Sat, Oct 20 04:35 AM EDT
By Euan Rocha and Stuart Grudgings
TORONTO/KUALA LUMPUR (Reuters) - Canada has blocked Malaysian state oil firm Petronas' C$5.17 billion ($5.22 billion) bid for gas producer Progress Energy Resources Corp, a surprise move that could signal problems for a much bigger offer by China's CNOOC Ltd for oil producer Nexen Inc.
The announcement late on Friday in Canada is a blow to the expansion plans of Petronas as its domestic oil supplies shrink and it seeks to boost its resources beyond Malaysia and volatile areas such as Sudan.
Its bid for Progress had not been expected to run into hurdles in a review process that asks the government to examine whether a deal is of "net benefit" to Canada. A rejection of both the CNOOC and Petronas bid could significantly damage the trade ties that Canada has been trying to build, especially with the Chinese.
Petronas, which said it was not ready to make any comment, has up to 30 days to make additional representations that could make its offer more palatable but it was not immediately clear what else it could put on the table.
"I can confirm that I have sent a notice letter to Petronas indicating that I am not satisfied that the proposed investment is likely to be of net benefit to Canada," Christian Paradis, Canada's minister of industry, said in a late-night statement.
"Due to the strict confidentiality provisions of the (Investment Canada) Act, I cannot comment further on this investment at this time," he said.
Paradis, whose statement on the Petronas-Progress deal came minutes before the official deadline on the review, said if required, the 30-day period could be extended with the consent of the government and Petronas.
"Subsequently, I will either confirm this initial decision or approve the acquisition," said Paradis, adding that Canada would maintain an open investment climate.
The deal attracted scrutiny after Chinese state oil firm CNOOC made a C$15.1 billion bid for Canada's Nexen Inc. Some members of Canada's governing Conservative Party are wary of the CNOOC offer, in part because of what they say are unfair Chinese business practices.
Earlier this month, Prime Minister Stephen Harper said China's "very different" political and economic systems were a concern. The Canadian government has extended its review of CNOOC's bid for Nexen by 30 days, to November 11.
A CNOOC spokeswoman in Beijing said she had no comment on the ruling against Petronas or whether it could mean the Chinese company's bid for Nexen was in trouble.
WARNING
Last month, China's ambassador to Canada warned against letting domestic politics drive the Canadian government's decision on whether to approve CNOOC's bid for Nexen.
The United States has long been the largest market for Canadian energy exports, but with America's growing oil output from unconventional sources and its rejection this year of the initial application on the controversial Keystone XL pipeline project, Canada has been forced to try to build bridges with Asian markets that would welcome its energy supplies.
Gordon Kwan, head of energy research at Mirae Asset Securities in Hong Kong, said he believed CNOOC would get the go ahead because it had made a lot of promises to reassure the Canadian authorities.
CNOOC, which has won approval from Nexen shareholders for the acquisition, has promised to retain all Nexen employees and make Calgary the headquarters for its Americas operations. It will also pursue a secondary listing of its shares in Toronto.
But Petronas had also attempted to highlight some of the benefits the deal offers to Canada. It has said it plans to combine its Canadian business with that of Progress and retain all of the target company's staff.
"Maybe Canada is using this to attach more conditions to the Nexen deal," Kwan said.
The rejection could spark a sell-off in shares of both Nexen and Progress Energy on Monday, as investors temper their expectations on the deals being approved.
Progress' share price had doubled since talk of the possible Petronas bid emerged in April, closing at C$21.65 on Friday. Shares in Nexen have also surged since CNOOC announced its bid in July, rising about 48 percent to C$25.15.
Canada last blocked a foreign takeover in 2010, when it stunned markets by rejecting BHP Billiton's $39 billion bid for the world's largest fertilizer maker, Potash Corp.
At the time the government gave BHP a 30-day period to come back with additional undertakings, but BHP withdrew its offer, sensing the bid was unlikely to win approval in the face of strong political opposition from Potash Corp's home province of Saskatchewan.
