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Canada puts squeeze on Petronas Startles observers by spurning Malaysian giant’s takeover of Progress; Harper says investors must wait on new policy framework Gary Park For Petroleum News
The Canadian government dropped a bombshell at 15 minutes before midnight on Oct. 19.
With the clock running down on a deadline, it spiked approval of the planned takeover of Canadian natural gas producer Progress Energy Resources by Malaysia’s state-owned Petronas.
The terse explanation by Industry Minister Christian Paradis said that after “careful and thorough review of the proposed transaction” under the Investment Canada Act he was “not satisfied that the proposed investment is likely to be of net benefit to Canada.”
He said Canada has a “long-standing reputation for welcoming foreign investment. The government of Canada remains committed to maintaining an open climate for investment.”
But Paradis’ refusal to say what specific conditions Petronas must meet to proceed with its C$5.2 billion acquisition sent analysts, industry leaders and investors into a spin.
Approval seen as formality If the Petronas-Progress deal, generally been seen as a formality, could not meet the government’s standards observers were left asking what hope China’s CNOOC had of receiving approval for its US$15.1 billion takeover of Nexen.
And, even more disturbingly, what signal was the government of Prime Minister Stephen Harper sending to Asian governments after months of assuring them that Canada’s door was open to foreign investment provided that translated into markets opening up in Asia for oil sands bitumen and LNG.
Now the spotlight is fixed on the Nov. 12 deadline for a government verdict on CNOOC and Nexen — a target date that could be extended by 30 days at CNOOC’s request.
The government has been less than forthcoming about its thinking, with Harper telling a brief news conference Oct. 22 that his government intends “in the not-too-distant future” to issue a new framework clarifying the Investment Canada Act, which covers takeovers by state-owned enterprises.
Trade Minister Ed Fast told reporters the rejection “does not set a precedent because every single application is considered on its own merits.”
Nov. 19 deadline Finance Minister Jim Flaherty said the government has given Petronas 30 days until Nov. 19 to show it can meet the government’s economic benefit threshold.
“I’m sure they will continue to work on it,” he said. “There is another period of time during which they can continue to have discussions and try to satisfy the concerns that (Industry Canada) has.”
CIBC World Markets said global investors “have already been struggling with why they need to own Canadian energy and (the Petronas-Progress) announcement clearly does not help … the last thing investors needed was a reminder that Canada is a risky political environment.”
A note by Barclays said foreign buyers of Canadian energy assets would likely be sidelined until the government provided further clarity.
It said the announcement would probably deal a serious impact to equity values, particularly for companies that lack the size and capital to develop their assets with an infusion from foreign acquirers or joint-venture partners.
Issues, remedies Progress Chief Executive Officer Michael Culbert said in a statement his company will work over the 30-day period “to determine the nature of the issues and the potential remedies.”
He said the “long-term health of the natural gas industry in Canada and the development of a new LNG export industry are dependent on international investments such as Petronas.”
Raymond James’ Calgary-based energy analyst team, led by Justin Bouchard, told clients that “given the decision came just minutes before the (Oct. 19) deadline, we believe Industry Canada effectively killed the deal because it ran out of time to assess the ‘net benefit’ to Canada.”
The analysts said that if the deal is eventually scuttled there would be a number of lost benefits, including: the equity premium of about C$2.5 billion Petronas offered to Progress shareholders; thousands of construction jobs and hundreds of permanent LNG-related jobs; a significant royalty stream from the development of Progress’ North Montney shale gas lands in British Columbia; and corporate taxes from liquefaction, pipelining and resource development activities.
“In aggregate, the gross benefits of the Petronas project are well into tens of billions of dollars, which makes it difficult to envision what costs could have been so substantial in Industry Canada’s eyes to even approach a notional offset,” the Raymond James analysts said.
Confused messaging Credit Suisse said in a note that the Canadian government “messaging appears confused because of its failure to explain in detail why the deal did not meet foreign investment standards.”
“Our view is that the decision is designed to make the Canadian government look tough as they negotiate final concessions from CNOOC over the Nexen acquisition,” the firm said.
But Credit Suisse warned that if both of the friendly takeovers by Petronas and CNOOC were rejected Canada would send a clear signal that it is not “open for business,” thus reducing “its attractiveness as an investment destination for Asian capital.”
Bernstein Research voiced confidence that the CNOOC-Nexen transaction will ultimately be completed, although that will hinge on China’s ability to “provide assurances of reciprocity for Canadian companies in China and CNOOC to be flexible over conditions.”
Deals different The investment bank listed four reasons why the CNOOC-Nexen deal is more likely to be approved.
It said Petronas, which acquired Progress mainly to underpin planned LNG exports, would be in a position to set the price of LNG exports, conflicting with its role as both a buyer and seller of LNG and creating misaligned interests with Ottawa on pricing.
In addition, Bernstein noted that Nexen’s portfolio is globally diversified, while Progress’ shale gas resources are all in Canada; Canada is likely to be more receptive to the benefits of Chinese investment in the oil sands; and CNOOC has guaranteed a post-merger plan for Nexen employees, making Calgary its North American headquarters.
The stalling over Petronas and Progress has stirred fresh talk about competing bids for Progress, with India’s OVL (ONGC Videsh Ltd.) leading a group of four state-owned companies in serving notice that it might be interested in establishing a foothold in Canada’s mushrooming LNG industry.
Also seen as possible bidders for Progress are ExxonMobil, which will become a leading contender to export Canadian LNG if its offer for Celtic Exploration closes, and Royal Dutch Shell, the lead partner in the LNG Canada consortium.
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