Let's Get Over "Net Benefit" Test Carping: Or Why Political Law is Still Law...and the World's Still Here

By Keith Edmund White, Editor-in-Chief

More complaining about the dreaded political nature of Canada's revamped "net benefit" test.  Critics seem to be saying, 'If a law's a law, it should always be transparent and consistent--just like jury decisions!'  Keith Edmund White looks at Don Lenihan's criticism of the Harper government new rules of foreign takeovers (i.e. the "net benefit" test), and stands up for the messy, status quo the revamped rules leave in place.  Added bonus:  mention of Conrad Black.

Don Lenihan, Vice President at Ottawa’s Public Policy Forum, hits the Harper government’s new rules on foreign takeovers of strategic Canadian industries (and compliments Conrad Black).
From Lenihan’s iPolitics article:

If we really are at the beginning of a long-term trend that will force the federal government to begin employing controversial (possibly highly controversial) measures to protect Canada’s strategic assets, the goal of the policy should be to ensure that the decisions are transparent, effective and fair.

Unfortunately, on this score the new rules raise more questions than they answer. Do we really want to include all SOEs under one catch-all rule? If an SOE is willing to comply with the same rules as private sector companies, should this make a difference?

If the policy allows “exceptional circumstances” to override the rules, how will these be defined? How will the government deal with future private sector cases that are similar to the Saskatchewan Potash Corp? What other resources or industries could be declared strategic assets?

What options are open to the government to create the kind of “middle ground solution” proposed by Black?

Lenihan echoes the worries of many commentators about Canada’s vague “net benefit” rules.  The tacit underlying assumption of Lenihan’s critique: all legal determinations should be consistent and transparent.  But aren’t foreign takeovers of critical Canadian industries (or of any nation) as political—as say—the political and inconsistent decisions to raise or lower taxes or conclude a foreign investment treaties?  And in the case of foreign takeovers, are any two Canadian industries really the same?

But what will keep Canada from deterring smart foreign investment?  Simple:  If Canada drives away smart investment, it will feel it where it counts--the pocket-book.

Sure, this approach may not have the gossamer shine (and superficiality) of administrative consistency, but there are legal issues that societies do not settle through bright-line rules. And those issues tend to be that way for a reason.

And Lenihan's critique--making a new sub-set of rules for SOEs that comply with private sector practices--shows just how illusory the quest for a Black-ian "net benefit" middle-ground is.  The more Canada tries to make rules for all possible foreign takeover scenarios, the longer the rule becomes, perhaps to the point of incomprehensibility--and the easier it is manipulated.  Just ask anti-Affordable Care advocates how they feel about the ACA being considered a 'tax' and not a 'mandate' by the controlling opinion of the Supreme Court, thereby passing U.S. constitutional muster.  The point:  rules don't always bring clarity, especially when they are voluminous and involve hot-button issues.  

Oh, and wait, we're worried, in the case of Chinese state-owned enterprise CNOOC takeover of Nexen,  of Canada's notoriously illiberal society negatively impacting the struggling, still-malleable but liberal-idolizing economy of China?   

Check out one notable exception to the chorus of "net benefit" naysayers, Jeffrey Simpson's article in last week's The Globe and Mail:

China [owner of Cnooc who put in the bid for Nexen] wants things both ways: that its SOEs can buy elsewhere but others can’t buy in China. That the Harper government has now identified a sector of the Canadian economy essentially off-limits to SOEs can’t logically be objected to by China, which puts big swaths of its economy out of reach of foreign investment or insists that foreign companies can only buy minority interests or participate in joint ventures.

China has been pursuing a policy of locking up natural resources wherever they can be profitably bought, and Canada seemed a likely next target. If China doesn’t like the new Canadian guidelines, there are plenty of other opportunities around the world. If China chooses not to test the guidelines, Alberta’s bitumen oil will still interest other investors.

The challenges of bitumen oil are so many that the new guidelines’ impact is among the least threatening. The changing oil scene in the United States, the difficulty of getting approval for pipelines, the growing emissions of greenhouse gases, the discount price for oil to the U.S. and high production costs are among the industry’s key challenges.

Mr. Harper, whose foreign policy is too often characterized by finger-waving intransigence, struck a reasonable balance in this instance between domestic interests and international concerns.

Is this the best system?  Probably not.

Is it a workable system for a sensitive topic in a democratic society?  Sure seems that way.