MEGA-DEALS
Canada is grappling with concerns that approval of the deals could spark a flurry of mega-takeovers of Canadian energy companies. Canada is home to the world's third-largest proven oil reserves, most of them in the western province of Alberta.
The government is trying to balance concerns over the deals with a huge need for foreign investment in the energy sector. Ottawa says C$630 billion in investment is needed over the next decade alone, with much of it to come from overseas.
Petronas, Malaysia's only Fortune 500 company, had already made a big push into Canada's shale gas sector last year when it bought a $1.1 billion stake in a field from Progress.
Petronas first bid for Progress in June to gain control of its holdings in the massive Montney shale-gas region of northeastern British Columbia, reserves that could feed a planned liquefied natural gas facility on the province's Pacific coast. The company raised its initial offer of C$20.45 per share to C$22 in July after a rival bid from an unnamed suitor.
As its domestic supplies start to dwindle, Petronas has been expanding abroad, investing in Sudanese oil, South African petrol stations and European liquefied natural gas.
It had seen the Progress deal as a crucial step to increase its presence in a more stable country after clashes on the border between South Sudan and Sudan this year virtually shut down its pipelines there.
The rejection throws into doubt Petronas' plans to partner with Progress to build a liquefied natural gas plant in Prince Rupert, British Columbia. The plant is being designed to process up to 1.2 billion cubic feet of gas a day, with a proposed startup of 2018.
Progress produced 44,641 barrels of oil equivalent per day in the second quarter. However its most valuable asset is 800,000 acres of exploration lands in the Montney shale-gas region of northeastern British Columbia.
Friday's announcement was the second time in two days that Canadian authorities had intervened to prevent one company taking over another.
The broadcast regulator on Thursday blocked BCE Inc's C$3 billion ($3.05 billion) bid for Astral Media, declaring the deal would give too much power to BCE, already Canada's biggest telecoms company and owner of numerous TV and radio assets.
($1 = 0.9908 Canadian dollars)
(Additional reporting by Charlie Zhu in Hong Kong; Editing by Raju Gopalakrishnan)
================
Insight: How the Petronas deal fell victim to Canada's China fears
Fri, Oct 26 01:05 AM EDT
1 of 2
By David Ljunggren and Scott Haggett
OTTAWA/CALGARY (Reuters) - Malaysian state-owned oil company Petronas was so confident last Friday that its purchase of Progress Energy Resources Corp would be approved by Canada that company officials had drafted a press release to announce the news.
At midnight Kuala Lumpur time, they were flabbergasted to learn that Ottawa wanted more time to make a decision.
Canada's 11th-hour veto of the $5.2 billion deal was the result of miscalculations and miscommunications, Reuters has learned through interviews with a dozen people briefed on the October 19 events.
The ruling stunned investors, driving down Canadian energy stocks and pressuring the Canadian dollar. It also cast doubt on Prime Minister Stephen Harper's repeated assertions that the country has an open door to foreign investment.
The result was an embarrassment for the supposedly pro-business Conservative government, which needs an estimated $660 billion to develop Canada's energy sector over the next decade.
Ottawa, sources said, wanted to approve the Petronas-Progress deal but was afraid that would tie the government's hands when reviewing the much more controversial $15.1 billion bid by China's CNOOC Ltd for Nexen Inc.
Officials were wary of setting a policy on investment by foreign state-owned enterprises that would make things difficult if Canada later decided to take a tougher line on CNOOC-Nexen.
Ottawa sought more time and thought a delay would be a small matter since Petronas had agreed previously to a two-week extension. But no one explained the situation to the Malaysians, who thought they had a done deal, felt blindsided and feared another agenda might be at play.
Petronas had already raised its bid after Progress received a counterproposal, thought to be from a major Western oil company. So it refused to accept an extension and played hard ball, expecting Canada to cave.
"You had them fully expecting that they would say 'No, we aren't going to take the extension' and that they'd be cleared and that would be the end of it," said a source who was briefed on the discussions between senior politicians and bankers advising the companies.
