CNOOC ’s $15.1 billion bid to acquire Canadian upstream oil and gas company Nexen has cast a spotlight onto the growing trade and investment links between China and Canada. The proposed blockbuster CNOOC -Nexen deal aside, the two nations have quietly been ramping up cooperation in recent years. Quality energy assets have driven a steady flow of sizeable Chinese investments, while a majority Canadian Conservative government – led by Prime Minister Stephen Harper - has reached out to China more vigorously and purposefully.
In the past five years, there have been no less than six Chinese investments of considerable size (greater than $ 1 billion) into Canada that were successful and approved by the Canadian government. These include Sinopec’s $2 billion merger with Tanganyika Oil in 2008, PetroChina’s $1.9 billion majority stake investment into Athabasca Oil Sands Corp in 2011 (in January 2012, the target exercised its option to sell its remaining 40 percent in the MacKay River oil sands project to PetroChina for $680 million), the $4.7 billion investment in Syncrude Canada by Sinopec in 2010, and last year’s $2.9 billion merger between Sinopec and Daylight Energy. In a $12.35 billion multi Asian- Western partnership, Shell Canada, China’s CNPC , Japan’s Mitsubishi, and South Korea’s KOGAS confirmed on May 16 that they would jointly develop an LNG export facility in British Columbia, Canada.
In fact, industry sources told Reuters that Chinese oil firms have been pondering the takeover of more Toronto listed oil companies with oil sands assets to secure reserves as well as operating experience. Possible targets touted by investment bankers have included Canadian Oil Sands Ltd and Talisman. “I expect the Canada-China relationship to develop at a significant, steady pace in both directions on investment and trade,” says Dr. Neil Campbell, a Toronto-based M&A partner at McMillan. “At the government level, Canada is working hard to compete for the attention of China in terms of capital investment, but I also think that the Canadian business community is now getting sensitised to the importance of looking at global markets, and not just looking to the U.S.”
Government friendliness
The Harper government’s openness to trade and investment is a strong motivator for increasing ties between China and Canada. “We’ve been leading missions with senior political and business figures to show an interest in developing relationships, in working with Chinese companies and the Chinese government,” says Campbell. Herbert Smith Hong Kong partner, Hilary Lau, also asserts that “government investment policies in Canada are a big selling point,” and calls Canada “one of friendliest Western nations” for foreign investors. “Canada has adopted a view that’s more heavily weighted towardsglobalisation,” says Christopher Nixon, aCalgary partner of Stikeman Elliott. “This particular government has gone further than past governments, at least in my view, by making trips to China to assure it that Canada is open for investment. It remains a significant focus of this government. Certainly, his government has gone out of its way to assure Chinese interests that there is a strong
bond sought between the two countries.”
Even when the Harper-led Conservatives were a minority in 2006, the party was generally viewed to be market oriented, and open to freer trade and investment. Campbell points out that the Liberal government that preceded the Conservatives was “for a long time, actually moving in those general directions”, and that the real turning point for Canada was when it signed the Canada-U.S. Free Trade Agreement in early 1988. “There was a psychological shift,” says Campbell. “Canada said, ‘we’re going to get out of the protected local branch plan protected economy, and become a trading economy that’s open’.” Since then, Canada has been steadily creeping onto the world stage to enhance its presence, and develop economic ties.
Attractive assets
A core driver for more Chinese investment into Canada is the latter’s rich and vast energy, and natural resources supply. From oil and gas to minerals and more, China is definitely paying attention. “There are obviously very large resource opportunities in Canada,” says Nixon. “These opportunities are attractive for long-term development and exploitation, and they have significant capital requirements which suit Chinese investments.” Ben Smith, a Hong Kong-based partner at Fulbright & Jaworski comments: “Sourcing capital in North America can be challenging. Meanwhile, China and the rest of Asia continue to be resource hungry, and they are eager to find opportunities to invest. The fit is excellent.”
Lawyers are quick to note that it is not simply that Canada boasts massive untapped energy reserves, but that its stable political environment, skilled labour force, technology and quality, reasonably-priced assets are hard to resist. “Canadian companies are generally very well managed, and have good staffing and technology,” says Lau. “Staffing and management are very important, which make these
targets pretty attractive to the Chinese.”
Lau says, traditionally, the Chinese have been investing a lot in developing, emerging markets, but “now they realise it’s not so easy and they need to diversify”. He emphasises that Canada is very amenable to integration, and that the Chinese companies are looking to adopt a more western work culture within its ranks to boost its internationality. “Chinese companies want everyone in their organisation to think like an international company, not simply speaking English well. If it can merge with a western company, foreign management would be introduced, and the culture would influence the Chinese organisation in terms of moving it towards a more international or western feel,” he says. “The culture point is quite important, because the Chinese want to take their companies to the next step.”