In any case, Lenihan should check out the Journal of Parliamentary and Political Law.

Also, to all readers, know that the world (and Canada) will survive the new "net benefit" test; just like the world (and Canada) survived the last one.

CNOOC Nexen Bid Part 3: Macleans Talks With Debra Steger

Check out Erica Alini's great Q&A with UOttawa professor, and former trade negotiator for Canada, Debra Steger.

Two main Steger snippets:

Compared to the U.S. and Australia, Canada’s Act, with the two review processes for “net benefit” and “national security,” is confusing and difficult to apply in practice, as in this case involving CNOOC. The “national security” process is also highly non-transparent in that there are no criteria specified for a review and no decisions are ever made public. The U.S. has one test for direct acquisitions: national security, with a list of 12 factors. These are wide-ranging and include: domestic production for national defence requirements, potential effects on U.S. technological leadership in areas affecting national security, potential effects on critical infrastructure in the U.S., long term projection of U.S. requirements for energy and other critical resources and materials. The U.S. approach is more specific, transparent, and integrated than the Investment Canada scheme. The U.S. CFIUS model also requires nine agencies to work together to carry out reviews. This would appear to allow for a broad range of views and better decision making than the Canadian approach in which Industry Canada plays the lead role.

...

My prediction is that the government will allow the investment, albeit with a requirement for undertakings designed to ensure that the resulting business operates in a transparent and commercial manner in accordance with Canadian corporate governance norms and likely to provide net benefit to Canada.

CNOOC's Nexen Bid: North Sea Oil Chinese Concentration? And Waiting for Canada's New 'Net Benefit' Test Parameters

By Keith Edmund White, Editor-in-Chief

If Nexen bid is approved, would China have a worrisome extent of control over Canada's largest North Sea oil field?

Owing to the surge of interest in CUSLINexus's last post on Canada's "net benefit test" and it's impact on CNOOC's takeover bid of the Canadian energy company Nexen, readers may be interested in (1) an update on revisions to Canada's "net benefit" rule and (2) a news exclusive regarding CNOOC's Nexen bid.

What to really watch for in a new Canadian "net benefit" test

WSJ reports on suspicions that changes to Canada's "net benefit" rule test will be very similar to Austrailia's approach.  But huge missing link in the article:  whether Canada adopts an Austrailian-like "net benefit" test or keeps its own, both are basically subjective tests.   The one seemingly change:  the national security review and "net benefit" review may be combined into one process, though if they are run by two different agencies that wouldn't be a huge reform.  

From WSJ:

Charles St-Arnaud, foreign-exchange strategist and economist at Nomura, said in the report that Canada’s new guidelines are likely to mimic Australia’s template in how that resource-rich economy judges foreign investments. The Australian criteria include: national security, which is already incorporated as part of Canada’s foreign-investment review; antitrust issues; the impact on tax revenue; jobs and a possible “fair return” for the local community; and the “character” of the investment, which is a catch-all category that considers the investor’s transparency and corporate structure.

Mr. St-Arnaud noted that Australia has a special provision governing state-owned enterprises, such as Cnooc and Petronas, in which policymakers consider whether the planned investment is of a commercial nature or done for “political or strategic objectives.” Matters that could support a SOE-led takeover in Australia include the investor’s willingness to list shares on the local stock exchange. As it happens, Cnooc promised to do just that when it unveiled its initial bid for Nexen in July.

Nomura’s suggestion that Canada might follow the Australia example comes after a Calgary think tank, the Canadian Defence and Foreign Affairs Institute, warned Ottawa not to follow the path of another resource-rich nation–Mongolia–that scared off international investors when it introduced new foreign investment guidelines last spring.

Instead of obsessing over name-changes to Canada's open ended "net benefit" test, the key is to look at whether (1) the test becomes more objective and (2) if the "net benefit" test and national security review are streamlined into one test, or if fewer federal agencies are responsible for foreign takeover bid reviews.

Would Approving CNOOC's Bid for Nexen Give China to Much North Sea Oil Control? 

And, while Canada is still reviewing the CNOOC bid under its current "net benefit" test, Bloomberg obtained a briefing memo prepared for Prime Minister Harper on the Nexen bid that emphasizes the considerable amount of control China would have over Canada's North Sea oil operations.

