PETRONAS Decision Signals Feds' Caution on SOE Investment Reviews

by Bennett Jones LLP

On October 19, 2012, minutes prior to the expiry of the review period mandated by the Investment Canada Act (ICA), the Minister of Industry, Christian Paradis, announced that he was rejecting the proposed acquisition of Calgary-based Progress Energy Resources Corp. by PETRONAS. The Minister did not provide reasons or details other than to state that he was “not satisfied that the proposed investment is likely to be of net benefit to Canada.”

PETRONAS is the national oil and gas company of Malaysia and is a state-owned entity (SOE). It has business assets and interests in the oil, gas and petrochemicals industries in more than 30 countries. Progress is a Calgary-based energy company focused on exploration, development and production of large, unconventional natural gas resources in northeast British Columbia and northwest Alberta.

PETRONAS, through a wholly-owned Canadian subsidiary, and Progress signed an arrangement agreement on June 27 of this year. Following a subsequent amendment to the agreement (whereby PETRONAS raised its bid price) the transaction was valued at approximately $5.9 billion.

PETRONAS has 30 days from the Minister’s announcement in which to submit undertakings and make representations to the Minister in an attempt to reverse his initial decision. PETRONAS has reportedly hired lobbyists to advocate on its behalf and has extended the outside date under its agreement with Progress to November 30, 2012. PETRONAS and Progress have also announced that they will be meeting with officials from Industry Canada and that they are determined to save the deal.


Since the undertakings PETRONAS was prepared to make and the reason for Industry Canada's decision are not public, it is difficult to definitively assess the implications of this decision at this time. The conciliatory comments made by Minister Paradis at the time that he announced his decision, and similar comments by Finance Minister Flaherty shortly after, stand in marked contrast with the tone of then-Industry Minister Clement's remarks in October 2010 when he rejected BHP Billiton Ltd's bid for Potash Corporation of Saskatchewan. Moreover, the decision to block the PETRONAS investment must be viewed in the context of China National Offshore Oil Corp.’s (CNOOC) US$15.1 billion bid for Nexen Inc., which is pending before the Investment Review Division (IRD) of Industry Canada. It is to be expected that the government will be coordinating its reviews of the two SOE transactions. Nevertheless, the decision is noteworthy for the uncertainty it has created as to whether Canada is actually open for business to foreign SOE investors, and to CNOOC in particular.

Changes to Canada’s Foreign Investment Policy

Before a reviewable investment may be completed, the Minister must determine that the investment is likely to be of net benefit to Canada. Canada’s investment regime has frequently been criticized for being subject to political intervention and for the uncertainty with respect to what constitutes net benefit to Canada. The ICA requires the Minister to take a number of factors into account in making his determination. The lack of transparency in the review process itself, and the fact that the Minister does not issue reasons for his decisions, has frustrated observers looking for guidance from past decisions. Following the Minister’s announcement concerning the PETRONAS investment, Prime Minister Stephen Harper stated that the government has, “in the not-too-distant future, the intention to put out a clear, new policy framework regarding these sorts of transactions.”
The question on many investors’ minds is whether the PETRONAS decision simply reflects the Conservative government’s desire to coordinate its reviews of two major foreign investments by SOEs, or, whether it can be taken as something more, namely, as an indication that the ICA review process is becoming more difficult, particularly for SOEs and potentially for investments in the oil and gas sector. It is important in this regard to bear in mind that Canada has only formally blocked two foreign takeover bids since the ICA came into force in 1985.1

SOE Guidelines

The PETRONAS decision marks the first time that Canada has declined to approve a proposed acquisition by an SOE. SOEs have generally fared well with the ICA review process and several SOE investments have been approved over the past four years in the oil and gas sector.2 Moreover, the Minister of Industry has already adopted Guidelines on State-Owned Enterprises. The Guidelines effectively create a quasi dual-track process whereby investments by SOEs are subject to an additional set of factors that the Minister is to consider under the net-benefit analysis.3 The Guidelines are intended to address the Conservative government’s stated concerns about SOE investment in Canada; namely, that they should operate according to sound principles of corporate governance and commercial orientation. That said, the prospect of heightened scrutiny under the ICA review process can be found in a recent Canadian Security Intelligence Service (CSIS) publication where CSIS warned that “certain SOEs and private firms with close ties to their home governments have pursued opaque agendas or received clandestine intelligence support for their pursuits here [in Canada].”


The timing of the Minister’s announcement that the PETRONAS investment had not satisfied the net benefit test was particularly unusual (i.e., the announcement was made only minutes before the expiry of the review period), and has led to market speculation that the rejection was the result of PETRONAS refusing to consent to an extension of the review period. Under the ICA, the Minister may unilaterally extend the review period once, for up to 30 days and, thereafter, may only extend the review period with the consent of the investor. If the Minister requires more time, and the investor is not willing to consent to an extension, the Minister has no choice but to expressly reject the transaction. To further complicate matters, the decision also comes just as Canada is joining negotiations on a Trans-Pacific Partnership trade and investment liberalization agreement with 10 other countries, including Malaysia.

