Canada's energy shifts to China

It is no coincidence that Canada, and not Australia, is playing host to a potential deal that would mark China's largest-ever foreign acquisition.

Overnight, CNOOC Ltd announced a $15.1 billion friendly bid for Canadian energy company Nexen Inc, representing a 66 per cent premium on Nexen's 20-day volume-weighted average share price.

If approved by the Canadian government, the deal would surpass Aluminum Corp of China's $14.3 billion deal for a 12 per cent stake in Rio Tinto PLC in 2008 to become the largest-ever overseas acquisition by a Chinese company.

Government approval is not guaranteed, but it stands a good chance. CNOOC sought to learn from BHP Billiton's oversight when the miner took for granted government approval of its $39 billion bid for fertiliser giant Potash Corp. Canada's Conservative government rejected the Potash takeover in late 2010, saying it would not represent a net benefit to Canada.

That decision raised fears Canada would scare off future foreign buyers, and in this deal the government will likely see an opportunity to restore its standing in foreign investment circles. CNOOC has helped its chances by promising to list Nexen on the Toronto Stock Exchange, maintain a North American headquarters in Calgary and otherwise retain Nexen's Canadian roots while building on its operations in Columbia, Yemen, the North Sea and the United States.

Canada and China have become increasingly frequent dance partners as China seeks a friendly foothold in the North America market and Canada hopes to tap Asian markets to help fund the costly development of its oil sands and diversify trade.

China has been waiting for an opportunity – and in this deal they see that opportunity – to make a fresh foray into the North American energy sector after its $18.5 billion bid for US company Unocal collapsed in 2005 under intense political pressure that scared off Chinese buyers. Unocal later merged with a much less politically sensitive partner in Chevron.

The China-Canada relationship is worth watching in Australia. At a time when the Australian government is scrambling to preserve Chinese investment and preparing a soul-searching white paper on the future relationship between Australia and its Asian trading partners, China has found itself an eager, and resource-rich, trading partner in Canada.

Canadian Prime Minister Stephen Harper has in a few short years significantly changed the tone of his country's relationship with China. For decades, economic ties between the two countries were strained by the insistence of successive Canadian governments – most notably Liberal Prime Minister Jean Chretien, who held office from 1993 through 2003 – that human rights abuses figure prominently in diplomatic talks.

Harper has changed the channel, focusing on the economy and investment. In February, he travelled to Beijing to market Canadian oil to China, stressing the need to diversify Canadian markets and reduce his country's reliance on the United States.

That push to diversify away from the US has gained momentum since US President Barack Obama's decision in January to put a hold on the Canada-to-Texas Keystone XL oil pipeline, saying the proposal required further environmental reviews. The decision prompted Harper to pledge to look elsewhere for buyers of Canadian energy exports.

That "elsewhere” is turning out to be China. Enbridge is proposing a $5.5 billion pipeline that would link Canada's oil sands with a west coast tanker port, allowing direct shipments to Asian markets.

Meanwhile, China Investment Corp. (CIC) – the $400 billion sovereign wealth fund that chose last year to open its first offshore office in Toronto, rather than in Australia, London or New York – bought a $1.74 billion stake in Teck Resources, while state-owned China Petroleum Corp (Sinopec Group) took a nine per cent share of oil sands producer Syncrude for $4.56 billion and separately last year bought oil and gas explorer Daylight Energy for $2.2 billion.

The CIC has been at the leading edge of China's efforts to smooth the way for further investments. Late last year, reports suggested the fund was planning to move its managing director to Canada to focus on increasing the fund's natural resources assets.

When the CIC opened its Toronto office, the fund's chief representative in Canada, Felix Chee, said the decision to increase its footprint in Canada over other markets, including Australia, reflected the view that Canada "is a welcoming place” for the country's investments.

"They don't want to be where they are not wanted,” Chee said, according to Toronto's Globe and Mail newspaper, which said that Chee has been urging the fund's senior members to shift their focus on resource investments from Australia to Canada.

China's growing affection for Canada's energy sector should be appearing on Australia's radar. The uncertain future of the Oakajee port and rail project – stalled pending a delayed report from the CIC – and the government's Asian Century white paper have led to deeper analysis about the future of Australia's relationship with China.

But amid this reflection and uncertainty, China is moving into another resources-rich country that is increasingly happy to roll out the welcome mat.