Technology strategy
The acquisition of advanced technology is another key attraction for the Chinese. If CNOOC is successful in purchasing Nexen, the deal will make the Chinese state energy giant the operator of a major oil sands project for the first time, giving Beijing the expertise to be able to tap massive unconventional oil reserves at home with new oil sands technology.
China estimates the oilsoaked sands it sits on could hold as much as 14.5 billion barrels, which would be double the country’s proven oil reserves. It also estimates that it has huge reserves of heavy oil and shale oil – oil trapped in shale formations. But the world’s second-largest oil consumer has pumped little from domestic sands and shale so far. China will eventually need the oil at home to fuel its expanding economy and keep expensive imports in check, and the purchase of Nexen would give it new technology and operational experience to help extract its domestic oil.”The Chinese companies must learn both ends, technology and its operational application,” said Al Troner, president of Houston-based Asia Pacific Energy Consulting to Reuters. “It is definitely not something that Joe Schmoe comes into, and can do efficiently on their own.”
Technology is costly. Nexen has the exclusive right to use an upgrading technology called OrCrude with Canadian oil sands company OPTI - bought by CNOOC for $2.1 billion last year with the help of Lau and his Herbert Smith team - within certain parts of one of its projects. Nexen also has the right to use it elsewhere in Canada and most of the rest of the world, subject to certain rights for OPTI to participate. “The real oil sands technology is about how you cut production costs and improve production efficiency -this is the core part of the technology that China needs as oil sands production is energy intensive and costly,” said an official with a major state-run Chinese oil company.
Canada : Entering the world stage
Canada has historically been heavily intertwined with its Southern neighbour for trade and investment. The U.S. remains Canada’s largest economic partner in 2010, according to official Canadian government data, 75 percent of Canada’s exports went to the U.S., and bilateral trade reached $645.7 billion, representing about $1.8 billion worth of goods and services crossing the border each day.
The Canadian government’s eyes, however, have been opened in recent years to its need to diversify its portfolio of trade partners, and detach from its reliance on the U.S. “One of the big drivers (for developing relationships with China) is to try and diversify, and grow our Asia trade and investment linkages, to wean ourselves down from the shockingly high proportion of our trade and investment flows that are with the U.S.,” says Campbell. In 2011, China overtook Great Britain to become Canada’s second-largest trading partner. Canadian exports to China rose by 27 percent to $17 billion last year from 2010, and China’s exports to Canada inched up 8 percent to $48.6 billion. Trade figures now show that Canada’s reliance on the U.S. has declined, with its U.S. trade depressing to 68 percent.
On Aug. 15, Canada’s minister of international trade and minister for the Asia-Pacific gateway, Ed Fast, and China’s minister of commerce Chen Deming, announced the completion and release of a joint Canada-China Economic Complementarities Study. In it, the expansion and strong momentum of Canada-China trade and economic relations are highlighted. As quoted from the Foreign Affairs and International Trade Canada site: “China is identified as a priority market under the government of Canada’s Global Commerce Strategy, and advancing our bilateral trade and investment interests with China is key to the future prosperity of Canadians. The value and breadth of Canada’s trade and economic relationship with China already exceeds those with most other priority markets, including the other fast-growing BRIC economies combined (Brazil, Russia and India)”.
Open sectors and threshold raise
As lawyers have pointed out, Canada is quite open to foreign investment. “Canada is pretty open to most sectors - there are just a few areas where we have some residual angst,” says Campbell. In particular, the telecoms and cultural industries remain protected and restricted, and parts of the transport sector
(mainly airlines) and financial services industry are limited. But the rest welcome international participation. Over the years, Canada has been chipping away at investment limitations across the board. According to Campbell, historically, under the Investment Canada Act (ICA ), the oil and gas sector had much lower thresholds and potential investors were much more carefully scrutinised. But these were taken out a long time ago. Additionally, amendments were made to the ICA a few years ago that removed sensitivities to other sectors, including transportation and uranium. Even now, the Canadian government is gradually moving towards liberalising the non-content portion of the telecoms sector. “We will eventually get ourselves in a position where we have reduced or eliminated restrictions on the telecoms sector,” says Campbell. The welcoming attitude of the Canadian government and the constant evolution to open up of areas of investment is a solid demonstration that Canada is ready, and willing to do business with the world.
Another significant sign that Canada is pro-investment is that the government is in the process of raising its review threshold to a substantially higher value. The current threshold for direct acquisitions of Canadian targets is if the business has assets greater than $330 million. Then, the “net benefit to
Canada” test would be triggered.
