By Scott Simpson, Vancouver Sun, July 28, 2012
Asian observers see potential for growing business, trade relations as China bids for Nexen
This week's bid by a state-owned Chinese company for ownership of Calgary's Nexen Inc. underscores a growing Asian interest in companies involved in Canada's resource sector.
The $15-billion Nexen offer by the China National Offshore Oil Corporation (CNOOC) follows last month's proposed purchase of Progress Energy by Petronas, Malaysia's state-owned oil and gas company. Friday Petronas raised its bid from $4.8 billion to $5.16 billion to counter a competing offer.
Both deals, which are subject to review under the Investment Canada Act, have implications for British Columbia because the targeted Canadian companies have large natural gas properties in B.C.
Progress is a major land-owner in the Montney shale gas region in northeastern B.C. while Nexen is a major player in another world-class B.C. gas region, the Horn River Basin.
CNOOC and Petronas are just two of the multinational energy companies vying for a stake of B.C.'s huge gas reserves - Royal Dutch Shell, Houston's Apache Corp, U.K.-based BG Group and ExxonMobil are already property owners in the northeast and they're all interested in developing a liquefied natural gas export sector based on gas produced in this province. Last February, Calgary's Encana sold a 40-per-cent share in its Cutbank Ridge gas property to Japan's Mitsubishi for $2.9 billion and LNG exports are a focus of that partnership as well.
But even with all that investment, China is a special case.
CNOOC a state-owned enter-prise in what remains, ostensibly, a Communist regime weighed down by concerns among the international financial community that its corporate dealings lack transparency. On Friday, federal NDP energy critic Peter Julian (Burnaby-New Westminster) and industry critic Helene LeBlanc (La Salle-Emard) asked the House Standing Committees on natural resources and industry to review the Nexen deal on the premise that it could lead to increased exports of raw oil-sands bitumen at the expense of refinery jobs in Canada. Nexen also has major shale gas holdings in B.C.
Following the 2010 rejection of a $40-billion bid by Australia's BHP Billiton to take over Saskatchewan-based Potash Corporation of Saskatchewan there's uncertainty about Ottawa's willingness to let CNOOC take over Nexen and perhaps compromise the access of Canadians to their own natural resources.
Expert China watchers, how-ever, think the deal will - and should - be approved because it appears to conform to the tone of recent Canadian and B.C. trade missions to Asia in which federal Trade Minister Ed Fast, Prime Minister Stephen Harper and B.C. Premier Christy Clark urged Chinese officials to consider Canada a sound venue for investment.
LARGEST FOREIGN DEAL If approved, the Nexen deal would be China's largest foreign purchase to date - and both a financial and moral victory in North American after the heavily politicized 2005 rejection by the U.S. of a proposed $13-bil-lion CNOOC takeover of Unocal Corp.
Incidentally, China already has a notable track record in B.C. Amid a global debt crisis in 2009, cash-strapped Teck Resources of Vancouver only regained its financial footing when Chinese Investment Corporation, or C.I.C., paid $1.9 billion for a 17-per-cent stake in Teck - which is Canada's largest producer of copper and one of the world's largest exporters of metallurgical coal used for steelmaking.
From 2008 through 2011, Asian countries including China, Japan, South Korea and India spent a total of $153 billion in direct purchases of shares of Canadian companies - about half of what U.S. investors spend here in a single year. Japan has been the single largest Asian investor, $52 billion in the 2008-2011 period, with China in second place at $31 billion over four years.
Resources including energy, metals, minerals and forest products rank high on the list for investment - hardly surprising, considering that the energy industry alone accounts for 6.7 per cent of Canada's gross domestic product.
In June the non-profit Asia Pacific Foundation, based in Vancouver, released a report that said in part that Canada's "energy resources are abundant but underutilized, while Asia's demand for energy is voracious and growing."
"The economic case for energy exports to Asia is now widely accepted," the report stated, noting that a surge in U.S. energy production predicated on hydraulic fracturing or "fracking" means that Canada needs to step back from its No. 1 trading partner and cultivate new energy markets.
"Although it is difficult to imagine a more complex issue than the Canada-Asia energy relationship, it is also difficult to imagine a more important issue as Canadians position them-selves within a dynamic global recovery.
"Energy exports to Asia would help redress a very large trade imbalance, especially in the case of Canada-China trade. Although Canadian trade with China has grown in absolute terms over the past decade, Canada's share of China's total trade is around one per cent, well below Canada's share of global trade."
Wenran Jiang, a member of the task force that produced the report, said this week in an interview that Canada is at the beginning of a potentially "huge" economic relationship with China.
Jiang is senior fellow with the Foundation and a special adviser to the Alberta department of energy. He's an unrepentant booster of Chinese investment in Canada - for practical reasons. China's manufacturing sector needs imports of energy and petrochemical feedstocks to make the goods, everything from smartphones to refrigerators, they export to Canada and the rest of the world.
