The Conservative government has focused relentlessly on resource development as key to Canada's economic prosperity, but with its new investment rules, Ottawa is risking slower growth in order to limit foreign-government control in the sector.
State-owned enterprises – which represent the fastest-growing source of global capital – will have to re-assess their commitment to Canada in light of new rules that restrict their investment activities, industry analysts said Sunday.
Prime Minister Stephen Harper approved two high-profile deals late Friday – CNOOC Ltd.'s $15.1-billion (U.S.) takeover of Nexen Inc. and Petronas' $6-billion (Canadian) acquisition of Progress Energy Resources Corp. At the same time, he said oil sands producers are now essentially off-limits for acquisitions by foreign state-owned enterprises (SOEs). Mr. Harper also announced new guidelines that raise the hurdles for future takeovers of Canadian firms by companies controlled by foreign governments.
Mr. Harper rejected any suggestion that the new rules will slow new projects in the resource sector, arguing that existing firms have plenty of access to money and that foreign firms, including SOEs, are still welcome to invest in this country. However, he said the government could bar acquisitions by state-controlled firms in other sectors should their presence reach the levels now seen in the oil sands, where they now account for about 10 per cent of production.
Natural Resources Minister Joe Oliver insisted Sunday that Canada will have ample access to capital to fuel development of resources, estimating that need at some $650-billion over the next 10 years. The industry has a long track record of financing development in the oil sands, he said, and acquisitions by state-owned companies represent a small part of that effort.
"We're not turning our backs on SOE investment overall," Mr. Oliver said in an interview. "Their capital is welcome in the oil sands provided it is in a minority position or joint venture, and we will certainly welcome state-owned investment in other sectors."
But industry experts warn that the foreign investors are looking for more control over their assets, not less, especially in high-cost environments like the Alberta oil sands.
"Whether SOE investors are prepared to live with this regime where they are required to acquire only minority investments or only acquiring acquisitions of control in exceptional circumstances, we'll have to see," said Frank Turner, a Calgary-based lawyer with Osler Hoskin & Harcourt LLP.
Indeed, Ottawa has made an explicit tradeoff between wide-open investment rules that would funnel vast amounts of overseas capital into oil sands expansion and Canadians' concern about the loss of control over those resources to foreign governments. The Alberta government has reacted warily to the new investment guidelines, concerned that they will slow development in the province.
"I think there is a pretty clear balancing act that the government had to consider between accepting foreign investment, which would expedite these project and expedite the development of the oil sands, and some of the opposition to foreign investment," said Geoff Hill, a Calgary-based consultant with Deloitte & Touche LLP.
"Some of the state-owned enterprises would want control and now it appears that would only be possible on a very exceptional basis [in the oil sands] and so that those investment opportunities would be more limited."
Mr. Oliver said he recognizes he will now have some work to do in re-assuring state-owned companies in places like China, India, Brazil, South Korea, Kuwait and Abu Dhabi – all of which have been considering further investment in Canada – that this country remains open for business.
That may involve emphasizing Canada's other advantages as an investment destination. Thomas d'Aquino, a prominent Ottawa consultant, noted that the country offers foreign investors a stable political climate and low corporate taxes – along with vast reserves of energy.
"I don't think it is going to be a deterrent to any SOE that wants to get a foothold here, or a minority stake, or wants to make money," Mr. d'Aquino said.
Some of the onus is now on CNOOC and other foreign government-controlled companies to demonstrate their their presence is beneficial to Canada, as the country looks to develop its vast resource base, said Peter Harder, a former deputy minister in foreign affairs and now president of the Canada-China Business Council.
He said the approval of the Nexen deal was a major advance in Canada-China commercial relations, even as both sides proceed somewhat warily.
"I think we need a period to politically digest this and we need leadership across the political spectrum to point out to Canadians why opening ourselves to Asia generally and China in particular is in our economic interest," Mr. Harder said. "And I don't know how we get the capital we need in the oil sands over the long haul without the involvement of state-owned enterprises, not just the Chinese but others."