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Nexen's Long Lake Phase I integrated oil sands facility southeast of Fort McMurray, Alta. China's State oil company CNOOC plans to buy Canadian rival Nexen Inc. for $15.1-billion, a deal which if successful would be China's biggest foreign corporate takeover and a test of Ottawa's tolerance of outside interest in its resources.


Prime Minister Stephen Harper has welcomed investment from Chinese and other state-owned companies in Canada's vast oil and gas resources. But his government is giving no answer to the question that is suddenly on the minds of investors and energy executives: How much foreign control would be too much?

China's CNOOC Ltd. thrust the issue back onto the agenda with its $15.1-billion bid to acquire Nexen Inc., one of the largest Canadian-controlled companies operating in the oil sands. The proposed acquisition – which has been endorsed by Nexen's board – must be approved by Ottawa's Investment Canada review agency and Mr. Harper vowed on Tuesday that it would be subjected to a rigorous review.

"Under the law, the transaction must be of net benefit to the country, and the government will make sure that investment is clearly scrutinized to ensure that it is of net benefit if it is approved," the Prime Minister said Tuesday in Oshawa, Ont.

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"Nothing should be assumed in terms of the government's decision, one way or the other, on that transaction."

But the rules about what constitutes a "net benefit" are still vague -- and the Nexen deal highlights the fact that Mr. Harper and his ministers have failed to clarify them despite years of wooing Asian investors, and a promise in 2010 by then-Industry Minister Tony Clement to be more explicit about how the government will evaluate foreign takeovers.

That has left potential investors guessing about how many Canadian-controlled oil and gas companies the government is prepared to see fall into foreign hands, and how big a domestic producer they might target.

Many analysts are expecting Ottawa will give its blessing to the CNOOC-Nexen deal, and that the approval will open the doors for well-financed state-owned companies like PetroChina and Sinopec to start shopping for cash-limited but resource-rich Canadian independents. Companies like Talisman Energy Inc., Athabasca Oil Corp., and MEG Energy Corp. are tempting targets whose acquisition could would have a higher likelihood of getting through the political minefield in Ottawa, while an acquisition of a larger producer like Cenovus Energy Inc. or Canadian Natural Resources Ltd. would set off alarm bells.

Critics have argued Ottawa needs to clarify Investment Canada's net benefit test so foreign investors know what is expected of them, and what targeted companies would be considered off limits -- especially after the Harper government's decision two years ago not to allow BHP Billion Ltd. to take over Potash Corp. of Saskatchewan Inc.

But drawing a line in the sand would be dangerous and counter-productive, said Jim Gray, a veteran oil executive and corporate director.

"I come down on the side that, yes, there should be a policy, on a case by case basis, where there should be individual assets that are judged to be core Canadians assets that have to be preserved," Mr. Gray said.

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"But you have to be careful about drawing a line in the sand. Just like the sands in the Sahara, I visualize them moving in the wind, and the sands shift."

Former federal industry minister David Emerson – who served under both Liberal and Conservative governments – said the Ottawa needs flexibility to judge each deal on its merits, given the conditions that exist at the time. A foreign acquisition of a large independent Canadian oil company might be acceptable if there are several others still operating, but the same deal might be rejected if it came after a spate of takeovers.

But both Mr. Gray and Mr. Emerson insist Ottawa must protect a critical mass of Canadian-controlled oil companies to maintain head office jobs, support research and corporate charitable giving, and simply maintain Canada's presence in a major industry that is so important to the country's economy.

"The question is, where do you draw the line and how do you enforce the line you have drawn," Mr. Emerson said. "Beyond a certain threshold, hollowing out [of the corporate sector] is not good for the country."

Of course, Canada has seen numerous takeovers in the past, especially in resources. They have come in waves: around the turn of the last decade, American acquirers swept up companies like Canadian Hunter Exploration, Gulf Canada and Anderson Exploration. That was followed by a round of oil sands takeovers, with Deer Creek Energy, Synenco Energy and Western Oil Sands falling into European and Asian hands.

In the first two years of the Harper government, foreign acquirers took over several large steel makers and mining companies – including, most notably, Inco and Alcan, two of the largest metals companies. That experience may have proved a wake-up call for Mr. Harper's government, and explain its desire to keep the rules flexible.

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Today, by some estimates, roughly half of Canadian energy is under foreign ownership.

And in Alberta, which expects over $180-billion in oil sands investment in the next decade alone, many see foreign investment as not only inevitable, but critical. Without it, executives, bankers and lawyers say, the province simply could not develop a resource that is among the top sources of crude on earth.

Canadian energy ownership is already incredibly diverse. One 2011 calculation found that in the oil sands alone, 86 companies from 22 nations owned land.

