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Canada cans Petronas offer

While it espouses the need for foreign investment in its energy sector, Canada is proving reluctant to give up control of its domestic producers

In a statement delivered two minutes before a midnight deadline of 19 October, the Canadian authorities rejected a C$5.1 billion ($5.13 billion) bid from Malaysia’s Petronas for Calgary-based Progress Energy.

The country’s industry minister, Christian Paradis, said the deal failed to meet a net benefit test under Canadian law. Petronas has 30 days to substantially amend and rework the offer, or the ruling will stand.

Canada reviews all foreign takeovers exceeding C$300 million, setting an extremely low bar in sectors like energy. Citing confidentiality, no reasons were given for the decision. If Petronas chooses to resubmit its bid, the review can be further extended at the minister’s discretion.

Nonetheless, the rejection sent immediate shockwaves through Canada’s oil patch. Progress’ shares opened almost 15% lower, at C$19, when stock markets reopened on 22 October morning.

The decision also affected other Canadian producers subject to foreign takeover bids, including Celtic Exploration, which was snapped up by ExxonMobil on 17 October for C$2.6 billion. That deal also must pass the net benefit test.

However, now even greater attention will focus on  China National Offshore Oil Corporation’s (CNOOC) $15.1 billion bid for Nexen. On 11 October, the Canadian authorities extended the review period by 30 days, to 11 November.

Nexen’s stock took a 6% hit following the Petronas news, and, at press time, was  trading 15% below CNOOC’s offer price of C$27.50 a share, a sign financial markets are increasingly betting against the Chinese.

According to Andrew Potter, an analyst the Canadian Imperial Bank of Commerce: “Global investors have already been struggling with why they need to own Canadian energy. Investors won't put much value on Canadian resource opportunities if they don't have access to capital. Joint ventures and mergers and acquisitions are key parts of this capital.”

In the wake of the Petronas decision, Potter now rates the chances of CNOOC approval at less than 20%. “If the issue was about reciprocal market access, then 30 days isn't going to fix the problem,” he said.

The government continues to insist that Canada welcomes foreign dollars. It also maintains that Petronas and CNOOC are not linked. “Canada has a long standing reputation for welcoming foreign investment,” Paradis said.

But the damage to that reputation may already be done. By now there is an established pattern of using the net benefit test to block deals for mainly political reasons.

In 2010, Canada used its review powers to block Australian resources player BHP Billiton’s C$40 billion for Potash Corporation. In that case, the national interest was presumably served by preventing BHP from gaining a Canadian monopoly on the production of a mineral used for fertiliser.

It is difficult to see how Petronas meets the same standard. With just 50,000 barrels of oil equivalent per day (boe/d) of production, Progress’ main asset is 800,000 undeveloped acres in British Columbia’s Montney fairway.

The region is a promising tight gas and liquids play that needs billions of dollars to develop, more than Progress could raise on its own. It is also likely to be the source for Canada’s ambitious plans to export liquefied natural gas (LNG) to the Pacific Rim.

In addition to providing capital dollars, Petronas is proposing an integrated LNG terminal on the country’s west coast, and access to Asian markets. Given Canada’s stated desire to expand trade with Asia, these would all seem to be in the national interest.

That’s notwithstanding the 90% premium Petronas is offering for Progress shares, a sweetener that all but assured overwhelming support from Progress’ shareholders at a special meeting in Calgary on 28 August.

For his part, Progress chief executive Michael Culbert said he is “disappointed” with the ruling. On 22 October the company issued a statement that will work with Petronas and industry officials to find solutions for the government’s concerns.

That may be easier said than done. Canada’s net benefit test is deliberately vague. It has no formally articulated aims; it merely grants absolute discretion to the prime minister and cabinet to determine what the public interest is. 

Now there are concerns over the role of state-owned entities in the broader economy, not just the energy sector. The government is said to be drafting a formal policy that will be released in November. It may have wanted to avoid granting approval before those new guidelines are in place.

The true reasons for the rejection will not be known for at least 30 days. Regardless, Canada is sending notice that its oil and gas is not for sale to the highest bidder. But at the same time, it is also sending the message that Canada is becoming a riskier place to invest.

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