CNOOC’s Nexen Takeover Bid and Canadian Investment Policy
Prime Minister Harper met with his Chinese counterpart, President Hu Jintao, at the sidelines of the Asia-Pacific Economic Cooperation (APEC) summit in Vladivostok yesterday. The two heads of state also presided over the signing of the landmark Canada-China Foreign Investment Promotion and protection Agreement that has been in the works since the Prime Minister’s visit to China last February. Yet, hanging over the agreement is Industry Canada’s on-going review of the $15.1 billion friendly takeover bid of Calgary-based Nexen Inc. by the China National Offshore Oil Co. (CNOOC).
On his way to Russia, speaking to a gathering of businessmen in Vancouver, Mr Harper said approval of the CNOOC deal should not be taken as a ‘litmus test’ for Canadian investment policy as he promised more clarity on Canadian rules for foreign takeovers. A much-debated issue is the ‘net benefit test’ that on the one hand examines quantifiable factors such as job creation and increased investment over time, but on the other, subjective judgments such as whether foreign takeovers are consistent with government policy.
The real sticking point in the CNOOC case is whether China’s third largest petroleum state-owned enterprise (SOE) is able to operate purely along commercial lines and not as an extension of Chinese government policy. A recent Asia-Pacific Foundation of Canada (APF) survey found an overwhelming majority of Canadians skeptical of Chinese SOEs taking over Canadian companies and assets with only 16% in favour. Acknowledging the suspicions, Mr Harper remarked it was incumbent on the Chinese to show their willingness to play by Western rules and that deepening relations were a two-way street.
Late last month, CNOOC formally sought approval of the takeover from the Canadian government. The Nexen board overwhelming endorsed the acquisition, especially because CNOOC is offering to pay a 62% premium over the stock price. The government has 45 days, extendable for another 30, to come up with a decision. Further, since 10% of Nexen’s assets are in the US, CNOOC has scrupulously filed for approval from the US government to address any American national security concerns.
Prime Minister Harper has said that his government is assessing the deal’s long-term impact for Canada and will look beyond a narrow definition of ‘net benefit’. Industry Minister Christian Paradis indicated that reciprocity for Canadian businesses investing in foreign countries is a key concern. Most industry insiders, however, believe that while the deal will be used to prod China on broader trade and investment issues, reciprocity should not hold up ultimate approval.
These sentiments were echoed in a Canadian Business article examining the CNOOC bid. The author urged Ottawa to resist calls for rejecting approval on the basis of lack of reciprocity on the Chinese side. Moreover, proper observance and application of Canadian environmental protection, labour, and competition laws should ease Canadian fears about any rogue behaviour from CNOOC.
“(Approval) should be exploited as an invitation to China to forge a deeper relationship. We should continue pressing China selectively for improved access to targeted areas of the Chinese marketplace where Canadian companies are poised to excel…We can learn a great deal from the exercise – and those insights could be crucial”, the article concluded.
Approval of the CNOOC deal is all the more symbolic and important since Canada will require as much as $650 billion over the next decade to develop its energy and other resources, Natural Resources Minister Joe Oliver remarked in Toronto prior to the Prime Minister’s trip. “Those numbers are just the beginning. Countries in the Asia-Pacific region are hungry for energy and minerals and metals and foreign products they need to fuel growth and build a better quality of life for their citizens”, he said.
Minister Oliver revealed that based on new calculations, natural resources development is now responsible for 20% of Canadian economic activity (15% directly and another 5% from indirect services), much higher than previous estimates. Just as important, natural resources industries – energy, forestry, metals, and minerals – account for 10% of Canadian jobs. In 2010, his ministry had natural resources accounting for only 11.5% of GDP.