The Canadian Federal government approved the$15b takeover of Nexen by CNOOC and the $5.9b takeover of Progress Energy by Petronas on Friday.
The Progress-Petronas transaction was initially rejected in October just prior to the expiry of the federal government's statutory review period. A new application for approval was submitted in November, and with the additional undertakings in the new application, the Investment Canada approval has now been granted. Prior to this reversal, the rejection was only the third transaction ever rejected this Act.
There are still hurdles to closing the CNOOC- Nexen transaction. While the European Union and the United Kingdom have cleared the transaction, the United States' review before the Committee on Foreign Investment in the United States is still ongoing. The parties have had to re-submit their bid for approval, and reports indicate that the proximity of Nexen's offshore platforms in the Gulf of Mexico may be seen as a national security issue.
The most interesting facet of the approval, however, was the simultaneous announcement by Prime Minister Harper of new rules for foreign state owned enterprises investing in Canada.
While the "net benefit to Canada" test will still apply, the government will look at such factors as the governance and commercial orientation of the acquiror, the degree of state control, the extent to which the acquiror conforms to Canadian standards of corporate governance (such as transparency and disclosure), adherence to free market principles, and the likelihood that the new enterprise will operate on a commercial basis.
What does this mean for the energy sector?
The Prime Minister has stated that, from now on, he expects acquisitions by state owned enterprises in oil sands in particular to be approved only on an "exceptional basis". He also stated that "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."
Natural Resources Minister Joe Oliver speculated that if Nexen and CNOOC had sought approval under the new rules, the transaction would have been rejected.
A more likely outcome is that foreign state owned enterprises will seek to enter joint ventures with Canadian entities. Minister Oliver has suggested that “Non-controlling minority interest in Canadian businesses proposed foreign SOEs, including joint ventures, will continue to be welcome in the development of the oil sands and Canada’s economy." This view was echoed by Talisman CEO Hal Kvisle, who suggested that new rules could actually benefit the energy sector, shifting the focus of foreign investment from takeovers to joint ventures.