Foreign takeover solutions adroit

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(DALE CUMMINGS)

Prime Minister Stephen Harper has adroitly resolved most of the difficult policy issues raised by the Chinese takeover of Nexen Energy Resources, a large, underperforming Calgary-based oil producer. China National Offshore Oil Corp. will be allowed to acquire Nexen and the Malaysian national oil company Petronas will be allowed to buy Progress Energy -- to the relief of all the parties to those transactions. But from now on the rules will be different.

Much of the anxiety in Canada about CNOOC lay in the slippery slope it seemed to announce. If a Chinese state-owned enterprise could buy a major operator in the Alberta oilsands, might we awake tomorrow to find that the Chinese government owned the oilsands and could dictate Canada's energy policy? Mr. Harper clearly does not intend that to happen.

Foreign takeovers of Canadian companies will continue to be judged by the net benefit they offer Canada. Takeovers by state-owned enterprises will be judged according to how much control the state-owned enterprise would have over the Canadian business that is being acquired and on its industry and how much control the foreign government has on its company. Takeovers by state-owned enterprises of companies operating in the Alberta oilsands, however, will be approved on an exceptional basis only. The government will cease reviewing takeovers of companies worth less than $1 billion, but for takeovers by state owned enterprises, the threshold will remain at about $330 million.

Announcement of this policy last Friday has already been warmly welcomed in China. A commentary distributed by the official Xinhua news agency urged all western countries to follow Mr. Harper's lead in abandoning their bias against Chinese investment. Immediate market reaction was on the whole positive: Nexen and Progress were up sharply, offsetting small declines in other Canadian oil and gas producers so that on balance energy shares were up slightly.

There is no reason to doubt the sincerity of the government's new policy. The drinker who says he's just going to have this last couple of drinks and then go on the wagon usually means it at the time. But the doctrine of "exceptional basis" leaves the government the wide latitude it needs to judge each oil-sands takeover by a state-owned enterprise as it comes along. Any state-owned enterprise worth its salt can come up with some kind of exceptional basis for an acquisition it wants to make. The prime minister of the day can sniff the political winds and decide whether it is exceptional enough under the circumstances of the moment. Mr. Harper had formerly intended to announce clear rules governing such cases. On further thought, he has left the government's hands untied.

Despite the rejoicing of the Xinhua news agency, Mr. Harper's policy reflects an unmistakable bias against state-owned enterprises, which are China's favourite instruments of economic policy. A lower threshold for review and a special list of criteria will apply to state-owned acquisitors. Difficult issues remain to be resolved about industrial espionage through state-owned firms and about China's unwillingness to expose its companies to inspection by foreign auditors.

CNOOC's presence in the Alberta oilsands will give that firm a chance to show Canada and the world that it operates according to the principles of the market economies and that it is not simply a tool of China's ruling Communist party. Mr. Harper has taken this significant step toward closer economic ties between China and Canada. Future steps can be taken or not according to the results that flow from CNOOC's participation in oilsands development and production.

This step-by-step approach deserves support. It also calls for constant vigilance so Canadians will have a solid basis of experience for evaluating the next takeover attempts. A few years of experience should probably be allowed to accumulate before China and Canada venture further down this road.

Republished from the Winnipeg Free Press print edition December 13, 2012 A16