With foreign takeovers of companies like Nexen, and others that may follow, "the oil sands are so large that it's not like we're giving away the key ingredient in the treasure," said Robert Page, a University of Calgary professor of environmental management and sustainability.

Yet even in Calgary, some say there should be exceptions. Take pipelines, which are largely owned by a few Canadian corporations, including TransCanada Corp., Enbridge Inc. and Pembina Pipeline Corp.

"If you're going to be worried about something strategic, to me it's the infrastructure you may want to look at as having a more special place," said Greg Turnbull, a senior Calgary lawyer with McCarthy Tétrault.

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Still, some caution against the rise of investments by state-owned enterprises and national oil companies. It is an irony that Canada, which has spent recent decades ridding itself of its own Crown corporations, is now effectively allowing other countries to nationalize its resources, said Jack Mintz, who leads the University of Calgary's School of Public Policy and serves on the Imperial Oil Ltd. board of directors.

CNOOC that it operates purely according to commercial principles. But "when you look at the whole literature on performance of state-owned enterprises relative to private companies, over time they don't operate as well," Mr. Mintz said. And a more inefficient operator carries real risks for Canada, since worse profitability "will affect royalties governments get and wages that people can get paid," he said.

"That's why I think one has to ask the question: would even the government of Alberta like to have a lot of state-owned enterprises running their oil industry?"



Suncor Energy Inc.

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The oil sands heavyweight. Taking out Suncor would be taking out the top of the Canadian energy industry, a company with a uniquely advantageous position in the oil sands and a source of substantial Canadian jobs. Plus, its $46-billion market cap makes it a tough beast to swallow, and its assumption of the Petro-Canada Participation Act, which restricts takeovers, gives it an added layer of protection.

Canadian Natural Resources

Another Canadian heavyweight, CNRL is a major producer of Canadian energy with a $30-billion market cap. It actually produces more energy than Suncor – nearly 9 per cent more in the first quarter – and its distinctly Canadian growth story makes this company an Alberta treasure.

Encana Corp.

A certain addition to this list three years ago, less certain now that it shed its oil assets and left itself only natural gas. Still, Encana is a critically important producer of gas, and it has a bit of an ace card: on 42 per cent of its Canadian land, it owns fee title to mineral rights. In other words, it owes no royalties on millions of acres. Having land fall into the hands of a foreigner who pays no royalties is unlikely to win much political favour.

Cenovus Energy Inc.

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The heavyweight in production of non-mineable oil sands, using a drilled-well technology called SAGD. An important developer of oil sands technologies, and owner of some of the most lucrative lands around Fort McMurray. It also has an ace card, with some of the same type of fee title lands Encana owns.


Talisman Energy Inc.

Diverse field of assets across the globe. Heavy in natural gas, a beaten-down commodity that has kept Talisman shares low, but drawn heavy international investment in recent years. And it's already started down the path: on Monday, Talisman signed a deal giving Sinopec 49-per-cent ownership of its North Sea operations for $1.5-billion.

Canadian Oil Sands Ltd

Owns 36.74 per cent of Syncrude, a major oil sands miner. Chinese companies have already shown interest in Syncrude, with Sinopec buying a 9-per-cent stake for $4.65-billion (U.S.). CNOOC also would gain a 7.23-per-cent stake in the asset if its acquisition of Nexen goes through. COS would be a simple transaction – it employs few companies and doesn't operate the asset, but provides a direct ownership of a substantial crude supply.

MEG Energy Corp.

A smaller, but growing oil sands company – just above 28,000 barrels a day of output this year, with plans to increase that nearly 10-fold by 2020. Owns land that contains over 2 billion barrels of reserves, so it possesses enough oil to be significant. Another developer of new oil sands technology. Plus, it's already partly in foreign hands, with CNOOC owning 14.8 per cent.

Athabasca Oil Corp.

An oil sands developer that's moving into tight oil – but has substantial oil sands assets, and a target of g 220,000 barrels a day by 2020. Still early stage, but has already succeeded in winning major overseas investment, through joint ventures with PetroChina, which has subsequently bought one Athabasca project outright, and is expected to do the same with another.

Crescent Point Energy Corp.

Large land base in light, tight oil, the stuff that has set U.S. energy output on fire. Assiduously run. Big enough to matter, with 90,000 barrels of oil equivalent a day, and plenty of running room for future years. Expensive based on current reserves, but exploring technologies that could bring enough oil to surface that its current valuation looks cheap.


Several former trusts are smaller companies, but still significant energy producers that could win outside dollars: PennWest Exploration, Baytex Energy Corp. and ARC Resources Ltd.

Nathan Vanderklippe with files from reporter Carrie Tait

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