The Canadian oil patch was shocked by the announcement just before midnight on Friday, Oct. 19, that the Government of Canada was disallowing the $5.5 billion takeover of Canadian gas producer Progress Energy Resources by the Malaysian state owned oil company Petronas. Pundits immediately jumped to the conclusion that this was bad news for CNOOC’s pending $15.1 billion acquisition of Nexen Inc, which has been given an 30 day extension while Canadian officials determine if that deal will be of net benefit to Canada. Indeed, the market drew the same conclusion, pummeling both Progress and Nexen shares when the TSX opened on Monday morning.
Does the rejection of the Petronas bid mean that CNOOC’s ambitions in Canada will be thwarted? Not necessarily.
There are a couple of factors at play.Enjoying this article? Click here to subscribe for full access. Just $5 a month.
First, what was the reason for the refusal of the Petronas bid, and how did Petronas play its hand? Reports indicate that after the two sides had exhausted the first 30 day extension of the review period without resolution, Canadian officials requested more time. The statute allows a further 30 day extension if the company agrees. Petronas did not and called the Government’s bluff, asking for a “yes” or “no” by the deadline. They got the answer they didn’t want. As Wenran Jiang, Director of the Alberta-based Canada-China Energy and Environment Forum put it, “Petronas was playing chicken with Ottawa and lost the bet.” What more Ottawa wanted out of the deal is open to speculation but it likely had to do with transparency and corporate governance, which are key elements of the net benefit test for SOEs. There is a connection with the CNOOC-Nexen deal in that there has been a lot of negative criticism of CNOOC’s bid in Canada, driven in part by Sinophobia and fear of takeovers by non-corporate entities. To approve CNOOC’s takeover of Nexen, even though it is hardly a Canadian corporate champion, Prime Minister Harper will have to convince Canadians that large SOEs, especially Chinese SOEs, will play by the rules set out by the Canadian Government and will act in the market as commercial enterprises rather than as corporate tentacles of the Chinese state. If Petronas was allowed to complete its acquisition without submitting to clear rules in this area, this would have set a negative precedent and Canada would lose leverage in its negotiations with CNOOC. In fact, CNOOC has already been more forthcoming than Petronas and in announcing its bid, outlined a number of areas where it was prepared to demonstrate net benefit to Canada. However, because CNOOC is a very large Chinese SOE, it will have to meet a high bar.
Despite the rebuff on October 19, the Petronas bid is far from dead. After having played chicken and lost, Petronas and Progress were quick to put out a press release the next day indicating that they “will be working over the next 30 days to determine the nature of the issues and the potential remedies.” Two days later Progress announced that “Petronas Canada has up to 30 days, or longer as mutually agreed to, to make any additional representations and submit any further undertakings. Petronas and Progress will work together to ensure that the Minister has the necessary information to determine that the proposed acquisition of Progress would likely be of net benefit to Canada.” In other words, Petronas can still turn this around. The lesson for CNOOC is to play its cards right, be forthcoming, give the Government the time that it needs to properly assess the risks and benefits (for example, allowing a further 30 day extension for the review if requested to do so, something that Petronas failed to do), and above all, ensure that it allays fears that it will introduce non-commercial (political) considerations into its oil market dealings.
The Petronas shock could have a salutary effect after all, despite the doomsayer’s predictions that Canada is sending the signal that it is closed to foreign investment. It signals clearly that the Government will assess these cases carefully and will not be bullied or rushed. Given negative reaction in a number (but not all) quarters regarding Chinese SOE investment, if Canada is prepared at the end of the day to approve the Nexen takeover, it had better have a good array of weapons in its arsenal to fight the critics and show that this investment will be good for Canada. It will set a high but not insurmountable bar. If the Government can close on the Petronas deal in the end, and get commitments that set an acceptable standard for SOEs, then the chances of CNOOC’s bid being approved will improve considerably. Despite the brouhaha and negative publicity over the Petronas refusal, in the view of this writer there is a better than 50/50 chance that in the end both deals will win approval.
Hugh L. Stephens is Executive-in-Residence at the Asia Pacific Foundation of Canada Home | Asia Pacific Foundation of Canada and Principal of TransPacific Connections (TPC Consulting ) |tpconnections.com. He is based in Victoria, BC, Canada.