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Ottawa poised to rule on Nexen, Progress Energy foreign takeovers

Nexen process operator Terry McCall tightens a valve on this well head while working at Nexen's Phase 1 Long Lake SAGD processing facility near Fort McMurray.

Dave Olecko/Nexen

After more than four months of deliberation, Prime Minister Stephen Harper is poised to release decisions on two controversial foreign takeovers in the oil industry that will set the tone for Canada's relationship with fast-growing Asian economies.

Many investors and political observers expect Mr. Harper's government to approve the proposed $15.1-billion takeover of Calgary's Nexen Inc. by Chinese state-owned enterprise CNOOC Ltd., as well as Malaysian-based Petronas's $6-billion bid for Progress Energy Resources Corp.

At the same time, Ottawa will release new foreign-investment guidelines that will signal to Asian governments and their state-owned enterprises the extent of Canada's appetite for further takeovers in key sectors. Ottawa is expected to release the decisions by the end of day Monday, and perhaps as early as Friday, though the ruling could encounter last-minute snags and be delayed further.

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The government is attempting a fine balancing act: looking to attract investment, while ensuring key sectors of the Canadian economy do not become dominated by firms owned by foreign governments. Rejection of either or both deals would undermine the Harper government's goal of expanding ties to Asia and attracting investment to finance development of Canada's resources.

"This cuts right to the core of Canada's economic policy," said Gordon Houlden, director of the China Institute at the University of Alberta.

"There's no doubt we need capital to develop our resources and the biggest single available pool is in China. To shut the Chinese out completely has a real downside."

Though seen as likely, a positive outcome for the two Asian buyers is far from certain, given the Conservative track record for turning down deals that the business community thought would pass muster under the Investment Canada Act, and given political opposition to corporate takeovers by foreign state-owned companies.

Shares in both the target companies climbed Thursday, though both remain well below the offer prices, reflecting the continued risk that the deals could fall apart.

Petronas's application was rejected in October, but the Malaysian state-owned enterprise (SOE) was given another opportunity to persuade Ottawa its acquisition of Progress would be a good deal for the country. Petronas said this week that the takeover would spur massive investment in a natural gas export facility in British Columbia, and is believed to have offered to list shares in its Canadian subsidiary at some point in the future.

For CNOOC, the challenge is more political. Several members of the Conservative caucus opposed the deal, and opinion polls show Canadians generally worry about large-scale Chinese investment aimed at gaining control of key resource sectors. Sources close to the talks say the Chinese company is cautiously optimistic that it will get a green light.

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Chinese firms are expected to invest $1-trillion in the coming years to acquire global assets.

"All Canadians – including myself – have some nervousness about allowing an absolute wide-open door for Canadian resources," said Mr. Houlden, a former diplomat to Beijing.

Some prominent oil industry executives have urged the government to erect specific barriers to takeovers by state-owned enterprises that would limit their presence in key sectors like the oil sands.

Murray Edwards, the influential chairman of Canadian Natural Resources Ltd., has urged Ottawa to ensure strong domestic presence in the industry.

The government must be clear, and create "some conditions or limitations" on takeovers, Mr. Edwards told reporters recently. If it doesn't, he said, "there is a risk that Nexen could be the first of many."

"From a country point of view, there is, I think, a desire – if not need – to make sure we have strong Canadian champions in industry, as well as strong foreign capital."

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However, Ottawa is likely to avoid explicit thresholds. Instead, it is expected to strengthen its guidelines that encourage SOEs to list shares on Canadian stock exchanges in order to heighten transparency and regulatory oversight, and to provide a policy statement that signals there will be limits to the government's tolerance for future takeovers.

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