By Michael Erman and David Ljunggren
NEW YORK/OTTAWA (Reuters) - Canada approved China's biggest ever foreign takeover on Friday, a $15.1 billion bid by state-controlled CNOOC Ltd for energy company Nexen Inc., but drew a line in the sand against future buys by state-owned enterprises.
In a fierce defense of a tough, new foreign investment framework, Prime Minister Stephen Harper said Canada would not deliver control of the oil sands - the world's third-largest proven reserves of crude - to a foreign government.
The ruling, anxiously awaited by investors and politicians alike, followed months of heated debate about how much of Canada's energy sector could and should be absorbed by companies run by other nations.
The bid triggered unusually open dissent among legislators in the ruling right-of-center Conservatives, many of whom were particularly nervous about the idea of allowing China to gain control of the oil sands.
Canada said yes to this deal, but will not do so next time.
"To be blunt, Canadians have not spent years reducing the ownership of sectors of the economy by our own governments, only to see them bought and controlled by foreign governments instead," Harper told reporters after Ottawa gave the deal the green light, along with approval for the less controversial takeover of gas company Progress Energy Resources Corp by another state-owned energy company, Petronas of Malaysia.
"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 added.
The bid by CNOOC, China's third-largest oil company, had raised huge questions for Harper's Conservative government, which sought both to appear open for investment and to diversify Canadian energy exports toward Asia and away from the United States. The strict new approach restricts state-owned enterprises to minority stakes in Canadian enterprises except in what Harper described as "exceptional circumstances".
It will raise questions about how Canada can raise C$650 billion ($657 billion) in investment it says it needs in the natural resources sector in the next decade alone.
Ottawa has yet to clarify the meaning of "exceptional circumstances", but Canadian ministers and analysts say much of the money will have to come from abroad and cash-rich China is an obvious source.
Analysts said the new rules could please market operators who complain Ottawa is too vague about the kinds of foreign investment it wants. Investment Canada, part of the industry ministry, must decide if takeovers are a net benefit for Canada, but critics say the process is opaque.
The Conservatives shocked markets in October 2010 by unexpectedly blocking a bid by BHP Billiton Ltd for Saskatchewan-based fertilizer maker Potash Corp.
"This approval helps overcome some of the stigma that was associated with Investment Canada after the BHP rejection. I think it is good news for the perception of Canada as a destination for capital," said Oliver Borgers, a partner at McCarthy Tetrault in Toronto.
STATE RUN, BUT WHICH STATE
Harper said he was confident other firms would want to invest in the oil sands, third only to OPEC members Saudi Arabia and Venezuela in crude reserves.
"What we're doing here is preventing a situation which I see developing, I have been worried about for a while now, ... where in the name of an open, globally competitive economy, we could see the transformation of our economy into a state-run economy, just a state-run economy not (run) by our government," he said.
The main opposition New Democrats, who had wanted the Nexen deal blocked, said Harper had not done enough to clarify the net benefit test.
"What the decision today does is send a very clear signal that these types of transactions, that these kind of takeovers will be approved," said energy spokesman Peter Julian.
Nexen, long viewed as a takeover target, is involved in oil sands in Canada and offshore production operations around the world. It was an ideal target for CNOOC, especially since no Canadian firms had tried to buy it.
Petronas offered C$5.2 billion ($5.3 billion) for Progress, a mid-size gas producer. Both suitors offered hefty premiums.
The shares of both takeover targets went on a wild ride, slumping late in the Canadian trading session on speculation that an after-market announcement could be negative.
Nexen's New York-listed shares then surged in after-hours trading on a Reuters story that the deal had been approved. The Canadian dollar firmed.
Canada said the approval came after CNOOC made significant commitments on transparency, employment and capital investments.
"By pushing back quite a bit they were probably able to get concessions in both these deals, in Nexen and in Progress," said Keith Moore, managing director at MKM Partners LLC in Stamford, Connecticut.
The all-cash offer and commitments are generous, some China and Hong Kong-based analysts said. But CNOOC had drawn lessons from its failed $18.5 billion bid for U.S. oil producer Unocal in 2005.
CNOOC has pledged, for example, to make Calgary the headquarters of its operations in the Americas, where it has already made major investments.
"CNOOC has been careful to address the net benefits to the Canadian authorities and regulators after its Unocal experience," said Scott Darling, head of Asia ex-Japan Oil & Gas Equity Research with Barclays in Hong Kong, adding that he expected CNOOC to complete the deal by the end of this year.
CNOOC has said the acquisition would boost production by 20 percent and proven reserves by 30 percent. The company has nine years of reserves based on current production -- one of the lowest ratios among major oil companies worldwide.
"For Nexen this is a fantastic deal," said Simon Powell, head of Asian oil and gas research at CLSA in Hong Kong. "What the big concern to me is that Nexen does not have the production growth that people think it does."
CNOOC officials in Beijing were not immediately available for comment.
The takeover gives CNOOC control of Nexen's 43 percent stake in the Buzzard field in the North Sea, the most important contributor in the crude blend used to for Brent international pricing benchmark.
CNOOC has asked the U.S. government to review its bid for Nexen's offshore oil assets in the Gulf of Mexico. CNOOC said last week the review was underway, and a Washington spokesman declined further comment on Friday.
Industry Minister Christian Paradis had initially rejected Petronas's bid for Progress but he allowed it to make new representations.
Petronas plans to re-list Progress in the next 3 to 5 years, said a Petronas source with knowledge of the deal. Progress assets include Canadian shale assets, in which Petronas already has a stake, and a liquefied natural gas export terminal under construction.
It has also agreed to have Canadians on the Progress board as independent directors and to retain the local workforce, the source said.
Petronas and Progress, which already have a joint venture in the Montney shale gas region of British Columbia, said this week they are advancing the C$11 billion LNG plant on Canada's West Coast. They held out the prospect of a bigger project if the takeover is approved, because Petronas would have access to all of Progress's gas reserves.
($1=$0.99 Canadian dollar)
(Additional reporting by Solarina Ho, Euan Rocha and Alastair Sharp in Toronto, by Louise Egan and Randall Palmer in Ottawa, by Jeffrey Jones and Scott Haggett in Calgary, and Charlie Zhu in Hong Kong and Niluksi Koswanage in Kuala Lumpur; Editing by Janet Guttsman and Neil Fullick)