Nexen Shows No Confidence Yet in Harper Assent
Prime Minister Stephen Harper is weighing whether to allow Cnooc Ltd. (883)’s $15.1 billion takeover of Nexen Inc. (NXY), even as northern Canadian companies and government officials work to attract Chinese money.
Investment from the Asian country helped push mineral exploration spending to a record last year in the Yukon, where the main challenge remains shipping resources such as gold, zinc and copper out of a frigid territory the size of Spain with a population of 35,800.
Harper begins a tour today of Canada’s three northern territories with a stop in Whitehorse, Yukon’s capital, where Cnooc bought 60 percent of oil and gas explorer Northern Cross (Yukon) Ltd. last year. The federal government must approve state-owned Cnooc’s offer for Calgary-based Nexen Inc. (NXY), the country’s No. 5 oil producer.
“These projects are going to require substantial investment to be able to move forward, and we’re going to require investment dollars from both Canadian companies and companies outside our nation,” Yukon Premier Darrell Pasloski said in a phone interview.
Harper, who discussed the Cnooc bid with his Cabinet Aug. 8, faces questions from opponents of his Conservative Party on the degree of influence Chinese state-owned companies will gain over the world’s third-largest oil reserves. Canadian business leaders have urged the government to seek more access to Chinese markets.
Concerns that Cnooc’s $27.50 per-share takeover bid may not get approved by the government have weighed on Nexen’s stock, keeping it below the offer price. Nexen shares closed little changed at $25.75 in New York on Aug. 17.
The trip will underscore the difficulty Canada faces exporting its natural resources to fast-growing Asian markets, a goal that Harper has called a “national priority.”
“It is a challenge logistically in the north, whether you’re building roads or whether you’re trying to get resources out, that is an issue, and the government has announced some infrastructure projects to help that along,” Andrew MacDougall, Harper’s director of communications, said in a pre-trip briefing to reporters in Ottawa Aug. 17.
While Yukon companies are able to ship commodities to Asia through a port in Skagway, Alaska, exploiting the full resource potential of the nation’s north may require Canada to invest in its own Arctic port infrastructure, said Pasloski.
“It’s crucial for us to have access to the world market,” he said. “Our big challenge is capitalization for major infrastructure investments.”
Some relief may come as early as this week with the signing of an agreement with the federal government to give Yukon a greater share of resource royalties. “I’m optimistic that will be signed shortly,” Pasloski said.
Asian companies have made seven “significant” investments in Yukon-based companies since 2007, Samantha Paterson, communications manager for the territory’s economic-development ministry, said in an e-mail. To be sure, they are all smaller than Cnooc’s bid for Nexen.
In 2008, Jinduicheng Molybdenum Group Co. Ltd. and Northwest Non-Ferrous International Investment Co. Ltd., both based in Shaanxi province, bought Yukon Zinc Corp.’s Wolverine zinc project in the southeast of the province for C$101 million ($102 million).
Yunnan Chihong Zinc & Germanium Co. Ltd. (600497), based in Yunnan province, formed a joint venture with Selwyn Resources Ltd. (SWN) in 2010 to invest C$100 million exploring one of the largest undeveloped zinc and lead deposits in the world.
Yukon was “ahead of the curve” among Canada’s 13 provinces and territories in wooing investors on trade missions to Asia, said Harlan Meade, chief executive officer of Selwyn.
Chinese investment has helped mining companies operating in Yukon survive the credit crunch that hit the industry after the global financial crisis of 2008, Meade said by phone from Vancouver, where the company is based. Yunnan Chihong’s investment allowed Selwyn to press ahead with its plans to begin production without having to raise more money through public equity markets.
Mineral exploration spending in the Yukon rose to C$307 million in 2011, topping the previous record of C$157 million in 2010 while the economy expanded 5.6 percent.
Still, Meade said there “is and should be a healthy discussion” in Canada about how much foreign investment the country is willing to accept in its natural resources.
“I suspect with the passage of time, Canadians will ask a lot more questions about what are the benefits we’re getting out of resource development,” he said.
The federal government should limit the size of stakes that state-owned enterprises from countries such as China can own in Canadian companies, Jack Mintz, a member of Finance Minister Jim Flaherty’s council of economic advisers, said in an interview this month.
Access to capital and infrastructure has also been an issue for Yukon’s neighbor, the Northwest Territories. Harper on Aug. 21 will visit Norman Wells, a town along the proposed route of the Mackenzie Gas Project, a pipeline conceived by a consortium of companies led by Imperial Oil Ltd. (IMO) to deliver natural gas to North American markets from the Mackenzie River delta.
Canada’s National Energy Board approved the project, which has been in the works since the 1970s, in December 2010 after a six-year review. Natural Resources Minister Joe Oliver in January cited the drawn-out review as a sign that the country’s regulatory system is “broken.”
The government in June streamlined the review process and gave Harper’s cabinet more authority to approve projects such as Enbridge’s Northern Gateway pipeline, a 1,177-kilometer (3,861 mile), C$5.5 billion conduit that would transport crude from Alberta’s oil sands to the Pacific Coast of British Columbia.
The territory hopes the Mackenzine pipeline will go ahead, said David Ramsay, the Northwest Territories’ minister of industry.
“The Mackenzie gas project sat in regulatory purgatory for six years,” he said by phone on Aug. 14. “I wouldn’t want to see another project face that type of scrutiny and delay.”
Imperial Oil spokesman Pius Rolheiser said in an e-mail the company continues to talk about a “fiscal framework” for the project with the federal government. “To this point, we do not have a structure that would enable a commercial project to proceed.” Low natural gas prices have held the project back.
Harper will also travel to Cambridge Bay, Nunavut before ending the trip in Churchill, Manitoba on Aug. 24.
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