enterprises in the quest to build businesses with ambitious growth plans and attractive long-term returns.
But the deal has also raised fundamental questions about the role of aggressive state-owned enterprises (SOEs) from emerging countries.
As SOEs from countries like China, India and Brazil seek to increase their footprint in the global marketplace, western governments are facing pressure to ensure the SOEs operate under the same rules as investor-owned competitors from the developed world. Now, with CNOOC’s bid for Nexen on the table, the world is watching Canada as Ottawa decides whether to approve the deal.
Skeptics worry that, in its hunger for resource capital, Ottawa is ignoring some fundamental risks associated with relying on national companies from China and other emerging markets that are controlled by regimes with little commitment to the marketplace or a level playing field in international trade and investment. Complicating Canada’s decision on Nexen, Prime Minister Stephen Harper has openly wooed Chinese firms for investment during several state visits to Beijing.
Some say Canada should turn down CNOOC, arguing state-owned enterprises don’t operate like western companies. Since the controlling shareholder is the government, an SOE has theoretically limitless access to capital and isn’t under the same pressure for short-term results typically felt by private firms. It adds up to a government-engineered competitive advantage over public companies that must meet strict rates of return on investment, giving SOEs a leg up as resource companies around the world vie for attractive assets and companies. Critics also worry about foreign governments controlling strategic resources on Canadian soil.
“I think we need to ask the question: Do we want to see the nationalization of the business in Canada, except it’s not nationalization by the Canadian government but by foreign governments,” said Jack Mintz, a University of Calgary economist who serves on the board of Imperial Oil Ltd.
CNOOC and other Chinese and Asian companies are owned by their governments and – much like Air Canada or Petro-Canada from bygone days – they are seen as important vehicles for their home countries’ national development, Mr. Mintz said. Canada’s own development would be hampered by too heavy a reliance on inefficient, government-controlled companies, he said. He urges Ottawa to limit SOEs’ acquisitions of operating companies to minority stakes.
CNOOC’s move on Nexen has already raised red flags among some members of the Congress in the U.S. – where Nexen is one of the largest leaseholders in the deep water of the Gulf of Mexico and a partner in some of the biggest offshore discoveries. In a letter released Friday, Democratic Senator Charles Schumer urged the administration to block the deal until it could wring commitments from China to allow more U.S. investment there. While the Americans can’t block the overall acquisition, they could force CNOOC to divest Nexen’s lucrative Gulf of Mexico assets.