Earlier this year, the Canadian government recently proposed two major changes for WTO (World Trade Organization) investors: First, the threshold would be based on a new measure – enterprise value – rather than the book value of Canadian business’ assets; and second, the progressive raising of the threshold to $1 billion over four years once the new threshold comes into force. For the first two years, the threshold will be $600 million, then rise to $800 million the following two years, and then finally jump
to $1 billion. No date has been announced for the issuance of these revised regulations, but market watchers are confident that they will come into play soon. “This government is pro-investment, and it would not be doing major raises to investment thresholds if it had a general wariness about investment from China,” comments Campbell.
China -Canada FIPA
One hallmark effort made between China and Canada recently was to solidify a trade pact. Earlier this year, on Feb. 8, China and Canada signed a series of agreements to boost modest levels of bilateral trade. During Prime Minister Harper’s visit to Beijing, he and Premier Wen Jiabao concluded negotiations of the Canada- China Foreign Investment Promotion and Protection Agreement (FIPA ), which had begun between the two countries 18 years ago.
Harper had arrived the previous day with a large trade delegation in a bid to ramp up exports and reduce Canada’s reliance on the huge U.S. market. In addition to the FIPA deal, a Declaration of Intent was signed by Ed Fast and Chen Deming. “The agreements being signed today, in such a wide range of areas, are further testimony that we are taking relations to the next level, and further strengthening our
strategic partnership,” Harper had said in a statement.
Both nations will need to conduct a legal review of the deal, and then sign and ratify it before it can take effect. This may take some time. “I assume that there are still details and text to be finalised before it can be ratified,” says Campbell. “Sometimes it’s hard to have a perfect window on the timing.” Still, the signing of the FIPA highlights Canada and China’s efforts to expand bilateral trade and investment
between the two countries.
The text of the agreement is not publicly available yet, but lawyers speculate that the FIPA will contain a basic set of protections for foreign investment that require host governments to treat foreign investments
with fair standards of treatment, pay compensation for direct or indirect expropriation at a fair value, apply laws impartially and transparently, refrain from discrimination and protectionist conduct, and allow for repatriation of profits and transfer of capital. “The presence or absence of one of these treaties does make material difference to the risk level that an investor has when they’re thinking of making a large investment into a host country,” says Campbell.
The two nations also signed an extension of a memorandum of understanding on energy issues covering oil, gas and nuclear energy, and trade and investment as well. “This agreement will increase opportunities to attract capital investment, and improve access to markets for Canada’s energy resources, technology, and related services,” a Canadian statement said.
Trans -Pacific strategic economic partnership On June 19, Canada announced that it joined 10 other nations in Trans-Pacific Partnership (TPP) talks aimed at creating an Asia-Pacific free trade agreement. The desired free-trade zone would be among a combined population of 658 million people, and a gross domestic product of more than C$20 trillion ($19.65 trillion). In 2010, Canada had expressed interest in officially joining the TPP talks, but was reportedly blocked by member nations New Zealand and the U.S.
over a disagreement related to Canadian dairy policy and intellectual property rights protection.
Canada’s push to be included in these talks now is part of its “get out there” strategy, notes Campbell.
“This is a further example of our determination to diversify our exports, and to create jobs, growth and long-term prosperity for Canadian families,” Harper told reporters in the Mexican beach resort of Los Cabos on the sidelines of a G20 summit.
Canada’s accession to the TPP will take a period of time as each member country must separately approve its bid to join the talks. An agreement among the countries currently in the group is not expected for at least another year. “Negotiations will likely extend well into 2013 before a deal is struck. It may even drift longer than that. But it is certainly do-able in the second half of 2013,” said Jeffrey Schott, a trade scholar at the Peterson Institute for International Economics, to Reuters.
Open for business
Though there have been some media reports of “vague” or “unclear” Canadian investment rules, most lawyers dismiss the notion. The government has fine tuned the ICA, issued guidelines for state-owned enterprise investments, and concluded the FIPA with China, as part of proactive efforts to create more transparency and clarity for potential international investors. In the past 30 to 40 years, Canada has only turned down two or three deals out of thousands (including the infamous 2010 BHP Billiton-Potash Corp bid). “So none of this justifies any conclusion that Canada is closed or hostile to investment, nor is there any basis for concern that there is some insurmountable uncertainty in our regulatory processes,” says Campbell.
Canada has made great strides to signal to not only China – but the rest of the world – that it is open for business. “There’s no doubt that at both a political and policy level, Canada remains heavily open to foreign investment,” concludes Campbell. It has liberalised numerous sectors, raised investment
thresholds, modernised its investment rules, pushed its participation in global party talks, and is working on various trade agreements, including ones with China, India, Japan and Europe. The outlook is bright for Canada, in particular with regards to energy investments from the Far East. “We are likely to see further investments from China into the upstream and midstream sectors in Canada and the U.S.” says Smith. “Canadian companies are generally very well managed, and have good staffing and technology. Staffing and management are very important , which make these targets pretty attracti ve to the Chinese.” Hila ry Lau, Herbert Smith.
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