Canada risks Beijing chill if Nexen deal nixed

Canada can expect a chilly reception and damaged relations with Beijing if the Harper government dents China's pride by refusing a $15.1-billion bid for a piece of this country's oilpatch, observers say.

And other foreign investors will have occasion to pause if state-owned China National Offshore Oil Corp. is blocked in the friendly takeover of Calgary-based Nexen, they add.

Those investors would question Ottawa's commitment to open markets and the government would take political heat from both supporters and opponents of the decision for once again not having a clear strategy for dealing with foreign takeovers.

Risk to shareholders

Stock values among Canadian resource firms would almost certainly fall, some hard.

"There's no good putting lipstick on a pig," says John Manley, a former Liberal industry minister who now heads the country's most influential business lobby group, the Canadian Council of Chief Executives.

"I don't know how you construct a narrative to explain saying no to this transaction."

On purely technical terms, the friendly deal announced July 23 is a no-brainer for the Nexen shareholders they would receive a 61 per cent premium on shares.

But under the Investment Canada Act, deals involving WTO member countries valued at more than $330 million must be a "net benefit" to Canada. Just what constitutes a "net benefit" exactly is unclear, but Prime Minister Stephen Harper has said clarifications are coming soon.

In an apparent bid to ease Ottawa's concerns, CNOOC has pledged to keep the head office in Calgary, seek a listing on the Toronto Stock Exchange and place some $8 billion of its assets under the control of Nexen's management in Canada. It has also promised to carry on Nexen's social responsibility programs in Canada and around the world.

There is even some suggestion of funding for the province's universities, and likely more concessions to come.

Opposition to deal

Still, the bid has galvanized forces on both sides with alarmist predictions of gloom, if not doom, whichever way the decision goes.

The NDP opposition has already turned thumbs down on the proposal, and even Harper is dealing with caucus members, such as Alberta MP Robert Anders, who have voiced displeasure.

U.S. politicians on both sides of the aisle have cautioned Ottawa against turning over natural resources to a Chinese state-owned company. Critics fear that CNOOC may answer more to Beijing than it does the market.

And the deal involves a Canadian national treasure, oil.

'There's no populous firebrand going around stumping on this issue' Strategist Tom Flanagan

Mix all those volatile elements together and it's no wonder that, following the July 23 announcement, the government froze.

Industry Canada has already asked for one 30-day extension to the process, which concludes before Nov. 11, and few would be surprised if it asked for another.

Sources in Ottawa and Calgary say they are working under the assumption that the federal government will ask the company for more time to decide on how to handle the deal, and that the company will readily agree. That's because there are still details to be worked out, and Prime Minister Stephen Harper will be out of the country for all of next week.

Manley notes that when the deal was first announced, Foreign Affairs Minister John Baird had only just returned from China on a mission to round up investment. And Baird was the last of a long line of ministers, including Harper on two occasions, to have gone to China over the past few years in an effort to get in on the economic action the emerging superpower represents.

"This would be taken very much as a rebuke to Chinese investment in Canada. This would potentially set back China-Canada relations quite a bit," he said.

Former Canadian diplomat to China, Gordon Houlden, agrees, although he adds it would not be fatal.

Mending fences

"I've been through ups and downs in the relationship for 30 years and ultimately few things are fatal," said Houlden, who now heads the China Institute at the University of Alberta. "But this is a big deal (for China) and it will have a chilling effect.

"The Chinese hate to lose face and this is an international story now, it would be noticed in the United States, it will be noticed in Europe and it will be noticed in China."

Ultimately, he said, time heals most wounds and the larger, macro-economic mutual benefits off the relationship would resurface. China exports much more into Canada than it imports, and the two countries have signed an investment protection agreement, due to be ratified by Ottawa on Nov. 1.

The political calculus favours a rejection. Two polls have shown fairly strong opposition to the concept of Chinese takeovers of Canadian resources, so saying no would allow the government to wrap itself with a nationalist cloak.

'We're going to need foreign investment' John Manley

But political author and commentator Tom Flanagan, who once served as Harper's chief of staff, doesn't believe the government would pay a big price for accepting the offer.

"There is this public suspicion of China and particularly SOEs (state owned enterprises) ... so the potential would be there, but there's no populous firebrand going around stumping on this issue," he explained. If the government hadn't delayed its decision, he said, the reaction would have been muted and temporary.

Every cause needs a champion and when the government rejected the hostile bid for Potash Corp. in 2010, Saskatchewan Premier Brad Wall rose to the fore, promising real political pain for Harper if the deal was not squashed.

In the CNOOC-Nexen case, Alberta's premier has been mostly supportive.

Manley says that in rejecting the offer Canada would get its hair mussed among foreign investors from other countries. That's because after a couple of decades of no official rejections, the Harper government would have axed three separate deals MacDonald Dettwiler, Potash and Nexen and possibly four if the Malaysian bid for Progress Energy Resources Corp. ultimately fails.

"You start to compile these (rejections) and you raise doubts in investors' minds about Canada, and I don't think that's in the country's interests," he said.

That has already begun to happen in the margins. Recently, even the progressive U.S. online magazine Slate took note of Canada's sudden turn toward protectionism, asking: "Is everything sacred in Canada?"

Manley said the risk for Canada is that the country needs foreign capital to develop its increasingly in-demand natural resources, not only the Alberta oilsands, but resources in Ontario and other parts of the country.

"We don't have enough domestic capital to do these very expensive, big projects," he said. "If we're going to realize the prosperity that comes from our natural resources we're going to need foreign investment."