On December 7 last year, after twice extending the deadline, Canadian prime minister Stephen Harper finally gave the go-ahead for China’s biggest overseas acquisition to date: the US$15 billion purchase of Canada’s Nexen Energy by Chinese state-owned oil company CNOOC. The deal cleared its only remaining hurdle in early February when it won approval from US regulators, needed because of Nexen’s US holdings.
When the deal was first announced last summer, it was seen as a test of the renewed strategic partnership between Canada and China, cemented by the prime minister’s visit to China in February, and a test of the climate for large-scale Chinese investment in Canada and North America generally.
That test has produced mixed results, with the green light for CNOOC on Nexen, which gives China access to assets in Canada’s controversial oil sands, proving an amber light for future investment.
Announcing the outcome of the government’s protracted review of the deal, Harper made two significant remarks: “This is not the beginning of a trend, this is the end of a trend,” he said. And further, as if to underline the reluctance with which his government approved the deal “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.”
Suspicion of China
Well before the review of this deal was under way, the Harper administration made it known that it intended to look particularly closely at investments by state-owned entities. And when it was the turn of the Nexen buy to be appraised, the government announced this would be the occasion on which it clarified its guidelines on the purchase of Canadian resource assets by state-owned corporations.
Of course, some state-owned entities such as Norway’s Statoil have been active in the Canadian oil-patch for decades. But the advent of large-scale Chinese investment was perceived by the Conservative government as a game changer, requiring increased scrutiny.
The stated reasons were that state-owned corporations may operate according to non-commercial principles that would distort the marketplace and may disadvantage other market players. But below the surface lay deep suspicion of the Chinese regime and dark foreboding about political motivations behind the activities of China’s state-owned enterprises.
These suspicions are broadly held within the supporter base of Canada’s ruling Conservative Party, especially among members associated with the rural and deeply Christian membership of the former Reform Party.
Even among Canadian petroleum producers there were concerns about the new kids on the block. The Petroleum Club is a cozy affair in Canada’s oil-rich city of Calgary and it is safe to say it does not share a large overlap in membership with the Communist Party, still less the Communist Party of China.
Finding strange company with opponents from the political right was a broad swath of opponents from the left, including the leadership of the Canada’s official opposition, the New Democratic Party. This end of the political spectrum had been stirred up by the active baiting of environmentalists and climate-change activists by the Harper Government and sympathisers close to it over the development of the Alberta oil sands.
Chinese investment was thrust into the fault line between the proponents of so-called “ethical oil” and the opponents of the “dirty oil” of the “tar sands”.
A mixed bag of opponents
The Nexen deal was announced just as the review process got under way for the controversial Northern Gateway project to carry bituminous oil from Northern Alberta to Kitimat on the Pacific coast of Canada’s British Columbia (from where it would be shipped by supertanker to China).
The New Democrats, with their large base of supporters among trade unionists in the manufacturing heartland of Central Canada were sceptical of the strategic emphasis placed on oil-sands development by the Harper government and its impact on the Canadian dollar and manufacturing exports. New Democrat leader Thomas Mulcair went so far as to blame the oil sands for the hollowing out of Canadian industry.
A further strand of controversy was promoted by dissatisfied Canadian investors in China, raging against the apparent lack of “reciprocity” in investment policies. These ranged from Canadian financial service companies concerned about the prolonged delays in gaining regulatory approvals for investments in China to Canadian mining corporations virtually shut out of resource development in China following difficult forays into mineral exploration.
The best these activists could hope for was the signing of the long-delayed Foreign Investment Promotion and Protection Agreement between Canada and China in September. Eventually, even this initiative passed through the distorting lens of environmental activists who labelled it a Trojan horse for reduced environmental and labour protections from Chinese investors as well as branding its private arbitration model (designed to shield Canadian investors from the deficiencies of the Chinese legal process) as “secret tribunals”.
The Nexen purchase proved a lightning rod of discontent for environmentalists, anti-communists, and borderline racists alarmed at the spectre of China looming over the Canadian economy, and anti-capitalists for whom anyone’s investment is filthy lucre. While Harper had no qualms about dismissing the anti-capitalists and the environmentalists outright, he had more trouble dismissing the xenophobic-tinged anti-communists, with whom he shared more than a few misgivings.
US oil independence tips the scales
As the review ground slowly forward, a series of unfortunate events complicated the process. While entirely irrelevant to the Nexen deal, a US Congressional report released in October highlighted security concerns with respect to two Chinese communications companies trying to expand into the US market – Huawei and ZTE. This focused unwanted attention on the impact of Chinese investment, particularly as Huawei already has a substantial footprint in Ottawa. Canada’s own Security and Intelligence Service had also issued warnings concerning Chinese investment.
But the re-election of US President Obama left the fate of the Keystone pipeline project uncertain, coinciding with a new IEA report that projected US petroleum self-sufficiency within a near time horizon, rendered additional Chinese investment in the oil sands both necessary and urgent. This tipped the scales in favour of approval even if new conditions were forthcoming and stringent conditions placed on the approval.
The conditions revealed on December 7 “clarified” the rules in a manner designed to give the government increased discretion in the approval process for any further deal, while signalling that any further investment that had the potential to give Chinese state-owned corporations a controlling interest in oil sands development would be unwelcome.
All in all, the green light for CNOOC on Nexen has not signalled a Canada flinging open its doors for future investment. Alongside an amber light for major takeovers, however, the signal given was that minority participation and joint ventures would receive more favourable treatment. Interestingly, Chinese reaction was muted. The strong language used by Harper was not hyped, and the public reaction in state media appeared instead to signal quiet satisfaction.
However, observers should not regard this note of caution as the last word. Large-scale Chinese investment in the Canadian resource sector is still a venture into uncharted territory. The fate of future investment prospects hinges very much on the smooth management and digestion of existing deals. Scandal-free operations, and sharing a few small-batch glasses of Canadian whiskey over at the Petroleum Club in Calgary might go a long way towards green-lighting future investment projects.