Nexen-CNOOC – Searching for Canada’s “Net Benefit”

Next month shareholders of Nexen vote on a lucrative offer from a company owned and controlled by the Chinese government for all of the shares in the Calgary-based, Canadian oil and gas company. If they do not say “yes” it will be a miracle. After all, The Chinese National Overseas Oil Company, or CNOOC as the buyer in known, is paying a sixty-six per cent premium on the price the shares were trading at when the offer was made on July 23, 2012.
CNOOC is so confident of the shareholders’ agreement that it has already asked for federal government approval of the deal, even though the formal vote has yet to be held. Because this would be a foreign takeover of a large Canadian company, the purchase requires the approval of the federal government agency, Investment Canada, before it can go through. The fact that the buyer is a company controlled by the Chinese government means that the pending decision by Ottawa has already attracted a lot of attention and comment.
The Nexen deal falls neatly into two of the five areas on which Canada 2020 is focusing in our ongoing project, “The Canada We Want in 2020.” Launched in the fall of 2011 and followed up with five public sessions in the spring of this year, the project looks at Productivity and InnovationIncome InequalityHealthCarbon and Energy and the rising importance of the Asia-Pacific region. The Nexen deal clearly falls into the ambit of both of the last two categories and is also of relevance in the productivity and innovation area.
When it reviews the deal, Industry Canada, on behalf of the federal government, will have to decide if there is a “net benefit” to Canada should the sale of Nexen to CNOOC go ahead. Clearly Nexen shareholders benefit, as does the Chinese government. That is why the deal has been tabled. Shareholders get a large premium for their shares and China gets all of the company’s energy resources, not just in the Alberta oil sands but also in the Gulf of Mexico, the North Sea, Latin America and West Africa.
Those supporters of the deal who do not directly benefit from the sale believe it is good for Canada because it attracts much-needed foreign investment to develop the oil sands. This is crucial not just for Canada’s energy needs, but also for the revenues and both direct and indirect jobs the oil sands will create. And, they point out,  saying “no” would represent a big setback to warming economic and political relations between Canada and China, which stand to yield other, larger benefits over time.
But opponents of the deal have a number of arguments as to why the sale should not go ahead.
The opposition of environmentalists who oppose any further development of the oil sands is easy to understand. But others have raised objections on a number of grounds, including that:

  • Nexen operates in one of Canada’s core strategic industries.
  • because CNOOC is owned by the Chinese government, this is not really a business and economic question but one of politics and foreign policy. Even if, as promised, the American head office of CNOOC is in Calgary and a class of shares in the company is traded on the TSE, the company will be an instrument of the Chinese government’s political, economic and foreign policy and the deal must therefore be regarded in that way.
  • there is no Canadian-Chinese reciprocity on such transactions. If a Canadian oil company wanted to buy a Chinese-owned one it could not.
  • the Chinese record on repressing human rights is reason enough to block the sale (opponents cite the Chinese government’s dealings with its smaller neighbours in disputes in the South China Sea, its manipulation of exports of rare earth minerals and its support of both Iran and the current regime in Syria).

The “net benefits” test in the Investment Canada Act was not conceived to deal with such non-economic questions. Yet the rise of  state owned enterprises and sovereign wealth funds that are created and operated by governments, has made these questions at least as – or even more – important than the pure economic questions that were originally envisioned by the test.
A further problem is that the definition of “net benefits” is so vague that it can mean almost anything on any given deal.
Whatever answer is given will set a precedent for how future, similar deals will be judged. This is why there is so much interest in how the Nexen – CNOOC deal plays out and why, at Canada 2020, we are following the developments very closely.