10/29/12

This past week, we saw the market impact of Investment Canada's decision to initially reject PETRONAS' (the Malaysian State-owned Enterprise) proposed takeover of Progress Energy Resources, a Canadian oil and gas company. In order to approve a takeover of a Canadian company, Investment Canada requires sufficient evidence of a 'net benefit' to Canada.

While this net benefit test is, at the moment, quite vague, the broader issue is the takeover of Canadian companies by SOEs with an even higher profile case in that of CNOOC/Nexen. Of course, this issue is not directly relevant to the U.S., but what are your thoughts on takeovers by SOEs in general? Should they be treated like any other corporation - ExxonMobil for example? And for my fellow Canucks out there, what are your thoughts on selling our resources to SOEs?

Update: Since the initial rejection, PETRONAS has reportedly agreed to extend Investment Canada's review process. It was rumored that the initial rejection of the proposal was as a result of PETRONAS' frustration with IC's request to delay approval for an additional 30 days after having already done so.

In my opinion, Canada as a country is being short-sighted in taking profits in the stock market and promises to provide some benefit to the country. Yes, there is the unfortunate fact that the Canadian energy sector requires billions of dollars in capital to develop its resources over the next decade, which they just can't access in the local market. However, the benefits of PETRONAS developing a west coast LNG facility or of CNOOC developing its leases in Alberta's oil sands may not outweigh the downside of the continued sell-off of our resources.

Another proposed takeover in the market recently was that of ExxonMobil purchasing Celtic Exploration, another Canadian oil and gas company. Based on the market reaction, and the fact that Exxon has operated in Canada through its subsidiary, Imperial Oil, for some time, expectations are for the Exxon/Celtic deal to proceed without a hiccup. The unfortunate reality is that the Exxons and the Chevrons in the U.S. aren't all necessarily interested in providing the capital to develop the Canadian oil and gas sector. So where are these cash-strapped companies turning faced with depressed cash flows as a result of weak natural gas pricing, poor differentials relative to U.S. pricing, and limited access to capital markets funding? Asian NOCs with boat-loads of cash and increasing energy requirements.

For my neighbours to the south, what do you think about Canada selling off resources to SOEs?

Comments (12)

10/29/12

It's all politics. I'm sure if Exxon wanted to buy Progress, the Canadian government would have been far less hostile. But since it's a Malaysian company (or Chinese, in the case of CNOOC), everyone goes apeshit.

10/29/12

Foreign takeovers are inevitable, the capital of SOE is needed to grow the oilsands

10/29/12

I think there should be a higher bar for companies from countries that expropriated American, Canadian, and European-owned resources 40 years ago. If you want to play the nationalization game, that's fine, but it's kinda hard for us to do business with you if you refuse to do business with us (by having state owned monopolies expropriated from the businesses you are now trying to buy).

10/29/12
IlliniProgrammer:

I think there should be a higher bar for companies from countries that expropriated American, Canadian, and European-owned resources 40 years ago. If you want to play the nationalization game, that's fine, but it's kinda hard for us to do business with you if you refuse to do business with us (by having state owned monopolies expropriated from the businesses you are now trying to buy).

You know we aren't talking about PDVSA here... A bit of an extreme view point especially in light of events during post-colonial history of a country trying to set up an oil & gas regulatory framework. Malaysia renegotiated their old leases in favor of production sharing contracts. The goal of PSCs is to encourage foreign investment while ensuring adequate resource sharing to the host country. Clearly it was fair enough for Shell and Exxon who continued massive investment into the country.

As for the Canada story... this is good news for US shale targets looking for Asian premiums..

10/30/12
kingb:
IlliniProgrammer:

I think there should be a higher bar for companies from countries that expropriated American, Canadian, and European-owned resources 40 years ago. If you want to play the nationalization game, that's fine, but it's kinda hard for us to do business with you if you refuse to do business with us (by having state owned monopolies expropriated from the businesses you are now trying to buy).

