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Li Fanrong, CEO of CNOOC Ltd., and interim Nexen Inc. CEO Kevin Reinhart last year, just after the Chinese state-owned CNOOC took control of Calgary oil and gas producer Nexen. Proposed new rules could make the purchase process more difficult for foreign state-owned enterprises.CHRIS BOLIN/The Globe and Mail

Ottawa is creating new uncertainty in the mergers and acquisitions market with new rules on foreign investors at a time when Canadian resource companies are already facing an uphill battle to attract capital.

In budget legislation introduced last week, the Harper government is proposing to amend the Investment Canada Act to give Ottawa more discretion in deciding what investments by state-owned enterprises (SOEs) will trigger a review, and whether companies are deemed to be influenced by foreign governments even if there is no direct ownership stake.

Analyst Michael Dunne of First Energy Capital in Calgary said there have been few deals involving SOEs since Ottawa signalled tougher screening policy last December. The government placed new ownership limits on oil sands assets while approving CNOOC Ltd.'s acquisition of Nexen Inc. and the sale of Progress Energy to Malaysia's Petronas. The lack of foreign buyers for Canadian resources properties has coincided with a general slump in asset values.

Ottawa did rule that Encana Corp.'s $2.2-billion sale of 49.9-per-cent interest in natural gas assets to PetroChina in December did not require an Investment Canada review, because Encana maintained operating status in the resulting joint venture.

But Mr. Dunne said the increasing scrutiny under the Investment Canada review could deter new deals from government-owned companies – even though Ottawa has insisted its welcomes such investment, though generally in minority stakes.

"If I'm an SOE and I'm considering this [legislation], there would be cause for concern," Mr. Dunne said.

With prices on the decline, a number of companies are rethinking asset sales. Cenovus Energy Inc. recently said it will take longer than expected to unload oil and gas assets in Saskatchewan, while ConocoPhillips Co. is looking to reduce its 50-per-cent stake in oil sands assets like Surmont and Foster Creek.

Merger and acquisition activity in the oil and gas sector has slumped dramatically. In the first quarter, deals amounted to less than $1-billion, the lowest quarterly figure since 1994, said Tom Pavic, vice-president of Sayer Energy Advisors in Calgary.

"There is a lack of capital, definitely," he said. "There is a lot of product out there, and a lot of sellers are not getting the valuations they want so they're not willing to transact."

Ottawa's policy toward state-owned enterprises has narrowed the field of potential buyers, said Danny Assaf, a foreign investment lawyer with Torys LLP who has written on Ottawa's SOE policy.

"With the challenging economic climate globally and the greater competition for capital, we need to be very targeted and measured in how we apply these SOE guidelines," Mr. Assaf said.

He said foreign companies with close ties to their governments will see new hurdles in Canada, and will need to adjust their investment plans to reflect the higher level of risk and managerial time that would be involved in a Canadian transaction.

Wenran Jiang, a China specialist at the University of Alberta, said Ottawa has broadened the definition of what it might deem to be a state-owned enterprise to include companies whose principals have close ties to government – a category that would include virtually every company in China, as well as nominally private companies like Russia's OAO Rosneft or Brazil's Vale SA.

Mr. Jiang said the policy extends beyond the resource sector and could target companies like Huawei, a privately owned Chinese telecommunications giant founded by a former officer in the People's Liberation Army. Huawei has not been active in acquiring Canadian assets.

He said there are several private-sector Chinese companies scouting for resource and refining assets in Canada, while the large state-owned oil companies like CNOOC, PetroChina and Sinopec will likely spend several years digesting their acquisitions before re-entering the market.

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