Instead, discussions became heated and at 11:57 p.m. Ottawa time, three minutes before the midnight deadline, Industry Minister Christian Paradis put out a terse release that he was rejecting the deal because it did not offer "net benefit" to Canada. He gave no details.
Shares of Progress and Nexen sank, as investors feared a similar fate for the CNOOC proposal. The Canadian government tried to play down those expectations, but the opaque nature of Canada's foreign investment guidelines didn't help.
Officials could not say what problems they found with the Progress deal. Indeed, there were no major issues - the transaction had been set for approval until it got caught up in Canada's sensitive ties with China, sources said.
Harper's office declined to comment on whether CNOOC-Nexen derailed the Petronas-Progress approval, or if there had been any miscommunication between the Canadian government and the companies. Paradis declined to comment on either deal.
Progress blamed a "communication breakdown" for the veto, but would not give details. [ID:nL1E8LM5ND] Petronas declined to comment.
COSYING UP TO CHINA
Starting in 2009, and intensifying with a visit to Beijing by Harper in February, Canada has been pushing for closer ties with China, a hungry market for Canadian resources.
But Ottawa somehow expected joint ventures, export markets and money for pipelines, without realizing the friendly approach would translate into bids for entire Canadian companies.
"We expected them to buy our oil, not our oil companies," one leading Conservative said. The issue came to a head in the summer. Just weeks after Petronas launched its bid for Progress in June, CNOOC offered to buy Nexen, Canada's No.6 independent energy firm by market value with assets in the oil sands, the U.S. Gulf of Mexico, the North Sea and off the coast of Nigeria. China had already invested more than C$10 billion in the Albertan oil sands, the world's third largest proven reserve of crude, by buying small companies or taking minority interests. But Nexen upped the ante. "I think there (would) be less of an issue if CNOOC ... had bought an operating interest in the assets. What wasn't expected was to buy the whole goddamn head office," said Felix Chee, head of the China Investment Corp's Canada office.Objections grew louder from Conservative legislators, many of whom are suspicious of China and especially dislike the idea of a state-owned enterprise buying Canadian energy assets. As the pressure mounted, Harper said Ottawa would clarify its guidelines on foreign investment rules, which center on the nebulous concept of a deal being of "net benefit" to Canada. Canada initially saw no reason to reject the Malaysian oil giant: Petronas was already partnering with Progress to develop a shale-gas field in British Columbia and an LNG terminal on the Pacific coast. The projects were in sync with Canada's wish to diversify energy exports away from the United States, and officials with Industry Canada sent the Petronas-Progress file to Paradis with a recommendation to approve. The decision deadline was Oct 5, but the government asked for a two-week extension to Oct 19. Investment sources said Paradis had indicated he had too much paperwork to deal with, a signal to the companies that there were no new problems. But it wasn't just paperwork. Canada realized it had to work out guidelines on foreign investments before answering Petronas, so China could not complain about double standards. "I think there is some element of Petronas not having given all the commitments that the government was looking for, but perhaps the larger question is just bad timing," said Robert Johnston, director of the Eurasia Group's global energy and natural resources practice, who is watching the situation. THE WAITING GAME By Sunday the rowback was starting, and ministers hinted that the rejection should not be seen as final or as an indication CNOOC would also be blocked. Harper even contradicted Paradis at one stage, saying the minister has not had enough information to determine if the Petronas deal passed Canada's net benefit test. Finance Minister Jim Flaherty became the government's conciliatory mouthpiece. "We welcome foreign direct investment, but the applications, the proposals have to be correct," Flaherty told CTV. Officials from Petronas and Progress this week met with industry ministry officials to discuss ways the bid could be revived. They have 30 days to address concerns. "What I'm hoping is that (a) bridge can be rebuilt here this week and we can actually have some good effective discussions and move this along," Progress Chief Executive Michael Culbert told Reuters. "We've got willing parties on either side and that's always positive for