DBRS: Canada-China Ties Would Get Big Boost from CNOOC/Nexen Deal Approval

OTTAWA - A Canadian ratings agency said Wednesday that Canadian-government approval of CNOOC Ltd.'s bid for Nexen Inc. would "dramatically" improve relations between Ottawa and Beijing, and likely lead to a significant boost in trade between the two countries.

But there are potential downfalls to the proposed $15.1 billion transaction, Toronto-based DBRS said in a special report on foreign investment in Canada's energy sector. It said the financial benefit to the resource sector may be limited, as Nexen could likely continue to access capital as a stand-alone company. And approval could open the floodgates for other state-owned enterprises to acquire majority interests in leading Canadian energy producers.

"Overall, the net benefit to Canada is somewhat mixed in terms of economic and political aspects," the ratings agency said.

It argued the transaction "is not necessary" because of Nexen's relatively healthy balance sheet. Foreign investment could add "greater value" to the Canadian economy if it was targeted toward smaller Canadian energy operators which may have limited access to funds and reduced access to the latest technology, it said.

DBRS also said the deal would likely boost efforts by Canada's Conservative government to establish closer ties with Asian markets, as it looks to diversify trade from its traditional markets in the U.S. and Europe.

"Future access to Asian markets may be accelerated," DBRS said. "This would help diversify the customer base and narrow the differential" in pricing between West Texas intermediate crude oil and Brent, it said.

CNOOC, a state-owned energy company controlled by Beijing, launched its proposed takeover of Nexen in July. Nexen's shareholders approved the deal last week. But the deal is subject to Canadian federal government approval, as required under Canada's foreign investment laws. Officials are currently vetting the deal to ensure it provides a so-called net benefit to the Canadian economy.

Prime Minister Stephen Harper has said the review of the CNOOC deal is unique because of its size and because it's led by a Chinese state-owned enterprise. Mr. Harper and some of his cabinet ministers have said Ottawa may push for some form of market reciprocity as a condition for approval.

However, the Canadian Conservative government has also pushed stronger ties with the Asia-Pacific region, especially China. This drive gained steam after the White House delayed approval for construction of TransCanada Ltd.'s proposed Keystone XL pipeline project.

Copyright (c) 2012 Dow Jones & Company, Inc.


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