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Oil sands, companies suffer from new takeover rules, study says

Critics have said the foreign-investment rules created a wider chill on state-owned investment in the energy industry, an argument that Ottawa rejects. But the University of Calgary economists say the policy had the “unintended consequence” of killing joint ventures – a key vehicle for junior oil companies.

Reuters

The Harper government's prohibition on takeovers in the oil sands by state-owned companies is depriving the sector of capital to fuel development, though strong crude prices have offset the impact on companies and projects, alike.

In a study released Thursday, Calgary-based economists Eugene Beaulieu and Matthew Saunders say the state-owned enterprises takeover policy resulted in an overall chill of SOE investment in the oil sands, and shaved 20 per cent from the share value of companies operating in the sector. For junior companies, the fallout was more like 30 per cent to date.

"The sector has long relied on foreign capital to finance projects, meaning that any move to deter outside investment could have profound consequences for the development of this critical economic asset," the economists said in the study.

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In addition to the foreign investment issue, the industry is dealing with a number of cross-currents: concerns about market access if new pipelines don't get built; worries about rising costs in an already high-cost environment, and rising competition for capital from booming U.S. unconventional oil plays. However, $100 crude prices can offset a lot of negatives.

And crude prices jumped to nine-month highs Thursday, reflecting ongoing export problems in Libya and concerns the intensifying sectarian conflict in Iraq could disrupt supplies from that country. Brent prices climbed 3 per cent on Thursday to $113.27 (U.S.) a barrel, while West Texas Intermediate rose 2.2 per cent to $106.71.

Despite ongoing debate about transportation logjams, Canadian prices have moved in tandem with global benchmarks. The trendsetting heavy crude Western Canada Select traded at $19.75 below WTI on Thursday, a differential that has widened in recent years as high as $40.

Prime Minister Stephen Harper announced the restrictions on SOE investment in December, 2012, when he approved CNOOC Ltd.'s $15.1-billion takeover of Calgary-based Nexen Inc. Faced with widespread concern about Chinese government involvement in a critical Canadian sector, Mr. Harper said Canada was "open for business" but not up "for sale to foreign governments."

"If they hadn't made those rules, there would be more capital being injected into the oil sands," said Michael Dunn, analyst with First Energy Capital. "But who am I to say what the right amount is? Is it too low? It's still fairly busy. But it certainly harms the business model of junior oil companies."

Critics have said the foreign-investment rules created a wider chill on state-owned investment in the energy industry, an argument that Ottawa rejects. But the University of Calgary economists say the policy had the "unintended consequence" of killing joint ventures – a key vehicle for junior oil companies – because such deals typically include a clause that allows one partner to assume control in the event the other party fails to meet its obligations.

Natural Resources Minister Greg Rickford said Canada remains "open for business" and that merger and acquisitions activity is picking up. But he said the government believes there is a need to prevent foreign governments from gaining control of key energy assets.

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"With our new rules, we have made a clear distinction between free market private investment, and entities controlled or influenced by foreign governments," he said in an e-mailed statement. "Foreign government entities will not be permitted to acquire control of a Canadian oil-sands business unless there are exceptional circumstances … Our balanced approach ensures that foreign investment transactions are reviewed on their merits based on the long-term interests of the Canadian economy."

The paper was published by the University of Calgary's School of Public Policy, which is headed by Jack Mintz. Professor Mintz loudly argued that Ottawa should put the brakes on SOE investment because it amounted to the "re-nationalization" of the oil patch by foreign governments.

Correction: An earlier version of this story incorrectly said Mr. Saunders works at the University's School of Public Policy.

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