Canadian Prime Minister Stephen Harper was never going to get it exactly right when he rewrote the rules governing foreign investment in the petroleum industry.
He acknowledged that during a 48-minute press conference when he spread his arms and said the space between his hands represented the gap between opposing points of view on the issue of state-controlled companies buying up privately held assets in Canada.
In the initial fallout to the new framework, however, Harper was credited by many with skillfully dousing a national firestorm by approving CNOOC’s US$15.1 billion takeover of Nexen, giving the Chinese their biggest offshore deal, giving market players a fat payoff and reassuring Canadians that China was not about to invade Canada’s resource sector.
But a few days of sober second thought raised some questions, not least whether closing the door on outright ownership of oil sands companies by foreign state-owned enterprises, SOEs, other than in “exceptional” circumstances, will stifle development of the sector.
Oliver: Ample access to capital
Natural Resources Minister Joe Oliver wasted no time making a case that Canada will continue to have ample access to capital, estimating that need at C$650 billion over the next 10 years.
He said there is a vast pool of capital available globally and within Canada to fuel growth.
“Historically, the bulk of the financing has come from the private sector,” he said. “So we expect that capital will continue to be available.”
Oliver said SOEs looking for oil sands assets will be closely scrutinized, but “outside the oil sands there will be opportunities and inside the oil sands there will be opportunities in joint ventures and minority interests.”
Partnership vs. control
Many observers argue that the partnership model works best for SOEs, giving them a chance to understand the market-based environment and deal with higher standards and accountability.
“We’re not turning our backs on SOE investment overall,” Oliver said. “Their capital is welcome.”
But industry experts caution that foreign investors are looking for greater control over their assets, especially in high-cost arenas like the oil sands.
“Whether SOE investors are prepared to live with this regime where they are limited to acquiring only minority positions, we’ll have to see,” said Frank Turner, a lawyer with the firm of Osler Hoskin & Harcourt.
Oliver acknowledged he will have some work to remove any doubts in places such as China, India, Brazil, South Korea, Kuwait and Abu Dhabi — all of which have hinted they are on the lookout for investment opportunities in Canada — that Canada remains open for business.
India reportedly upset
India, which has been hinting over recent years that it is on the verge of making an offer through its Oil and Natural Gas Corp. (owned 69 percent by the Indian government), is reported to be upset by the new rules just a month after Harper took a team of industry leaders to India to talk up energy deals.
The official line from India is that its companies will probably adjust their acquisition strategies and now settle for minority partnership.
But some industry leaders in India suggest the Canadian government position is hypocritical when measured against Canada’s free trade rhetoric and, in punishing the communist regime of China unfairly penalizes India’s democracy.
Concern in Alberta
If there has been a setback for India and other investors the worry in Alberta is whether placing the oil sands off-limits to wealthy state-owned firms amounts to a chill over the resource.
The province’s Energy Minister Ken Hughes was emphatic that “there is now the potential for less investment going into the oil sands,” which could reduce competitiveness in a resource that already faces high costs of producing crude at a time when higher financing costs loom.
Alberta Finance Minister Doug Horner said his government needs greater clarification of the rules before deciding whether the foreign investment required to “fully realize the potential of our resources” is at risk.
The Calgary Chamber of Commerce agreed that more must be done to improve and clarify the “net benefit test” Canada applies to its review of foreign investment proposals.
“The demand for energy resources is going to be insatiable,” said Ben Brunnen, the chamber’s chief economist and policy director.
“It’s important that we get our rules up to date and done right at this point in time, otherwise we’re going to be scaring off some significant potential trade partners and investors to develop our energy resources,” he said.
Industry agreement
From the inside of the oil sands, Marcel Coutu, chief executive officer of Canadian Oil Sands, which owns almost 37 percent of the giant Syncrude Canada consortium, described the new investment rules as “very balanced.”
He said that when SOEs have access to a lower cost of capital, coupled with strategic political and economic reasons for owning energy projects, they have an edge over other potential buyers — an advantage that is now being taken away.
“We now have a level playing field which I think will be healthy for any industry,” Coutu said.
Hal Kvisle, chief executive officer of Talisman Energy, which has no presence in the oil sands, said that if company can acquire 100 percent of another enterprise it will naturally pursue that objective, but if taking control becomes difficult or impossible, the attention of acquisitors will shift to models that are better for the Canadian oil patch.
Kvisle said minority ownership can help lower the cost of capital for companies while retaining local leadership teams.
He said that is healthier than a model that allows small companies to accumulate assets to flip them to larger players — a trend he rated as “quite disruptive to the development of strong management teams and strong technical teams that have been the foundation of our success.”
