State-owned investors a reality as Canada debates Chinese oil patch bid
Observers say CNOOC's $15.1 billion bid for Nexen is a chance to clarify ground rules in a new world where state-directed investors are flexing their muscles.
OTTAWA—The Chinese National Offshore Oil Corp.’s bid to buy Calgary oil producer Nexen Inc. is posing a conundrum to Canada’s governments and its people: what do we do when wealthy state-owned enterprises come calling?
Asking that question is easy. The hard part, it seems, is answering it.
Whatever the outcome of CNOOC’s $15.1-billion bid for Calgary-based Nexen, observers agree it’s a chance to clarify the ground rules in a new world order where state-directed investors are flexing their muscles.
And with Communist China leading the charge, the public is being drawn into a confounding and inflammatory debate that can join free-market purists and free trade-wary nationalists in a common cause.
Large amounts of global capital are pooling in fast-developing regions where state-owned companies are common. For a resource-rich and capital hungry country like Canada, that’s precisely where the rubber hits the road.
“This battle for all these resources is heating up and Canada is stuck between the US and China,” explains Walid Hejazi, a professor of international business at the University of Toronto’s Rotman School of Management.
The Conservative government has already stalled a $6-billion bid for Progress Energy Resources Corp. by Malaysia’s state-owned Petronas while it mulls over the CNOOC deal.
The national debate is hitting full throttle.
“A half century ago, state capitalism was called fascism, and it should continue to be today,” Terrence Corcoran thundered in the National Post.
On the other side of the right-left spectrum, Thomas Walkom of the Toronto Star wrote that “most Canadians have direct experience with state-owned firms (or, as we call them, Crown corporations) and know that this is not true.”
While the term may be new to Canadian dinner tables, state-owned enterprises, or SOEs, are not some foreign phenomenon. Canada Post is an SOE, as were Air Canada and Petro-Canada in the not-too-distant past.
“They’re not all created equal,” Jack Mintz, a famously free enterprising economist at the University of Calgary, said in an interview, before adding with a laugh: “Some are not as inefficient as others.”
State enterprises, almost by definition, are driven by motives beyond profit maximization, Mintz noted.
“And then, of course, the questions are, what are those other objectives?”
That’s where China comes into the frame as a common lightning rod.
Last October, the hawkish US-China Economic and Security Review Commission—created by Congress in 2000 to examine national security issues related to China—issued a stark warning about Chinese state-owned enterprises.
“Recent examples, as well as financial disclosure documents, indicate that if maximizing shareholder value conflicts with state goals, SOEs and their wholly-owned subsidiaries are likely to pursue the goals of the state.”
The commission’s report said China is not keeping the commitments it made when it joined the World Trade Organization in 2001.
“If anything, China is doubling down and giving SOEs a more prominent role in achieving the state’s most important economic goals.”
There’s more than a whiff of Sino-phobia to the current debate, worries Randall Morck, the distinguished chair in finance at the University of Alberta who argues neither China nor oil is really the crux of the matter.
“I think it would be an even bigger issue if Air India was trying to take over Air Canada,” Morck said. “We would still have cause to worry whether it really makes sense to have foreign bureaucracy-controlled companies in charge of the careers and economic assets in Canada.”
Across the ideological divide, economist Jim Stanford of the Canadian Auto Workers, arrives at much the same place, only from a diametrically opposite direction.
“The implicit assumption is that you can trust a private corporation but you can’t trust a state-owned company,” said Stanford. “In my view, we can’t trust any of them to look after the Canadian public interest. We need active public policy tools to make sure that both of them advance the Canadian public interest.”
Stanford cites the muted Canadian response to investments in the oilpatch by Statoil, Norway’s state-owned energy company.
“It strikes me as bizarre that while we welcome public capital from other countries (like Norway, where the wealth fund was built up from resource royalties) to develop our non-renewable resources, we can’t find ways to wisely do the same with our own resources,” Stanford wrote in an email. “It seems that Canada believes in state ownership of energy—but only as long as it’s someone else’s state, and our energy.”
Indeed, there’s a certain irony to corporate-tax-cutting free marketers fretting over Chinese state investment while the Conservative government chides corporate Canada for sitting on billions of dollars of uninvested “dead money.”
Against that must be set CNOOC’s willingness to pay a 61% premium on shares of the smallish and underperforming Nexen (Petronas is offering more than 100% above market value for Progress)—enough to make anyone wonder just what agendas are at play.
As Glen Hodgson, the chief economist at the Conference Board of Canada, puts it with a rhetorical shrug: “The world is complicated.”
China, and its state-owned enterprises, are a reality that must be dealt with.
“They are really the outreach arm now of China,” Hodgson said in an interview.
The rising Chinese superpower is “using state enterprises as a way to build relationships around the world, find new sources of energy. They’re now building into the global economy the way transnational corporations were 40 or 50 years ago,” said Hodgson.
“So if you turn off the SOEs, you’re basically thumbing your nose at the Chinese, and we can’t afford to do that.”
Hejazi at the Rotman School makes the same point, independent of the complicating Communist Chinese bugbear.
Canada is selling its energy at below market prices because our landlocked oilpatch essentially has but a single customer, the US, he said. That has to change.
“Wouldn’t it be wonderful if the private sector would amass the tens of billions of dollars, if not hundreds of billions, that would be needed to develop all of the infrastructure to get our energy out there” Hejazi said. “But it’s not happening.”
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