ANALYSIS-Canada has more reasons to approve Nexen deal than block it

Mon Jul 23, 2012 7:00pm BST

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(All figures in U.S. dollars)

* Ottawa wants Chinese investment in energy patch

* Gov't keen to restore reputation after Potash affair

* Critics fear deal would give China too much energy control

By David Ljunggren

OTTAWA, July 23 (Reuters) - A friendly, $15.1 billion Chinese bid for a big Canadian energy company is in line with government pleas for foreign money to develop the costly tar sands of northern Alberta, a possible pointer to the eventual approval of the deal.

Ottawa said only that it would review state oil company CNOOC's bid for Nexen Inc, based on its laws on foreign investment. But lawyers, analysts and insiders said there were good reasons for the deal to go ahead, and fewer reasons to block it.

"It so far appears to be a mutual two-way street. Canada has made it clear that they are looking for Chinese investment ... and China is now in a way reciprocating that interest by investing in a Canadian company," said Oliver Borgers of law firm McCarthy Tétrault LLP in Toronto and a specialist in antitrust law and foreign investment reviews.

"It appears to want to do a lot for that Canadian company in terms of increasing its size, its footprint, its presence globally, all of the things that would be music to the ears of the Canadian government."

Approval of the deal would go a long way to restore a Canadian foreign investment climate that the government dented in 2010 when it rejected $39 billion attempt by Australian miner BHP Billiton Ltd to buy fertilizer maker Potash Corp . The Conservative government said the Potash takeover would not bring a net benefit to Canada and it vetoed the deal.

But Potash Corp was a huge player - and a big employer - in the politically significant province of Saskatchewan, while Nexen's assets are far more widely distributed.

Nexen is active in Columbia, Yemen, the North Sea and the United States as well as in Canada, and the majority of its production and cash flow come from outside Canada.

Outlining its offer early on Monday, CNOOC said it would keep Nexen's Canadian operations and seek a listing for its shares on the Toronto stock exchange.

"This is a friendly deal ... there is a great deal of forethought given to the kind of presence in Canada that the government is seeking," a source close to the deal told Reuters.

"The (Canadian) government tends to look for generation of economic activity in these deals. ... If that's the gauge -- generation of activity and development -- then this I think is a pretty compelling proposition."

Canadian Prime Minister Stephen Harper went to Beijing in February this year, partly in a bid to sell Canadian oil to China, and he stressed the need to diversify markets and reduce reliance on the United States. Without foreign money, development of the oil sands would lag, the government says.

Even so, Chinese investment in Canadian energy firms is sensitive politically, and Ottawa will want to be sure that the bid is of net benefit to Canada.

A big challenge for Harper will come from critics who say Canada has no business allowing a Chinese state-owned enterprise to snap up a Canadian resource, and a section of the Conservative Party itself remains suspicious of China.

The left-leaning Council of Canadians activist group said the proposed takeover would give China a direct say over the oil sands and proposed pipelines carrying crude to West Coast ports and Asia-bound tankers.

"The Canadian government should say no to this deal," council chairwoman Maude Barlow said in an e-mailed statement.

The source close to the deal dismissed the suggestion that a Chinese state-owned enterprise might bid for a Canadian energy company for anything other than strictly business reasons.

CNOOC "is manifestly a commercial entity, this company is publicly listed, it trades on two of the biggest stock markets on the world. This company has provided above-average returns to shareholders and seeks to sell its output on the world market at the highest possible price," the source said.

Gordon Houlden, a former Canadian diplomat with extensive Chinese experience and head of the University of Alberta's China Institute, said it would be inconsistent of Canada to block the deal so soon after Harper's visit to China.

"Should there not be a massive negative (domestic) reaction ... I think this goes through," he told Reuters.

But Houlden said Ottawa would have to think carefully about the precedent it might set by allowing CNOOC to buy Nexen.

"I do not believe the government would contemplate, let's say, 10 purchases of this order, which would be well within China's means," he said.

"If you (spent) $30 to $50 billion you could take out almost all of the largest Canadian energy companies and I don't think that it would be the government's plan to have a wholesale transfer of ownership from Canada to China of those assets."

The deal is subject to two separate Canadian reviews, from the Competition Bureau, and from Industry Minister Christian Paradis, who must decide whether to permit the deal or block it, either on national security grounds or because it is not of net benefit to Canada.

(Additional reporting by Euan Rocha; Editing by Janet Guttsman and Frank McGurty)

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