While at a reception in Beijing earlier this year, I talked to a director of the China Investment Corporation, the world’s fourth biggest sovereign wealth fund.
He told me that if the Canadian government had not approved the takeover of Nexen by the Beijing-based state-owned oil company, CNOOC, Chinese investment in Canada would have dried up overnight.
“We don’t want to be where we’re not wanted,” he said.
So much for investment flowing where it gets the best return.
The Conservatives did approve the takeover but also introduced new rules that stipulated that any investment in Canada by a state controlled enterprise greater than $344-million in asset value would trigger a review.
The result: Investment in Canada by Chinese state-owned enterprises — which totaled $33-billion between 2005 and 2012 — has fallen off a cliff.
The new rules state control of an oil sands business by a state-owned enterprise will only be deemed to be of net benefit to Canada in “exceptional” circumstances.
The unwritten subtext is that the Harper government prefers private foreign investment over state-owned investment and minority stakes over acquisition or control.
Stephen Harper admitted the critical importance of foreign direct investment when he introduced the new rules, but that part of his speech appears to have been ignored by foreign investors.
As revealed by CIBC vice-chair Jim Prentice, Mr. Harper’s former industry minister, investment in the Canadian oil sands has dipped dramatically in the wake of the Nexen decision. Foreign direct investment in the oilpatch has declined 92% this year to $2-billion from $27-billion last year. Merger and acquisition activity has dropped to $8-billlion from $66-billion last year. The disparity is not solely due to 2012 being a bumper year because of the $17-billion Nexen deal — CIBC figures suggest activity has averaged around $50-billion a year over the last decade.
What are the causes? Mr. Prentice says there is a confluence of three factors — price adjustment because there are more sellers than buyers in the oilpatch; realization that Canada has an infrastructure deficit (namely, not enough pipelines to get product to market); and, the impact of the new foreign investment rules.
The latter is particularly piquant since Mr. Prentice was industry minister when the government first introduced provisions to police investments by sovereign wealth funds.
Speaking from London, Mr. Prentice said he does not advocate the government change its policy, but it has to be clearer in its tone that it welcomes investment. “Not everyone is getting the message that Canada remains open to the world. In fact, some are coming to believe the opposite,” he said.
It seems that the bureaucracy, taking its lead from government, has become more active in reviewing new investment. The perception overseas seems to be that investment will be waved through only in exceptional circumstances. Mr. Prentice is suggesting that message be reversed — that “barring exceptional circumstances, such as a majority stake in oil sands companies, their presence is welcome and indeed valued.”
He said that companies have sought his counsel when they are looking at headquarters for new oil and gas operations in the West. “These companies have their eyes on Canada but they don’t want to be rejected. They certainly don’t want an embarrassing confrontation with a western government. And I can tell you first hand, because they seek my advice, that right now they are puzzled by Canada.”
The young turks around the Prime Minister (and Jason Kenney) will likely dismiss this mild criticism as the opening salvo in a leadership campaign by an aspirant for the top job in the land. In fact, Mr. Prentice denies he retains political ambitions. “I’m quite happy doing what I’m doing — that’s what I’m committed to. I closed that door several years ago when I left politics,” he said.
But there is no getting away from the implicit criticism — that this government lacks an energy trade agenda.
We do not have the trade agreements in place, nor the relationships formed with the key players in Asia Pacific, to make the switch from continental energy supplier to global player, which we will need to do as the U.S. displaces imported oil with domestic supply.
For a party that has claimed “trade is the new stimulus,” the Conservative government’s talk at home has not been matched by action abroad.
Foreign direct investment has accounted for one quarter of all the capital injected into Canadian energy projects — without a steady stream, the anticipated expansion will not happen.
“As a country, Canada should not be intimidated by the presence of large state-owned enterprises,” Mr. Prentice said. “Canada needs that capital.”