communications." It was not clear what extra commitments Canada could want, given that Petronas already made firm promises on corporate governance, jobs and investment - all points highlighted in Canada's foreign investment guidelines. Harper, hinting that news on the Petronas bid might come at the same time as a decision on CNOOC and the new investment guidelines, promises more details soon. "We will, as I say, give greater clarity on our policy framework going forward when we take a couple of decisions that are before us at the present time," he said on Monday. ($1 = 0.9926 Canadian dollars) (Additional reporting by Jeffrey Jones, Randall Palmer and Euan Rocha; Editing by Janet Guttsman, Tiffany Wu and David Gregorio) ================= CORRECTED-UPDATE 1-Malaysia's Petronas says "no clue" on Canadian investment policy Thu, Nov 29 22:52 PM EST (Removes reference to Petronas being unaware of new investment framework when it resubmitted its bid) KUALA LUMPUR, Nov 29 (Reuters) - Malaysian state oil company Petroliam Nasional Bhd (Petronas) said Canadian policy on foreign investment has left potential investors confused, saying the energy industry has "no clue" about its new framework for foreign investment. The Malaysian firm's initial bid for Canada's Progress Energy Resources was blocked by the Canadian government last month when Industry Minister Christian Paradis said it was unlikely to bring a "net benefit" to Canada. Petronas resubmitted a $5.2 billion bid for the firm earlier this month, but its CEO Shamsul Azhar Abbas told reporters on Thursday that Canada's requirements remained unclear. "The whole industry has no clue on what the framework is going to be. Whatever it is, we leave it to them now," Shamsul added, after the company released third-quarter results. . He said that Petronas had now given the Canadian authorities what it felt was what they needed to show a "net benefit". Canada has said it will unveil new policy guidelines on foreign investment at about the time it announces verdicts on the Petronas offer for Progress Energy and a much bigger $15.1 billion takeover bid by China's CNOOC Ltd for Nexen Inc , a Canadian oil company. A review period for the CNOOC deal has been extended to Dec. 10. Canadian Prime Minister Stephen Harper said on Wednesday that decisions would be made soon on the two bids, even though U.S. regulatory authorities this week signalled they may delay approving the deals. When Paradis rejected the Petronas offer, the Malaysian group was given time to resubmit its bid with additional undertakings. Petronas and Progress Energy - which plan a multi-billion dollar liquefied natural gas plant on Canada's west coast - have extended a deadline to complete the deal to Dec. 30, the two firms said in a statement last week. (Reporting By Al Zaquan Amer Hamzah; Writing by Siva Sithraputhran; Editing by Ian Geoghegan) =============== Canada approves Nexen and Progress Energy bids Fri, Dec 07 19:45 PM EST By Michael Erman and David Ljunggren NEW YORK/OTTAWA (Reuters) - Canadian authorities approved the acquisition of Nexen Inc by China's CNOOC Ltd on Friday, but said they would block virtually all new attempts by foreign state-owned enterprises to buy controlling assets in the country's vast oil sands. The ruling, closely watched by investors and politicians alike, followed months of heated debate over how much of Canada's energy sector, and especially its oil sands, should be absorbed by companies run by other governments. The Nexen deal is the largest successful foreign takeover ever by a Chinese company. Separately, Ottawa also gave the green light for the purchase of Progress Energy Resources Corp by Petronas of Malaysia. However, with the rulings, Prime Minister Stephen Harper served notice that future investments by state-owned enterprises would face much tighter scrutiny. Harper said the two approvals marked the end of a trend for the pro-business Conservatives. "Foreign state control of oil sands development has reached the point at which further such foreign state control would not be of net benefit to Canada," he told reporters. CNOOC bid $15.1 billion for Nexen, which is involved in oil sands in Canada and offshore production operations around the world. Petronas offered C$5.2 billion ($5.3 billion) for Progress, a mid-size gas producer. Its offer had been rejected once and the Malaysian company was invited to reapply. Both suitors offered hefty premiums. The Canadian dollar firmed against the U.S. currency after Reuters reported the CNOOC deal had been approved. The shares of both takeover targets went on a wild ride after the government announced it would announce its decisions and both finished lower as the market closed before the positive rulings were