Following the bombing of Pearl Harbor, Franklin Delano Roosevelt described Dec. 7, 1941, as “a date which will live in infamy.”
While those words might be too strong to describe the actions of the Canadian federal government on that same date this year, given what has transpired in the takeover of Nexen (NYSE:NXY) by CNOOC (NYSE:CEO), China’s state-owned oil company, it’s at least a date which will live on in business memory.
The Nexen approval will have everlasting consequences on state-owned foreign takeovers of Canadian companies — most of them good — so it’s important to understand how things will change when it comes to foreign investment in Canada.
The $15.1 billion deal wasn’t the only takeover that got the green light Dec. 7. Prime Minister Stephen Harper also approved the $5.1 billion takeover of Progress Energy Resources (PINK:PRQNF) by Petronas, Malaysia’s state-owned oil company. Thus, in one fell swoop, $20 billion of Canada’s oil industry was taken over by entities working for foreign governments.
The approval of both of these deals alongside the introduction of additional foreign ownership rules — rather than a straight-up veto — sends a signal to foreign companies that Canada is still open for business … just as long as you’re not state-owned.
According to Statistics Canada, 35% of the oil and gas industry in Canada is under foreign control. The only sector where foreign control is greater is in manufacturing, at 53%.
Imagine the U.S. giving up majority ownership of any of its industries. It just wouldn’t happen. Granted, capital availability in the U.S. is far greater than Canada could ever hope to cobble together, and as a result, outside investment is an unfortunate necessity. But it shouldn’t mean Canada selling a majority of its valuable assets to foreign entities. Yet it’s estimated that 71% of the oil sands production is foreign-owned.
According to the National Post, Canada is the only country of the world’s top five oil nations — Saudi Arabia, Venezuela, Iran and Iraq are the others — that doesn’t have a state-owned oil company. That wasn’t always the case. Petro Canada existed from 1975 to 1990 as a federal crown corporation, but it ultimately was sold to Suncor Energy (NYSE:SU) in 2009. Suncor has 57% foreign ownership.
About 80% of the world’s oil reserves are controlled by state-owned companies; therefore, most of the big oil companies, like Exxon Mobil (NYSE:XOM), are calling on Canada to replace their reserves. Investment Canada — which considers takeovers of more than $330 million — will continue to welcome foreign investment that’s not state-owned wherever there’s a net benefit to Canadians.
The New Rules
There are five changes to the guidelines for investment by state-owned enterprises:
- The definition of what constitutes a state-owned enterprise has been broadened;
- There are now limits on state-owned investments in the oil sands;
- There will be additional scrutiny of state-owned investments;
- State-owned enterprises will have lower threshold for investment review; and
- Investment reviews involving national security can take longer than the 130-day limit currently in place.
Natural Resources Minister Joe Oliver suggests the new state-owned foreign ownership rules implemented as a result of the CNOOC/Nexen deal would today prevent a deal from happening. Stephen Harper said the following about the rules:
“To be blunt, Canadians have not spent years reducing ownership of sectors of the economy by our own governments, only to see them bought and controlled by foreign governments instead.”
The emphasis here is on foreign governments. The new rules widen the definition of what is a state-owned enterprise to include those that are influenced directly or indirectly by a foreign government. They don’t, however, explain how the government will determine said influence — making it more difficult for foreign investors to know whether the review process will look kindly on a proposed control investment that has some minority participation by a state-owned enterprise.
Fortunately, the same rules do not apply to minority investments by state-owned enterprises, which fall outside the jurisdiction of Investment Canada. The federal government has made it clear that it welcomes minority investment by state-owned enterprises in the Canadian oil sands.
As I said previously, the rule changes for foreign investment are specifically for state-owned enterprises. The federal government is moving ahead with its plan to raise the threshold requiring investment review of foreign takeovers (non-state-owned) from the current $330 million to $1 billion over the next four years. Meanwhile, the threshold for state-owned takeovers remains $330 million.
Nothing has changed as a result of these rule changes if you’re a foreign company without any connection to state-owned enterprises. However, it has sent a crystal-clear message to foreign governments that Canada’s natural resources are hands-off. Whether this results in a reduction of state-owned investments in Canada remains to be seen.
The opposition New Democratic Party might not like the fact that ambiguities remain in the foreign ownership rules, but there needed to be some wiggle room for the government.
As far as most investors are concerned, it’s business as usual. That’s good news for Canada.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.