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The Globe and Mail

China needs to show it’s no threat; Canada’s oil patch needs to compete

The national debate over the CNOOC-Nexen deal in the past few months has polarized policy makers and the general public – raised some "difficult policy issues" as Prime Minister Stephen Harper put it – and generated global media interest in the Canadian government's final decision.

Since Mr. Harper had touted his intention to make Canada an "energy superpower" for quite some time now, all eyes were on Canada awaiting the decisions on the takeover of Nexen as well as Progress Energy by Malaysian national oil company Petronas. But the approval of both on Friday, and the newly announced limits on state-owned enterprises (SOEs), looks more like a defensive act aimed to limit the influence of others rather than a projection of Canada's own influence.

The most immediate beneficiaries are the Nexen and Progress shareholders, their purchasers and the Canadian economy. More than $20-billion will be pouring into the pockets of ordinary Canadians and institutional investors; the Nexen global operations will receive a much-needed capital injection, with more to come; the new $9-billion joint venture LNG project between Petronas and Progress now has certainty; and CNOOC will have a much bigger global presence, with access to more energy assets in Europe, North America and other parts of the world.

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By not rejecting the Nexen deal, Mr. Harper avoided putting himself in an awkward position. After all, he had heavily courted Chinese investment and reiterated time and again that Canada would diversify its market to China and Asia. With Friday's decision he wants to demonstrate that he has indeed walked the talk, and that Canada is still open for business.

But the Prime Minister has also shown that while he is no longer a China skeptic, he is not exactly a panda hugger.

By prohibiting further takeovers of large Canadian energy firms by foreign state-owned enterprises, or as everyone understands, by Chinese SOEs, Mr. Harper is clearly playing a balancing act between pleasing the opposing voices to the Nexen deal and the overall Chinese presence in the Canadian economy.

The problem is that opponents have never put out a set of convincing arguments to make their case. With only 1 per cent of Canada's total daily oil production and just 3 per cent of Canada's total proven reserve, Nexen is nowhere close to being a national security concern no matter how the critics spin it. The opponents, if based on political system/human rights records, will have to do the math on how many countries on Earth that Canada has to cut economic ties with according to their criteria.

And then there are those who are simply unwilling to accept the reality and the prospect that some Canadian energy companies are, and will be owned by "the Chinese" (not just by the Chinese SOEs), as one newspaper columnist complained in a media debate with me.

Mr. Harper, with his masterful political instinct, is now taking the populist lead by holding up a stop sign while wrapping himself in the Canadian flag. Most observers seem to agree that he has made the best call given the circumstances, but time will tell if such sweeping measures on foreign SOE investment are the right call.

For the moment, the ball is in the court of foreign SOEs. In the case of China, Nexen represents the largest-ever international acquisition by any Chinese company; Sinopec also has Daylight Energy under its 100 per cent control; and PetroChina has a large oil-sands joint venture with Athabasca Oil Sands Corp. They have all been operating in Canada for some time. But the Canadian public, often misinformed, knows little about how they function. The Chinese SOEs need to take time, learn and showcase to Canadians and the world, through existing and the new Nexen ventures, that they are not a threat to Canada, they don't operate on a different set of rules, and indeed provide a "net benefit" to this country.

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The ball is also in the court of large energy firms owned by Canadians. Now they have received the protection they wanted against potential "unfair competition" from powerful state-owned enterprises. The test is whether they can continue to perform well and remain competitive in the marketplace. If they fail to do so, and if there is not enough private capital to take them over (and they now cannot be taken over by foreign SOEs), will they seek taxpayer bailouts using the same protectionist logic? Or will the newly announced, opaque "exceptional circumstances" clause kick in?

Finally, there is the role of the provinces. Did Ottawa consult them when they were designing these new SOE investment conditions? Apparently not if we read the cautious and measured responses from the premiers of Alberta and Saskatchewan. While the policy on foreign takeovers is in the federal realm, provinces have ownership of, and jurisdiction in, managing energy and resources. For such important policy changes, it is only reasonable to treat provinces as part of the decision-making process rather than as outsiders.

As the debate continues on the pro and cons of the Friday announcements, much uncertainty lies ahead for Canada's most important industrial sector, and the country is certainly not even close to the "energy superpower" status that Mr. Harper would like to have.

Wenran Jiang is a political science professor at the University of Alberta and the director of Canada-China Energy & Environment Forum.

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