CALGARY – Foreign capital will continue to flow into Canada’s resource sector, despite Prime Minister Stephen Harper’s vow to raise the bar on the level of state-owned investment it will allow from now on, experts said Friday as Ottawa waved through two multibillion-dollar deals.
In announcing the long-awaited approvals of a Chinese takeover of Nexen Inc. (TSX:NXY) and a Malaysian takeover of Progress Energy Resources Corp. (TSX:PRQ), Harper said there are limits to how much foreign state-owned influence is acceptable, particularly in the oilsands.
That caveat didn’t appear to spook observers in Canada’s business community, who expect foreign dollars to continue to pour into the oilpatch — even if it’s not through blockbuster takeovers, but rather bite-sized deals that have been the norm for several years now.
There’s no indication that joint-venture deals, minority investments and small-scale acquisitions will be stifled in any way, said Greg Stringham, vice-president of oilsands and markets at the Canadian Association of Petroleum Producers.
There has been relatively little political outcry to deals such as PetroChina’s joint venture with Athabasca Oil Corp. (TSX:ATH) three years ago, and the subsequent move for full control of an oilsands project earlier this year. Nor has Sinopec’s nine per cent interest in the Syncrude oilsands mine generated much furor. Both companies are controlled by the Chinese state, as is Nexen’s buyer, CNOOC.
The energy industry invested $61 billion in projects this year and “that’s bigger than the economy can supply,” said Stringham.
“So we’ve got to look beyond our borders for that investment in order to develop that resource for the good of Canadians — or in (the government’s) words, the net benefit.”
John Stephenson, portfolio manager at First Asset Investment Management, was similarly unfazed by Ottawa’s take on future foreign deals.
“We can’t close the door in its entirety. We have to open it. I think the government’s done a good job in walking a fine line,” he said.
University of Calgary economist Eugene Beaulieu said he’d still like to see more clarity from Ottawa about what exactly constitutes a “net benefit” to Canada, but that Friday’s announcement sends a positive signal to would-be foreign investors.
“They do have wiggle room right now,” he said. “I think they played this one pretty well because it’s not going to be free and open for state-owned enterprises to come in and buy whatever they want.”
At the same time, it’s not going to cut off the investment flow.
“I think it’s a positive. If we would have said no (to CNOOC and Petronas), it might have.”
George Addy, a senior partner at law firm Davies Ward Phillips and Vineberg, said he understands why Ottawa is particularly concerned about foreign ownership in the oilsands, since the sector is currently controlled by just a handful of companies.
“If you have a sector with 1,000 owners there, it’s a little different. He’s saying we’re down to 15 companies in this sector so it’s getting concentrated,” said Addy, who heads up his firm’s competition and foreign investment review group.
“He’s doing that short of drawing a numerical line, which I think was a wise thing to do.”
Addy said there’s a long history of foreign investment in the oilpatch through minority stakes and joint ventures, and that’s not going anywhere.
“They obviously they think there’s a return on that investment. I don’t see why that would change.”
David Detomasi, a business professor at Queen’s University, said the Harper government was caught “flat-footed” when it came to dealing with the political response to the Nexen-CNOOC deal, and what sorts of future investments it could open the door to.
“I think today’s announcement is reassuring to China, with whom Harper is trying to build increasing economic relations. I think the Chinese worked very hard to secure the right conditions to allow that bid to go through,” he said
“However, beyond that, I do think … he’s going to be much tougher on investments from state-owned companies.”
While that might stymie investment from the likes of CNOOC and Petronas going forward, there’s plenty of cash from massive non-state players such as looking for a home.
“The global oil industry is spending about $600 billion a year on exploration alone. While CNOOC has a massive exploration budget, so do all the big majors that we typically associate with oil and gas — ExxonMobil, Chevron,” he said.
“It would be interesting to see if a similar bid was launched by some of the big private major American companies, would it have the same sort of political ramifications in Canada? I think there still would be.”