Canadian COMPETITION LAW

With the recent announcement of a proposed friendly take-over of Nexen by the China National Offshore Oil Corporation (CNOOC), some Canadian and international media are asking whether the deal will be blocked under the Investment Canada Act.  Questions have been raised regarding the size of the transaction, commercial orientation of CNOOC, policy issues concerning the acquisition of significant Canadian assets by state-owned enterprises (SOEs) and questions as well about the level of China’s foreign investment reciprocity.

This transaction, as well as a number of other Chinese oil related acquisitions in the past few years, has also generated a considerable amount of legal, policy and other commentary in relation to Chinese investment in Canada and the appropriate policy posture for the Canadian Government.  There have too also been inevitable comparisons to the recently failed attempt by BHP to acquire Saskatchewan’s Potash Corporation.  Despite some speculation as to whether the transaction will get Investment Canada Act clearance, I am going to go slightly out on a limb at this very early stage to hazard that it will.  Why?

First, statistically, despite the increasing debate and criticism of Canada’s current Investment Canada Act process, the vast majority of foreign investments have been approved – only two transactions have been rejected since 1985 (of more than 1600 applications for review).  Past statistics, of course, are not necessarily an accurate predictor of the result in a process that is highly fact specific and political.

Second, the majority federal Government has made repeated statements that Canada is “open for business”.  The most recent of which occurring yesterday, with Canada’s PM heralding a new era for the competitive marketing of grain saying: “Our Government is committed to creating open markets that will attract investment, encourage innovation, create value-added jobs and build a stronger economy for all Canadians.”

Third, the federal Government has increasingly been indicating a desire to strengthen China/Canada trade and investment relations.  For example, the Prime Minister completed a significant trade mission to Beijing earlier this year, in which the Conservatives, among other things, reiterated Canada’s desire to strengthen bilateral trade with China and concluded negotiations for the Canada-China Foreign Investment Promotion and Protection Agreement (FIPA).  Some of the Prime Minister’s announcements last February in China, which signal a desire to strengthen Canada’s relations with China, include a stated desire to “take relations to the next level and further strengthen [Canada’s] strategic partnership” with China and that “investment flows between Canada and China are at an all-time high contributing significantly to jobs and economic growth in both countries.”

Fourth, with increased political uncertainty relating to Canada’s traditionally most important oil export market – i.e., the U.S. – Chinese investment in Canadian oil production represents at least two benefits: increased necessary capital and more markets.

Fifth, CNOOC appears to have taken many of the right steps to secure approval, including rather fulsome promises to establish Calgary as the head office of its North and Central American operations, maintain Nexen’s current management team and employees, implement and enhance Nexen’s current planned capital expenditure program (maintaining the status quo is not an option under the net “benefit” to Canada test) and to pursue an additional listing on the TSX.  Some commentators have said that CNOOC “walks and talks” like a commercial enterprise.

Sixth, while hardly an empirical measure, upstream oil and gas assets do not seem to raise the same emotional sensitivity as a globally rather rare resource linked to crop and food production.

Finally, as a practical matter, while Canadian regulators’ experience with investments by SOEs is relatively recent, with the first majority acquisitions by SOEs being cleared in Canada only beginning several years ago, no SOE investment has yet been rejected on Investment Canada grounds.  In fact, there have been a great many SOE investments in Canada, of both minority and majority interests, in the past few years that have included:

Abu Dhabi National Energy Company’s acquisitions of Northrock Resources Inc. and PrimeWest Energy Trust (2007, 2008), ARMZ Uranium Holding Co.’s  acquisition of a controlling interest in Uranium One Inc. (2010), China Investment Corporation’s acquisitions of 45% of Penn West Energy Trust (Peace River Alberta) (2010) and 17.2% holding in Teck Resources (2009), CNOOC’s acquisitions of a 16.69% interest in MEG Energy and 100% of OPTI Canada Inc. (2005, 2011), CNPC’s and ONGC’s  acquisition of 38% of Al Furat Production Company from PetroCanada (2005), GDF SUEZ Energy North America’s acquisition of Ventus Energy Inc. (2007), International Petroleum Investment Company (IPIC)’s  acquisition of 100% of NOVA Chemicals (2009), Korea National Oil Corporation’s acquisition of Harvest Energy Trust (2009), PetroChina/CNPC’s acquisition of 60% of Athabasca Oil Sands Corporation’s Mackay River and Dover oil sands projects (2009), SinoCanada’s acquisition of a 40% interest in the Northern Lights Oil Sands Project (2005), Sinopec’s acquisitions of an approximately 9% holding in the Syncrude Project and 100% interest in Daylight Energy Ltd. (2010, 2011) and Statoil ASA’s acquisition of North American Oil Sands Corporation (2007).

As such, while CNOOC’s bid to acquire Nexen is far from commonplace, largely based on its magnitude, acquisitions of Canadian oil assets by Chinese and SOE investors from many other countries are not novel anymore.

Also, while it is yet early, there does not appear to be the level of stakeholder or political opposition to this transaction, despite its size, that was seen in relation to BHP/Potash.  Interestingly, the opposition does not appear to have appetite (perhaps yet) to call for the transaction to be blocked, but is using it as an opportunity to call for further transparency to be added to the Investment Canada Act review process.

Now, having said that, will stakeholder, political or even internal Conservative party opposition (along the lines of party member dissent developing over the Northern Gateway Pipeline) develop?  It is very possible.  The transaction may be subject to review until the early fall (or late fall if a national security review is commenced in addition to a general net benefit to Canada review under section 20 of the ICA).

The market also appears to have doubt as to whether the deal will clear – Nexen’s share price has been trading below the bid price.  Is this based on surrounding controversy – for example, the allegations of insider trading against a Hong Kong firm – or growing opposition by some U.S. politicians, or general uncertainty regarding the federal Government’s stance toward significant Chinese SOE investments, or CNOOC’s 2005 withdrawal of its bid for Unocal in the U.S.?  It seems to me that while all of these may account for market nervousness, they do not necessarily represent obstacles to Investment Canada Act approval.

Is it also possible that the so-called “undertakings” creep that has been developing in Canada may mean that more stringent commitments are also sought to clear the transaction?  This is also entirely possible, and appears to be one (if not the primary) reason for the withdrawal of the BHP bid for Potash.

Finally, it is also possible that any serious opposition to the transaction has not yet materialized – for example, in the context of the recent Glencore/Viterra transaction, some stakeholders took some time to study the transaction in before expressing concerns about impacts in some relevant markets.  The Saskatchewan Government, for example, commissioned an independent research report analyzing the transaction and affected markets.  These sorts of steps take time and may mean that it is later in the summer or fall until any serious opponents of the transaction develop publicly in Canada.  The success or failure of any Investment Canada Act review is therefore a moving target, given that the process is largely political.

It does, however, appear that CNOOC is taking (and has taken) the right steps to smooth the path to approval and, unlike BHP/Potash, serious concerns in Canada (unlike the U.S.) do not appear to have yet been raised.  It will be very interesting to see whether any significant impediments to this deal will develop in Canada, of the kind developing in the U.S. in relation to Nexen’s U.S. Gulf of Mexico assets.

For more information about the Investment Canada Act see:

Investment Canada

SOEs

National Security

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