known. The Harper government also said it would impose stricter conditions in the future on investments by state-owned enterprises in all sectors of Canada's economy and that it would welcome non-controlling minority investments by such enterprises in Canadian companies. In approving the deal, the Canadian government said CNOOC made significant commitments on transparency, employment and capital investments. The takeover was overwhelmingly approved by Nexen shareholders in September, but the Canadian government delayed approvals while it drafted a long-promised update to the rules governing investments by state-owned foreign companies. It also had to deal with the qualms of some of its own members over whether companies from the communist country should be allowed to buy up Canadian energy assets. Harper has wooed investors in China and elsewhere in Asia to deploy capital in the Alberta oil sands, the world's third-largest crude deposit, and in other resources. The requirements are far too large for Canadian companies to fund alone. "I realize there were a lot of politics that went into this thing. But I think the overriding factor is that in order for Canada to be able to develop all those tremendous resources that they have is that they were going to need a lot of foreign capital," said Keith Moore, managing director at MKM Partners LLC in Stamford, Connecticut. "I think they probably played it very well. By pushing back quite a bit they were probably able to get concessions in both these deals, in Nexen and in Progress." The acquisition will give CNOOC control of Nexen's 43 percent stake in the Buzzard field in the North Sea, the most important contributor to the crude blend used to set the Brent crude price that serves as the international oil price benchmark. It also includes oil production from Yemen, offshore West Africa and the Gulf of Mexico. CNOOC also gains full control of Nexen's Long Lake oil sands project in northern Alberta, properties containing as much as six billion barrels of recoverable crude and a 7.2 percent stake in the Syncrude Canada Ltd joint-venture. Industry Minister Christian Paradis turned down in October the C$5.2 billion ($5.3 billion) bid for Progress by Petronas, but gave the Malaysian state-owned energy company a chance to make new representations. The companies, which already have a joint venture in the Montney shale gas region of British Columbia, said this week they are advancing an C$11 billion liquefied natural gas plant on Canada's West Coast. They held out the prospect of bigger project if the takeover is approved because Petronas would have access to all of Progress's gas reserves. Nexen shares ended down C$1.58, or 6.3 percent, at C$23.29 on the Toronto Stock Exchange on Friday. Progress fell 88 Canadian cents, or 4.4 percent. to C$19.37. Nexen's New York-listed shares surged to $26.94 in after-hours trading. ($1=$0.99 Canadian) (Additional reporting by Solarina Ho, Euan Rocha and Alastair Sharp in Toronto; Writing by Jeffrey Jones; Editing by Frank McGurty, Bernard Orr, Tim Dobbyn, Leslie Gevirtz and Andre Grenon) ========= Analysis: Nexen's U.S. Gulf oilfields key to China's deepwater ambitions Thu, Dec 13 03:01 AM EST By Charlie Zhu and Michael Erman HONG KONG/NEW YORK (Reuters) - CNOOC Ltd's purchase of Canadian energy producer Nexen Inc may prove to be bittersweet if U.S. regulators block the Chinese state-run oil company from taking over Nexen's oilfields in the Gulf of Mexico. CNOOC won a major coup last week by securing Ottawa's consent for the $15.1 billion deal, China's largest ever overseas acquisition, but the company is still waiting for approval from the U.S. government. While the Gulf assets are just a fraction of Nexen's reserve base and production, they would give CNOOC a foothold in the world's premier deepwater oil province from which to acquire the technical know-how to drill in the contested South China Sea. "The Nexen prize is the hi-tech ultra-deepwater drilling tech," said a person familiar with CNOOC's business strategy, adding that the Gulf of Mexico assets were "one of the key reasons that they are buying Nexen". Approval from Washington is also important to CNOOC as it wants to be endorsed as an acceptable operator in the United States after American politicians blocked its high-profile bid for Unocal in 2005, according to another source. A rejection would not sink the entire deal -- CNOOC is ready to buy Nexen excluding the U.S. assets, people familiar with the situation told Reuters. But it would be a major blow to CNOOC's deepwater ambitions. An acquisition of the Gulf of Mexico assets would make CNOOC the operator of deepwater producing assets for the first time, giving it the prized opportunity to grasp the