Nexen Approval and New Requirements for Foreign SOE Investment

Posted by david on Dec 12, 2012 in Blog | 0 comments

As expected, the Harper government’s decision to approve CNOOC’s takeover of Nexen garnered mixed reviews from pundits across the spectrum.  One National Post columnist hailed the Prime Minister for his able handling of the delicate politics involved while a Sinologist critic warned of sinister Chinese Sunzi-style strategy that could threaten Canada’s sovereignty if “China accumulated a critical mass of economic power”.

On this issue, the Prime Minister was able to carefully balance the need to uphold the greater good of Canada-China trade and investment while appeasing those concerned about Canadian resource security.

The Harper government declared that purchases of Canadian assets by foreign governments though SOEs are different from strictly private transactions and so will be judged on their own merits and approved on an “exceptional basis”.  Henceforth, applications by foreign interests, especially SOEs, will be closely scrutinized for the degree of control or influence they could exert on the Canadian company, the industry in which it operates, as well as the extent to which a foreign state could exercise control or influence over the SOE making the acquisition.

Daniel Schwanen, author of a C. D. Howe Institute study on foreign, notably Chinese, SOE investment in Canada released just prior to the announcement, wrote in the Globe and Mail that the Harper government’s statement made some needed clarifications for foreign investors but may also lead to questions about overall Canadian trade and economic policy.

The revised guidelines now require an evaluation of the market orientation, corporate governance and transparency of the Canadian acquisition. There are also provisions for free market principles and industrial efficiency, indicating a clear preference for private companies.  Equally important, the reference to approval on ‘exceptional basis’ is a “de facto declaration of a national strategic interest in the oil sands. This opens the door to state-to-state negotiations whereby Canada leverages access to state owned investors in exchange, for example, for broad market access concessions for Canadian firms”, Mr Schwanen pointed out. 

In the wake of the Nexen deal, Canadian eyes are trained on Scotiabank’s $719 million offer to buy a 20% share of the Bank of Guangzhou whose approval by Chinese banking authorities has languished for the past year.  But a Scotiabank spokeswoman said the bank does not see the Nexen deal as having an impact on its purchase and its president remained confident the deal will go through.       

Meanwhile, the Alberta government has reacted cautiously to the new guidelines, concerned that it could slow the pace of foreign investment into the oil sands.  Natural Resources Minister Joe Oliver had himself estimated that Alberta will need some $650 billion over the next decade to develop the sector.  Thus, Mr Oliver recognizes that his government has much work to do to reassure SOEs not only from China but also India, Brazil, South Korea, Kuwait, and Abu Dhabi, all of which are considering investment in Canadian oil and gas.

Interviewed by the Globe and Mail, Peter Harder, a former deputy minister of foreign affairs and now president of the Canada-China Business Council, said the Nexen deal is a major advance for Canada-China business relations but both sides will be treading delicately in the offing.

“I think we need a period to politically digest this and we need leaderships across the political spectrum to point out to Canadians why opening ourselves to Asia generally and China in particular is in our economic interest. And I don’t know how we get the capital we need in the oil sands over the long haul without the involvement of SOEs, not just the Chinese but others”.

Writing in the Ottawa Citizen, Wenran Jiang, China scholar at the University of Alberta, suggests Chinese SOEs can react in a number of ways.  They may acquiesce to the requirements but take only minority shares of Canadian assets.  They could challenge the guidelines as unfair, discriminatory and even hostile causing them to stay away from the oil sands.  They could also pack up and leave for better pastures entirely as Chinese SOEs don’t lack suitors for investment. 

Mr Jiang concludes: “Which scenario(s) will unfold depends on how Canada will engage with China.  We now need a coordinated strategy between the federal government, the provinces, and the private sector in dealing with exactly what Harper has said, that Canada needs to take advantage of the Chinese market while avoiding the risks associated with it”.