Nexen & Progress Takeovers Approved: What Next?
The federal government’s announcement on Friday that it is approving two more big oilsands takeovers (by China’s CNOOC and Malaysia’s Petronas, both state-owned suitors) was political tap-dancing at its best.Â Prime Minister Harper’s speech listed several reasons why takeovers by foreign state-owned firms are a problem … but then proceeded to approve $21 billion worth of them.Â Future takeovers by foreign state-owned firms of bitumen assets will not normally be approved, he boldly proclaimed.Â (This strikes me like warning a burglar who has just robbed your house that you are going to install a burglar alarm sometime in the future.)Â Exactly how and on what criteria oilsands takeovers by foreign SOEs is not clear (and remember, the government also promised to clarify its foreign takeover rules after the BHP/Potash debacle, but has yet to do so).Â Foreign companies which are not state-owned are still welcome to take over Canadian bitumen companies — and foreign state-owned companies are still welcome to take over other (non-bitumen-centred) petroleum companies.Â So this purported “crackdown” on foreign takeovers is awfully narrow and unclear in its potential application.
Harper’s government is trying to balance various competing pressures, including:
* Shareholders drooling over the hefty premium being offered by the two state-finaced firms.
* Other energy firms which also like the fact that global hunger for their assets is driving share prices up (and reducing their cost of capital for new ventures).
* Grassroots conservatives (including Preston Manning, Harper’s mentor) who rebelled strongly at the idea of Chinese Communists owning our oil.
* Other vested interests concerned with how outright rejection of the CNOOC bid might affect Canada’s overall (and incredibly lopsided) trade and investment relationship with China.
I do not believe that the incredibly ad-hoc position outlined on Friday, based more on jaw-boning than real policy intervention, will ultimately satisfy many (if any) of these competing pressures.Â The position is rife with contradictions:
* If foreign state-owned ownership is bad, why approve $21 billion more of it?Â Solely because CNOOC and Petronas got their bids in before the government woke up to the danger?Â That’s a ridiculous criteria.
* Do we really think that foreign private takeovers of Canadian non-renewable resources are somehow safer than foreign state-owned takeovers?Â Some conservatives (like Manning) argue state-0wned companies have deeper pockets and act according to different criteria than private firms.Â This is clearly the case, but hardly implies that the actions of deep-pocketed foreign firms (like Exxon-Mobil, BP, and others) are somehow benign and inherently aligned with the interests of Canadians.Â Because most of the world’s oil is already controlled (rightly so) by SOE’s elsewhere (see my previous post on this), private oil firms are flocking to Canada as a crucial source of future incremental supply.Â I do not believe that takeovers by foreign private corporations offer any more net benefits for Canadians than takeovers by foreign SOEs.
* Why will we continue to allow SOEs to buy anything else in our economy (including conventional oil and natural gas assets and companies), but not oilsands?Â That’s another arbitrary and contradictory line in the sand.
In essence the Conservative policy on foreign investment is still very much in disarray.Â Their normalÂ ideological bias in favour of non-intervention is grating against the obvious structural risks (evident even to Canadian private-sector leaders) posed to Canada by untrammeled foreign access to such a strategic and non-renewable resource.
I will be interested to watch in coming months to see if this new position (if it is ultimately reflected in real changes to the Investment Canada regime) affects the Canadian dollar.Â In the short term, of course, $21 billion of new foreign equity flooding into the country will obviously push the dollar up.Â In the long run, though, if foreign access to purchasing the oilsands is genuinely curtailed (and that is still a very big “if”), we could very well see a retreat of the dollar.Â I have argued elsewhere that the dollar is so overvalued (about 25% above PPP, making our loonie one of the most overvalued currencies in the world) because of the structural sense in global capital markets that our resource-related assets will increase further in value over the long run.Â (The loonie is certainly not held up by our trade or productivity performance, which have both been abysmal, and I doubt the long-run importance on the currency of our relatively stronger fiscal position.)Â That opinion by foreign speculators could change if their faith is shaken that commodity prices will indeed keep soaring, and/or if their access to super-profitable Canadian resource assets is curtailed.Â We may be seeing both these factors coming into play, and hence I am cautiously optimistic that we may be approaching a turning point in the dollar’s decade long appreciation.Â (Of course, other monetary and financial factors will play a key role on that front, too.)
A pet peeve of mine in the whole debate over energy takeovers has been the kneejerk assumption made by almost everyone (including some opposition critics) that Canada “needs” foreign capital to develop the vast mineral resources buried under our feet.Â In macroeconomic terms, this is clearly nonsense.Â There’s a prior, crucial question that must be answered first: namely, how much of that resource wealth do we even WANT to develop, and how quickly (keeping a close eye on the economic and environmental side-effects)?Â But once we’ve made that judgment, Canada clearly possesses the economic capacity to develop our own resources — using our own capital and ingenutiy, on our own terms, and in a manner that generates maximum net benefits for Canadians (including the ancillary benefits that COULD be generated through supply-chain development, secondary processing, and related activities — ancillary benefits that are ignored and hence foregone in the current laissez-faire policy environment).
