Federal approval not the end of this story

In the end, it was as close to a Solomon-like solution as it could be, but when everyone around town was saying “it could have been worse,” you know it wasn’t good enough.

The good news, of course, is the fact the two deals on the table — the takeover of Nexen by the China National Offshore Oil Corporation and of Progress Energy by Malaysia’s Petronas — were approved. As they should have been.

These two deals were struck in good faith and based on the existing rules that were in place, such as they were. To reject them — especially after Prime Minister Stephen Harper had been to China telling officials there that Canada is open for business — would have caused both Canada and the companies involved in the deals, to lose face.

That would have done huge harm to future investment in both the country and the province.

The bad news, however, is what comes next in the context of future investment in the oilsands.

Let’s remember that it was only one week ago Friday that Natural Resources Minister Joe Oliver addressed a packed room at The Petroleum Club downtown, remarking at one point that Canada’s energy resources would need $650 billion over the next 10 years. Oliver also said that if all the energy projects were to be developed over the next 25 years, they would generate $4 trillion in economic growth and one million jobs.

Well, here’s the question we all have to be asking Minister Oliver: Where is all that money going to come from now?

Does the federal government really believe those companies with the capital are going to be satisfied with a wafer-thin, mint-size $1 billion investment limit?

It’s too early to tell, but when you look at how investments have changed in the last several years, it’s clear the “ask”’ has gotten bigger; from non-operated, passive investments to an outright acquisitions, such as China’s Sinopec buying Daylight Energy last year.

“We have seen an evolution in the terms in which the state-owned enterprises are prepared to invest in Canada’s oilsands. This is going to turn back the clock and I don’t know if they will be prepared to transact on that basis,” said Frank Turner, a partner in the mergers and acquisitions practice in the Calgary office of Osler, Hoskin & Harcourt.

Here is what they appear to have missed.

By limiting the universe of potential buyers, the federal government has effectively increased the cost of capital for oilsands players.

Need anyone be reminded the oilsands are already the highest cost barrel — and development costs have been rising? Anything that adds to a rising cost structure is not helpful, to say the least.

And while many were saying the government provided more clarity with Friday’s announcement, what about its use of the word ‘exceptional’ — as in any future purchase of an oilsands company by a stateowned entity would only be possible under ‘exceptional’ circumstances?

Exactly what constitutes exceptional circumstances? An OPTI situation where the company was in bankruptcy protection? A company that puts a ‘for sale’ sign that doesn’t get an offer? Is exceptional the new ‘net benefit?’

The market was looking for transparency, but it seems the phrase transactions will be evaluated on ‘their own merit’ suggests takeover deals will continued to be looked at on a case-by-case basis. So much for clarity. Now, if a company wants to sell outright it has a smaller universe to choose from and its negotiating leverage is greatly diminished.

But here is something that seems to be forgotten in all this — we are not selling anything. The leases belong to the province. And there are checks and balances in place governing development.

That’s why Premier Alison Redford said what she did Friday: “All investors, whether foreign or domestic, private or state-owned, must comply with existing Canadian and Alberta laws if they wish to operate here. Alberta owns, and will continue to own, the natural resources within its borders.”

In other words, the government allows for access to the resource but never relinquishes control.

What seemed to be missing in Friday’s comments was guidance on how investments were going to be monitored.

Where are the teeth ensuring that acquiring companies comply with their stated undertakings? More important, perhaps, would have been a clear outline of what would happen to investors if they were out of line in terms of compliance.

One of the routes the government could have chosen would have been to impose higher taxes, royalties or severe financial penalties that would make the asset in question worth less to them, than someone else. That way, the federal government could ensure they would meet the standards of operating in this country. And this could be done from a legal standpoint, not a legislative one.

It’s worth noting one of the biggest messes in terms of corporate takeovers gone wrong by foreign companies had to do with U.S. Steel buying Stelco. Anyone who followed that story is only too aware of what happened there: U.S. Steel bought Stelco in 2007 and failed to live up to the job commitment undertakings it made at the time of purchase.

Industry Canada sued U.S. Steel in 2010 for failing to maintain employment levels at the steel mills, which were one of the undertakings made in order to receive Ottawa’s approval for the transaction.

U.S. Steel wasn’t a stateowned enterprise.

Finally, there is an elephant in this room.

Why did the restrictions placed on potential oilsands investments not include natural gas? Is it a signal the federal government is backing off its support of the development of that resource? Exactly what does this mean for the Northern Gateway oil pipeline? This isn’t over. It will be interesting to see what happens to markets on Monday.

Companies like MEG Energy, in which CNOOC has about a 16 per cent interest, or Athabasca Oil Corporation, which sold its McKay River oilsands project to a subsidiary of PetroChina earlier this year might well be looking at the world differently today than they did Friday; PetroChina holds a 40 per cent interest in the Dover project and is in a position to buy the remaining 60 per cent at the end of this year.

What these companies are dealing with is eerily similar to what happened in 2006, when Prime Minister Stephen Harper announced the elimination of the royalty trust structure. That move effectively eliminated a business model that saw individuals and companies risk capital to develop a resource, with the intent to sell it to a larger entity having the financial ability to continue to grow that asset base.

Then, as now, the cost of capital went up and business plans were forced to change.

One can easily make the case that the same thing transpired on Friday.