NEW YORK/OTTAWA Canadian authorities approved the acquisition of Nexen Inc NXY.TO by China's CNOOC Ltd (0883.HK) on Friday, but said they would block virtually all new attempts by foreign state-owned enterprises to buy controlling assets in the country's vast oil sands.
The ruling, closely watched by investors and politicians alike, followed months of heated debate over how much of Canada's energy sector, and especially its oil sands, should be absorbed by companies run by other governments.
The Nexen deal is the largest successful foreign takeover ever by a Chinese company. Separately, Ottawa also gave the green light for the purchase of Progress Energy Resources Corp PRQ.TO by Petronas of Malaysia.
However, with the rulings, Prime Minister Stephen Harper served notice that future investments by state-owned enterprises would face much tighter scrutiny.
Harper said the two approvals marked the end of a trend for the pro-business Conservatives.
"Foreign state control of oil sands development has reached the point at which further such foreign state control would not be of net benefit to Canada," he told reporters.
CNOOC bid $15.1 billion for Nexen, which is involved in oil sands in Canada and offshore production operations around the world. Petronas offered C$5.2 billion for Progress, a mid-size gas producer. Its offer had been rejected once and the Malaysian company was invited to reapply. Both suitors offered hefty premiums.
The Canadian dollar firmed against the U.S. currency after Reuters reported the CNOOC deal had been approved. The shares of both takeover targets went on a wild ride after the government announced it would announce its decisions and both finished lower as the market closed before the positive rulings were known.
The Harper government also said it would impose stricter conditions in the future on investments by state-owned enterprises in all sectors of Canada's economy and that it would welcome non-controlling minority investments by such enterprises in Canadian companies.
In approving the deal, the Canadian government said CNOOC made significant commitments on transparency, employment and capital investments.
The takeover was overwhelmingly approved by Nexen shareholders in September, but the Canadian government delayed approvals while it drafted a long-promised update to the rules governing investments by state-owned foreign companies.
It also had to deal with the qualms of some of its own members over whether companies from the communist country should be allowed to buy up Canadian energy assets.
Harper has wooed investors in China and elsewhere in Asia to deploy capital in the Alberta oil sands, the world's third-largest crude deposit, and in other resources. The requirements are far too large for Canadian companies to fund alone.
"I realize there were a lot of politics that went into this thing. But I think the overriding factor is that in order for Canada to be able to develop all those tremendous resources that they have is that they were going to need a lot of foreign capital," said Keith Moore, managing director at MKM Partners LLC in Stamford, Connecticut.
"I think they probably played it very well. By pushing back quite a bit they were probably able to get concessions in both these deals, in Nexen and in Progress."
The acquisition will give CNOOC control of Nexen's 43 percent stake in the Buzzard field in the North Sea, the most important contributor to the crude blend used to set the Brent crude price that serves as the international oil price benchmark.
It also includes oil production from Yemen, offshore West Africa and the Gulf of Mexico.
CNOOC also gains full control of Nexen's Long Lake oil sands project in northern Alberta, properties containing as much as six billion barrels of recoverable crude and a 7.2 percent stake in the Syncrude Canada Ltd joint-venture.
Industry Minister Christian Paradis turned down in October the C$5.2 billion bid for Progress by Petronas, but gave the Malaysian state-owned energy company a chance to make new representations.
The companies, which already have a joint venture in the Montney shale gas region of British Columbia, said this week they are advancing an C$11 billion liquefied natural gas plant on Canada's West Coast. They held out the prospect of bigger project if the takeover is approved because Petronas would have access to all of Progress's gas reserves.
Nexen shares ended down C$1.58, or 6.3 percent, at C$23.29 on the Toronto Stock Exchange on Friday. Progress fell 88 Canadian cents, or 4.4 percent. to C$19.37. Nexen's New York-listed shares surged to $26.94 in after-hours trading.
(Additional reporting by Solarina Ho, Euan Rocha and Alastair Sharp in Toronto; Writing by Jeffrey Jones; Editing by Frank McGurty, Bernard Orr, Tim Dobbyn, Leslie Gevirtz and Andre Grenon)