UPDATE 1-Canada starts formal probe of CNOOC's Nexen bid

* CNOOC's filing starts 45-day review process

* Government review to gauge "net benefit" to Canada

* Some gripe about restricted access to Chinese resources

By Jeffrey Jones

CALGARY, Alberta, Aug 29 (Reuters) - Despite some dissent in Prime Minister Stephen Harper's cabinet, the odds look favorable for China's state-owned CNOOC Ltd's $15.1 billion bid to take over Nexen Inc, the Canadian oil producer, as Ottawa starts a formal review of the deal.

Harper, himself, has cautioned against presuming he will rubber stamp the takeover. But he has made high-profile overtures to China to attract the C$500 billion ($506 billion) in investment he says the country needs over the next decade to develop its natural resources, notably Alberta's vast oil sands.

Industry Minister Christian Paradis said on Wednesday that CNOOC had submitted an application for government approval of its deal under the Investment Canada Act, kicking off a 45-day review to determine if the takeover will result in a "net benefit" to Canada. Paradis can unilaterally extend the somewhat murky process for an additional 30 days.

The bid is a crucial test of the Harper Conservative government's assertions that Canada is open to foreign investment, even by state-owned enterprises, as investors remain wary that the deal could be blocked or hit with onerous terms as was the case with BHP Billiton's failed 2010 bid for Potash Corp.

Some opposition to CNOOC's bid has emerged within the Harper cabinet, with concern raised about the potential for losing control of the oil sands, the world's third-largest crude source, to Chinese state-owned companies.

However, the Globe and Mail reported on Wednesday that Finance Minister Jim Flaherty, one of the most powerful cabinet members, has warned colleagues that blocking the deal for political reasons will hurt shareholder value and damage relations with China just as Canada looks to be on the cusp of a vast surge in oil exports.

A spokesman for Flaherty declined to comment on the report.

Sources close to the deal have told Reuters that Natural Resources Minister Joe Oliver, who has pushed hard to open up new markets in Asia for Canadian crude as a way to bolster economic returns, appears to be tilting toward approval.

CNOOC announced on July 23 it will offer C$27.50 a share, a 61 percent premium to the stock's price a day earlier, for Nexen, which operates in the Canadian tar sands, as well as in the Gulf of Mexico, North Sea and offshore West Africa.

Unlike Potash Corp, one of just a handful of companies that produce its namesake fertilizer product in Canada, Nexen is among dozens of developers in the oil sands.

But Nexen's share price, up 2 Canadian cents at C$25.13 on Wednesday, shows investors remain unsure about the deal getting the nod from Ottawa.

"This will be not an easy one to turn down, in the face of urgings from the prime minister, multiple ministers and (Alberta's) premier to encourage Chinese investment in Canada and in the energy sector," said Gordon Houlden, director of the University of Alberta's China Institute and a former Canadian diplomat in China.

Still, the issue of reciprocity -- with Canadian companies being prevented from making some investments in China -- has emerged forcefully since CNOOC announced its friendly offer for the Calgary-based oil producer, China's richest foreign bid.

Reciprocity is not specifically part of the review process, but the government can include it if it wants.

Paradis told reporters on Tuesday that government reviews of takeover bids by state-owned enterprises examine the company's ownership and governance, what their expanded presence will mean to the Canadian economy over the long term, and whether the deals fit with Ottawa's polices.

"Reciprocity is always going to be there in the background. It's going to be raised by critics of the deal, it's going to be raised by economic nationalists, it's going to come up certainty around a cabinet table though it's not front and center in the Investment Canada Act," Houlden said

"It's lovely in principle, but in practice, the theory that you have to harmonize investment policies in this country with investment policies everywhere else is somewhat unrealistic."

CNOOC, mindful of its failed $18.5 billion bid for California-based Unocal Corp under heavy opposition from Washington in 2005, has promised several measures to make the Nexen takeover palatable to Canada as the government makes its net benefit calculations.

They include maintaining all of the current staff and management, making Calgary the headquarters for its operations in the Western Hemisphere, and listing its shares on the Toronto Stock Exchange.

In its information circular mailed to shareholders last week, Nexen said CNOOC had raised its bid twice between May and July as talks toward a deal progressed.