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CNOOC-Nexen: A pivotal step for Canada and China

Tags: CNOOC, Nexen
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As Ottawa decides whether to approve a takeover bid by China's state-backed oil company CNOOC for Calgary-based oil producer Nexen (NXY-T), a growing chorus of the country's top business leaders say blocking the deal could send the wrong message at a critical time when Canada is trying to increase its trade with the world's second largest economy.

In July, CNOOC launched its $15.1-billion offer for Nexen -- kicking off the first ever outright takeover of an oil patch company by a Chinese firm and putting the spotlight on Ottawa at a time when it's trying to nurture a stronger relationship with China.

Because the takeover offer is worth more than $330 million, Ottawa must provide its approval and ensure that it passes the "net benefit" test. As part of the test, lawmakers must weigh whether the deal will increase economic activity in Canada, employ Canadians and foster innovation, among other factors.

Critics have warned that the test is vague and open to the whims of politicians, rather than a set formula that evaluates every deal on similar terms. Ottawa has repeatedly said it would provide more clarity on foreign investments, but to date it has failed to follow up on that promise.

But more importantly for Canada's business leaders is the message that Ottawa could send to Beijing in approving the takeover of Nexen, a company many believe is not a strategic asset to Canada.

"If you think about the process that's being followed, it's a market, there is a price that's being paid [and] I don't think it’s a strategic asset that's going to change the outcome of the country," Dominic Barton, global managing director of McKinsey & Company, says. "I just don't see what the risk is and I think it's a signal of having a deeper relationship [with China].

Jim Prentice, senior executive vice-president and vice chairman at CIBC and former Industry Canada Minister, adds that blocking the deal would throw a wrench in recent moves by Ottawa to open China's booming economy to Canadian businesses.

"We are right in the middle of a strategic partnership with China…it would be a very bad time to turn around in the middle of the road on that," he says. "This transaction needs to continually be viewed through that perspective. It would be a very bad time for us to be turning around in terms of our partnership with China."

He stresses that Canada, particularly the oil sands, needs foreign capital to develop its resources in the coming years. In a recent report, CIBC analysts estimate that projects being planned in the oil sands will need as much as $200 billion in capital to go ahead.

"Canadian capital markets and debt markets over the next 10 years couldn't fund that with exclusively Canadian capital," he says. "At this point in our history, some of that capital is going to be from Asia and from China."

Brian Ferguson, CEO of Cenovus Energy says that the Canadian economy has in the past used foreign capital to build and grow its economy.

"We all need to remember is that Canada has a very rich history in terms of accessing foreign capital markets and allowing foreign investment to really help build the economy and country we have today," he says. "Canada is not an island, we operate very much in a global world and a global economy."

The CNOOC takeover is also a perfect opportunity for Canada to move away from its dependence on the U.S. economy, the business community says. While America is still Canada’s largest trading partner by a large margin, that margin has been shrinking.

China currently ranks as Canada's second largest trading partner, with trade between the two countries amounting to $64 billion US in 2011 -- up from the $11 billion posted in 2001. But that’s still well behind the United States, where bi-lateral trade with Canada amounted to more $570 billion, according to Industry Canada.

Meanwhile, China’s investment in Canada increased 36-fold in the last 10 years to $10.7 billion in 2011, while Canada’s investment in China reached $8.3 billion in the decade, according to a recent joint study done by the two countries.

Trade with the U.S. accounted for as much as 80 percent of Canadian trade at the end of the 1990s but has fallen to about 68 percent, according to BMO economists.

Annette Verschuren, chair and chief executive officer of NRStor and former president of The Home Depot Canada and Asia, says Canada must continue to diversify the number of markets targeted by the country's exporters and look beyond North America.

"Have we relied too much on our partners in the NAFTA agreement [North American Free Trade Agreement]? Maybe we have, maybe we should have been looking further out earlier…it needs to be done," she says. "Having a portfolio of investments around the world as a country is critically important."

Verschuren adds that China is experiencing "undeniable growth" and Canadian business needs to figure out how to break into that market.

"We have to recognize it as a great potential country to be associated with," she says.

McKinsey & Company's Barton adds that those political and business leaders that believe the U.S. will always be the country's top trading partner are misguided.

"I think the U.S. will always be an extremely important partner, but when you look at the scale of the shift that's going on -- one billion new middle class consumers in the next 10 years [in Asia], that is just a historic level in human history that is happening," he says. "Over time that market will be much larger than the U.S. market."

Canada's rich base of natural resources – and the massive amount of capital needed to develop them – could provide the perfect platform to take advantage of China's strong economy.

"I think that for China and the rest of the BRIC countries to do really well, the only way for them to grow economically is to need more natural resources -- they're simply going to need them," Andre Desmarais, president and co-chief executive officer at Power Corporation, tells BNN. "You can't have 8-percent growth in China year after year after year and think that the price of natural resources won’t go up …so that's a net benefit to Canada."

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