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Now you see it, now you don’t Canada ends open season for foreign state-owned enterprises to seize control of oil sands; approves CNOOC, Petronas takeovers Gary Park For Petroleum News
The Canadian government left the door open long enough to allow China’s CNOOC and Malaysia’s Petronas to sneak through and gain regulatory approval for their respective takeovers of Nexen and Progress Energy Resources.
At the same time, Prime Minister Stephen Harper slammed the same door on any future attempts by state-owned enterprises, SOEs, to take control of oil sands companies in particular, other than in “exceptional circumstances.”
In changing Investment Canada Act rules governing foreign investments in Canada’s natural resources sector, the Harper administration failed to satisfy either side after taking four months to bring what was supposed to be clarity and consistency to a controversial issue.
But Industry Minister Christian Paradis, who oversees foreign investment reviews, said Canada could not afford to apply the new rules retroactively.
“We have a hard-won reputation,” he said. “Canada is a stable place. We are serious in terms of predictability.”
In other words, in recalibrating its investment dealings with Beijing, the Harper government did not want to start out by rebuffing CNOOC and possibly future billions of dollars of investment in the petroleum industry.
Diverging opinions Whether it has succeeded is already the subject of diverging opinions.
Some say a new bilateral investment rights treaty is designed to guarantee fair treatment of Chinese and Canadian investors doing business in the other nation.
“That’s essentially the big gift for China,” said Stuart Trew, trade campaigner for the nationalist Council of Canadians. “That’s the deal that’s going to let the CNOOCs of the world, or other Chinese investors, expand without limit.”
Alberta Premier Alison Redford applauded the approval of the US$15.1 billion Nexen transaction, which gives CNOOC assets in the oil sands and British Columbia shale plays along with the Gulf of Mexico, North Sea and offshore West Africa, and the C$6 billion Petronas offer for major natural gas prospects held by Progress with the prospect of using those resources for an LNG export venture.
Still unclear is how the United States government will react to the future of Nexen’s operations in the Gulf of Mexico.
But Redford was less effusive in announcing that her government would “study the implications of (Harper’s) statements about future investments by state-owned enterprises.”
Alberta Intergovernmental Affairs Minister Cal Dallas said Alberta plans to reach out as a stakeholder once it understands the implications of the new guidelines.
“What’s clear is we will continue to need to attract large amounts of capital into Alberta and into Canada to support the development of the oil sands,” he said. “We will have to first see exactly what the language of the policy means.”
Dallas, while doubting there would be a “massive negative reaction” from Chinese investors, was more concerned about the impact on the valuation of other oil sands players.
Estimated C$17B on market Calgary-based investment dealer Peters & Co. has estimated that oil sands assets worth C$17 billion are currently on the market, including various stakes held by ConocoPhillips, Marathon Oil and Murphy, matching the combined value of oil sands transactions over the past decade.
For Paradis the message behind the new guidelines is clear.
Canada is open to allowing state-owned enterprises to gain minority stakes in oil sands companies, or to negotiate joint ventures, he said, but added his government is not prepared to allow a wave of buyouts of oil sands producers by Chinese state-owned corporations or other energy-hungry countries.
Harper told reporters that with only 15 companies playing leading roles in the oil sands his government was concerned that further control by SOEs would not be beneficial for Canada.
“When we say that Canada is open for business, we do not mean that Canada is for sale to foreign governments,” he said.
“The government’s concern and discomfort for some time has been that very quickly, a series of large-scale controlling transactions by foreign state-owned companies could rapidly transform (the oil sands) industry from one that is essentially free market to one that is under the control of a foreign government.”
He said the CNOOC acquisition of Nexen’s oil sands assets — primarily its controlling stake in the financially and operationally challenged Long Lake project — was “not the beginning of a trend, but the end.”
SOE threshold remains C$330M Included in the government changes, the threshold triggering a review of takeovers by foreign private investors will be raised to C$1 billion from C$330 million, but C$330 million will remain in place for SOEs.
The government also set out five conditions SOEs must meet in future to gain government approval for a transaction, including proof that an investment would be commercially oriented and that the investor would be free from influence by its home government.
What Canada described as its “net benefit test” will remain in place for all takeovers, whether by private companies or SOEs, while a second phase of tests will be applied to determine how much control or influence the SOE would have over a Canadian subsidiary and how much control or influence the foreign government would have over the subsidiary.
In the immediate run up to the announcement, the jittery mood among Nexen and Progress investors was evident as shares of Nexen tumbled as much as 16 percent on the Toronto Stock Exchange, triggering a circuit breaker that briefly halted trading in the stock, while Progress shares slipped 4 percent.
Just days before it obtained the go-ahead to complete its takeover of Progress, Petronas said that approval would trigger massive investment in a joint LNG export project in British Columbia. Initial plans for the Pacific Northwest LNG project involve processing 2 billion cubic feet per day of gas for export.
“It shows Petronas and Progress have confidence there is a viable LNG industry in Canada,” Progress Chief Executive Officer Michael Culbert said.
“A decision like (the Petronas deal) that allows foreign investment, whether it comes through joint ventures or equity, is critical for Canada to go forward and be competitive in the world LNG markets.”
Companies disagree Sveinung Svarte, chief executive officer of Athabasca Oil Corp., which has reportedly been attempting to negotiate a minority deal with state-owned Kuwait Petroleum Corp., said the new rules “look positive” from the standpoint of joint ventures.
But John Brussa, chairman of Penn West Petroleum, which is working with Japanese utilities and Korea Gas on a possible plan to export LNG, said the news is not very positive for shareholders who will no longer be able to collect the premiums that come with takeovers.
Laura Lau, senior vice president and portfolio manager at Brampton Investments in Toronto, expects valuations of Canadian resource companies will now fall because of the chill in the investment atmosphere.
The law firm of Stikeman Elliott said the new SOE guidelines “may impede escalated SOE participation in (the oil and gas sector), with a resultant drag on the speed and degree of such development.”
Murray Edwards, chairman of Canadian Natural Resources, one of the most influential voices in the Canadian petroleum industry and someone who reportedly has the ear of Harper, recently told reporters that Canada should not allow a strong domestic presence in the oil and natural gas sector to erode.
“There is a desire, if not a need, to make sure we have strong Canadian champions in industry, as well as strong foreign capital,” he said.
Edwards said the government needed to impose some strict conditions or limitations on takeovers or Nexen would just be the first of many companies to disappear.
Peters & Co. said the high level of assets potentially available for buyers “results from the cost intensive nature of developing these assets, combined with lower netbacks compared to other crude oil plays in North America.”
“While on a near-term basis this may provide operators with more flexible opportunities to deploy capital, we believe the scale and production potential of the oil sands will continue to attract capital from large foreign companies wanting to secure significant resource,” it said.
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