Nexen takeover decision a crossroads for Canada and China10/1/2012
OTTAWA — A crossroads in Canada’s relations with China is fast approaching, with Prime Minister Stephen Harper’s government on the verge of a foreign investment decision that will spell out the risks Ottawa is willing to take to tap into Asia’s economic juggernaut.
As political and commercial stakes mount by the day, federal officials are secretly laying the groundwork for a yes-or-no decision on the $15.1-billion play by China’s state-controlled oil giant for a precedent-setting role in Canada’s oil sands development.
The ruling on whether the proposed buyout of Calgary-based Nexen Inc. by the Chinese National Offshore Oil Corp. (CNOOC) can go ahead will greatly influence relations with Beijing, shape Canada’s future energy strategy and signal Ottawa’s willingness to cede control of natural resources to foreign interests.
The planned acquisition, which would be the largest investment in Canada’s oil patch by a Chinese company, has quickly flared into a national controversy over the wisdom of allowing state-controlled companies, particularly from China, to bankroll Canadian natural resource businesses.
Still, it’s likely Harper will give the purchase a green light. He has personally sought to drum up more Chinese investment in Canada and boosting oil sands production is a high priority of his government. But managing the politics of the takeover could present the Conservatives with a tough challenge.
The public is wary of the deal. Industry support for the acquisition is laced with caution about benefits to Canada and the potential for a wave of foreign buyouts. And even Conservative Members of Parliament who would normally trumpet oil sands investment are raising concerns.
“Most Canadians want to ensure that the government applies a rigorous lens to acquisitions of large Canadian resource companies, particularly by state-owned enterprises,” said Immigration Minister Jason Kenney, a senior Harper cabinet minister who has often been critical of China’s human rights record.
Conservative MP Rob Anders (Calgary West) said it’s imperative that approval of such takeovers be accompanied by conditions governing intellectual property and the percentage of foreign ownership allowed.
“There are a lot of people, I would say the vast majority of the country, who are very concerned about making sure there’s conditions,” Anders told reporters.
“I’m not crazy about a state-owned enterprise, period,” he continued. “But I do draw a distinction between China as a non-benevolent actor versus a Canada or a Norway. There are human rights differences between those countries, clearly. And I think Canada does have to take into account strategic interests. . .and a lot of people would say to you that oil is a very strategic resource.”
One of the flashpoints of the Nexen deal is its very size.
A move to buy a portion of Nexen would have been easier for Canadians to swallow, said Felix Chee, chief representative in Canada of China Investment Corp. “What wasn’t expected was to buy the whole. . . head office,” he told an Asia-Canada business conference.
An independent analysis of the deal by DBRS, a Toronto credit rating agency, concludes it would produce mixed results. While it would help cement Canada-China commercial ties, it may not add much to Nexen’s existing financial capacity and is likely to reduce Canadian control of petroleum resources, the agency said.
Also, there’s no reason to think Chinese owners of Nexen will act in Canada’s national interests, James Jung, senior vice-president of DBRS, said in an interview. “You have to go back to Corporate Finance 101. The corporation exists to maximize shareholders’ interests. If the shareholder is a state-owned company, all those upsides will be going to the state-owned entity in a foreign country.”
A recent poll by Ipsos Reid confirmed the potential political minefield of countenancing foreign buyouts of Canadian resources. While six in 10 Canadians see Asia’s expanding middle class as an opportunity for Canada, 40 per cent said “Asia’s growing economic strength represents a threat to the Canadian economy.” And 76 per cent expressed fear that more foreign investment could cause Canada to lose control of its natural resources.
“For any government, for the federal government, provincial governments, for businesses that want to come in, it’s all tricky right now,” Mike Colledge, Ipsos’ president of Canadian public affairs, said of the possibility of Chinese buyouts in the oil patch. “The jury is still out. This is the direction Canadians are hopeful about and want to go in, but they want to see some Canadian self-interest built into all the deals.”
And Canada’s spy agency has warned darkly about unnamed state-owned foreign companies underhandedly trying to acquire control over strategic sectors of the economy.
At the same time, CNOCC’s purchase of Nexen enjoys enormous support in the Canadian business community. Senior executives see China’s massive foreign currency reserves as a vital source of money needed to develop the oil sands, which will require an estimated $200 billion in investment over the next 25 years.
Beyond that, expanding business ties to China, which is poised to become the world’s top economic powerhouse within a decade, is widely viewed as the key to maintaining the strength of Canada’s export-based economy in an era when trade with the United States trade is shrinking.
“There’s a huge amount of growth that’s going to come here on virtually any trajectory,” Bank of Canada Governor Mark Carney said during a discussion of Chinese and Asian economic expansion this week. “There is sustained opportunity. These are relentless forces.”
CNOOC, which has won approval from Nexen shareholders for the acquisition, is privately suggesting Ottawa will look favourably on the takeover, according to reports from China. And there’s no doubt that turning down CNOOC would be a significant setback for Canada’s fledgling efforts to expand economic ties with the Chinese.
“It’s important that we be open for capital,” said former Conservative cabinet minister and CIBC vice-chairman Jim Prentice. But he said approving the deal is also important “because we are midpoint in terms of developing the strategic partnership with China. . . It’s the wrong time to turn around.”
CNOOC has moved carefully to court Canadian approval of its takeover bid. It has pledged to retain all Nexen employees and establish Calgary as headquarters for $8 billion of the Chinese firm’s other assets in the Americas. The company also promises to seek a listing on the Toronto Stock Exchange and maintain Nexen’s social responsibility efforts globally.
By mid-November, the federal government must decide if the bid qualifies under the vague “net benefit” test applied through the Investment Canada Act, which has seldom been used to block foreign takeovers.
Harper said a few weeks ago that, given the size and nature of the Nexen proposal, the government must use the decision to “put in place a pretty clear policy framework that indicates why it would or would not accept this decision or subsequent such decisions.”
His ministers have also suggested any approval will require certain conditions be met, including a commitment from Beijing for better investment access for Canadians companies in China.
The more the public hears about the Nexen deal, the greater the demands for clarity from Ottawa. While the oil industry supports CNOOC’s plan, it wants specific guidelines that will apply in case foreign state-controlled corporations make a run at bigger Canadian oil and gas players, such as Suncor Energy Inc. or Canadian Natural Resources Ltd.
And opposition politicians are accusing the government of playing fast and loose with Canada’s national interests.
“People are concerned about opening the floodgates to other foreign governments buying up our natural resources,” NDP finance critic Peggy Nash says. “If (the Conservatives) refuse to act, we will have the slow hollowing-out and the nationalization of our resources by other governments.”