Family spat over foreign investment

Prime minister, Alberta premier disagree; Redford says foreign investment policy undercutting growth; British investors not deterred

Gary Park

For Petroleum News

They come from the same province. They operate under a common political banner.

But there is a rift between Canadian Prime Minister Stephen Harper and Alberta Premier Alison Redford that reflects unhappiness within the petroleum industry.

In a rare public snipe between the two, Redford said uncertainty over Harper’s foreign investment policy is undercutting external investment in Canada’s petroleum industry — although she conceded that “absolute clarity” on the rules would be “foolish” if that removed discretion in considering takeover bids.

However, Redford, after a meeting of provincial and territorial leaders, said the rules had changed so often and so unilaterally that they were driving away offshore money.

“There is too much uncertainty right now,” she said, referring indirectly to a sudden shift last December when the federal government approved takeovers by China National Offshore Oil Corp. of Nexen for US$15 billion and Malaysia’s acquisition by Petronas of Progress Energy for C$6 billion.

At that time, Harper announced that state-owned companies could only acquire majority stakes in Canadian oil sands companies in “exceptional circumstances.”

Redford said the result is that global equity firms who might be candidates to enter the petroleum sector have been “given pause” by uncertainty with respect to the rules.

She said there has been a “drastic drop” over the past year in the volume of merger and acquisition activity by foreign investors.

The 10 premiers and three territorial leaders asked the Harper government to define more clearly the key procedures under the Investment Canada Act and to publish the reason for declining or accepting foreign investments.

A spokesman for Harper insisted the government still needed latitude in deciding which investments to approve, but otherwise “welcomes and encourages foreign investment.”

David Collyer, president of the Canadian Association of Petroleum Producers, told a Calgary conference in November that there has been a sharp fall off in foreign investments this year, partly because producers are having difficulty with unmanageable upstream costs.

He said the influx of Asian capital this year will be less than C$1 billion, compared with C$30 billion in 2012, and is unlikely to change much in 2014.

Collyer said the Chinese are not looking for a fixed rate of return from their Canadian assets, but their Canadian partners have to prove they can function commercially by lowering capital costs and opening up export markets.

“Overall margins are getting squeezed and it is a challenge for Canadian producers to maintain competitiveness and also maintain their social license to operate,” he said.

In addition, he noted that the industry has to overcome First Nations’ opposition to resource development and to reconcile public and private interests.

The prospect of tougher reviews does not appear to discourage British investors, who have been warming up to the Western Canadian energy sector.

Giants such as Centrica, BG Group, half-British Royal Dutch Shell, and engineering and consulting company AMEC are all building their operations, spurred on by their government.

Wes Morningstar, senior vice president of Centrica’s Western Canadian operation, which includes a joint deal with Qatar Petroleum International to pay C$1 billion for Suncor Energy’s conventional assets, said more deals could be on the way.

“Being long-term investors, we want to invest when the commodity cycle is near its low and that is what we think we have today,” he said. “As natural gas prices come back, we are going to be well situated with this asset (which produces 65,000 barrels of oil equivalent per day and 400 million cubic feet of gas per day).”

Tony Kay, the British consul general in Calgary, said Centrica’s move is evidence of a market for an even larger British footprint.

He said doing business in Western Canada for a British company “is more straightforward than in India or China” because of a common language and legal system and ease of travel.

Canada’s Natural Resources Minister Joe Oliver said he has solicited feedback on the new oil sands investment rules during recent trips to China and South Korea.

“Nobody said they were dampening enthusiasm for investing in Canada,” he said. “From the Chinese president down, they have a keen interest in Canada and its resources and investment opportunities.”

Oliver suggested the current lull is because Chinese and others are still integrating their investments in Western Canada, while a shrinkage in China’s economy is affecting its ability to invest abroad.