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A Progress Energy Resources rig. Trading Monday will be about more than what will happen to Progress and Nexen. Investors are now weighing whether other companies they once saw as easy targets for foreign investors with deep pockets will face similar, although undisclosed, roadblocks.

Progress Energy Resources

The federal government has blocked a Malaysian state-owned company's attempt to take over a Canadian natural gas firm.

Petronas offered $6-billion to buy Progress Energy Resources Corp., but in order for the deal to be approved, it had to show Ottawa the takeover would be a "net benefit" to Canada. Industry Minister Christian Paradis late Friday evening said Petronas did not meet this standard, although it still has an opportunity to convince the government otherwise.

Ottawa has never blocked an oil and gas takeover, and has never clarified the rules surrounding the net benefit test in the Investment Canada Act.

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Progress Energy chief executive Michael Culbert said Petronas will appeal the decision, according to Bloomberg.

"We're very surprised by the decision that we received this evening," Mr. Culbert told Bloomberg. As its suitor appeals, it will  "help where we can help,"  he said.

"We believe that the transaction is of net benefit to Canada and Progress will be continuing to work with the federal government to prove that point."

The decision comes as the Harper government, which has gone to enormous lengths to convince outsiders Canada is open to foreign investment, reviews CNOOC Ltd.'s proposed takeover of Nexen Inc. The stakes are much higher in that $15.1-billion deal because it involves the oil sands and China. It would mark China's largest investment in Canada, and critics argue Ottawa is ceding control of the country's natural resources to foreigners. On the flip side, it will take hundreds of billions of dollars to develop Alberta's bitumen reserves, and energy proponents argue it cannot be done without overseas investors and buyers like CNOOC.

The Conservative government had to make a call on the Petronas/Progress deal Friday, and did so three minutes before midnight.

"I can confirm that I have sent a notice letter to Petronas indicating that I am not satisfied that the proposed investment is likely to be of net benefit to Canada," Mr. Paradis said in a statement. "I came to this decision after a careful and thorough review of the proposed transaction.

"Under the Investment Canada Act, Petronas now has up to 30 days to make any additional representations and submit any further undertakings, which can be extended with my agreement and that of the investor," Mr. Paradis said. "Subsequently, I will either confirm this initial decision or approve the acquisition."

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He added the Investment Canada Act barred him from commenting further on the deal.

One challenging issue for Petronas, which is wholly owned by the government of Malaysia, is Ottawa's guidelines for approving deals involving state-owned enterprises. As part of its net benefit test, Ottawa requires such national oil companies to operate as commercial entities, with transparent governance structures, independent directors on their boards and Canadians standards of accounting and auditing.

Industry Canada says non-Canadian firms are "encouraged to support their plans for the Canadian business by submitting specific undertakings." They can include appointment of Canadians to its board of directors, listing of shares on a Canadian stock exchange, and employment of Canadians in senior management positions.

Because of the confidential nature of the Investment Canada review, it is unclear what level of commitments Petronas made.

In contrast, CNOOC Ltd. – which is traded on New York and Hong Kong stock exchanges – made public commitments on several of the recommended undertakings in its propoised acquisition of Nexen. Critics say the Chinese companies remains an arm of the Beijing government, rather than a fully commercial operation.

Other wholly-owned national oil companies, including the Kuwait Petroleum Corp., have signalled an interest in acquisitions in Canada, but have little transparency in their governance structure.

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Even as the government rejected the takeover, it painted itself as a friend of outside investors.

"Canada has a long standing reputation for welcoming foreign investment," Mr. Paradis said. "The government of Canada remains committed to maintaining an open climate for investment."

Alberta, which does not have the power to block transactions, reiterated its support for takeovers such as those proposed by Petronas and CNOOC, although it does not address specific deals.

"We respect the federal net benefit test as a good and thorough process. We must also respect the appeal period," Mark Cooper, a spokesman for spokesperson for Alberta's International and Intergovernmental Relations Minister Cal Dallas, said in an interview Saturday. "In general we are supportive of foreign investment and the overall benefits it can bring to Alberta's economy.

"We work hard to attract investors to Alberta and will continue to do so," he said.

The federal New Democratic Party wants Prime Minister Stephen Harper to kill the proposed CNOOC/Nexen marriage. The Official Opposition, however, did not weigh in on the Petronas/Progress deal, which is further ahead in the review process than CNOOC and Nexen.

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It is extremely rare for Ottawa to kill takeover deals, although the government has stepped in three times since 2008. In all three cases, the government questioned whether the deals would benefit Canadians.

