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'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.

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.