Canadian oil and the growing hunt for foreign investment

Canada is now considering relaxing rules on foreign investment in its oil sector, even opening it up to Chinese state-owned enterprises, in an effort to attract foreign capital.

Snapshot of live video stream of tar sands extraction efforts. Imagery via Canadian Association of Petroleum Producers (CAPP) website.

GENEVA, September 4, 2016 — The world’s oil producers are still struggling to come to grips with the ongoing global energy price slump. Canada, for one, is now considering relaxing rules on foreign investment in its oil sector, even opening it up to Chinese state-owned enterprises, in an effort to attract foreign capital.

At a cabinet meeting on August 21, Canadian Finance Minister Bill Morneau said Ottawa plans to discuss with China how to attract more investment into Canada at the September G20 summit. That announcement, and especially the prospect of Chinese state-owned firms owning stakes in Canada’s energy industry, marks a dramatic reversal in rhetoric compared to Canada’s previous government.

Former Conservative Prime Minister Steven Harper once referred to opening Canada to greater Chinese investment and trade as “selling out important Canadian values” of democracy and human rights. Granted, that was before Harper went on to seal billions in trade and investment agreements with Beijing and approve the $15.1 billion sale of oil and gas company Nexen to China. Nonetheless, he introduced measures stipulating that Canada would only approve the future sale of an oil sands company to a Chinese state-owned firm under “exceptional circumstances.” Even for Harper, the recent slump in oil prices might have qualified as exceptional.

For Morneau and his boss, new Canadian premier Justin Trudeau, outside capital is clearly desirable, especially when the drop in oil revenue has helped produce a projected budget deficit of almost $30 billion.

Some regions of the country have been hard hit, particularly the oil-producing western provinces Alberta and Saskatchewan. Alberta may be the epicenter of the oil crash, shedding almost 40,000 oil jobs in 2015 and seeing unemployment rise from 4 to 7 percent.

While the impact of current oil pricing has been subtler elsewhere, the entire country has suffered the ill effects. Bank of Canada governor Stephen Poloz has pointed out that the oil-influenced $50 billion cut to Canada’s national income is equivalent to $1,500 lost by every Canadian citizen. A business outlook survey released by the Bank reported that business investment intentions have fallen to their lowest level since the 2008-2009 recession, with hiring plans reaching six-year lows. David Madani, chief economist at Capital Economics, says these may be signs of an upcoming full-blown recession.

Acting on environmental concerns, the current U.S. government has also thrown a wrench in Canada’s energy plans. Barack Obama’s decision to block the Keystone XL pipeline has put additional pressure on the Canadian energy industry and thrown up a considerable impediment to growth in the sector. The decision to block the pipeline project effectively scuttled a project considered essential to improving the flow of oil from western Canada to global refineries and markets. According to TransCanada CEO Russ Girling, the project would have employed 2,200 Canadians almost overnight.

Canada joins the rest of the world’s major oil producers in struggling to make up budget shortfalls, and some of those countries are contemplating much broader changes to make up the difference.

Saudi Arabia, whose revenue (along with its Persian Gulf neighbors) is expected to drop by $300 billion this year, has launched an aggressive program to build itself a “post-oil” economy, labelling the reform package Vision 2030. Among other objectives, these reforms seek to increase foreign investment from 3.8 to 5.7 percent of Saudi economic output and ultimately raising non-oil government revenue to $266.6 billion by 2030.

In addition to expanding its national defense industry, which already has deep ties to American firms like Boeing and Lockheed Martin and Britain’s BAE Systems, the Saudi monarchy is looking to broaden its ties with traditional partners (like the US and UK) beyond the realm of geopolitics. This effort has included a trade-minded visit to America by Deputy Crown Prince Mohammed bin Salman and, in the wake of Brexit, increased talk of a free trade deal between Britain and the Gulf Cooperation Council (in which Saudi is the largest and most influential member).

The overarching idea of the Vision 2030 program is to cultivate a deep-rooted, lasting diversification of an economy that has always been reliant on oil. To that end, Saudi leaders are looking to privatize even the most critical sectors (like healthcare and air travel), and the capital they are looking for will have to come from abroad. For the first time ever, retailers will be allowed to be entirely foreign-owned, a move Saudi policymakers hope will create one million new retail jobs by 2020.

Foreign investors will also be able to buy shares directly in initial public offerings (IPOs), namely the partial sale of the Saudi national oil company (Saudi Aramco).  The national oil company had been fiercely protected from foreign investment in the past, with foreign investors only permitted to take part in IPOs on a case-by-case basis.

The Canadian energy industry is certainly less politically sensitive than Saudi Arabia’s, but it remains an integral component of Canada’s national economy. When times were good, Canada exercised its right to be picky about which foreign investors were able to buy in to the sector, as Harper helped illustrate by trying to keep the Chinese out. As the massive profits of a few years ago have dried up, however, even the most opaque components of the global energy market have had to open up to meet the economic and budgetary shortfalls. Compared to a jealously-guarded state asset like Saudi Aramco opening up to the world, the idea of Chinese state-owned companies being allowed to buy additional stakes in Canadian oil prospects hardly seems surprising at all.

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