expertise it desperately needs to realize its production target. China, the world's largest energy user, is already relying on imports for more than half of its oil needs. The country has long hoped to expand deepwater exploration in the South China Sea as onshore production growth sags. CNOOC, which derives nearly all its domestic output from shallow waters, has vowed to build deepwater capacity of 1 million barrels of oil equivalents per day by 2020, more than doubling the company's total production. Buying Nexen -- most of whose reserves are oil sands and shale gas in Canada and crude oil in the North Sea -- would mark a "material entry into the Gulf of Mexico" and an "increase in access to deepwater expertise", CNOOC said in a July presentation after it announced its bid for Nexen. As the Committee on Foreign Investment in the United States, or CFIUS, examines whether the deal presents any threats to national security, a handful of U.S. politicians have voiced concerns. One issue the committee will examine, CFIUS experts say, is whether Nexen's assets are too close to sensitive U.S. military areas. Senator James Inhofe, soon to be the top Republican on the Senate Armed Services Committee, told Reuters on Tuesday that he hopes CFIUS forces CNOOC to divest the assets. "It's the same as it would be when I object to their presence in our borders in California, or the Panama canal -- they're not our reliable ally," Inhofe said. Under U.S. law, CFIUS operates in complete secrecy and it is not known when it may make a decision or which way it is leaning. CNOOC has declined comment on the review and Nexen had no immediate comment. UNOCAL OVERHANG CNOOC was forced to abandon its $18.5 billion bid for California-based Unocal in 2005 because of bitter opposition on sovereignty grounds from U.S. lawmakers. The rebuke influenced its bid for Nexen, and it carefully prepared for the review processes it would face. Some energy analysts and investment bankers not involved in the transaction say they believe the U.S. government would approve the deal, perhaps with some agreements on who operates the rigs, as CNOOC is just buying a relatively small portfolio in the Gulf. Nexen produced 22,000 barrels of oil equivalent per day in the region in 2011, less than 2 percent of overall Gulf of Mexico production. The Gulf accounts for around 10 percent of Nexen's production and 5 percent of its proved and probable reserves, according to recent company statements. Foreign oil and gas companies are very common in the Gulf both as operators and lease owners -- Royal Dutch Shell and BP Plc are the two largest oil producers there. Brazil's state-controlled Petrobras also has a substantial position in the Gulf. Analysts and bankers also pointed to the approval of recent acquisitions of minority stakes in some U.S. onshore oil and gas assets by CNOOC and China's Sinopec Group, parent of Asia's largest refiner Sinopec Corp. "I am going to toss the coin and say look, given Canada has approved, it is more likely now the U.S. will approve," said Simon Powell, head of Asian oil and gas research at CLSA in Hong Kong. But CFIUS standards can often be murky. For instance, a privately owned Chinese company was blocked in September from building wind turbines close to a Navy military site used to test unmanned drones in Oregon. SOUTH CHINA SEA AMBITION As China's energy demand soars, CNOOC and other state Chinese oil firms like Sinopec Group have been venturing into deepwater projects in partnership with global oil majors such as Total and Shell in west Africa and offshore Brazil in the last few years. But the Chinese firms mostly play a minority, passive role in such projects, with limited access to deepwater exploration and production know-how and hence with lack of exposure to the entire operational process. That leaves an acquisition as the other route to acquiring new technical expertise. "What they could learn in the Gulf of Mexico could be deployed back into the domestic, South China Sea exploration in terms of best practices in the longer term," said Gordon Kwan, head of energy research at Mirae Asset Securities in Hong Kong. CNOOC launched its first ultra-deepwater rig earlier this year and it is drilling south of Hong Kong in an area within Beijing's ambit. Industry watchers expect CNOOC will eventually move the $1 billion rig to explore in deeper and more oil-rich waters further south in the South China Sea, where China, Vietnam, the Philippines, Taiwan, Malaysia and Brunei have overlapping territorial claims. The deepwater area of the South China Sea remains untapped, largely because tensions between rival claimants have made oil companies and private rig-builders reluctant to explore contentious acreage well