Prime Minister Stephen Harper’s decision to protect Canadian oil companies like Suncor Energy Inc. (SU) from being controlled by Chinese and other state-owned enterprises may hinder the country’s ability to attract the C$650 billion ($658 billion) needed to develop its resources.
After approving bids by China’s Cnooc Ltd. (883) and Malaysia’s Petroliam Nasional Bhd. for Nexen Inc. (NXY) and Progress Energy Resources Corp. (PRQ), both of Calgary, Harper said last week that would be the “end of a trend” because state-run companies may have “larger purposes” that go beyond commercial objectives.
“To be blunt, Canadians have not spent years reducing the ownership of sectors of the economy by our own governments only to see them bought and controlled by foreign governments instead,” Harper told reporters. “When we say that Canada is open for business, we do not mean that Canada is for sale to foreign governments.”
The risk is there isn’t enough capital to replace what state-owned companies could have brought, said Walid Hejazi of the Rotman School of Management at the University of Toronto. This could boost costs for Canadian producers while U.S. rivals are finding new ways to tap reserves and a sluggish world economy limits resource prices.
The implication for Canada is that “a lot of these ventures are not going to reach their potential because of a lack of access to capital,” said Hejazi, a professor of international competitiveness. “Where is that money going to come from?”
Statistics Canada reported last month that expansion of the world’s 11th largest economy slowed to a 0.6 percent annual pace in the third quarter, with business investment and exports falling the fastest since the recession in mid-2009. Canada’s Standard & Poor’s/TSX Composite Index has gained just 2.2 percent so far in 2012, trailing the 12.9 percent gain in the U.S. S&P 500 index. Canadian energy stocks are the second-worst performing group in the benchmark index.
Natural Resource Minister Joe Oliver said today there is a “huge amount of capital available” to develop the country’s oil reserves, while Imperial Oil Ltd. (IMO) Chief Executive Bruce March said today in Toronto the takeover rules won’t undermine access to capital.
Industry Minister Christian Paradis told BNN television network in an interview that the lack of capital may be considered one of the exceptional circumstances under which the Canadian government would allow foreign takeovers of oil sands producers by state-owned enterprises.
Harper first outlined his plans to turn the country into an “energy superpower” six months after winning the 2006 election, during a London speech when he said Canada is a nation that could reduce the world’s dependence on state-owned oil supplied by unfriendly governments.
“We believe in the free exchange of energy products based on competitive market principles, not self-serving monopolistic political strategies,” Harper said at the time.
That was before the global recession crippled the economies of Canada’s traditional sources of capital -- the U.S. and Europe -- and left the country increasingly reliant on Asian money for investment. While the U.S.’s share of Canada’s stock of foreign direct investment has declined by as much as 16 percentage points since 1999 to 54 percent, the share from Asia has more than doubled to 10.5 percent, government figures show.
Harper last week reiterated his belief that Canada must continue to run as a “free market economy.”
The government “determined that foreign state control of oil sands development has reached the point at which further such foreign state control would not be of net benefit to Canada,” he said.
Chris Ragan, a former adviser to Finance Minister Jim Flaherty and economics professor at Montreal’s McGill University, said the finality of such a statement was “actually quite shocking,” given Harper hasn’t articulated exactly how state-owned companies behave differently than other businesses.
“It’s much more this unspecified emotional discomfort with having a communist government owning a company that is then going to own a company here,” Ragan said. “There might be a sensible economic rationale for this decision, but we never heard one.”
The new rules target countries like China that exercise a lot of influence over state-owned businesses, a government official said, asking not to be identified because he isn’t authorized to talk about internal policy discussions. State- owned companies with less history of government interference probably won’t be affected as much, the official said.
The guidelines were also designed to give Canada more leverage in negotiations with China over opening up the world’s second-largest economy to Canadian goods, the official said.
Foreign direct investment in Canada’s energy and mining industry is stalling. The country has attracted C$11.4 billion of capital over the past four quarters, the lowest total in more than a year, and less than what Canada’s energy sector attracted in 2008 and 2009, during the global recession.
Canadian producers are also cutting spending and shutting wells as they face slumping prices and increased competition from rising U.S. production. Suncor of Calgary, Canada’s largest energy firm, will delay construction of its Fort Hills oil sands project in northern Alberta and is evaluating projected costs on its planned Voyageur bitumen upgrader, Chief Executive Officer Steve Williams said Nov. 1.
To bolster the industry, Harper and Oliver traveled to China in February, where Harper called for deeper links between the two countries. Diversifying energy exports to Asia is a “national priority,” he said.
As Asian investments grow, “they are watching to see whether we continue to be welcoming,” Oliver said in an interview on the flight home from that trip to China. “We’ve told them we are welcoming,” said Oliver, who has said Canada needs C$650 billion over the next decade to develop its natural resources.
Harper clarified last week that Canada’s welcome will be largely confined to minority stakes and joint ventures. The new guidelines will add an extra layer of scrutiny for state-owned companies seeking takeovers in Canada and rule out further state-owned controlling investments in the oil sands other than in “exceptional circumstances.”
According to a report prepared for the U.S.-China Economic and Security Review Commission, state-owned enterprises accounted for about 50 percent of China’s GDP.
Such companies are not restricted to China. State-owned enterprises in member countries of the Organization of Economic Cooperation and Development -- a group of the world’s major industrialized countries -- employ more than 6 million and have market values of about $2 trillion, according to data from the Paris-based OECD.
“The oil sands are such a large resource on a global scale that the government is trying to cap on a cumulative basis how much of that resource we’re actually giving up to the control of other countries,” said Chris Feltin, energy analyst at Macquarie Group Ltd. in Calgary. “It’s a very strategic resource for Canada.”
Investment by Chinese state-owned companies in Canada’s energy industry has become contentious, with opposition lawmakers calling for a public review of the Cnooc bid and some members of the governing Conservative Party openly opposing it.
Harper has acknowledged the unease among Canadians about deals such the Cnooc’s transaction. Fifty-eight percent of Canadians wanted the government to block the Nexen takeover, according to an online poll of 1,000 people taken Oct. 10 to Oct. 11 by Angus Reid Public Opinion.
“In the past, our primary priority was superpower America and now it’s superpower China,” said Nik Nanos, an Ottawa-based pollster. “I’m not sure Canadians have really given that a lot of thought, which creates a challenge for Harper.”
One question that remains unanswered is why Cnooc and Petronas met those “exceptional” circumstances and how the government will interpret those new guidelines in the future, said Dany Assaf, a lawyer at Torys LLP in Toronto who specializes in foreign investment. The continued lack of clarity may cast an unnecessary pall over investment if the rules are deemed more restrictive by investors than the government intended, he said.
“I don’t think the policy is out of line with the concerns of Canadians and what foreign governments would expect in a foreign-investment regime,” Assaf said. “I think the risk is people will misperceive the strictness of these policies. They may over-interpret them.”
To contact the reporters on this story: Theophilos Argitis in Ottawa at email@example.com; Andrew Mayeda in Ottawa at firstname.lastname@example.org
To contact the editor responsible for this story: David Scanlan at email@example.com