Canada has blocked Malaysian state oil firm Petronas' C$5.17 billion ($5.2 billion) bid for gas producer Progress Energy Resources in a surprise move that could signal problems for a much larger Chinese deal in the country's energy sector.
Canada's announcement late on Friday, minutes before a deadline, was a blow to Petronas whose domestic oil supplies are shrinking and which has been seeking to boost its resources beyond Malaysia and volatile areas such as Sudan.
It also raises doubts over Chinese oil group CNOOC's C$15.1 billion offer for oil producer Nexen and could weigh on other Canadian firms hoping for foreign investment to tap their vast energy reserves. Any rejection of the CNOOC bid would likely damage trade ties Canada has been trying to build with China, underlining political sensitivity to Chinese corporate expansion in North America.
"I have sent a notice letter to Petronas indicating that I am not satisfied that the proposed investment is likely to be of net benefit to Canada," Industry Minister Christian Paradis said in a statement. The government, which has said C$630 billion investment is needed in Canada's energy sector over the next decade, has been trying to balance concerns over the deals with a need for foreign investment.
The bid for Progress had not been expected to run into hurdles in a review process that asks whether a deal is of "net benefit" to Canada. But in a sign it was attracting greater scrutiny, Canada earlier this month extended its review of the bid by two weeks. Petronas, which said on Saturday it was not ready to comment, has 30 days to make its offer more palatable. It was not clear what it could put on the table.
The Petronas deal attracted scrutiny after CNOOC made its bid for Nexen. Some members of Canada's governing Conservative Party are wary of the CNOOC offer, in part because of what they say are unfair Chinese business practices. Earlier this month, Prime Minister Stephen Harper said China's "very different" political and economic systems were a concern. A CNOOC spokeswoman in Beijing said she had no comment on the ruling against Petronas or whether it could mean the Chinese company's bid for Nexen was in trouble.
Last month, China's ambassador to Canada said the government should not allow domestic politics to affect its decision on whether to approve CNOOC's bid. However, some sources said the CNOOC deal need not necessarily be threatened. "I don't think that kills the CNOOC-Nexen (deal) but we do hear there is still a lot of local opposition to overcome," one Hong Kong-based energy sector banker said.
"It allows Canada to send a signal without upsetting a large trading partner. Better to upset Malaysia than China in a way." Chinese firms have more usually had difficulty doing business south of Canada's border, and this has come to the fore in recent weeks. The United States House of Representatives' Intelligence Committee issued a report earlier this month saying companies should stop doing business with Chinese groups Huawei and ZTE over security concerns.
On Thursday, the chief executive of US aircraft maker Hawker Beechcraft, whose $1.79 billion sale to a Chinese firm fell through, said China-bashing by US presidential candidates may have contributed to failure of the talks. The United States has long been the largest market for Canadian energy exports. But with growing US oil output from unconventional sources and the rejection this year of an initial application on the controversial Keystone XL pipeline project, Canada has been forced to try to build bridges with Asian markets that would welcome its energy supplies. CNOOC, which has won approval from Nexen shareholders, has said it will retain all Nexen employees and make Calgary the headquarters for its Americas operations.