A five-day trip to China by Canadian Prime Minister Stephen Harper, who had set a primary goal of “reanimating” trade relations, ended Nov. 10 in apparent success.
Meetings with China’s top leadership - the first one-on-one sessions granted to Harper in his eight years as prime minister - ended with C$2.5 billion in business deals and the creation of a currency trading hub for the Canadian dollar and Chinese yuan, without operating through the U.S. dollar, which is expected to save Canadian business millions of dollars a year.
Harper said he did not hear a single word of protest relating to Canada’s restrictions on oil sands investment by foreign state-owned enterprises, SOEs - an issue that now seems to vex the Alberta government more than Beijing.
“The Chinese leadership did not raise with me at any point the issue of Canada’s investment rules,” Harper told reporters.
“It would be difficult for (Beijing) to do so given that Canada’s investment climate is much freer than the investment climate here,” he said.
In making that comment, Harper indirectly conveyed his view that the temperature has been lowered after a tumultuous few months between the two countries which saw Canada copy finger pointing by the U.S. over cyber-hacking that has been traced to Chinese sources.
Continued unhappiness at home
But he returned home to face continued unhappiness over foreign investment rules imposed in December 2012 that have caused a dramatic drop in the development of Alberta’s oil sands by China’s SOEs.
When the Canadian government approved the US$15.1 billion takeover of Nexen by CNOOC it slapped a ban on outright takeovers of oil sands companies by foreign firms, other than on an unexplained “exceptional basis,” sending the industry into a tailspin.
CIBC World Markets said offshore participation plunged by 90 percent in 2013 from 2012 which was largely blamed on rules that allow the government to review and block any transactions valued at more than C$330 million.
The law firm of Norton Rose Fulbright Canada, NRFC, rated 2013 as a “troubling year” for M&As in the Canadian oil and natural gas sector.
In a variation from the CIBC numbers, it estimated activity totaled US$10.2 billion, off 80 percent from US$50 billion in 2012, although the firm noted that the value of global transactions feel 50 percent in the same period.
But NRFC said that although investment by Chinese SOEs was on the downswing, other Asian investors showed interest in deal-making on a “smaller, strategic scale.”
Call for reform
However, University of Calgary assistant professor of economics Trevor Toombe is among those calling for reform of the Investment Canada Act to prevent the government from arbitrarily turning away foreign investors.
“Clear, enforceable, non-discriminatory rules will become increasingly important as Canada’s energy sector grows,” he said. “Trade depends on investment.”
Although Harper was seen as responding to deep-seated unease among Canadians about foreign SOEs having too much control over a strategic resource, the new Alberta administration under Premier Jim Prentice - once a loyal right-hand man in Harper’s government - is calling on the Canadian government to take a fresh look at its foreign investment rules.
Harper’s 2012 guidelines, which he said were intended to send a message that Canada was “not for sale to foreign governments,” has had the unintended consequence of turning off the taps on investment money and blocked the progress of a new wave of oil sands projects.
Ron Hoffman, Alberta’s newly named senior representative for the Asia-Pacific Basin, said the guidelines have caused “confusion (because of) some looseness in the language.”
He said Alberta believes foreign companies, such as CNOOC and Sinopec, should be entitled to credit for a “positive” track record in the province and is urging clarification around what constitutes a state-owned company - a question that is especially important to the Chinese government which notes that many of its companies engage in public trading.
‘Lost opportunity’
For now, evidence of a “tremendous lost opportunity” is accumulating, Ian Wild, an executive vice president at ATB Financial, told the Globe and Mail, noting his company is involved in 10 “sets of discussions” with Chinese companies that want to buy into Alberta’s energy, real estate, construction and service sectors.
While that debate builds, lawyers with the firm of Osler Hoskin and Harcourt are reportedly working with Chinese SOEs on a way to reignite investment by acquiring resource land instead of companies.
They argue that pure exploration properties are not normally considered businesses and thus not subject to Investment Canada review.
Peter Glossop, a lawyer with the firm, said the “initial visceral reaction” to Canada’s new investment regulations is giving way to a realization that there are other ways of doing business.
But the hit to Canada’s reputation as a friendly destination for foreign investment - combined with the British Columbia government’s long wavering over its LNG tax regime - has spurred Chinese investors to look elsewhere, especially Africa, Central Asia and Southeast Asia.
It hasn’t helped that the Nexen assets have been poor performers, resulting in the replacement of long-time Nexen Chief Executive Officer Kevin Reinhart with a Chinese executive to tackle the company’s persistent headaches with its Long Lake oil sands project.
The fallout from the December 2012 intervention by Harper is mirrored in comments by Rafi Tahmazian, a senior portfolio manager with Canoe Financial, who bluntly said the investment potential ended with the Nexen-CNOOC deal.
“A lot of companies with oil sands leases need access to incremental capital, but the Canadian market is too small to handle that kind of financing,” he told the Globe and Mail.
He said proposed pipelines such as Keystone XL, Northern Gateway and Energy Easy could be industry catalysts, “but they all have mountains to climb” given their dependence on oil sands production to fill the systems.
Hundreds of billions needed
For the oil sands sector to boost output by 50 percent to 3 million bpd over the next six years and to 5.2 million bpd by 2030 will need capital spending of C$600 billion-C$700 billion, the Canadian Energy Research Institute estimates.
Peter Tertzakhian, an energy economist, said the inability to attract capital could see the oil sands slow down over the next five or 10 years, while investors turn to North Dakota and Texas, where the production risks are less and the returns are strong.
Whether the grand hopes for the oil sands have evaporated, or are just taking a timeout, may be determined by how the Harper government responds to the call for change and the mood he encountered in Beijing.
Even so, not everyone believes the investment rules will kill off investment in Canada’s oil patch.
Erica Downs, the senior analyst for Asia at New York-based Eurasia Group, said that despite concerns over the slow pace of new pipeline projects and LNG development along with the restrictions on investment, Canada will remain a destination for China’s oil and gas sector.
She said the completion of PetroChina’s acquisition of 40 percent of the Dover oil sands project from Athabasca Oil for C$1.1 billion “demonstrates PetroChina’s commitment to operating in Canada over the long-term.”
However, that participation is “likely to move at a slower pace as a result of the challenges that all companies operating in Canada face,” Downs said.
