Barely a month goes by without one trade delegation or another from Canada arriving in Beijing, courting Chinese buyers for everything from energy and minerals to Canadian beef and ice wine.
So the news late Friday – already the weekend in Beijing – that Canada had shot down the acquisition of Progress Energy by Malaysia's state oil company Petronas had a particularly foreboding feel, three weeks ahead of a review deadline in the $15.1-billion bid by China's CNOOC for Calgary-based oil sands producer Nexen Inc.
"When CNOOC announced this Nexen deal, it wasn't even on my radar that it could be turned down," said Laban Yu, senior vice-president and head of energy in Asia for Jefferies research and investment firm. "It's hard to imagine how Petronas could get cancelled and CNOOC could go through, unless this is a last-ditch attempt to wring concessions out of both of them."
Lawyers, businessmen and advisors in Beijing, Shanghai and Hong Kong who have worked directly with CNOOC on deals in Canada and the U.S. have all expressed shock at the decision. That the Canadian government appears to have made its refusal on a technicality, and whether or not the deal may be salvaged, may be beside the point for a Chinese oil industry which has still not fully recovered from CNOOC's failed attempt to purchase Unocal in 2005.
"We always had the view here in China that Canada is more willing than the U.S. and that is certainly no longer the case," said one China-based lawyer in mergers and acquisitions who has worked with Chinese oil companies. The pending CNOOC deal with Nexen, he said, had already put all other negotiations on hold.
"Will it have a chilling effect? Yes, for sure. ..It kind of leaves everybody hanging, everybody in China," the lawyer said. "It just creates uncertainty and a lot of problems."
"Obviously it raises concerns, but it doesn't mean the CNOOC deal is dead," said another China-based lawyer who has worked with CNOOC. "I think the stakes are high with the Nexen deal…I think it's known in Canada if they don't pass this deal, Chinese investment in Canada will dry up and that would not be a good thing for either Canada or China."
The move on Petronas seems in direct odds with the image Canadian businesses and politicians have tried to project on frequent missions to Asia and particularly China, including the Council of the Federation premiers' alliance last month, an alliance of Canada's 11 largest cities this past June, and seemingly endless rounds of provincial, city and federal delegations.
The most significant, however, was the one led by Prime Minister Stephen Harper himself in February of this year, accompanied by four top Cabinet ministers and senior executives from energy and mining industries, among others.
CNOOC was known to have been shopping around for a larger acquisition to add to its stable of holdings; Canadian sources say it was just after the prime minister's long-awaited visit to China in February that the ball on Nexen got rolling.
"[Harper's] efforts to say 'we're open to investment' had a tangible and real outcome, in that they did come and they did invest. So that is what makes this a very confusing mixed message," said a Canadian with knowledge of the CNOOC-Nexen talks.
CNOOC in Beijing this week refused comment on the Petronas decision and any implications for their bid, pending their own review. Last month, the company's CEO, Li Fanrong, told The Globe and Mail that the Nexen deal could serve as a "bridge" for future cooperation between China and Canada.
Now, the question arises: What was Canada hoping to accomplish with all its courting, if its suitors run the risk of failing at the eleventh hour?
"I think this is seen as an indicator of whether or not Canada is open for business. Mr. Harper came to China in February and said that Canada was open for business. This will be seen as a test of that," said Howard Balloch, a former Canadian ambassador who is now chairman of Canaccord Genuity Asia.
Canaccord has an agreement to establish a $1-billion Canada-China Natural Resource fund with the Export-Import Bank of China, signed as one of many deals during Stephen Harper's trip to China in February, though the fund is not yet operational, Mr. Balloch said.
"I think executives at CNOOC are exhorting their negotiating team to sharpen their pencils and put together a case that is persuasive. I would think they are quite worried about what this means and I think it goes beyond CNOOC," Mr. Balloch said.
What is at stake in CNOOC's Nexen bid is the future of Chinese investment in Canada's energy sector. After CNOOC's bid for Unocal fell through in 2005, their next U.S. deal of significance – a $2.2-billion purchase of Chesapeake Energy assets – did not come until late 2010.
"After Unocal fell through, the US didn't see any more investment for years. I can see the same thing happening in Canada," Mr. Yu said.