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Great Wall of Canadian Energy Keeps Chinese on Outside

Canadian Prime Minister Stephen Harper
Canadian Prime Minister Stephen Harper said last Dec. 7 that state-owned companies will be banned from buying majority stakes in the oil sands outside of “exceptional circumstances.” Photographer: Stuart Davis/Bloomberg

Dec. 6 (Bloomberg) -- Canadian Prime Minister Stephen Harper said developing the world’s third-largest pool of oil reserves is as difficult as building China’s Great Wall. Chinese companies may find themselves outside looking in.

Harper announced a year ago tomorrow that Canada will keep state-owned enterprises from acquiring oil sands businesses -- one of the last and biggest steps in an overhaul of foreign-investment review rules that govern takeovers of Canadian companies together worth more than C$1.87 trillion ($1.75 trillion).

In addition to limits on state-owned investors, Harper has also blocked takeovers on national security grounds and concerns over the loss of strategic resources such as potash. The message for investors is Canada will accept less foreign capital and slower development to ensure resources are kept under some Canadian control, even at the expense of lower company valuations.

Harper’s policy is “constructive nationalism,” said Marcel Coutu, chief executive officer of Canadian Oil Sands Ltd., a Calgary-based company that holds the biggest stake in the Syncrude oil sands project, one of the country’s largest operations with capacity to produce 350,000 barrels per day.

“Would I like to get a higher price for a company if I was any CEO in town? Sure,” Coutu said. At the same time, the industry “doesn’t belong to the shareholders or the capital markets. It belongs to the population of a nation.”

State-Owned Enterprises

Harper said last Dec. 7 that state-owned companies will be banned from buying majority stakes in the oil sands outside of “exceptional circumstances.” In other industries, acquisitions will be judged on the degree of industry influence a buyer would have, and how much the buyer is controlled by its home government. Approval of the $15.1 billion takeover by China’s Cnooc Ltd. of Calgary-based Nexen Inc., revealed at the same time, was the end of a trend, Harper said, not a precedent.

A year later, critics have become increasingly vocal in raising concerns that the policy has put a chill on investment. Jim Prentice, Harper’s former industry minister and now an executive at Toronto-based Canadian Imperial Bank of Commerce, says the message sent to state-owned companies by the rules may be contributing to slumping investment. Deals in Canada’s oil and gas sector shrank to $10.5 billion in the first three quarters of this year from $40.5 billion in 2012, according to data compiled by Bloomberg. Of the about $68 billion of foreign-asset purchases made by Chinese companies over the past 12 months, only 2.3 percent was spent in Canada. That compares with 29 percent in the prior 12 months, when Canada was the top target for Chinese companies.

Investment Share

Between 2005 and 2012, state-owned enterprises accounted for 86 percent of total outward Chinese investment, according to a 2013 report prepared for the U.S.-China Economic and Security Review Commission, a body that reports to the U.S. Congress.

The last major Canadian acquisition by a China-based company was PetroChina Co.’s C$1.19 billion purchase of a 49.9 percent stake in an Alberta shale formation one week after Harper’s announcement.

At a Nov. 15 meeting in Toronto, Canada’s provincial premiers, led by Alberta’s Alison Redford, called on Harper to provide more clarity around the rules. Tom Mulcair, leader of the main opposition New Democratic Party, which opposed the Cnooc-Nexen deal, said in a speech in Ottawa this week that Harper’s “unpredictable approach certainly doesn’t instill much confidence in investors.”

SOE Chill

State-owned enterprises “are wondering what appetite there is for SOE investment in Canada, period, let alone the oil sands,” said Peter Harder, president of the Canada China Business Council and a former government official who once advised Harper on Group of Eight issues. “There’s a chill among SOEs, they’ve got other places to invest.”

Harper rejected calls for more clarity last month, telling a business-school audience in Toronto that Canada shouldn’t be totally transparent in its foreign-investment rules.

“It is absolutely necessary, when the investor is a foreign government, for the government of Canada to be able to exercise its discretion and have direct conversations with those foreign investors,” Harper said Nov. 8. “When you are dealing with large state investors -- foreign governments as the investor -- I think it would be foolish for the Canadian government to provide absolute clarity.”

Harper’s announcement last year reflects the evolution of his views on foreign investment as Canada searches for the C$650 billion needed to develop its natural resources over the next decade.