It will cost billions to develop Canada's oil sands and unconventional natural gas fields, and industry supporters argue foreign investment will be necessary to make that happen. Critics, however, worry foreigners, especially state-controlled companies, will soon control too much of the west's resources unless the government intervenes.

Laura Lau, a fund manager at Toronto's Brompton Funds, thinks the Progress deal was squashed because of the political hubbub around CNOOC's chase for Nexen.

"If it wasn't for Nexen, the deal might have gone through," she said Saturday. "The questions were always surrounding Nexen. It was never really surrounding Progress."

The market believed the tie-up between Petronas and Progress would go through because the pair could make a strong case when facing the net benefit test. While Petronas can appeal, Friday's midnight decision is "not a good sign," she said. Nexen, Ms. Lau believes, will have an even tougher challenge.

"Part of the reason for Progress is it just can not fund its capital program by itself," she said. "I think the net benefits in Nexen are not as good as the net benefits in Progress."

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Petronas could bring billions of investment dollars to Canada to develop liquefied natural gas projects, pipelines, and other necessary infrastructure, she said, estimating the price tag for projects could be around $30-billion.

"There was never really a question of net benefit there," Ms. Lau said. But "Nexen has even less benefits than Progress."

The majority of Nexen's projection is outside of Canada, but one of its jewels is the potential to develop its Long Lake oil sands project. This effort has faced serious difficulties, both technically and geologically. Investors hoped CNOOC's deep pockets could help solve extraction problems by pouring more money into the project than Nexen could on its own.

Ms. Lau, along with others in the market, expects Progress and Nexen's stock to trade south Monday. Other companies with pending foreign investment deals could do the same, she said.

Investors are already bracing for a market rout Monday, arguing the scotched deal means potential takeovers of other companies are unlikely.

"To say that this is unexpected would be the understatement of the year," said Eric Nuttall, portfolio manager for the Sprott Energy Fund. He predicted "carnage coming Monday morning," calculating that companies can expect to see a $10-billion plunge in market value.

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"Progress will likely fall by at least 30 per cent," he said, and suggested Nexen Inc., Encana Corp., Celtic Exploration Ltd. and other companies with exposure to British Columbia's large Montney gas field could all be affected in the market.

If Ottawa is signalling a broader discomfort with investment from state-owned oil companies, "imagine the potential money that has just been taken off the table," Mr. Nuttall said. "Staggering."

Exxon Mobil Corp. on Wednesday offered $2.6-billion for Celtic. – a deal that will also need approval from Investment Canada before it can be consummated. Celtic, like Progress, is a natural gas company. Slews of gas companies are struggling now because of the low natural gas prices and the high cost of developing gas fields. Exxon was rumoured to in the race for Petronas.

Before the Petronas/Progress deal was sent to Ottawa for approval, the Malaysian company had to sweeten its bid for its Canadian target. It offered investors $22 per share in July, up from the $20.45 it offered when the friendly deal was disclosed in late June.

The CNOOC/Nexen deal was expected to be a key test for energy takeovers and potentially force the government to clarify the net benefit rules. However, by blocking the Petronas/Progress arrangement, the government is signaling acquirers must make strong cases in order to gain approval – even when the oil sands are not involved.

Only one of the three takeover deals the federal government squashed involved natural resources. The trio, however, all caught investors by surprise.

Canada's telecommunications regulator on Thursday nixed BCE Inc.'s proposed takeover of Astral Media Inc. Both firms are Canadian and the Canadian Radio-television and Telecommunications Commission made the decision.

The federal Tories stamped out BHP Billiton Ltd.'s hopes of capturing Potash Corp. of Saskatchewan using the Investment Canada Act in November, 2010. The Anglo-Australian mining company faced sharp opposition from Brad Wall, the leader of the right-leaning Saskatchewan Party and the province's premier. He lobbied his federal counterparts to block the hostile takeover.

The Conservatives rejected that deal in part because it considered potash a "strategic resource" in the global food supply, Agriculture Minister Gerry Ritz said in the House of Commons at the time. Tony Clement served as Industry Minister when this deal was sidelined. BHP did not appeal the decision.

Jim Prentice rejected Alliant Techsystems Inc.'s plans to buy MacDonald Dettwiler and Associations Ltd. for $1.3-billion in 2008. Alliant is an American company and Mr. Prentice argued the deal would not be a "net benefit" to Canada. This decision stunned investors because Ottawa had never before exercised its power to shoot down deals under the Investment Canada Act.

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