Some commentators have suggested that more pro-active management of the political process involved in ICA review might have made a difference in the PETRONAS/Progress case. Significantly, PETRONAS does not appear to have had any registered lobbyists on board until after the rejection. Prudent investors will want to make sure that their transaction is well understood by all potential stakeholders in government and will engage appropriate government relations assistance early in the process. This is particularly significant in the context of SOE transactions.

Furthermore, many have speculated that the PETRONAS decision resulted from a breakdown in negotiations and from PETRONAS' frustration with the ICA process and timing, and it has been suggested that the government’s rejection must have been triggered by a PETRONAS refusal to consent to an extension of the review period. The timing of the CNOOC/Nexen review also likely affected the PETRONAS decision. Whatever the outcome of the ICA process in the CNOOC/Nexen deal, it will be viewed in light of the PETRONAS decision and thus the government will want the two decisions to be consistent. Furthermore, the Prime Minister's recent announcement regarding the impending release of a new policy framework regarding SOE investment may also have played a role (the announcement was made only three days after the PETRONAS announcement). Either way, if the reports that PETRONAS played hard-ball by refusing an extension are true, then the PETRONAS decision stands as a warning to investors that refusing to consent to an extension upon the Minister’s request will increase the likelihood of an unfavourable ruling.

It should be reiterated that, despite the refusal, the deal may still ultimately receive approval. The announcement may simply mean that the Minister needs more time to review the transaction, particularly in light of the concurrent CNOOC/Nexen review and the development of a new policy framework regarding SOE investment.

CNOOC – Nexen Deal

Finally, investors and other interested observers are wondering what effect the rejection of the PETRONAS investment will have on CNOOC’s proposed acquisition of Nexen. It is to be expected that the government is coordinating its reviews of the two transactions and its policy development simultaneously. Whether this means the PETRONAS decision should be seen as an anomaly is still unclear.

As in the PETRONAS investment, Industry Canada will have to decide whether the CNOOC bid is of net benefit to Canada. To date, the Prime Minister has sent mixed messages in regards to the CNOOC/Nexen deal, stating on the one hand that Canada welcomes investment from China and that selling more of Canada’s natural resources to Asia is a “national priority”. The government is also on the verge of ratifying a foreign investment promotion and protection agreement with China. On the other hand, the Prime Minister recently stated that the CNOOC/Nexen deal “raises a range of difficult policy questions”. There may also be a national security aspect that factors into Canada’s relationship with China, although that factor will potentially be present in SOE transactions from any country, including Malaysia.

The outcome of the CNOOC/Nexen review is still unclear and the Minister has recently extended the review period for the second time, this time with CNOOC's consent, for a period of 30 days. December 10, 2012 is the new deadline for the CNOOC bid, barring any further extension requests from the Minister. Moreover, the Prime Minister’s communications director, Andrew MacDougall, has recently stated that the new policy framework is not expected to be unveiled prior to that date.


The PETRONAS decision appears to herald a new policy orientation in connection with foreign investment by SOEs in Canada, the outlines of which are yet to be articulated. It is certainly possible that the PETRONAS transaction may yet be approved. For the moment, however, there is considerable uncertainty regarding the Canadian investment review process with regard to SOEs.

  1. These two cases were the recent proposed takeover of fertilizer maker Potash Corporation of Saskatchewan Inc. by Australia’s BHP Billiton Ltd., and the 2008 bid by US-based Alliant Techsystems Inc. to acquire the aerospace division of Vancouver-based MacDonald, Dettwiler & Associates Ltd.
  2. A number of acquisitions of control of Canadian businesses by SOEs have been approved. In 2011, Harvest Operations Corp. (a wholly-owned subsidiary of Korea National Oil Corporation) acquired producing and undeveloped assets from Hunt Oil Company of Canada, Sinopec acquired Daylight Energy and CNOOC Limited acquired OPTI Canada Inc. In 2010, Sinopec acquired ConocoPhilips’ stake in Syncrude, and finally, in 2009, International Petroleum Investment Company (of the Emirate of Abu Dhabi) acquired NOVA Chemicals Corp., Korea National Oil Corporation acquired Harvest Energy Trust and PetroChina International Investment Company acquired a 60-percent interest in two oil sands projects from Athabasca Oil Sands Corp.
  3. These factors include, inter alia, governance and commercial orientation of the SOE (e.g., the SOE’s corporate governance, reporting structure, and compliance with Canadian laws and practices), the extent to which the non-Canadian is owned or controlled by a state, and whether the Canadian business to be acquired by an SOE will have the ability to operate on a commercial basis.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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