Posted below is a version of my column from the Globe and Mail:, which challenges the assumption that Canada “needs” foreign capital (whether physical, human, or financial).Â In fact, we are supplying capital to the rest of the world, not importing it.
One more footnote: the prolific economics blogger & tweeter Stephen Gordon has challenged my argument on this point (on twitter) from this curious perspective:Â Why should we force Canadian investors to hold more bitumen-related assets in their portfolios than they want to?Â This line of reasoning does not challenge my argument that Canada (as a country) has enough capital to do it ourselves — it simply points out that it may be inconvenient or too risky for Canadian financiers to put so many of their eggs in the bitumen basket.Â This begs the obvious question: if being overinvested in bitumen is risky for Canadian investors, then it is surely at least as risky for the rest of society (those of us who do not pocket the rich dividends and capital gains paid up in recent years by petroleum equities), not to mention the environment.Â At any rate, suggesting that Canadians should allow foreign firms to take control over our own non-renewable resources, in order to facilitate optimal portfolio diversification opportunities for the owners of domestic financial wealth, hardly strikes me as a compelling counter.
Here now is the Globe and Mail piece:
A common undercurrent in recent debates over foreign ownership is the near-universal assumption that Canada â€œneedsâ€ foreign capital to develop our vast energy resources. For example, Fridayâ€™s Globe and Mail quoted an Alberta professor who put it unequivocally: â€œThereâ€™s no doubt we need capital to develop our resources, and the biggest single pool is in China.â€ If the analysis starts with that assumption, then itâ€™s no wonder policy-makers will bend over backwards to attract this essential, precious substance called â€œcapital,â€ as witnessed by Ottawaâ€™s approval Friday of two takeovers by state-owned foreign firms.
In popular discourse, capital is a synonym for â€œmoney.â€ In economics, however, it means something more specific. Capital, for economists, is production saved from current output, in order to be reinvested in the expansion of future output. Corn seed that is saved and replanted next year, rather than being eaten this year, is the simplest example.
To qualify as capital in this sense, the value in question must be produced but not consumed, and then used to produce something else. Complementing the tangible product that is actually reinvested (which we call physical capital), we also need the know-how (or â€œhuman capitalâ€) to use ever-more-sophisticated capital goods to enhance future production.
With this distinction in mind, it is worth revisiting the questions that most observers have simply breezed past. What exactly is â€œforeign capital,â€ anyway? And why do we need it, to extract the resource wealth buried beneath our feet?
In the case of the two takeovers which Ottawa approved on Friday, we certainly arenâ€™t getting human capital (or know-how) from the foreign investors. To the contrary, itâ€™s our human capital that they, in part, are after (especially in the Nexen case). Bitumen is a unique Canadian resource, and no-one knows how to extract it and process it better than Canadians. Canadian technology is a key asset â€“ and with these takeovers, the human capital will flow out (from Canada to Asia), not in.
The actual capital goods purchased and put to work in energy developments do often come from foreign suppliers. Most investment goods purchased in Canada are imported, and weâ€™ve missed many opportunities to leverage our own resource investments to enhance Canadian content in the resource supply chain. However, importing a foreign-made capital good is different from relying on foreign capital. Remember, we pay for that imported machinery with income saved from our own current production. In essence, when we canâ€™t produce a machine ourselves, we produce something else â€“ usually more resources â€“ to trade for it.
Measured by foreign direct investment, Canada has been exporting capital â€“ not importing it. During the four years ending 2011, Canadian companies invested almost $75 billion more in their own foreign subsidiaries, than foreign companies invested here. By this measure, too, Canada supplies capital to the rest of the world, not the other way around.
Even if we simply equate foreign capital with â€œmoney,â€ we clearly donâ€™t need it. Canadian non-financial businesses are sitting on $600 billion in cash balances (or â€œdead money,â€ in Mark Carneyâ€™s parlance). After-tax corporate cash flow substantially exceeds new capital spending, so that stockpile is growing even further. Business has de-leveraged dramatically: debt-equity ratios are at their lowest levels in decades. Corporations could clearly re-leverage if money was genuinely in short supply â€“ and Canadaâ€™s resilient banking system would be capable and happy to oblige.
There are certainly cases when foreign investment does add real value to a project: supplying proprietary technology or expertise, integrating Canadian operations into global product development plans, or accessing international marketing opportunities. In those cases, I fully support more foreign investment. But none of these criteria fit the CNOOC and Petronas cases. Those takeovers add nothing to our real economic capacity to develop and sell our resources (all depending, of course, on how much and how fast we want to produce and sell those resources in the first place). The only thing these foreign investors bring to the table is money â€“ and weâ€™ve got plenty of that. Our real national capacity to produce is not enhanced by these transactions, and may be undermined (given the risks posed by foreign control over a strategic, non-renewable resource).
In short, there is no real economic sense in which Canada truly needs foreign capital (whether physical, human, or financial) to develop our own natural resources. We are quite capable of doing it ourselves, thank you very much â€“ and weâ€™d be much better off if we did it that way.