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The Globe and Mail

Ottawa walks a fine line on CNOOC-Nexen review

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.


The federal government is looking to use CNOOC Ltd.'s $15.1-billion bid for Nexen Ltd. as leverage to gain greater access to China's vast marketplace, but is expected to judge the deal on its own benefits to Canada.

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

The proposed takeover by the Chinese state-owned company has raised some concern among key conservative commentators, and sources say some ministers have privately raised a warning flag about the deal.

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However, Finance Minister Jim Flaherty has warned against a politically inspired veto that could damage shareholder value and commercial relations with the Asian powerhouse, insiders said.

Prime Minister Stephen Harper indicated last week that the government will look beyond a narrow "net benefit" test in assessing the takeover's long-term impact. Industry Minister Christian Paradis said Tuesday that Ottawa is eager to negotiate better access to foreign markets for Canadian firms, and suggested reciprocity is a key concern for the government.

"It is very important for us to make sure that our Canadian business can grow wherever it is possible," Mr. Paradis told BNN TV when asked about the CNOOC-Nexen review and the need for reciprocity. "And as a government, we have to make sure they have the opportunities."

Ottawa's approach to the Nexen deal underscores the Conservatives' willingness to take a more involved stance on foreign takeovers than they did when they first came into office in 2006, aiming to maximize the reward for Canadian business.

Ottawa appears to be pursuing parallel tracks, in which it will use the CNOOC acquisition to spur action from China on a proposed foreign investment protection agreement, but it is unlikely to directly link the two issues by withholding approval for the Nexen takeover, government and industry sources said Tuesday.

Under the Investment Canada Act, has 45 days to review a proposed foreign takeover, plus a 30-day extension period, though either the government or the company can ask for an extension. New regulations allow the government to release reasons why it turns down a proposal if it concludes a takeover does not represent a net benefit to Canada.

After producing a report this summer on the benefits of Canada-China trade and investment, Ottawa is now looking to kick-start negotiations and is using China's investment appetite as leverage to get those talks going.

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Anticipating the growing power of state-owned enterprises, the Harper government put up additional Investment Canada screening that requires the companies to demonstrate that they will operate on a commercial basis, rather than as a policy arm of a foreign government.

CNOOC has sought to win support for its bid by offering to list its shares – which trade in New York and Hong Kong – on the Toronto stock exchange, and by maintaining Nexen's management and establishing Calgary as the headquarters for its North American operations. However, the federal government is likely to demand a more robust capital spending plan for CNOOC to demonstrate that the deal represents a net benefit for the country.

While CNOOC is majority-owned by the Chinese government, it insists it operates independently. And CNOOC views the reciprocity argument as a government-to-government issue, not something it can offer with the Nexen bid.

Beijing does allow some foreign investment in its resource sector. International oil companies are producing crude in the South China Sea, though they are limited to a 49-per-cent stake in the assets. Several Canadian-based mining companies are exploring of minerals in China, but they face protectionism and stultifying bureaucratic red-tape.

"I think those that would oppose the deal are trying to muddy the waters a bit," said Peter Harder, a former deputy minister at Foreign Affairs and now president of the Canada-China Business Council.

Canadians shouldn't expect China to open every sector to foreign investment, he said, any more than China should demand removal of restrictions covering Canadian banks and telecommunications companies.

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"In my mind reciprocity is a good objective, if by that you mean the the economic relationship and the benefits flowing from [foreign direct investment] need to work both ways and is successful both ways," he said.

Editor's note: An earlier online version of this story and the original newspaper version of this story incorrectly stated that under the Investment Canada Act, the government has 90 days to review a proposal. This online version has been corrected.

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