There has not been a fuss quite like it since the turn of the century when a C$50 billion wave of takeovers pushed U.S. control of Canadian oil and gas production close to 60 percent and never such a clamor for updated foreign investment limits since 1977 when foreign ownership of production stood at 74 percent.
Although the debate is currently being driven by a pending C$7 billion takeover of mining giant Noranda by metals trader China Minmetals, the petroleum industry is waiting off stage to see what happens next.
After decades of blocking Chinese companies from spending money overseas, the Beijing government is pushing them to invest abroad to round up natural resource assets.
By the end of 2003, Chinese companies had invested US$33 billion in 7,470 companies in more than 160 countries, including US$6 billion in 58 overseas oil and gas projects.
That is far short of the US$60 billion of foreign investment in China, but the gap could rapidly be closed as Beijing openly urges its state-owned enterprises to “go global.”
Bob Broadfoot, a Hong Kong-based consultant, told The Associated Press that China has the “ability to argue with foreign companies that ‘if you want access to our market, you will have to sell us a stake in your company.’”
Noranda would be largest purchase to date
The Noranda purchase would be China’s largest foreign acquisition to date and represents the first time any state-owned Chinese enterprise has made a bid for a Canadian company.
The result has been confusion and uncertainty within Canadian government ranks.
Prime Minister Paul Martin has welcomed the move by Minmetals, but Industry Minister David Emerson has confessed to some unease about allowing such deals, given China’s human rights record.
“Fundamentally, I think it is a good thing. We’re investing heavily in China and I think it’s a sign of China’s increasing growth and maturity,” Martin said, while adding Canada will not step around human rights issues.
Emerson said that having a state enterprise own Canadian resources is different from private ownership, indicating that Canada could attach conditions to any deal, including export controls.
“I don’t think that you should assume that somehow it’s a wholesale sale of the Canadian resource case,” he said. “It would not be that.”
But he said Canada can’t “complain endlessly about being too dependent on the United States” and then take steps to jeopardize its relationships with China, its second largest trading partner.
Bilateral trade with China hit a record C$23 billion in 2003, up 16 percent from 2002 and Chinese foreign direct investment in Canada climbed to C$422 million in 2003.
Members concerned investment act inadequate
Members of Parliament from all four parties represented in the House of Commons expressed concern Oct. 26 that the 19-year-old Investment Canada Act is outdated or inadequate.
The act currently calls for government reviews of direct acquisitions worth more than C$237 million by member countries of the World Trade Organization.
Andy Savoy and Denis Coderre, both from the governing Liberal party, agreed there is a need for change in a time of globalization, especially with China sending out signals it is ready to go on a shopping spree for resources.
Brian Masse, an MP from the left-wing New Democratic Party, said the issue was far larger than the Minmetals-Noranda deal.
“The stakes are higher than people understand,” he said, suggesting that if foreign ownership legislation was amended and the deal was turned down it could harm Canada’s relationships with China and its growing trade.
“This is a very hungry dragon and its demand for copper and nickel and oil have long outpaced domestic supply,” said Howard Balloch, a former Canadian ambassador to China. “Domestic supply will never again satisfy its hydrocarbon or base metal needs.”
Matthew Simmons, a Houston-based economist, said China’s need for “reliable energy in massive supply is profound.”
China’s Foreign Minister Li Zhaoxing has left no doubt that companies from the Chinese government’s vast stable of state-owned enterprises are poised to make many resource takeover bids as the country gains influence.
Greatest stirrings in oil patch
Although the Minmetals-Noranda transaction has captured the spotlight, the greatest stirrings are taking place in the oil patch.
Sinopec, China Petroleum Corp., is conferring with Beijing about buying into Alberta’s oil sands and PetroChina has talked with officials of the Canadian Oil Sands Trust, which owns 35.49 percent of the Syncrude Canada oil sands operation.
Alberta Premier Ralph Klein said Sinopec officials have held discussions with key oil sands players — Syncrude, Suncor Energy, Shell Canada, Husky Energy and Canadian Natural Resources — as well as Alberta’s Energy Department.
He said Sinopec officials are talking with their government about the prospect of a direct investment in the oil sands.
Meanwhile, a PetroChina delegation met with oil sands trust executives in the late summer, said trust President and Chief Executive Officer Marcel Coutu.
He said the focus was on the possibility of a long-term agreement to ship production from the oil sands to China, rather than PetroChina taking a stake in the trust.
Coutu said the “ball’s in their court,” as they evaluate whether Chinese refineries could process synthetic crude.
He said it is possible rather than likely that the Chinese will either reach a supply agreement or acquire outright ownership of part of Syncrude.
“Their interest in supply is serious,” Coutu said. “I don’t think there’s any doubt about that.”
Pipeline to British Columbia needed
For now the greatest barrier is the absence of a pipeline to carry production from Alberta to a port on the British Columbia coast, but a solution sits at the top of Enbridge’s priority list as it contemplates a 400,000 barrel-per-day pipeline before the end of the decade.
Enbridge has also been in discussions that could see Sinopec either buy production or invest in the pipeline.
On the sidelines, there is fresh speculation that Sinopec is interested in staging a takeover of Husky Energy, which has substantial plans for the oil sands that could see it pumping 235,000 bpd from two projects by 2010-2014.
Currently Hong Kong billionaire Li Ka-shing and his family control 72 percent of Husky, through the Hutchison Whampoa conglomerate and individually.
Li has already stood on the brink of a sale in early 2002, when Husky confirmed it was in talks with PetroChina, but prospects of a deal crumbled when Chinese officials disclosed they were offering US$4.4 billion and immediately drove up the value of Husky shares.