away from sovereign coastlines. Rich hydrocarbon resources are believed to lie below the center and south of the South China Sea, which is in the disputed zone. Estimates for proven and undiscovered oil reserves in the entire sea range from 28 billion to as high as 213 billion barrels of oil, the U.S. Energy Information Administration said in a March 2008 report. That would be equivalent to more than 60 years of current Chinese demand, under the most optimistic outlook, and surpass every country's proven oil reserves except Saudi Arabia and Venezuela, according to the BP Statistical Review. Chinese state media have called the South China Sea "the second Persian Gulf". CNOOC also hopes to use the acquisition of Nexen to form a foundation for growth in the Gulf of Mexico, analysts say. Currently, it just owns a minority stake in a deepwater joint venture project with Nexen in the Gulf and some relatively small assets divested by Norway's Statoil in 2009. Its deepwater capabilities should also benefit from Nexen's projects in the North Sea. Nexen has 43 percent of the Buzzard oilfield in the North Sea, Britain's largest pumping about 200,000 barrels per day. They are not deepwater projects but CNOOC can learn how to deal with harsh weather -- expertise also key for CNOOC to expand its deepwater footprint, analysts say. "You learn how to conduct drilling in extreme weather. It is not deep water but it is harsh weather," said Mirae's Kwan. (Additional reporting by Roberta Rampton in Washington and Bill Powell in Shanghai; Editing by Alex Richardson and Tiffany Wu) ============== Insight: Security fears dogged Canada debate on China energy bid Sun, Dec 23 16:21 PM EST 1 of 2 By David Ljunggren OTTAWA (Reuters) - In September, two months after China's state-owned CNOOC Ltd made an unexpected $15.1 billion bid for Canadian energy company Nexen Inc, Canada's spy agency told ministers that takeovers by Chinese companies may threaten national security. The rare warning from the Canadian Security Intelligence Service (CSIS), which was disclosed to Reuters by intelligence sources, did not stop the takeover. That was approved by Canadian authorities earlier this month. But the intervention and an influential U.S. lawmaker's warning in October that Canadian companies should be careful about doing business with Chinese telecom equipment companies Huawei Technologies Co and ZTE Corp made the approval process for the deal more difficult than initially expected. "CSIS did not like the Nexen bid and thought it was a bad idea for Chinese firms to be investing in the oil sands. It all played into their greater fears about firms like Huawei," said one person familiar with the agency's concerns. "They do not want to wake up one day and realize a crucial sector of the economy is under the control of foreign interests." And after listening to the spy service, which usually keeps a low profile, Canada drew up surprisingly tough foreign investment rules that were unveiled when approving the Nexen deal, China's biggest-ever successful foreign takeover. In a clampdown on companies it deems influenced by foreign governments, Canada will block similar purchases in the future. CSIS has been silent about what it said to Ottawa on the Nexen transaction, and it declined to comment for this story. It didn't specifically recommend the CNOOC deal be blocked, but rather warned more generally about such deals with Chinese entities, the person said. In reality, the government was unlikely to want to block the CNOOC bid, given a high-profile push by Prime Minister Stephen Harper earlier in the year to boost ties with China, and given that a lot of Nexen's assets are outside Canada, and it has underperformed other energy companies. SPECIFIC WORRIES By pushing back aggressively, CSIS ensured that it got foreign investment policy tightened significantly to deter similar such takeovers by companies under the sway of foreign governments. "I think people at CSIS and elsewhere are going 'Good. That was a very good response by the government'," said Ray Boisvert, a former CSIS assistant director of intelligence, who retired this year after almost three decades at the agency. "It did reflect some of those deep strategic concerns that practitioners have had about this kind of investment." Specific worries include theft of Canadian intellectual property, espionage, computer hacking and foreign companies gaining too much influence over crucial sectors of the economy, said the person familiar with the agency's views. The government could, in theory, nationalize assets if it thought foreign control was problematic. But the pro-business Conservatives would likely find it politically unpalatable to take such a step. "To be blunt, Canadians