You know we aren't talking about PDVSA here... A bit of an extreme view point especially in light of events during post-colonial history of a country trying to set up an oil & gas regulatory framework. Malaysia renegotiated their old leases in favor of production sharing contracts. The goal of PSCs is to encourage foreign investment while ensuring adequate resource sharing to the host country. Clearly it was fair enough for Shell and Exxon who continued massive investment into the country.

As for the Canada story... this is good news for US shale targets looking for Asian premiums..

Well by the looks of it (looking up and down at different posts) this viewpoint ain't so extreme.

The US has been never really been a colonial power. Indeed, we were originally a colony. We were an imperial power, but a lot of that ended with Jimmy Carter in the late '70s. Nobody on this board was alive when the US was an imperial power.

I have a better idea, which may actually be a little extreme:

1.) Let these countries invest in the US.
2.) Jack up the taxes on US production by foreign governments to the same production taxes they impose on our producers, or 75% if they do not allow our companies to explore and produce oil in their country. Also charge a 20% sales or transfer tax on resources from foreign governments to other parties.
3.) A bunch of foreign countries will cry "Not Fair! What's good for the goose is not good for the gander!"
4.) Make a quick $100 Billion off China, the UAE, and Venezuela.

I'm not sure how I feel about Malaysian sovereigns investing in the US. Do they have a history of nationalizations? That's what I'm getting at. The Arabs and North Africans engaged in wholesale expropriation of US-owned, Arab-located resources in the early '70s. They should NOT be allowed to own resources here.

10/29/12

I have a major problem with SOEs invest in Western markets while Western companies can not invest in a reciprocal manner.

10/29/12

@PetEng maybe we should let them, then nationalize them at 50 cents on the dollar?

10/29/12

Adamantly opposed. SOE do not require profitability to maintain market share. They can operate at a loss while manipulating supply to keep prices low and suppress competition. Directly impact inequitable distribution in regulatory restrictions and you end up with a single enterprise system over time.

10/29/12
ragnar danneskjold:

Adamantly opposed. SOE do not require profitability to maintain market share. They can operate at a loss while manipulating supply to keep prices low and suppress competition. Directly impact inequitable distribution in regulatory restrictions and you end up with a single enterprise system over time.

This makes no sense given the underlying transaction/topic/discussion. If Petronas does not require profitability and intends to export Canadian gas then this would mean that they are propping up what would supposedly be an otherwise unprofitable Canadian enterprise. If however, the gas is supposed to be for the domestic market and Petronas again neglects profitability to keep Canadian domestic prices low this is a wealth transfer from the people of Malaysia to Canadian consumers. How are either of those net-detrimental to Canada?

10/30/12
kingb:
ragnar danneskjold:

Adamantly opposed. SOE do not require profitability to maintain market share. They can operate at a loss while manipulating supply to keep prices low and suppress competition. Directly impact inequitable distribution in regulatory restrictions and you end up with a single enterprise system over time.

This makes no sense given the underlying transaction/topic/discussion. If Petronas does not require profitability and intends to export Canadian gas then this would mean that they are propping up what would supposedly be an otherwise unprofitable Canadian enterprise. If however, the gas is supposed to be for the domestic market and Petronas again neglects profitability to keep Canadian domestic prices low this is a wealth transfer from the people of Malaysia to Canadian consumers. How are either of those net-detrimental to Canada?

Short term impacts of propping up a non viable entity has a longer term impact to otherwise viable domestic producers. Whether or not Petronas producees for domestic consumption, it may be willing to operate at lower or no margin and in the short term Canadian consumers will benefit. In the aggregate, the potential elimination of competition will result in no pricing mechanism to prevent them from making up the lost revenue over time on the back end. The net impact becomes a hypothetical of future revenues to a Canadian or foreign companies competing on an equal playing field versus allowing a foreign government entity to artificially suppress competition in your back yard. Ending in the inevitable transfer of Canadian wealth to Malaysia, and no private domestic producers with the ability to exercise a competitive advantage.

10/30/12

Stephen Harper is an economist who claims to believe in free markets.......except when it doesn't suit him. I'm a big fan of Harper but on this occasion I disagree with him.

10/30/12

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