Courtesy of iPolitics, but from Bloomberg:

CNOOC Ltd.’s $15.1 billion takeover of Nexen Inc. would give the Chinese company the largest stake of an oil field in the North Sea that “has increasingly influenced” global oil prices, according to a memo sent to Prime Minister Stephen Harper by Canada’s top government worker.

...

It also cites the commitments CNOOC promised at the time, including establishing Calgary as its North and Central American head office, maintaining Nexen’s employment level and management, and enhancing Nexen’s capital spending.

The memo says the bid would mean the Chinese government would own a 16 per cent share of Syncrude, Canada’s biggest oil- sands project in production, with China Petroleum and Chemical Corp., known as Sinopec, owning 9 per cent and CNOOC acquiring Nexen’s 7 per cent.

From previous reports, it still appears the Nexen bid will be approved.  But, as reported in yesterday's Montreal Gazette, Canada has no problem extending (for a third time) the review process, and it's clear Alberta's provincial government wants its voice heard in the "net benefit" review process.

Friday Morning News Wrap

By Keith Edmund White, Editor-in-Chief 

Liberals Can’t ‘Centerize’ Themselves To Victory. Paul Wells at Maclean’s gives some sober advice to a Canadian Liberal Party still on the ropes: 

In fact, if the country’s assorted Liberal parties are in the mood for advice from the “department of easier said than done,” they should waste no more time seeking to present themselves as the middle ground between extremes. Instead they should find some extreme worth defending. What social end is so important that it’s worth taxing to achieve? What fights are worth fighting?

The decline of Liberal parties in Canada produces a kind of optical illusion. The centre isn’t disappearing, it is becoming crowded. Nothing about the Liberal name ensures the endurance of Liberal parties. Loyalty will not save them. Wit and heart will, or nothing will.

Two First Nations Tribes Territorial Dispute May Delay Major Canadian Wind-Energy Project.  The Anishinabek and Batchewana tribes are arguing over their territorial lines, which were set by the Robinson Huron Treaty of 1850. At risk: the 36-turbine, 80 km/~50 mile Bow Lake Wind Farm Project. Check out The Globe and Mail’s report.

Cyber Espionage Part of Doing Energy Business in China? TheStar.com reports on increased Canadian cybersecurity spending, but notes the skepticism of Queen’s University cyber-security expert David Skillicorn. And iPolitics.com reports on espionage as part of doing business in China: 

There are plenty of anecdotal examples of cyberespionage in the energy sector and some consider it part of the business.  

“One of the companies we deal with makes power plants,” said a source familiar with the Canadian energy sector. “They built a power plant in China and all the intellectual property was stolen.”

CNOOC-Nexen Deal In the Greater Canada-China Economic Context.  Conventional wisdom says that the CNOOC-Nexen deal will be approved. But the real story, at least according to Asia Pacific Foundation President and CEO Yuen Pau Woo, is what strings Canada puts on future Chinese acquisitions of Canadian companies. What I find surprising? Woo’s advocacy for ‘smart’ state economic planning in Canada. From The Globe and Mail: 

An opportunity was missed a few years ago when there was a bidding war for Inco. At the end of a convoluted series of offers and counteroffers, two bidders were left standing – Vale of Brazil and Teck Resources of Vancouver. Vale was the much bigger player, and Teck’s offer came as a surprise. Since the acquisition was subject to government review, Ottawa had a chance to weigh in. Support for Teck would have resulted in a much enlarged Canadian company ranking in the top five of global mining giants.

But Vale prevailed, and another Canadian icon went into foreign hands. To be sure, Teck is Canada’s largest diversified mining company and still a global player, but an opportunity for a “national champion” to enter the top tier of mining companies was missed.

The point of this example is not to bemoan foreign ownership but to bring clarity to the goal of building national champions. Blocking foreign investment in and of itself won’t create globally significant Canadian companies. By the same token, a purely hands-off approach to market transactions is no guarantee of success. If this sounds complicated, it’s because economic statecraft is complicated. Beware of those who would boil it down to just a few easy rules. 

