The decision on CNOOC's proposed acquisition of Nexen will be a key litmus test on whether the government intends to “walk the talk” on diversification. Approval – along with clear limits on future foreign investments – not only makes sense, but is clearly in the national interest, if the government seriously intends to broaden economic ties with the fastest-growing, second-largest global economy.
Concerns about state-owned enterprises not adhering to market principles have some legitimacy, as do the undeniable facts that the Chinese political system is different and plays by different quasi-market rules. Furthermore, Canadian firms have nothing like open access to invest in China on oil sands development or in virtually any other sector.
But Canada needs foreign investment to develop its huge resource base, and China has unmatched capacity to participate. With less than 5 per cent of the oil sands leases, Nexen is a relatively small player. The majority of its assets are outside Canada. CNOOC is making tangible capital commitments to invest in developing its leases in Canada, and to employ Canadians in this development. As demonstrated by its decision to establish its North American head office in Calgary, CNOOC will also make significant commitments to the communities hosting its facilities. It is also important to underscore that the operations of Nexen under CNOOC ownership will be fully in accordance with all Canadian laws and regulations. Ownership does not give any firm a licence to misbehave. On the contrary, CNOOC’s behaviour in Canada will be monitored closely and will impact on future investment aspirations. The Chinese know that.
The 35-per-cent public float of CNOOC will be listed on the Toronto Stock Exchange, as well as the New York and Hong Kong stock exchanges, to provide a higher degree of governance transparency than is the case of some other SOEs already operating in Canada.
Polls suggest a good deal of opposition to this transaction, but polls can easily be manipulated in order to elicit a negative, if not knee-jerk, response.
The “net benefit” definitions of Investment Canada rules, along with the national security and SOE nuances added to the legislation, remain deliberately opaque and give the government considerable latitude on decisions. However, rejection of the CNOOC bid would not only be a blow to the shareholders of Nexen who voted overwhelmingly to approve the deal, but it would be damaging to the Harper government’s recent efforts to develop a strategic economic partnership with China.
Nonetheless, approval should be accompanied by some clear guidelines setting limits or conditions on future acquisitions of this kind. A threshold of 10 per cent on any resource sector for outright acquisition, allowing only minority stakes in those above the threshold, would be one such approach. Equally, to give credence to Prime Minister Stephen Harper’s concern about the “imbalance” in the economic relationship, the government could serve notice on the Chinese government of what is needed to redress the imbalance and improve access for Canadian investors and exporters. It is called leverage, and it is fundamental to any trade negotiation.
There may be other ways to balance our need for foreign capital with our desire to retain control of our destiny. But we are sorely mistaken if we believe that investors do not have other options. They do. If we respond erratically to foreign overtures, they will place their investments elsewhere and the world will fast get the message that Canada is not open to business. Making choices in a turbulent, highly competitive global economy is not easy, but blocking investments that fully meet Investment Canada criteria is not conducive to reward.
The harsh reality is that because our energy exports are captive to a single market, we are a price-taker, not a price-maker, for oil – and the price of late has been 20-per-cent to 25-per-cent below world prices. As well as establishing guidelines for foreign investments in our resource base, the government should review urgently, with Canada’s oil companies, ways to reduce our dependence on imports of oil which, in turn, causes Canadian consumers to be gouged by distribution bottlenecks and severe weather conditions in the United States. As the late Peter Lougheed argued, developing greater refining capacity and pipeline infrastructure in Canada will enable us to benefit our own consumers and to market our energy products beyond North America.
What we cannot do, as a nation highly dependent on trade and foreign investment, is pick and choose by stealth, or welcome investment only from countries that mirror our political values. We have to do business with the world as it is, not as we wish it to be. That can be done sensibly and pragmatically in a manner that respects our basic laws and regulations, serves the national interest and broadens the prospects for our future prosperity.
Derek H. Burney is Senior Strategic Advisor for Norton Rose Canada LLP and a former Canadian Ambassador to the United States. Fen Osler Hampson is Distinguished Fellow and Director of Global Security at CIGI and Chancellor's Professor, Carleton University.