Federal foreign investment fears threaten growth

Mega-merger delays could sink billions in economic development and thousands of jobs in Western Canada

Tens of billions of dollars in benefits for B.C. from continued foreign investment in Alberta's oilsands is at risk if the federal government blocks the sale of two Calgary-based oil and gas companies in deals worth more than $20 billion.

Earlier this year, Petronas, Malaysia's state-owned oil and gas company, announced it was planning to acquire Progress Energy (TSX:PRQ) in a deal worth approximately $5.5 billion. And in July, China National Offshore Oil Corp. (CNOOC), China's state-owned oil and gas giant, announced plans to acquire Nexen Inc. (TSX:NXY) in a deal worth US$15.1 billion.The federal government rejected Petronas' acquisition of Progress Energy in October, but the company has continued to negotiate with Industry Canada to ensure the deal meets the government's requirement that it be a "net benefit" to the country.

A decision on CNOOC's acquisition of Nexen is expected in mid-December.

Much of the public debate has focused on the fact that both deals involve foreign state-owned enterprises. But Roger Mortimer, chief investment officer at San Francisco-based Parador Asset Management, noted at a recent CFA Vancouver wealth management conference that foreign investment from Asia will become increasingly vital to the country's future economic prosperity.

"Canada's growth and the Canadian prosperity we have enjoyed is entirely dependent on foreign capital," he said. "Canada is not big enough to fund the development and build-out of Alberta's oilsands for the next 25 years. All of that money has to come from outside the country, and Asian players have continued to play a big role."

According to a Canadian Energy Research Institute report, more than $253 billion in capital investment will be needed over the next 25 years to tap approximately 16% of the total amount of oil reserves in Alberta's oilsands currently under development.

It noted that B.C. would be among the three principal provinces to benefit from oilsands development after Alberta and Ontario. The report added that, by 2035, more than 400,000 jobs would be indirectly created by the development, injecting more than $15 billion in wages and more than $28 billion in added economic growth to the province.

Bringing in foreign capital, however, will be key.

Mortimer noted that such an endeavour is already challenging in today's volatile investment markets. Canada represents only 2% of the global investment world. It's also seen as a risky market to invest in because of the heavy weight of resource and financial services stocks on the TSX.

"We've just come through a period in the last 18 months where the Canadian market underperformed the S&P 500 by 25%, which tells you how violent the corrections in this market can be when the world loses confidence."

When it comes to oil and gas investment, Mortimer noted Canada remains one of the few places in the world that still accepts foreign investment in the sector. Approximately 80% of the world's oil reserves are not open to private-sector investment, and the bulk of it is in politically unstable jurisdictions.

Despite the resource sector's volatility, Canada remains attractive in part because of its stable political system and sound financial sector.

In B.C., China Investment Corp., the country's sovereign wealth fund, has kept its $1.7 billion investment in Teck Resources (TSX:TCK). And Korea Gas Corp., a state-owed enterprise of the Korean government, has a 40% stake in Kitimat LNG.

Despite the government's caution, Mortimer was hopeful that the Progress and Nexen deals would win approval.

He noted that on the Nexen deal "the company was reviled by the investment community, and nobody else wanted to buy it. It's odd there should be any objection at all that it can be sold to the Chinese, because there were no other bidders." •

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