Detroit-Windsor Crossing: Harper’s Hard Press & Michigan’s Messy Ballot Battle. The Harper government, in their proposed 2013 budget, is exempting a second-planned bridge crossing between Windsor and Detroit from environmental review. We’ll see if that sticks, or if the NDP or Liberals can make political hay out of it. But, perhaps more importantly, Michigan voters may decide the pace any new international crossing is made—and it’s bringing out colorful local politics. The owner of the Ambassador Bridge, Manuel ‘Matty’ Moroun, is pushing Proposal 6, which—if passed—could create legal hurdles for the planned construction of the Detroit River International Crossing Project. And he seems happy to deal for votes from both ends of the political spectrum.  Will an international bridge crossing be tangled by an unlikely coalition of ballot voters this November?  And how is this issue, unlike the Keystone XL pipeline, not getting any national political attention?  From The Windsor Star:

Critics say Moroun already has a deal in play with the group Americans For Prosperity, buying the group’s support on Proposal 6 by bankrolling its campaign on Proposal 5 — a ballot initiative to limit taxes.

Last week, the Detroit Free Press reported on Moroun bartering with the United Auto Workers for the union’s support on Proposal 6 in exchange for Moroun financially backing Proposal 2 — the union’s ballot initiative on collective bargaining.

Reportedly under pressure, UAW leadership backed away from the deal, with union president Bob King saying the UAW would remain neutral on Proposal 6. 

The UAW’s recent hints of support for Proposal 6 were made all the more embarrassing by the revelation that earlier this summer, King wrote a letter to the U.S. federal government extolling the benefits of a new bridge crossing.

CNOOC’s Nexen Bid & “Net Benefit” Test: What the Legal Test Betrays About Canadian Politics and the Harper's Economic Agenda

By Eskor Edem, Staff Writer 

A Chinese state-owned company, CNOOC, wants to take a controlling interest in Canadian energy company Nexen. The hang-up? The bid must satisfy the “net benefit” requirement that Canadian law imposes on all foreign direct investments exceeding C$299 million. Critically, while the “net benefit” test is—on paper—a six-pronged legal test, a political figure—Minister of Industry and member of the Stephen Harper cabinet member Christian Paradis—applies the test. Thus, political, not the legal, factors will likely determine if CNOOC’s bid passes the net benefit test. CUSLI-Nexus staff writer Eskor Edem reviews the “net benefit” test, identifies the three political factors critical to Mr. Paradis’ decision, and concludes that CNOOC’s bid will likely pass the “net benefit” test. But that won't be the end of the story:  the CNOOC bid still has other administrative hurdles to clear.

“Net Benefit” Test

Although established as statutory law, the “net benefit” rule is really more a political test allowing the seating administration the block foreign investment injurious to its policy vision. Under the Investment Canada Act transactions are reviewable when they exceed the threshold of C$299 million. The final decision of whether a transaction is a “net benefit” is made by the Minister of Industry. As the Minister is an appointed political position, the economic policy of the governing party plays a prominent role in reaching an answer to the “net benefit” question. In determining whether foreign direct investment is a “net benefit”, the Minister of Industry considers a number of factors related the potential economic and cultural impact of the investment. The economic factors weighed range from the potential impact on domestic jobs, the participation of Canadians in the venture, and the impact on Canada’s global competitiveness. Cultural factors can be seen as a catch-all for a range of politically sensitive, non-economic topics—like a foreign investment’s impact on Canada’s indigenousness population, the First Nations. 

Lessons from Canada’s “Net Benefit” Rejection: BHP Billiton and Potash

In 2010, then Minister of Industry Tony Clement rejected BHP Billiton’s proposed hostile takeover of the Canadian mining company PotashCorp. The negative impact of BHP’s proposed takeover on Saskatchewan’s mining economy was the determinative factor in Minister Clement’s rejecting the bid on “net benefit” grounds. Saskatchewan is home to 1/3 of the global potash market. Naturally, this means that the government derives significant revenues from potash mining companies—15% in 2008. But the province also plays a critical role in potash pricing: with a Canadian industry body, Canpotex, the sole distributor for Canadian potash that is marketed outside North America. Canpotex’s exclusive control over the marketing of Canadian potash provides price stability on which Saskatchewan can rely in estimating its future revenue stream. 

PotashCorp. made up 54% of Canoptex’s output at the time of BHP’s bid to acquire it. As such, BHP’s insistence that it would take PotashCorp. out of Canoptex would have dealt a significant, if not fatal blow, to Saskatchewan’s influence on the price of potash on the international market. Opening up Canada’s potash market posed a serious threat to the Canadian economy and, perhaps more importantly, Saskatchewan’s finances. A law firm advising the Province on the matter in Jan. 2011, Jones Day found: 

[T]here was a risk of significant job losses by other Canadian potash manufacturers as a result [of] BHP’s plans to run its Jansen mine “flat out” and its threatened departure from Canpotex… Saskatchewan could [have] los[t]up to CAN $6 billion in tax revenues if BHP operated PotashCorp mines at full capacity.

