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CNOOC is set to formally apply this week for Investment Canada’s approval to take over Calgary-based Nexen, whose board has agreed to the offer that would provide shareholders with a 62-per-cent premium on the stock price

HANDOUT/Reuters

Ottawa has extended its review of China's proposed takeover offer for Nexen Inc., a deal that has stirred controversy as Canadians debate whether it is appropriate for state-controlled companies to own large swaths of the oil sands.

The Harper government is weighing whether to approve CNOOC Ltd.'s $15.1-billion (U.S.) takeover of the Canadian company. The deal must prove to be a "net benefit" for Canada in order to win the government's blessing. On Friday, Industry Minister Christian Paradis said the review's new deadline is Monday, Dec. 10.

"The required time will be taken to conduct a thorough and careful review of this proposed investment," Mr. Paradis said in a statement. The review period can be extended further should CNOOC agree. A decision, Mr. Paradis said, will be made based on the rules detailed in the Investment Canada Act's guidelines for investment by state-owned companies.

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The extension comes as China's government is in a state of transition, with power scheduled to change hands Thursday. Xi Jinping, China's vice-president, is expected to take over from Hu Jintao, the country's paramount leader.

Also, Prime Minister Stephen Harper lands in India this weekend for a six-day visit. Investors, especially state-owned firms, are keenly watching the Nexen deal to see whether Canada's energy sector is in fact open for major investment deals.

The government's decision on CNOOC is important because it will set the tone for future foreign takeovers of Canada's oil and gas companies. While all three of China's state-controlled oil and gas companies have investments in Canada's energy sector, the Nexen deal is different because of its size. Those in favour of foreign investment, including investments made by state-owned companies, argue Canada needs players like CNOOC because domestic companies cannot fund expansion plans in the energy sector without outside support. The government, they argue, should make it clear foreign companies are welcomed. Opponents, including the New Democratic Party, fret about giving foreign governments, particularly Beijing, too much control over Canadian resources and companies.

CNOOC had to agree to the Dec. 10 extension because Ottawa already used up its right to unilaterally stretch the review.

The CNOOC extension comes two weeks after Ottawa said Petronas' bid for Progress Resources Energy Corp. did not pass the net-benefit test. However, sources say Petronas, which is owned by the Malaysian government, would not agree to extend the review process, which left the government no choice but to reject the offer. Petronas and Progress, a natural gas company, were stunned by the announcement, and are now working with government officials to resurrect their $6-billion friendly takeover deal. Their deal was turned away Oct. 19 and they were given 30 days to prove the union would be a benefit to Canada, although that 30-day period can be extended.

Sources say Ottawa wanted to extend the Petronas bid because it is in the midst of clarifying the "net-benefit" rules. A new framework is on the way, sources say, and will contain a duel-track system – one set of rules for regular corporations and a second set for companies under the control of foreign governments.

The existing net benefit test is murky, although the government demands foreign buyers keep senior management and employees, and maintain spending commitments, even if the market turns sour. Further, Ottawa wants buyers to operate like commercial entities. CNOOC, which offered Nexen investors $27.50 per share in July, has pledged to keep managers and employees, Nexen's name, list on the Toronto Stock Exchange, enhance capital expenditures on the Canadian company's assets, and make Calgary its North and Central American headquarters. Petronas will also keep Progress's name intact, retain senior management and other employees, as well as spending plans. It has also proposed a Canadian subsidiary board. Petronas' financial information is public and some of its subsidiaries are listed, however it will not list on the TSX.

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