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Canada Cracks Door to Foreign Investment

The Canadian government earlier this month granted Chinese state-controlled industry a spot in the North American oil and gas industry with its approval of a merger by CNOOC Ltd. of Nexen Inc. (see NGI, Dec. 10), but it pledged that the toehold will not be allowed to grow into a dominant role.

Prime Minister Stephen Harper unveiled prohibitive new rules for takeovers of Canadian companies by foreign state corporations, at the same time as he announced approvals of two deals made under the previous, more tolerant regime.

CNOOC now will be allowed to complete its C$15.1 billion purchase of Nexen and Malaysia's state-owned Petronas also will be permitted to scoop up Progress Energy Resources for C$6 billion. Canada regulators previously had rejected both bids (see NGI, Oct. 29).

However, Harper and his Conservative government -- as avowed opponents of state intervention in the economy, starting at home in Canada -- immediately presented a new foreign investment code aimed at preventing the two Asian deals from setting off a domino effect.

"Canadians generally and investors specifically should understand that these decisions are not the beginning of a trend, but rather the end of a trend," Harper said in a brief speech. "When we say that Canada is open for business, we do not mean that Canada is for sale to foreign governments."

The toughened new rules single out the oilsands for the strongest protection against any spread of foreign ownership, as the most active Canadian economic growth field and a target of rising Chinese investment.

The new regime indicates that all takeovers of Canadian firms by foreign state-controlled corporations that cost more than C$330 million will be reviewed by the federal government in Ottawa. Takeovers by investor-owned foreign corporations will be exempt from government reviews unless their value exceeds C$1 billion. The reviews will consider the degree of control or influence that a foreign state-owned enterprise (SOE) will likely exert on its Canadian takeover target in particular, and on the industrial sector involved in general.

"Most importantly," Harper said, the Canadian government "will consider the extent to which the foreign government in question is likely to exercise control or influence over the state-owned enterprise acquiring the Canadian business."

The oilsands are singled out for special shielding because only 15 companies operate in the field due to the mammoth scale of projects required to achieve reasonable economies of scale in the northern Alberta bitumen belt. The new rules say foreign oilsands takeovers will only be allowed in exceptional circumstances. Alberta Premier Alison Redford endorsed the Nexen and Petronas decisions and said her provincial government will seek further clarification of the new national policy.

Nexen owns one of the biggest and newest in-situ or underground production complexes for tapping oilsands deposits that are too deep for open-pit mining. Progress is principally in the natural gas side of the Canadian industry, and its takeover by Petronas grew out of a joint venture in developing a Pacific Coast export terminal for liquefied natural gas (LNG) (see NGI, June 6, 2011).

Other branches of China's state-sponsored energy industry that have bought into the oilsands to date include Sinopec Group and PetroChina Co. The Chinese-owned assets range from a 9% interest in the biggest mining and upgrading complex, 350,000 b/d syncrude, to minority holdings in a range of new, much smaller but growing in-situ projects. PetroChina last week also clinched a joint venture with Encana Corp. to explore the Duvernay Shale (see related story).

Harper said, "The government's concern and discomfort for some time has been that, very quickly, a series of large-scale controlling transactions by foreign state-owned companies could rapidly transform this [oilsands] industry from one that essentially a free market to one that is effectively under control of a foreign government."

Canadian industry and political analysts viewed the simultaneous takeover approvals and announcement of tougher rules for future deals as a compromise meant to tell China a door could be open for partnerships if it adapts to free markets, and meant to show voters that the Conservatives are not just servants of the stock exchanges and wealthy foreign investors. In popular opinion polls, about three-quarters of Canadians opposed approving corporate takeovers by Chinese state-controlled enterprises (see NGI, Oct. 22).

Approval by the Canadian government was seen as the biggest hurdle to the CNOOC-Nexen deal. It still needs to win the approval of both the U.S. and UK governments, as well as the satisfaction or waiver of "other customary closing conditions," Nexen said.

In the United States the companies are seeking approval from the Committee on Foreign Investment in the United States, which is an inter-agency committee authorized to review transactions that could result in control of a U.S. business by a foreign entity in order to determine the effect of such transactions on the national security of the United States. Nexen has operations in the U.S. Gulf of Mexico, but these are a fraction of its assets overall.

"This [Canadian approval] is an important milestone in the process and confirms our belief that this transaction provides a number of significant benefits to Canada and to Nexen," said Kevin Reinhart, Nexen interim CEO. "We remain focused on working with CNOOC to bring this transaction to a close."

Petronas and Progress said they welcomed the Canadian approval; they complete the transaction last week. "This approval by the Canadian government marks a vital step in our plans to develop a LNG export business and opens promising new business opportunities for Progress, British Columbia and Canadian trade expansion," said Progress CEO Michael Culbert.

"Canada has great potential in the global LNG market -- a growing market that's already worth more than C$300 billion per year. While international LNG trade is intensely competitive, new facilities such as our Pacific Northwest LNG project are vital to building Canada's market position."

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