Developing View

For Harper, security concerns, foreign policy and broader economic interests such as maintaining headquarters may outweigh the business case for foreign investment -- an approach he had been developing since 2007 when Abu Dhabi National Energy Co., an oil producer controlled by the United Arab Emirates, announced it would acquire PrimeWest Energy Trust.

In 2008, the government blocked the sale of MacDonald Dettwiler & Associates Ltd.’s space business to Minneapolis-based Alliant Techsystems Inc. In 2010, Harper rejected Melbourne-based BHP Billiton Ltd.’s bid to buy Potash Corp. of Saskatchewan.

“As much of an advocate as I am of free markets, I don’t think that governments realistically can just make the assumption that everybody else is operating on a market basis,” Harper said in an interview with Bloomberg News in 2011. Canada can’t assume “that the country’s only interest would be in simply letting the so-called market, which isn’t always a free market, decide all these things.”

Policy Cost

Harper’s interventions have had a cost. BHP’s hostile bid for Potash was valued at $39.6 billion. Three years later, the Saskatoon-based company’s market value is $27.4 billion.

Canada’s currency has fallen 6.9 percent against its U.S. counterpart in the past year, ranking it 11th out of 16 major currencies tracked by Bloomberg. The country’s benchmark stock index has climbed 8.6 percent in that time, trailing the 27 percent return on the Standard & Poor’s 500 Index.

The Canadian economy has also struggled to build steam over the past two years, with growth expected to remain flat in 2013 at last year’s 1.7 percent pace, according to economist estimates gathered by Bloomberg. The average monthly job gains in the first 11 months of this year have slowed to 13,400 from 25,400 a year ago, Statistics Canada said in a report today.

While Harper has been criticized for his approach, no Canadian prime minister has faced the same scale and composition of foreign investment.

Investment Flows

Since Harper came to power in February 2006, the book value of foreign direct investment in Canada has increased by C$263 billion. There have been 79 proposed foreign takeovers of publicly traded companies worth more than C$1 billion under Harper’s tenure, double the previous seven years, according to data compiled by Bloomberg. Of the 10 largest Canadian takeovers by Chinese companies, nine took place during Harper’s Conservative administration.

In designing the rules for SOE investment, Harper tried to give Canada leverage in negotiations with China over opening up the world’s second-largest economy to investments from Canadian companies, a government official briefed on the matter said last year.

National security has become another issue, with Harper formally adding it in 2009 as a consideration under Canada’s foreign investment review process.

The country cited such concerns in October when it rejected the C$520 million sale of Manitoba Telecom Services Inc.’s Allstream unit to an investment firm co-founded by Egyptian billionaire Naguib Sawiris.

‘Nobody Listened’

During the government’s Cnooc-Nexen review, Canada’s spy agency, the Canadian Security Intelligence Service, issued a report that said foreign investment by some state-owned enterprises may represent a national-security risk.

“The authorization for the Chinese to buy that company was perceived by CSIS as a blow in the face, because they warned against it, they were concerned, and nobody listened,” said Michel Juneau-Katsuya, chief executive officer of the Northgate Group, a security consulting firm, and formerly head of the Asia-Pacific desk at CSIS.

The issue resurfaced this month after Canadian police arrested a man and accused him of trying to leak classified information related to the country’s national shipbuilding strategy to the Chinese government.

“It’s certainly an area of concern but it’s not an area of concern in the sense that we are ill prepared for it,” Industry Minister James Moore told reporters Dec. 2 in Montreal.

Trade Agreements

The restrictions on investment come as Canada is taking other steps to encourage trade and investment. The country has signed free trade agreements with 37 countries during Harper’s tenure, the latest with the European Union. Under the terms of that deal, Canada is raising the threshold for triggering a review of foreign investment from countries with which it has free trade pacts -- including the U.S., Mexico and the EU -- to C$1.5 billion from C$344 million.

“What Harper has just said to the world is the screening mechanism is alive and well,” said Walid Hejazi of the Rotman School of Management at the University of Toronto. Part of the message is “there may be two classes of foreign investors.”

To contact the reporters on this story: Theophilos Argitis in Ottawa at; Andrew Mayeda in Ottawa at

To contact the editor responsible for this story: David Scanlan at

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