Currently the Canadian government is trying to decide whether or not they should allow the Chinese National Offshore Oil Corporation (CNOOC) to purchase 100% of Nexen, a Canadian oil company that operates in the Alberta oil sands. This is going to come down to our old friend “net benefit”. I must always be sure to include the quotation marks because its definition has never been clear. Some time ago I wrote about the how the Canadian government had blocked the sale of Potash Corporation to BHP, an Australian company. I ended that post hoping that the government would eventually explain the exact reasons for blocking the sale but they never did. The consensus in the media seems to be that there was no way we could sell the Potash Corporation because it is unique and it controls a huge amount of the world’s potash supply. Nexen on the other hand only controls about 5% of the Alberta oil sands and so everyone seems to think this deal will be allowed — under certain conditions. Conditions like keeping the Nexen head office in Canada with at least 50% of the board being Canadian, keeping 80-100% of the current workforce levels and maintaining the company’s commitments for capital investments for a certain number of years as well as posting the company’s stocks on the TSX.
This is where you say Hey that does not sound very much like a free market to me! You are correct. In the Potash post I mentioned that at the meeting of the G20 countries the Canadian government said they would refrain from adding any new trade barriers and then went ahead blocked that purchase anyway. Maybe now they will say that by allowing this new deal they are honouring the commitment? There needs to be some consistency.
The current government hates getting involved with running companies. Remember the Canadian Wheat Board? I wrote about it a few posts back. That was an evil State Trading Enterprise (STE) that sucked profits from hardworking Canadian farmers. We had to get rid of it because a government had no place in markets. You may have already guessed where I am going with this. A quick look at any reliable source of information will tell you that CNOOC is a Chinese STE. That is correct, it is owned by the Chinese government. So while our government tells us how terrible it is for an STE like the Canadian Wheat Board to exist here in Canada it is likely to approve the entrance of a Chinese STE into our market.
On the positive side Harper has claimed that they will push the final decision back 30 days (into November). The government is going to take the extra time to create a framework for this type of foreign takeover. This is long overdue; it will finally get rid of the “net benefit” stipulation which is the political equivalent of “if we feel like it”. My hope is that they do it properly and completely. Right now people are saying that 5% is okay to sell, but we need to set specific guidelines. Can one foreign entity own 5 companies in Canada that each account for 5% of oil sand operations? 10 companies? Do we limit companies by their country of origin? Does it matter if they are state owned or not? Will the limits be firm or will they be altered in each trade deal we negotiate? There are a hundred more questions we need to answer.
The CNOOC-Nexen deal is worth about $15 billion and has taken up most of the recent headlines but it is just the appetizer for the feeding frenzy to come. There has been almost no talk about the fact that Oil and Natural Gas Corp and Oil India Ltd, along with refiner and retailer Indian Oil Corp have put in a $5 billion bid on a share of the oil sands owned by ConocoPhillips. All three are STEs operated by the Indian government. The framework that is promised along with the CNOOC-Nexen decision needs to lay down exactly how Canada intends to handle these cases. We have the third largest supply of oil in the world; if Harper wants to diversify away from U.S. exports he better make sure we are ready for it.