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Sat, 15 Dec 2012 18:15:00 GMT | By Deirdre McMurdy, MSN Money

The new rules of foreign investment

A cocktail party guide to understanding what happened with the Nexen and Progress deals.

Deirdre McMurdy

On Dec. 7 the federal government announced it was approving the sale of $21.1 billion worth of Canadian energy assets to two companies owned by foreign governments. At the same time, Prime Minister Stephen Harper introduced new rules for future foreign investment, specifically by government-owned enterprises.

There’s been a steady stream of debate and opinion about the new rules and about the deals themselves. Here’s a basic breakdown of what you need to know to survive the inevitable chat about these issues on the Christmas cocktail party circuit.

A word of advice: be sure to have at least one vodka-based cocktail — but not a drop more — before entering the fray on this contentious topic.

What’s the big deal?

The Government of Canada has approved the sale of two Canadian companies to two state-owned enterprises (SOEs). Nexen will be sold for $15.1 billion to China’s national oil company China National Offshore Oil Corporation (CNOOC). Progress will be sold for $6 billion to Petronas, which is owned by the government of Malaysia.

In political terms, the ultimate proof that this is a big deal for Canada is that the policy and the messages were delivered directly by the prime minister and not through a cabinet minister.

Why are these big deals such a big deal?

  • The domestic manufacturing sector has increasingly declined — a victim of lower-cost foreign competition and a stronger currency – and energy has become the single-most important category of exports. Sales of oil, natural gas and electricity now bring in over $94 billion a year and account for almost a quarter of all we sell to other countries. That means that oversight of the sector is more critical than ever.
  • The oil sands are the third-largest reserve of crude oil in the world. The value of such a large pool of crude oil is greatly enhanced by the fact that Canada is politically and economically stable and has a trained, literate workforce.
  • When a foreign government rather than a private sector entity owns assets, there is legitimate concern about parallel political agendas affecting investment in and deployment of the resources. That’s why the new Canadian rules reflect the reality that SOEs don’t tend to act the way public shareholder-owned companies do.
  • The above considerations are amplified by the fact that there are relatively few players in the oil sands (just 15) and the concentration of ownership — along with the strategic economic importance of long-term development for Canada — makes it crucial to keep operations transparent and accountable.

Fun fact: the oil sands represent 60 per cent of the world’s oil supply that is NOT in state-controlled hands.

What are the most controversial points?

  • Canadians have always been uneasy about foreign investment in the resource sector, even though it’s necessary to attract foreign money to develop those resources. These deals reignite that profound mistrust.
  • Although the federal government has changed its tune and is now officially supportive of building more trade ties with China, residual ambivalence remains. In particular, Canadians are uncomfortable with China’s approach to human rights, copyright, and a perceived lack of political transparency.
  • Finally, given that much of our oil production is currently landlocked and requires the construction of controversial new pipeline capacity to bring it to market, there’s a legitimate question about selling a valuable asset at a discount because it has no near-term market access.

Fun fact: According to recent polls, more than two-thirds of Canadians were opposed to the CNOOC and Petronas takeovers. The prime minister also acknowledged that the two approvals had “broad” (i.e. not unanimous) support from his caucus.

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