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CALGARY, Alberta (Reuters) - China's big oil companies have steadily increased their stake in Canada's energy sector but have not yet tested the limits of a Canadian government that may recoil if they buy one of the nation's larger companies.
Since China National Offshore Oil Corp made its first tentative Canadian investment in 2005, paying C$122 million for a 16.7 percent share of the then-private oil sand developer MEG Energy Corp, China's international oil companies have spent or pledged more than C$11 billion ($11.2 billion) in Canada.
Most of that has gone for minority stakes in the Canadian oil sands, a vast resource that rivals the oilfields of Saudi Arabia in size, albeit with oil that is far more costly to wrest out of the ground.
But their purchases have become more ambitious in recent months. Seemingly no longer content to be a junior partner, the state-controlled companies are buying entire companies, with Monday's C$2.2 billion friendly offer for shale gas producer Daylight Energy Ltd the latest example of a deal.
However many experts think any bid for a Canadian crown jewel like Suncor Energy Inc, Canadian Natural Resources Ltd or Cenovus Energy Inc would severely test the friendly business ties between the two countries.
"I don't think they could be bought," said Randy Ollenberger, an analyst with BMO Capital Markets.
"I think the buyers and sellers would be reluctant to test that ... and yes, the Canadian government may in fact block those transactions, seeing those companies as being material and industry leaders."
Canada can review and block any foreign investments worth more than C$312 million, a paltry sum in the global mergers game, if it thinks a deal is not in Canada's best interests.
It has exercised that right twice; once with the planned acquisition of a satellite company by a U.S. bidder and last year, when it blocked BHP Billiton's $39 billion hostile takeover of Potash Corp.
The latter was a startling rejection that prompted analysts to question Canada's free trade credentials.
"Canada has a process under the Investment Canada Act under which all large transactions are reviewed and that process is one that has worked well in the past," Ed Fast, Canada's international trade minister, said on a conference call from Qingdao, China, a stop on a week-long trade mission.
"We expect that it will work well in the future. The message I've been communicating here in China is that Canada is an investor-friendly nation. We have a very clear and understandable and fair set of regulations and laws under which investors can make their investments."
Fast's trip to China is part of a turnaround for a Canadian government that as recently as five years ago was somewhat leery of ties with China.
Ottawa has since proved eager to court Chinese investment, particularly in the energy sector, with a stream of cabinet ministers lobbying for new trade links.
Recent energy investments came in July, when CNOOC snapped up struggling oil sands developer Opti Canada Inc with a small cash payment and the assumption of $2 billion in debt. Sinopec Corp then bid C$2.2 billion for Daylight, a small domestic producer with attractive shale gas assets in Alberta.
On the other side of the coin, a proposed C$5.4 billion shale gas joint venture between gas giant Encana and Petrochina collapsed this summer, after more than a year of negotiations.
The companies said coyly that they failed to find common ground on the valuation or structure of the deal.
China wants access to Canada's oil and gas to power its expanding economy. Canada's oil industry, for its part, is seeking deeper ties with China and planned export pipelines to tidewater ports will give Canada a role in sating China's appetite for oil.
The deals in Canada haven't yet awakened the protectionist fervor and political opposition seen in the United States in 2005 when China's CNOOC bid $18.5 billion for U.S. oil and gas producer Unocal Corp. The backlash killed that deal, upsetting Sino-U.S. relations.
"It's only an issue if someone makes it an issue," said Yuen Pau Woo, chief executive of the Asia Pacific Foundation of Canada think tank. "We operate in a free market environment and there are (deals) taking place all the time between domestic and foreign companies that pass muster. But clearly if the numbers go up and the target is a prominent or iconic Canadian company there will be hesitation."
Before China's state-controlled oil companies are accorded the same right to broaden their holdings that U.S. and European companies now enjoy, the government needs assurances that the they are not just operating as an arm of government.
The Canadian government "will be paying very close attention to the terms of how state-owned enterprises are operating, whether their logic is commercial or strategic" said Paul Evans, director of the University of British Columbia's Institute of Asian Research.
Additional reporting by David Ljunggren in Ottawa. Editing by Martin Howell