The federal government is pushing CNOOC Ltd. to lock into commitments on investment and employment tied to its proposed takeover of Nexen Inc., but the Chinese company fears such pledges could hurt the profitability of the Calgary energy company if oil prices weaken.
Faced with significant opposition to the deal among the Canadian public and in its own caucus, the Harper government is keen to negotiate tough and binding commitments from the Chinese state-owned enterprise to ensure the takeover represents a net benefit for Canada, sources close to the talks said Monday.
One critical area is the enforceability of any undertakings made by CNOOC as part of the net benefit test, which the government uses to determine whether to approve takeovers by foreign entities. In the past, some foreign acquirers of Canadian companies have reneged on investment promises when economic conditions turned sour.
Spending and job commitments are proving to be a point of contention in the proposed $15.1-billion (U.S.) deal, underscoring the difficulty the federal government faces in winning such pledges from foreign acquirers.
Also complicating the government's decision: Canada is seeking reciprocity from China regarding takeovers or investment by Canadian companies in China, but it's not clear how that goal will be achieved.
CNOOC made a series of promises when the takeover was first proposed in late July. They cover issues of governance and transparency, including plans to list the company's shares on the Toronto Stock Exchange and maintain Canadian management. As well, the Chinese firm has vowed to make Calgary the headquarters for its North American operations, maintain Nexen's charitable and corporate social responsibility commitment, and increase long-term investment in the oil sands.
However, Ottawa is pushing CNOOC to make an unprecedented level of promises on investment and employment that would erode the commercial viability of the transaction, the sources said. The pressure comes even as the federal government demands that companies controlled by foreign governments operate as commercial corporations in Canada.
Spending commitments may be particularly tricky given Nexen's challenging Long Lake oil sands project, which has suffered delays and production shortfalls. Canada's oil industry, meanwhile, is facing numerous challenges in the years ahead, as companies battle soaring costs and surging U.S. oil production.
Still, investors appear to be increasingly confident that Ottawa will approve the $27.50-a-share deal, and have bid up Nexen shares from a low of $23.01 (Canadian) on Oct. 26 to $25.99 last Friday, before profit-taking Monday saw the stock close at $25.32. A number of deadlines have passed for a decision, but Ottawa appears to have won CNOOC's agreement to keep talking, and a conclusion is now expected either late this month or early in December.
At the same time, the federal government is retooling its guidelines for takeovers by state-owned enterprises, and is assessing a $6-billion bid by Malaysia's Petronas for Calgary-based Progress Energy Corp. But Ottawa has said that it will assess both the CNOOC bid and the one by Petronas according to existing Investment Canada rules.
Some past deals with investment and employment guarantees attached, such as Vale SA's takeover of Inco Ltd. and U.S. Steel's acquisition of Stelco Inc. have failed to meet commitments.
Chinese companies are prepared to be patient while Ottawa resets its policy framework, said Wenran Jiang, an Alberta-based consultant who advises the provincial government on its energy dealings with Chinese state-owned companies. But there is a concern that Ottawa is making exorbitant demands as part of the net benefit review.
"It would be unreasonable for the Canadian side to demand the locking in [of undertakings] regardless of market fluctuations and principles," Mr Jiang said. "It is reasonable for Canada to demand of CNOOC or other companies to provide net benefit in terms of employment or long-term investment, but not regardless of the market fluctuations.
"We can't have it both ways. We want to have the money from China, we want to have them follow our rules in being transparent and market-oriented, but then there is the tendency due to the pressure of resource nationalism to push China to operate as if it is state-owned enterprise and, regardless as to whether it is profitable or not, they have to lock in to give us something in the future."
Former industry minister Jim Prentice said he expects Ottawa to be more explicit in its demands for future deals that state-owned companies should have separately incorporated subsidiaries listed on Canadian exchanges, with independent directors and audit committees. But he said Ottawa should not let concerns over the CNOOC deal derail its effort to pivot toward Asian and China and away from an exclusive dependence on the U.S. market for energy exports.
"We can't allow ourselves to get distracted and take our eyes off what really matters," Mr. Prentice said in a speech to the Canadian-American Business Council in Ottawa on Monday. "The CNOOC-Nexen deal is big and it's important, but it's not the main issue. The main issue is market access to Asia generally and China specifically."