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Canada ‘not for sale,’ says Prentice Federal government ponders national security test for foreign takeovers of firms by state-owned enterprises, welcomes outside investment Gary Park For Petroleum News
After less than two years in office, the Canadian government of Prime Minister Stephen Harper, while preaching the importance of foreign investment, is being forced to follow the lead of other developed nations who are curbing the entry of state-owned companies into their economies.
Industry Minister Jim Prentice announced Oct. 9 the government is starting a review this fall into whether a “national security test” should be applied to foreign investments.
He said that countries such as the United States, Australia, China, Germany, Japan and the United Kingdom are limiting foreign investment in certain sectors to protect their national security.
Prentice made special mention of the American Foreign Investment and National Security Act which protects the United States national security, critical infrastructure and key technology.
“Canada asserts no less a right,” he said, noting that Harper on Oct. 3 conceded that the absence of such a test in Canada is an oversight that should be addressed.
“Like other countries around the world, it’s important that we have safeguards in place to protect our interests,” he said in a speech to the Vancouver Board of Trade.
Government won’t delay action Faced with a global race for corporate control, the Harper government has decided it can’t delay taking action, even though a high-level government panel is due to report by June 2008.
Prentice said the panel agrees that measures are needed to update legislation covering foreign investment and competition and that action could not wait for the panel’s reporting deadline.
“Both Canadians and non-Canadians are entitled to clarity,” he said. “Our interest is ensuring that state-owned enterprises in Canada are operating under the same standards as any other commercial enterprise.
“Free markets do not mean a free pass,” Prentice said. “Canada is open for business, but it is not for sale.”
He said a national security review is not intended to discourage all investment by state-owned firms, observing that several firms owned by the French and German governments are operating “successfully” in Canada.
But there have been hints of nervousness among federal cabinet ministers over the entry by Chinese state-owned oil companies into the upstream end of the oil sands sector.
TAQA a concern That has been compounded over the past six months with Abu Dhabi National Energy Co. (better known as TAQA), 75 percent owned by the Abu Dhabi government, proceeding full steam towards its goal of investing about $20 billion on Canadian oil and gas assets by 2012.
In its latest foray, TAQA made a C$5 billion cash offer in late September for PrimeWest Energy Trust, just six months after buying Northrock Resources for C$2 billion and only two months after snagging the Canadian holdings of Pioneer Natural Resources for C$540 million.
TAQA Chief Executive Officer Peter Barker-Homek said the PrimeWest deal is a “major leap forward” for his company on a global scale, with the bundle including 285 million gross barrels of oil reserves, production of 61,000 barrels of oil equivalent per day, a land base of 1.1 million net acres and a tax pool of C$2.7 billion.
If the deal closes as scheduled in November, TAQA will have Canadian output of 110,000 barrels of oil equivalent per day, vaulting it into the ranks of Canada’s top 14 oil and gas producers, with reserves nudging 500 million barrels of oil equivalent.
Some analysts, including William Lacey with FirstEnergy Capital, said the 34 percent premium offered by TAQA on the trading value of PrimeWest units was a high-end bid.
UBS Securities Canada estimates that TAQA is paying a long-term gas price of US$9.30 per thousand cubic feet for PrimeWest’s gas reserves, which is “far higher than current spot and futures rates.”
Likely conscious of the concerns about a Middle Eastern company setting up shop on such a scale in Canada, Barker-Homek put some shine on TAQA’s image by announcing it will give C$1 million to charity in 2008.
TAQA plans ‘aggressive growth’ But he didn’t back down from TAQA’s long-term plans, saying the company could resume Canadian purchases in 2008, confirming the strategy is one of “aggressive growth,” with the focus on conventional oil and gas, coalbed methane and possibly both midstream and downstream opportunities, leaving the oil sands on the sidelines for now.
Currently, TAQA is the only active acquisitor of Canadian conventional properties, while other potential buyers adjust to wobbly stock values that are under pressure from the Canadian government’s decision to end the tax advantages enjoyed by trusts, weak natural gas prices and uncertainty over how far the Alberta government will go in raising royalties and taxes.
“There is a philosophy that says ‘Buy on ambiguity,’” Barker-Homek told the Financial Post.
“If you are a long-term investor and if you are a believer in the market segment that your business operates in, then you should look through the short-term cycles to what the long-term cycle is likely to be.”
To that end, he is bullish on the outlook for natural gas in North America, based on the environmental appeal of gas.
UBS analyst Grant Hofer believes TAQA will continue to pursue trusts to achieve its goal of “long-life, stable assets.”
Canadians uncomfortable But TAQA’s rapid emergence has heightened concerns among Canadians about the security of their natural resources.
Bruce Anderson, chief executive officer of the polling firm Harris-Decima, said extensive polling shows Canadians are uncomfortable with the prospect of losing control of those resources.
He said at the very least they want “strong assurances that Canadian interests have been very carefully considered by Ottawa.”
Prentice insisted his Vancouver announcement was in the works well before the latest TAQA deal, which Harper said is “will be reviewed under existing rules.”
However, he said Canada planned to “broaden somewhat the criteria under which we look at acquisitions, but not to feed protectionist sentiment.”
Prentice has said an Investment Canada review will examine questions of TAQA’s control by the Abu Dhabi government and the transparency of its governance, causing hedge fund executives to ask for clarification of the government’s intentions.
To date the only measuring stick is an Investment Canada review of TAQA’s acquisition of Northrock, which resulted in the company making commitments to increase capital spending and preserve Canadian management.
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