ANALYSIS-UPDATE 2-Nexen deal should get approved by Ottawa

Mon Jul 23, 2012 11:29pm BST

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* 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 (Adds Alberta government reaction)

By David Ljunggren

OTTAWA, July 23 (Reuters) - A friendly $15.1 billion Chinese bid for a big Canadian energy company gels with government pleas for foreign money to develop the costly oil sands of northern Alberta -- a possible sign that the deal could win Ottawa's approval.

The Canadian government 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 say there are good reasons for the deal to go ahead, and few reasons to block it.

"It so far appears to be a mutual two-way street. Canada has made it clear that it is 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.

"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," said Borgers, who specializes in antitrust law and foreign investment reviews.

Approval of the deal would help restore a Canadian foreign investment climate that the government dented in 2010 when it rejected a $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 around the world.

Unlike the Potash offer, in which Saskatchewan's premier voiced strong opposition, contributing to its demise, Nexen's home base of Alberta appeared enthused by CNOOC's play for the company, saying its oil sands assets require major investments.

"Today's potential transaction is further evidence of the vital importance of Alberta's oil sands to meet global energy demand," Alberta Energy Minister Ken Hughes said in a statement. "Foreign investment benefits Albertans, and Canadians, putting Canadian firms in a better position to compete globally."

One Toronto-based legal expert on foreign investment laws said CNOOC is making all the right noises by saying it is going to keep jobs in Canada, make Calgary one of its international headquarters and list on the Toronto Stock Exchange.

"This makes the political climate a little easier," said the expert, who asked not to be named. "On the BHP deal, I'm not sure there was enough forethought given to the political landscape."

FRIENDLY DEAL

Nexen is active in Colombia, 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.

"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.

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.

"Canadians have always been worried about American influence and American hegemony," said Peter Morici, professor at the Robert H. Smith School of Business - University of Maryland and a hawk on China's trade policies.

"I think they'll worry a lot more about China being dominant than they ever did the Americans."

SETTING A PRECEDENT

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 Harper's own Conservative Party itself remains suspicious of China.

Canada's opposition New Democratic Party also had concerns.

"Foreign state-owned companies are buying up Canadian natural resources to pursue their own interests, while the Conservative government just sits on their hands. This deal must be subject to a thorough, transparent and public review," said New Democrat industry spokeswoman Helene LeBlanc.

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 reaction ... I think this goes through," said Houlden.

But he said Ottawa would have to think carefully about the precedent allowing the deal might set.

"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." (Additional reporting by Euan Rocha and Jeffrey Jones; Editing by Janet Guttsman, Frank McGurty and Phil Berlowitz)

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