The CNOOC-Nexen / Petronas-Progress decision is now behind us, but the most interesting issues surrounding these takeover deals are only just coming to light. CNOOC and Petronas (both state-owned enterprises of China and Malaysia respectively) have been given the green light to acquire two Canadian energy companies, but the decision was made with the qualification that it was "not the beginning of a trend, but rather the end of a trend."
The central question is whether Canada is still open to state-owned enterprise (SOE) investment. Opponents of the deal are celebrating what they see as a red line on SOE investment. In Prime Minister Stephen Harper's words: "Foreign state control of oil sands development has reached the point at which further such foreign state control would not be of net benefit to Canada."
This would seem to be an unequivocal rejection of further SOE investment, except that the Prime Minister went on to say that there could be "exceptional circumstances" in which the government would find the acquisition of control of a Canadian oil-sands business by a foreign state-owned enterprise to be of net benefit.
The nature of these exceptional circumstances is not known, but it is a reasonable assumption that since the CNOOC and Petronas acquisitions passed the net benefit test, other SOEs could very well emulate their example and likewise make the cut.
In the near term, no state-owned enterprise would be so foolhardy as to test the government on the "exceptional circumstances" provision. But in the years ahead, the line in the sand could fade if market conditions change and investment from a foreign state-controlled company is seen as critical to the Canadian industry.
As it turns out, we are in a situation where grim market conditions for Canadian natural gas are crying out for foreign investment, including from SOEs. From this perspective, approval of the Petronas-Progress deal (which is mostly about gas) was a no-brainer. It is not by accident, therefore, that Mr. Harper's stern warning was limited to "oil sands development" and presumably does not include natural gas and other segments of the energy industry.
Rather than drawing a permanent red line against SOEs, what the government has very skillfully done is to give itself the flexibility to respond to changing circumstances. At the same time, it has sent a very clear signal of openness to foreign investment, not only by approving the CNOOC and Petronas deals, but also by raising the threshold for review of private foreign investment projects in Canada. Critics will bemoan the continued lack of clarity in the net benefit test, but ambiguity can sometimes be constructive and the government has in this case cleverly contained its cautionary words about SOEs under the very shiny and substantial packaging of more than $20-billion approved foreign investment.
There is, however, much unfinished business.
The Prime Minister's warnings on SOEs and his robust defence of Canadian ownership of the oil sands will resonate well with the public, but the discussion should not end there. With CNOOC and Petronas joining at least another dozen or so state-owned companies and sovereign wealth funds that have significant investments in the country, there is an opportunity now to more carefully and calmly consider the issues that were not adequately addressed during the fevered period of public debate about CNOOC-Nexen.
What exactly is it about foreign SOE investment in Canada that is to be feared?
Is it that they overpay for Canadian assets? Hooray for shareholders. Do they underperform private companies? Private companies also vary in their performance. Will they mistreat workers or despoil the environment? We have laws against that.
The general objection to foreign SOEs is that they are beholden to their owners – the government of another country. But what specifically would a foreign government instruct the company to do that would be so contrary to Canadian interests and could not be protected against by legislation? And how would that be different from a decision by the head office of an American or German-owned private company that adversely affects its branch plant in Canada? Is foreign state-owned investment in this country really a form of re-nationalization of Canadian industry? Isn't the market framework for doing business in Canada more important than who owns the business?
Another unresolved question is on the maintenance of a high degree of Canadian ownership of the oil sands. Setting aside the fact that Canadians already own 100 per cent of the resource (our governments merely grant companies the right to develop that resource), what is the public policy purpose of creating a ring-fence around Canadian ownership of oil sands companies (or any other sector)? Is the ring-fence to protect against SOEs only, or does it also include foreign private oil and gas companies?
Implicit in the case for a ring-fence is the notion that Canada needs national champions. But protection from takeovers in itself is unlikely to create globally significant companies, least of all in the oil and gas sector where even our biggest companies are middle ranking at best, and where national oil companies account for about 80 per cent of global reserves.
Perhaps we need to have a discussion about what it really would take for Canada to have national champions in selected industries. Do we have the appetite for a new kind of "industrial policy" that will create globally significant companies in this country? The CNOOC-Nexen / Petronas-Progress decision was merely a sideshow in this much bigger and more challenging conversation about Canada's economic future.
Yuen Pau Woo is president and CEO of the Asia Pacific Foundation of Canada