New Canadian rules limiting control of its oil sands by foreign state-owned companies may turn away some investors who now covet more than minority stakes just as the industry seeks massive amounts of capital to fuel its growth ambitions.
The oil sands in western Canada, the world's third-largest crude reserve and the source for much of the United States' oil imports, need an estimated C$120 billion ($121 billion) in investment in the next decade, according to the Alberta government.
The scale of the investment means that the industry will need to tap foreign capital. But, in approving the contentious take-overs of Nexen Inc and Progress Energy Resources Corp by Chinese and Malaysian state-owned companies, Prime Minister Stephen Harper put a limit on potential investment.
The government said future bids for control of oil sands businesses by state-owned enterprises (SOEs) would be allowed only in exceptional circumstances. "The government's concern and discomfort for some time has been that very quickly a series of large-scale controlling transactions by foreign state-owned companies could rapidly transform this industry from one that is essentially a free market industry to one that is effectively under the control of a foreign government," Harper told reporters.
The policy suggests SOEs of foreign nations must be content with non-controlling interests in the 170-billion-barrel oil sands resource.
"The 'for sale' sign on the Canadian oil sands has been effectively removed, at least as far as SOEs are concerned," said Richard Steinberg, the chair of Fasken Martineau's mergers and acquisitions practice group in Toronto. During the past decade, Chinese and other Asian companies, seeking energy to help fuel their growing economies, have steadily boosted the size of acquisitions, starting with minority stakes in start-up ventures, and increasing to, in two cases now, taking full control of oil sands projects.
Before its $15.1 billion bid for Nexen, China's CNOOC Ltd first became a 35 percent owner of the Long Lake, Alberta, oil sands project, by buying Opti Canada in 2011. This year it set its sights on the majority partner, Nexen, which also has assets in the Gulf of Mexico, North Sea and Nigeria.
"Would they have gone down that path, would they have bought Opti, if they had known it would be unlikely they would get approval to buy Nexen?" FirstEnergy Capital Corp analyst Michael Dunn said. "From that perspective, it's worrisome."
With its take-over of Nexen, CNOOC Ltd will get 100 percent of Long Lake and 7.23 percent of the Syncrude Canada mining and synthetic oil processing joint venture. Sinopec, another Chinese SOE, owns 9 percent of Syncrude. The new restrictions could send Asian SOEs and their checkbooks to other jurisdictions that have fewer jitters about foreign control, an Asia-based energy banker said.
"If anything, this will only encourage Chinese and Indian bidders to diversify even further to places like Brazil, Kazakhstan, West Africa and others," the banker said.
Another banker took a less pessimistic view saying Canada, as a major source of energy, and Asia, as a major source of demand, needed one another. "The reality is: Canada needs investment and Asia needs gas and that equation will drive deals," the banker said.
The bankers declined to be identified because they are not authorised to talk to the media.
More broadly, while Canada's statement was aimed at explaining how it would apply investment rules to oil sands, SOEs looking at acquisitions in other sectors "will face a tough process," said Subrata Bhattacharjee, a partner and co-chair of the national trade and competition Group at Heenan Blaikie in Toronto. "The government's expectations for commitments and compliance will be very high," Bhattacharjee said.
FOREIGN-FUELED GROWTH
Tightened investment rules for the tar sands, which require expensive and energy-intensive methods to produce and process into refinery-ready oil, come as the industry aims to double production from the resource to more than 3.2 million barrels a day by 2020. That is a cornerstone of Harper's stated goal of turning the country into a global energy superpower.
The policy will not affect all foreign companies or those with government ownership, just those deemed to be controlled by their governments. Indeed, capital from the United States, Britain, France, Norway and a host of other countries has gushed into the sector for years.
Still, Ottawa has staked much of its trade policy on building ties with Asian countries, including China, especially in energy. In October, Canadian Energy Minister Joe Oliver said Indian investment in Canada's oil sands was lagging and energy group Enbridge Inc wants to construct a pipeline to the West Coast so Alberta crude can be shipped to Asian markets.
Alberta's government, which has strongly supported foreign investment in its oil sands as well as diversifying markets for the production, said it is possible that there could be a short-term negative reaction by potential buyers.
"The market capital votes with its feet and so I'm as interested as you are in terms of what the reaction to the decision is going to be in the marketplace itself," Cal Dallas, the province's international and intergovernmental affairs minister, told Reuters.
"I think that will be somewhat instructive in terms of what the direct impacts of the decision are. Longer term, the investment climate in Alberta continues, anywhere I travel to, to be seen as one of the most attractive in the world."
He said the province expects to have a say in any future oil sands deals.
From the oil industry's perspective, the rules are welcome as they clear up confusion about what Canada is looking for when it demands that foreign investments have a net benefit to the country. They had been criticised for being too vague.
"It doesn't stop the flow in my mind, and I honestly believe this, it opens the door to all those who have been watching this thing and saying, 'Just tell us how you want us to operate and we'll do that,'" said Greg Stringham, vice president of the Canadian Association of Petroleum Producers, the industry's main lobby group. "So that leads them down the path of more joint ventures, partnerships and those types of things."
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