have not spent years reducing the ownership of sectors of the economy by our own governments, only to see them bought and controlled by foreign governments instead," Harper said as he announced the new investment rules. In October, the U.S. House of Representatives' Intelligence Committee urged U.S. firms to stop doing business with Huawei and another Chinese telecom equipment company ZTE on the grounds that Beijing could use products made by the two companies to spy. The House Intelligence Committee's chairman, Rep. Mike Rogers, a Michigan Republican, urged Canada to take a similar stance, and two days later, the Canadian government indicated it would not let Huawei help build a secure government communications network because of possible security risks. "The Huawei business caused a lot of political complications for the CNOOC bid," another person familiar with the CNOOC deal said of the U.S. committee's report. Both Huawei and ZTE have repeatedly denied the allegations in the report, and China's foreign ministry dismissed as "baseless" the idea that security concerns could impede commercial ties. "We hope that the relevant party can objectively and justly treat Chinese companies' overseas investment and cooperation plans, and stop actions which harm Chinese companies' image and do more to benefit the promotion of bilateral trade and business cooperation," said ministry spokeswoman Hua Chunying. CLANDESTINE SUPPORT In its annual report, released in September, CSIS noted risks that included espionage and illegal technology transfers, and said some foreign state-owned enterprises had "pursued opaque agendas or received clandestine intelligence support for their pursuits" in Canada. The agency did not give details, but added: "When foreign companies with ties to foreign intelligence agencies or hostile governments seek to acquire control over strategic sectors of the Canadian economy, it can represent a threat to Canadian security interests." CSIS, hit by controversy in 2010 after its head suggested China had too much influence over some Canadian provincial politicians, did not mention any country or firm in its report. It is unclear how much, if any, influence the United States had on the Canadian authorities' foreign investment policy. Fen Hampson, head of the global security program at the Centre for International Governance Innovation in Waterloo, Ontario, said he had learned that a
U.S. official visited Ottawa in the last few months to discuss mutual concerns about foreign state-owned enterprises. U.S. Ambassador David Jacobson told Reuters he was not aware of such a meeting, but he noted that officials from the two countries met constantly. "I would be surprised if almost any issue you could think of has not come up in one or more of those conversations," he said. "The United States has not sought to influence Canada's decision with respect to that (CNOOC's bid)... We respect that decision."The Canadian government did not respond to a request for a comment. Chinese companies have bought up smaller Canadian energy firms before, but the July 23 bid for Nexen was their first attempt to buy one of the larger players. Nexen has assets in Canada, the North Sea, Nigeria and the Gulf of Mexico. Technology that Nexen and its partners use for deep sea drilling could interest CNOOC. [ID:nL4N09N3R5]
Asked about the CSIS concerns, a spokeswoman for Industry Minister Christian Paradis replied: "The government has the authority to take any measures it considers necessary to protect national security."Yet two people close to the deal noted that the Canadian government did not exercise its option to do a separate review of the potential security risks of the CNOOC-Nexen bid, again signaling its concerns were tied to overall Chinese investment rather than to this particular deal. Under the new rules, which Paradis is responsible for enforcing, foreign state-owned enterprises can no longer buy controlling stakes in assets in the oil sands, the biggest reserve of crude oil outside Saudi Arabia and Venezuela. Such enterprises can buy minority stakes in the oil sands, or majority stakes in companies outside the oil sands. Companies deemed to have strong government links will be treated with particular caution wherever they propose to invest. "When it comes to our security and intelligence services, they would rather pull up the drawbridge than let it down," said Hampson, co-author of a report on trade ties between Canada and emerging nations that he discussed with Harper in June. (Reporting by David Ljunggren in Ottawa; Additional reporting by Ben Blanchard in Beijing; Editing by Janet Guttsman, Martin Howell and Jan Paschal) =======================
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