"What people don't quite understand, and normally the media doesn't emphasize, is that China is producing not only for itself. If you look at what that energy is used for, what they do with that coal, copper, steel and all that, it's for producing goodies for everybody else - especially manufactured goods," Jiang said.
"A typical discussion in the past couple of days about the Chinese takeover of Nexen, about China's huge appetite for energy, is about the implications for [Canada's] national security, sovereignty. To me this is a very superficial discussion. We are in this together and the Chinese are part of the global division of labour." Jiang doubts the Nexen offer will be rejected.
"The federal government's trade minister already put a message out welcoming Chinese investment for economic growth. I think all the bars are met, given the offer, on the so-called net benefit to Canada. If it is rejected it is going to be a very bad reputation for Canada."
Instead, he sees the potential for the deal to enable Canada's trade relationship with China to flourish.
"As the Chinese ambassador told me, and the Chinese [business] executives I talk to on a regular basis have told me - 'Whatever Canada can produce, China can consume.' When we complain that we have a four-to-one trade deficit [with China] on an annual bilateral trade basis, the Chinese response normally is 'Produce it and we'll buy it.' "We're not producing enough. Look into agriculture, for example. We have a management system and a supply sys-tem that does not encourage the country to produce dairy products beyond our domestic supply - we can't even have an industry that's export based."
As an example, Jiang cited enormous demand in China for milk powder, and Canada's dairy industry is not equipped to take advantage of the opportunity.
"We're still a small player and we don't have policies in place that are tuned towards dealing with a much-growing economic giant like China."
Similarly, he added, China is only "at the beginning stage of going abroad."
"We have a lot of rule-based and market-based experience and expertise, and legislative, regulatory history, and we can guide China, work with Chinese companies and help them to become better corporate citizens in much of the rest of the world. The more we do that with the Chinese, the less they will go to places to work with dictators."
UPSIDE FOR CHINA
Bryan Henderson, an expert adviser on China for PricewaterhouseCoopers, sees several advantages for China in the Nexen deal, beyond securing a supply of energy.
It's lowering the inflation and market-based risk of all the export revenue it's accumulating, by investing in physical assets that have long-term value. That means less dependence on low-yielding U.S. treasury bills as a primary store of Chinese government wealth. Energy, as a commodity, tends to raise the standard of living of those who possess an abundance of it. Finally, by strengthening relationships with North American oil and gas producers, China is going to be in a position to acquire both the expertise and technology necessary to begin development of its own - reportedly substantial - shale gas reserves.
"China obviously has a lot of capital to invest. A lot of it in the past has been invested in U.S. treasuries. [China's current economic] five-year plan is to diversify its trade surpluses, so put-ting it into something that will enhance China's energy future is an obvious target for them," Henderson said.
"With the Communist party firmly in control, its legitimacy, if you want to use that term, is based on providing the population with an ever-increasing standard of living. That takes a huge amount of energy. China's got tonnes and tonnes of coal and it has a lot of shale gas but it doesn't meet all of its own needs. So to provide that energy going forward, five, 10, 15 years down the road, I think is obviously part of their rationale in making these acquisitions.
"We just talked about energy, oil and gas, primarily. But also what we see is increasing interest in technology. Most people think of high-tech when they think of technology, but I'm thinking more in the oil and gas sector of companies that provide services to the oil and gas industries. These would be smaller companies, some of them private, some of them publicly owned. We're starting to see quite a bit of interest in that sector as well."
Keith Head, HSBC chair at University of British Columbia's Sauder School of Business, said questions for Ottawa include a determination of whether or not a state-owned enterprise such as CNOOC would conduct itself differently in Canada than a publicly traded company.
"You need to do a sound, grounded analysis, look at the track records, look at scenarios where there could be conflicts of interest and evaluate how serious those scenarios are," Head said.
"Why does this company want to buy Nexen? The answer is that they want to control them. So then the question is, why do the Chinese want so much to control Nexen?"
Head does not believe China's motives are "nefarious."
"It just involves their own desire to secure their supplies. Is it good for Canada or bad for Canada? It depends. It could well be good, or it could be adverse in the sense that Canada could reach a point where it was unable to get as much crude oil from the oilsands supplied to eastern refineries as they would like because their supplies are all tied down for export to Asia."
If he were assessing the deal for Ottawa, Head would also want assurances that CNOOC would respect Canadian environmental law in the development of its resources.
"We're aware of Enbridge's past spills, and that's a Canadian-owned company. So it's not like the fact of being Canadian owned makes you a good steward to the environment. But on the other hand, a foreign corporation with foreign shareholders, reporting to a foreign government may care less about preserving Canada's environment and negative consequences of spills or other environmental damage than a Canadian corporation might. That's something you'd also want to think about exploring."
© Copyright (c) The Vancouver Sun