The Harper government has now agreed that a chunk of Canada’s oil and gas sector can be controlled by state-owned companies from afar. China’s CNOOC will get its prize in Nexen; Malaysia’s Petronas will be allowed to own Progress Energy Resources.
But that’s it. After the deals are done, state-owned enterprises, or SOEs, will be allowed to buy oil sands companies only under exceptional circumstances.
Is that fair? The issue should not be whether to allow foreign ownership, but whether that ownership comes with iron-clad commitments.
At this point, we don’t know, because Ottawa has not disclosed the commitments made by CNOOC in its $15.1-billion (U.S.) deal and Petronas in its $6-billion (Canadian) acquisition.
But one hopes the government has learned the lessons of the past because, so far, most foreign takeovers have come up shamefully short on assuring a “net benefit” to Canada. That’s as much the government’s fault as that of the foreign buyers.
Had the government embarked on a nationalistic campaign before Friday, both the Chinese and the Malaysian bids would have been turfed into the Pacific. CNOOC, which now wins a diversified energy company whose assets range from Alberta oil sands to conventional oil off the West Africa coast, is controlled by the Chinese state.
Its website describes China National Offshore Oil Corp. as “a mega government-owned company operating directly under the State-owned Assets Supervision and Administration Commission.”
CNOOC is takeover-proof. So is Petronas, the state-owned company that bid for Progress, a Canadian natural gas player. Should they have been allowed to buy Canadian companies that cannot buy them? (In 2005, CNOOC was given the bum’s rush out of the United States when it had the temerity to bid for Californian oil giant Unocal).
A No answer would have seemed fair. But it would also have been hypocritical: If there is one Western country that has protected, and still protects, large parts of the industrial and services economy, it is Canada.
For large parts of their lives, Air Canada, Canadian National Railway, Petro-Canada and Atomic Energy of Canada Ltd. were Crown corporations, meaning they were wholly immune from takeovers, even from domestic bidders. At one point, there was a cap on the foreign-ownership percentage of the Canadian oil and gas industry. Most of the big Crown corporations have been privatized or sold to industry players in the past decade or two. (Last year, AECL’s nuclear reactor division went to SNC-Lavalin).
Canada’s banks are still protected by a 20-per-cent ownership limit that effectively bars foreign takeovers. Canada’s cultural industry, including the CBC, is protected, as are, in effect, many of Quebec’s flagship companies through the typically nationalistic Caisse de dépôt et placement du Québec, whose home-grown investments include Bombardier and Alimentation Couche-Tard.
China just may be on the same privatization route, though getting to the same (low) level of state control could take decades. The process has already started. While still very much a state company, CNOOC has listed its shares on the New York and Hong Kong exchanges, meaning it is making some effort to become transparent and embrace Western-style governance, financial reporting and auditing standards. If CNOOC wants to ease its entrance onto the world stage, this process will have to continue.
Banning China and Malaysia from buying Canadian companies would not only have looked hypocritical, given that Canada’s own economy was, and remains, far less open than advertised by the “open market” propaganda, it would look like punishment. Whether any foreign company should be allowed to buy a “strategic” asset is an entirely different matter.
So, should CNOOC and Petronas have been welcomed into the heart of Canada’s energy industry? The answer is yes and no. Yes, if they behave like genuine partners, no, if they behave like resource imperialists. On Friday, we did not know what conditions had been imposed on them by the Canadian government.
Foreign companies have a disgraceful record on the “net benefit” front in Canada. Many big companies, from Brazil’s Vale to U.S. Steel, have promised far more than they have delivered after they snapped up brand-name Canadian companies.
Typically, companies pledge to keep employment and investment levels intact or rising; buy supplies from Canadian sources; keep the head office in place; and ensure that research and development programs are not hustled out of the country. In many cases, some or all these promises have been broken, leading to a hollowing-out of Corporate Canada. Exhibit A is Hamilton, once a thriving steel town.
Of course, the “net benefit” test was its own worst enemy because the term was never adequately defined and the sinners were never punished. U.S. Steel gutted Stelco. What was the Canadian government to do? Seize a steel plant that its owners did not want?
The new “net benefit” test must be clearly defined and easily enforced. It has to be transparent. It must come with a defined set of sanctions or fines if benefit promises are broken. And it has to come with the understanding that Canadian companies investing in, say, China, will be treated equally fairly, even if they are not allowed to own 100 per cent of a Chinese company.
But once these rules are in place, why should other oil takeovers from SOEs be stopped? Either they meet the tough new requirements or they do not. If not, they are welcome to take a hike.
Canada needs foreign capital, all the more so since the United States seems to be going through a bout of insularity. What it does not need is foreign hit-and-run companies that lie about their commitments to Canada. CNOOC and Petronas got in under the wire. Future buyers shouldn’t be stopped just because their bids come after CNOOC’s and Petronas’s. They should be stopped if their bids do not help Canada.