Independent marketing could have potentially resulted in the (1) the loss of price setting abilities which the province had enjoyed to date; (2) a significant decline in the potash prices largely due to BHP’s level of production; and (3) a significant decline in tax revenue. 

Given the high level of public disapproval of the takeover, approving BHP’s bid carried significant political down side for the Harper administration. On top of public disapproval, Conservative provincial officials voiced their avid resistance to the transaction. In making their case against BHP, provincial officials argued that an “increasingly strategic” resource required maintaining Saswatchan’s influence over global potash prices. According to some, approving BHP’s takeover held the potential of reducing Canada’s food and energy security.

The “Net Benefit” Test’s Political Factors and Why CNOOC Passes the Test

A decision in CNOOC’s favor would provide credibility to Prime Minister Harper’s policy of strengthening Canada’s economic ties with Asia. Minster Paradis’ final determination will be guided by Prime Minister Harper’s goal of ensuring Canadian natural gas and oil producers get access to China's growing energy appetite. As such, application of the “net benefit” rule to CNOOC will likely diverge from the strict letter of the law. In reaching his decision, Paradis will likely consider three political factors:  (1) the nature of the targeted company; (2) The level of provincial support for the CNOOC’s acquisition; and, (3) the possibility of greater market access for Canadian firms operating in China.

Unlike Potash, Nexen is not uniquely dominant in Canadian industry. Nexen only ranks as a middling player in Canada’s oil and gas sector. John Manley, a former Liberal Minister of Industry, made clear if a larger Canadian oil and gas company was at stake, the government would be likely to block a takeover bid on “net benefit” grounds, in this Bloomberg Sept. 2012 article:

‘[If Suncor were the target company]…you would have a different set of questions being asked, simply because of [Suncor’s] scale and…importance in the Canadian context,’…Suncor is Canada’s ‘biggest independent, and that puts it in a somewhat different category.’

CNOOC’s takeover of Nexen does not threaten Alberta’s finances. Unlike the Potash market, in which Canoptex plays a price setting function, factors inherent to the oil and gas markets prevent any single player from determining market prices. In the oil and gas market prices are largely set by supply and demand, with spontaneous political events playing an influential role in short-term price volatility. As such, Alberta does not have the ability to set the market price its oil and gas producers get for their output. Hence, in this regard CNOOC’s acquisition of Nexen will not affect Alberta’s royalty stream; thus, CNOOC’s bid avoids a major point of contention in BHP’s bid.

Furthermore, unlike the Potash bid, the provincial government of Alberta supports CNOOC’s bid. During a recent interview, Alberta’s Premier Alison Redford spoke favorably of CNOOC’s acquisition of Nexen, stating:

At the end of the day, our view is that if this is in Alberta’s interest, it should go ahead. And we think there’s a lot of benefit for Alberta and Canada in this deal.

And in discussing CNOOC’s bid, public commentators have stressed a potentially large up-side for Canada if the bid is approved: If Canada grants China market access within the energy sector, other Canadian companies may find it easier to get access to the burgeoning Chinese marketplace. As reported by the Wall Street Journal, DBRS debt rating agency has found:

‘This transaction would dramatically improve Canada-China relations, which could in turn provide greater economic trade between the two countries.’…add[ing] that approval could also open the door for Canadian businesses in China.

And, obviously, CNOOC’s Nexen bid would strengthen energy ties between China and Canada. Given Canada’s unease with the Obama administration’s reluctance to approve the Keystone XL project, laying the foundation for substantial growth in Sino-Canadian energy trade has become a major policy objective of the Harper administration.

Conclusion

The CNOOC bid, albeit not without some belly-aching, is very likely to pass Canada’s “net benefit” test. First, while superficially a 6-pronged legal test, the “net benefit” rule is really more a political test: giving the Canadian government a way to block foreign investment that may compromise core Canadian economic interests. And as BHP’s failed bid shows, the political variables at play are: (1) the size and scope of the targeted Canadian company, (2) support on the provincial level for the acquisition, and (3) the economic rewards of approving the bid. With Nexen a relatively small player in the Canadian oil and gas industry, Alberta’s support of CNOOC’s bid, and the Harper government’s eagerness to open up the lucrative Chinese marketplace to Canadian firms, CNOOC’s bid for Nexen is very likely to clear the “net benefit” hurdle.

