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Varcoe: Time to revisit barriers to Chinese investment in oilsands

Canada’s energy sector needs capital. Alberta wants foreign investment. China has money to spend.

It seems like a natural marriage.

Yet, in the first three months of the year, one of the biggest sources of foreign investment dropped sharply for the province’s largest industry.

The country’s energy sector saw only $400,000 invested by Chinese companies — among deals that closed with approval during the period — falling to its lowest level in six years, says a report by the China Institute at the University of Alberta.

Canada’s oilpatch, once a magnet for state-owned enterprises looking for an energy deal, “is now among the least favoured sectors for Chinese investment,” says analysis by the institute.

“Energy investment is at a low, there’s no doubt about it,” says Gordon Houlden, director of the institute. “We should be concerned; worry is too strong, but we should be concerned.”

Even if there’s no worry, these numbers should serve as a wake-up call for an industry trying to raise capital during a period of low commodity prices, but also for provincial and federal governments struggling to stimulate the economy.

It also begs the question of whether the barriers to investment by state-owned enterprises, put in place by the Harper government in late 2012, still make sense.

On Wednesday, Foreign Affairs Minister Stephane Dion met with his Chinese counterpart, Wang Yi, in Ottawa, where the two pledged to “open up a new golden era” of bilateral relations.

There’s room for improvement.

The U of A report shows Chinese investment in Canada during the first three months of the year totalled $235 million, down from $1.7 billion in the fourth quarter.

The decrease comes even as China is ramping up its foreign spending.

With a population of 1.4 billion and the country’s growing economic clout, China remains a massive source of investment; it makes sense for Alberta’s cash-strapped energy sector to be fishing in this pond for capital.

It’s also important to note Chinese investment in energy has not dried up completely.

The institute’s figures do not include deals announced at the end of 2015 or early 2016 that haven’t closed or received approval under the Investment Canada Act.

In late March, Calgary-based Bankers Petroleum Ltd. announced it was acquired by Geo-Jade Petroleum Corp. for $575 million, while Long Run Exploration Ltd. shareholders approved its sale to Sinoenergy Investment Corp. for $100 million and the assumption of $679 million in debt.

But this is a far cry from earlier in the decade, when Chinese state-owned enterprises were looking to secure long-life oilsands reserves. An estimated $29 billion in energy deals occurred between 2011 and 2013.

The pace of the deal making, however, sparked nervousness over foreign control of Canada’s natural resources, particularly by Chinese state-owned enterprises.

The debate intensified with the $15.1-billion takeover of Nexen Inc. by CNOOC Ltd. in December 2012.

At the time, the former Conservative government approved the takeover but said future acquisitions in the oilsands by state-owned enterprises would only be approved in “exceptional” circumstances.

Since then, the ground has shifted.

Commodity prices have tanked. The federal and provincial governments have changed. Thousands of oilpatch jobs have vanished.

Chinese investment in Canada’s energy sector fell to $2.4 billion in 2014 and $5.4 billion last year before the first-quarter funk, according to the institute.

Aside from the obvious impact of weak oil and gas prices, several other factors have affected China’s energy investment strategy.

Houlden, a former diplomat, says the restrictions imposed by Ottawa, past investments performing poorly, corruption issues in China and a lack of pipelines to get Alberta oil to the coast for export are acting as a drag.

John Gruetzner, managing director of Intercedent Ltd., a Canadian investment advisory firm focused on Asia, says a correction in China’s economic growth and the improved availability of energy supplies have also “taken the urgency out of acquiring oil.”

“The rules put in by the Harper government are having an impact in that they create another area of risk in a deal and also cost of completing a transaction,” he said in an e-mail.

But should we care if China spends less in the oilpatch?

A poll last year by the institute found only 42 per cent of Albertans think more Chinese investment in energy and resources is welcome.

There are long-standing concerns about the country’s human rights record. And China doesn’t allow reciprocal investment in its energy sector.

But Canada’s energy industry remains a capital-intensive business, even during these down times.

Jackie Forrest, vice-president of energy research at ARC Financial, notes the Canadian energy sector is expected to spend more than $30 billion on capital this year, even as producers only generate an estimated $18.6 billion in cash flow.

“In downturns, when it’s harder to get capital to fund the industry, it’s even more important that we’re open to any sources of capital that the industry can get,” she said.

Before last year’s federal election, the Liberals indicated they would review and loosen the oilsands investment barrier, although Prime Minister Justin Trudeau was non-committal when asked about the issue in April.

It’s time to re-examine the rules and see if they’re serving Canada’s needs, particularly if this is done as part of a comprehensive free trade arrangement with China.

“To me it’s crystal clear that four million Albertans … cannot begin to fund a gigantic oil industry that is super capital intensive in this province,” says Houlden.

“We need foreign capital. It’s critical to our Canadian prosperity.”

News source: http://calgaryherald.com/business/energy/varcoe-time-to-revisit-barriers-to-chinese-investment-in-oilsands