You are probably already familiar with the CNOOC acquisition of Canadian firm Nexen. This energy sector deal could face opposition in more than one jurisdiction, including Canada, where most of the assets are. However, when this was announced a while back, a lot of the bitching and whining about it came from U.S. government folks, who seem to be fixated on Chinese State-owned Enterprises (SOEs) these days. At the time, it appeared as though opposition from Canada would be quite limited.
That was then, this is now. We’ve been through a lot of China investment-related news over the past couple of weeks. Companies like Huawei and ZTE, countries like the U.S. and Australia. Of course, I’m not sure how much effect, if any, this all had on Canadian decision makers, but it seems like a reasonable assumption.
Running parallel to the CNOOC-Nexen deal was another acquisition of a Canadian energy company by Malaysian oil behemoth Petronas (disclosure: I used to do some IP work for them back in the day), which is a State-owned company. This deal did not appear to be heading for any trouble, and indeed, according to a great report by Reuters, Petronas had already prepared press releases to send out trumpeting a government approval.
What happened? You might have already guessed:
Canada’s 11th-hour veto of the $5.2 billion deal was the result of miscalculations and miscommunications, Reuters has learned through interviews with a dozen people briefed on the October 19 events.
[ . . . ]
Ottawa, sources said, wanted to approve the Petronas-Progress deal but was afraid that would tie the government’s hands when reviewing the much more controversial $15.1 billion bid by China’s CNOOC Ltd for Nexen Inc.
Officials were wary of setting a policy on investment by foreign state-owned enterprises that would make things difficult if Canada later decided to take a tougher line on CNOOC-Nexen.
Oh, Lordy. You have got to be kidding.
At the beginning of all this, it looked like the CNOOC deal would have no problems. Fast forward a few weeks, and not only is it in doubt, but it has contaminated Petronas in Canada.
There were a lot of reasons why the Petronas deal went tits up (i.e., it wasn’t just worries about CNOOC-Nexen), but if anything, that just makes the Canadian officials look even worse. I won’t get into those details since the timeline of the Petronas cock-up has nothing to do with CNOOC, but if you want a good groan, check out the Reuters article.
So what must China be thinking about all this? Not only are they pissed off at the U.S. government for Huawei, ZTE, and Sany/Ralls, and worried about how Australia will handle Huawei, but now they have Canada making trouble. It’s all rather discouraging, isn’t it?
If the Nexen deal is ultimately scuttled, I fully expect Beijing to not only be disappointed and bang the usual “Protectionism!” drum, but to accuse Canada of rigging this game from the beginning. With the Petronas decision, Canada is signalling that it has significant doubts about CNOOC; some could argue it has already made up its mind, perhaps prematurely.
An approval of the CNOOC-Nexen deal would certainly help to allay some of China’s fears on the foreign investment front, but not all of them. At this point, China’s SOEs (and some notable private Chinese firms) must feel like they have targets on their backs.
One final point, on Canadian foreign investment law. The standard used in these reviews apparently has something to do with whether the deal is a “net benefit” to Canada. If it isn’t, the deal can be rejected. I don’t know more than that, or what sort of analysis the law requires when determining what constitutes a “net benefit.”
Quite a difference from the U.S. national security review though, huh? Seems like a “net benefit” standard allows a country to sneak reciprocity concerns into the process, among other factors. I also wonder how this sort of standard squares with WTO law, but that’s an issue for another day.
Now we just need to wait and see what the Canadian government does next.