News Round-Up

Some attention-grabbing Canadian headlines.

Why Canada’s Start-Ups Run South.  In a thoughtful piece, Canadian Business explores one Canadian start-up online billing start-up that has resisted relocating to the United States.  The piece also explores why Canada is losing its home-grown success stories to the States:

Roger Martin, dean of the Rotman School of Management at the University of Toronto, has been studying this phenomenon in frustration for years. He’s concerned that policy-makers mistakenly continue to cultivate scientific and technical expertise at the expense of managerial skills: “Companies are going to continue to move to the U.S. to access the managerial talent they need to grow their technology businesses. We’ve been showing this data since 2005, and little or nothing is being done in Canada to help it out.”

For his part, McDerment has been able to capitalize on Canadian talent that’s gone abroad and now wants to return home, often for reasons—they want to be near family, or they don’t want to raise their kids in the U.S.—that are as personal as McDerment’s are. He also maintains that FreshBooks’ corporate culture has been key to attracting, and retaining, that talent. “You’re not just building some technology in the bowels of some mega-corporation that may or may not see the light of day. And if you’re working in a high-performing team with a bunch of top performers, why budge?”

Harper Government Shows Support for Nunavut’s International Airport’s Getting a Big P-3 Styled Facelift.  Showing the Canadian government’s continued commitment to develop Canada’s North, the Canada News Centre reports on a $70 million + investment in the Iqaluit International Airport Improvement Project.  The one missing link: finding a private partner to build the various improvements to meet the increased demands of Nunavut’s business gateway.  To learn more about the airport, check out the check the Nunavut Department of Economic Development & Transportation and skim over this 4-pager on Iqaluit’s history and future.  Interesting fact: while doubling passengers served since 1985 to 125,000 in 2011, Dulles International Airport in Virginia had, in 2011, 23.2 million annual passengers.

Quebec’s Corruption Probe Continues to Expose Canada’s Mafia Ties.  Macleans reports on York Regional Police officer Mike Amato’s 2-hour discussion on Canada’s ties to the Mafia to the Charbonneau Commission—the Quebec government’s corruption probe into the province’s construction industry (named after the inquiry’s head, Justice France Charbonneau).  Learn more about the commission, which is now in its second phase, in Sept. 17 articles published by Montreal’s Gazette and Ontario’s Toronto Star.  One interesting note: while the Commission has its own lawyers (Commission attorney Sonia Lebel has been speaking for the prosecution, but Sylvain Lussier is chief prosecutor), Quebec’s governing party—formerly the Liberals and now the PQ—have official representation on the Commission, meaning the party has government paid for lawyers who can participate in the hearings (other parties can applied and be granted participant or intervener status).  A fascinating topic, and a interesting legal-political set-up to tackle a sensitive subject.

Government Approval for Cnooc's Nexen Bid Will Being Starting Soon.  With Canadian energy producer Nexen shareholder approving a take-over by Chinese-owned Cnooc by a hefty margin, the Canadian government will now have to review the bid.  Speaking to Bloomberg, Peter Harder, senior policy advisor at Fraser Milner Casgrain LLP and president of the Canada China Business Council, says the Cnooc offer is “well constructed” to meet Canada’s net-benefit test for big foreign investment in Canadian industries.

So-Called "North American Energy Independence" and China's Planned Acquisition of Canada's Nexen

By Keith Edmund White

China wants to buy Canadian energy producer Nexen for over $15 billion.  And guess who's Nexen number one buyer?  The United States.  Should this matter?  And does it hold an opprotunity to promote U.S. economic interests in China.  Side-note:  To get a sense of just how big $15 billion is, keep in mind that the New England Patriots are worth a paltry $1.2 billion.  And one more thing:  did you know Canada's very murky "net benefit" rule basically allows the Canadian government to block any instance of foreign investment it doesn't like?  Gotta love the rule of (international trade) law.

Oh the joys of a liberalized trading system.  Is America really more energy independent when it buys Canadian energy?  Sure.  But what happens when the company drilling that energy in Canada is owned by China?

Yup, you heard right.  The government owned Chinese government-owned firm Cnooc is going through Canadian and American governments' reviews of their planned acquisition of Alberta-based energy company Nexen.  If the deal is approved, America will be buying energy based in Canada but profiting China.

