Canada draws the line on state-controlled energy deals
Asian state-run companies will take over Canada's Nexen and Progress Energy
After a series of delays, the Canadian government has finally approved two deals that will see Asian state-run companies take over Canadian energy firms Nexen and Progress Energy. China National Offshore Oil Corporation (Cnooc) will acquire Nexen, Canada’s fifth-largest oil producer, in a $15.1 billion deal, while Malaysia’s Petronas will buy Calgary-based Progress Energy for C$6bn ($6.1bn).
Nexen and Progress saw their share prices surge almost 15% after the announcement on 9 December. Nexen gained $3.25 a share on the New York Stock Exchange to close at $26.77 a share, while Progress added C$2.59 a share in Toronto, rising to C$21.96 a share.
Government approval came after considerable hand-wringing on the part of the Canadian authorities, which had initially rejected the Petronas proposal and extended the mandatory review period on each deal by 30 days.
Canadian Association of Petroleum Producers (Capp) head David Collyer, formerly a senior vice-president with Shell Canada, said the decision saw the government strike the right balance between foreign investment and domestic control of the country’s oil and gas resources.
However, in an unexpected move, Canada has said it will not approve similar acquisitions of domestic energy producers by state-owned entities in the future, except in “exceptional” circumstances. Officials added that government-controlled companies like Cnooc will not be allowed to assume controlling stakes of companies in the energy sector. Instead, the government will encourage those companies to enter partnerships and joint ventures.
The Canadian government estimates C$650bn of investment will be needed to develop the country’s energy resources, including oil sands, which has been formally deemed a vital strategic asset. There will be no changes for foreign private sector firms, although those deals must also meet the net benefit test. For example, ExxonMobil will likely be allowed to proceed with its proposed C$2.6bn takeover of natural gas producer Celtic Exploration.
The new policy is meant to strike a balance between attracting much-needed foreign investment while assuaging domestic concerns over Asian state-owned companies’ increasing prominence in the energy sector. Under Canadian law, takeovers of domestic firms where the transaction is valued at more than C$330m must be deemed to be a net benefit to the country. But if the new rules were meant to further define what constitutes a “net benefit,” then the policy regarding state-owned companies raises more questions than it answers.
The Cnooc and Petronas deals were approved under the old rules, but energy minister Joe Oliver said at a recent conference that it is unlikely either deal would have been allowed under the new policy. “When we say Canada is open for business, we don’t say Canada is for sale,” Oliver told members of Capp. Oliver, though, appeared to give the government some leeway, acknowledging that not all state-owned companies are created equal, by virtue of the “degree of control” exercised by their governments.
When asked by Petroleum Economist if a deal proposed by a company like Norway’s Statoil would be approved under the new rules, Oliver was evasive. He was equally evasive when asked if a company like ExxonMobil or Shell would be allowed to assume control of a major domestic producer like Suncor, which is already subject to foreign ownership limits under Canadian law.
Each case, he said, would be judged “on its own merits”. If that sounds a lot like the old policy, it is. Essentially there has been no change to what constitutes a net benefit under the existing rules; the definition remains entirely at the discretion of the prime minister and cabinet to decide.
The country spent much of the 1980s and 1990s in a bitter debate over privatising its own national oil company, Petro-Canada, which was eventually sold to Suncor Energy in 2009. Prime minister Stephen Harper said after the decision was announced that he is reluctant to see Canadian government control of the economy replaced with foreign government control.
Presently, less than 10% of the Canada’s energy sector is held by state-owned companies, such as PetroChina and Cnooc. However, about 50% of the sector is controlled by US firms, including ExxonMobil, ConocoPhillips and Devon Energy.
Asia’s state-run companies represent the largest and fastest growing source of development capital in the world. And they offer long-term, committed dollars for major energy projects.
Oliver insists Canada must diversify its export markets in the face of declining demand for the country’s oil and natural gas in the US. Yet the new rules threaten to alienate China and others that Canada will need as it starts to look for new partners.