This shows just how complicated energy strategy can be in a world where foreign companies--if not foreign countries--can buy companies anywhere in the world.

But, then again, perhaps this purchase is just what's needed to help U.S. industries facing Chinese government resistance to foreign investment and suffering from Chinese-based copyright infringement.

From MarketWatch.com:

Chinese energy giant Cnooc Ltd.’s $15.1 billion deal to buy Nexen Inc. is under increasing political scrutiny in the U.S. even as it faces a long regulatory review in Canada.

“It is rare that we have so much leverage to exert upon China. We should not let this window of opportunity pass us by. At some point, we have to put our foot down over China’s refusal to play by the rules of free trade,” U.S. Sen. Charles Schumer, a New York Democrat, wrote Friday in a letter to Treasury Secretary Timothy Geithner.

Geithner and the Treasury Department chair the Committee on Foreign Investment in the U.S., or CFIUS, an interagency board that reviews deals for national security implications. Cnooc, or the China National Offshore Oil Corp., is a government-owned company.
The deal is subject to CFIUS review because Calgary, Canada-based Nexen has substantial drilling operations in the U.S. portion of the Gulf of Mexico.

It is expected that the Cnooc-Nexen (CA:NXY) deal will be reviewed by CFIUS in Washington and by securities regulators and courts at the federal level in Ottawa, Canada.

But, what about the big question:  is this deal good for the United States?  Well, Christopher Helman argues that there's no un-"lame" reason to reject the deal, and--whatever concerns there might be about the deal--it's going to happen:

From Helman's article Cnooc-Nexen Deal Is Just the Beginning of American Oil and Gas Grab (July 2012):

The only conceivable reason to block Cnooc would be its government connection. Cnooc is publicly traded, but like its sister companies PetroChina and Sinopec, a majority of its shares are held by the government, which wields a heavy hand of influence over multinational acquisitions, especially one so potentially loaded as this.

My point is that if dwindling oil resources was the arguable (but lame) rationale for America’s rejection of the Unocal deal in 2005, there is no basis for that rationale today. In fact, even if all of Cnooc’s $19.5 billion Nexen investment went to acquire North American assets, it would still be a drop in the bucket. Most of Nexen’s 5.6 billion barrels of estimates resources are tied to the oil sands, but roughly 45% of Nexen’s 210,000 bpd of flowing production is in the U.K.’s North Sea waters.

If Canada were to reject Cnooc’s bid it would almost certainly have to block Malaysian state oil company Petronas in its $5.5 billion takeover of British Columbia-based Progress Energy. Don’t count on it.

Canada welcomes this foreign investment, especially in the western provinces, because it wants to diversify its customer base for oil and gas exports. Judging by the Obama administration’s rejection of the Keystone XL pipeline, American consumers seem to prefer importing crude oil from Saudi Arabia and Venezuela than from Canada’s oil sands. No wonder the Canadian government sees the long-term boon of building export terminals on the Pacific coast both for oil and liquefied natural gas.

...

Until the Nexen deal, the two national oil companies with the biggest investments in North America were Statoil, with roughly $20 billion and Korea National Oil Company, with roughly $9 billion.

The foreign land grab for America’s oil and gas has only just begun. Who’s next? Well as I pointed out last month, Sinopec has already been in talks with Chesapeake Energy to acquire acreage in big plays like the Permian Basin. Whether or not Sinopec pulls the trigger will likely depend on how Cnooc’s Nexen deal is received by regulators. Considering that China holds $1.2 trillion in U.S. treasuries, Washington is in no position to say no.

But Helman does omit an interesting legal aspect of Canada's review process.  The Canadian government can review (and block) significant foreign investments in Canada under the Investment Canada Act.  The purpose:  to make sure Canadians benefit from big infusions of foreign investment in Canada.

A critical part of this Act is that a significant foreign investment in Canada must be a "net benefit" to Canada.  If government regulators find that a certain foreign investment in Canada is not, the deal is off.

And what guides this rather powerful tool of government control over the selling of Canadian industries to foreigners?  A very flabby six-prong test that can allow anyone to 'prove' any investment is or is not a net benefit to Canada.  (For those interested, read Canadian economist William Watson's No Rules for Net Benefit Test Financial Post opinion piece.)

So, while this deal may be on track to pass Canadian and American review, what will be interesting to watch is what conditions U.S. and Canadian regulators put on the deal--and how these conditions may be critical to developing America and Canada's trade relationship with China.