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OTTAWA (Reuters) - Canada's ruling Conservative Party is split over a landmark $15.1 billion bid by China's CNOOC for oil producer Nexen, leaving Prime Minister Stephen Harper with a difficult final call to make.
A green light, still viewed by many as likely, would allow China's biggest ever foreign takeover, extend China's foothold in Canada's crude-rich oil sands - an area with the biggest proven resources of energy outside Venezuela and Saudi Arabia - and help Beijing fulfill its drive for better access to energy resources to fuel the world's second-largest economy.
A "no", or conditions on the deal that were too onerous for CNOOC, would cut the takeover premium on Canadian resource stocks, and likely stem Chinese investment in the energy patch, as well as damaging Canada's already dented reputation as a friendly jurisdiction for foreign investment.
It would also infuriate Beijing, which might make the Chinese market a less welcoming destination for Canadian exporters. When U.S. opposition thwarted CNOOC's attempt to buy California-based Unocal Corp in 2005 it angered Chinese officials and strained Sino-U.S. relations.
But while the Canadian government insists it is open to foreign investors, despite its shock rejection of BHP Billiton Ltd's $39 billion bid for Potash Corp in 2010, many in the Conservative Party say a deal with a state-owned Chinese firm is problematic and needs to be subject to restrictions.
Harper, who usually brooks no dissent from his legislators, faces a caucus where many are openly nervous about the idea of a Chinese state-owned company buying up part of the crude-rich tar sands.
"There's a lot of people, I would say the vast majority of the country, that are very concerned about making sure there's conditions (on CNOOC)," said Rob Anders, a Conservative member of Parliament from Alberta, where the oil sands are located. He told reporters on Wednesday that he regarded China as "a non-benevolent actor and a strategic adversary."
One of the reasons the deal may get approved is that Harper went to Beijing in February to sell the idea of China buying Canadian oil and investing in Canada. Rejecting the CNOOC bid would seemingly make a mockery of his strategy.
"I think this deal goes (through) because otherwise it will have a very, very chilling effect," said Gordon Houlden, a former Canadian diplomat with extensive Chinese experience who heads the University of Alberta's China Institute.
In recent days, China has shown how concerned it is that approval is in doubt. During a visit to Toronto, Minister of Commerce Chen Deming called on the Canadian authorities to be "fair and objective" when analyzing acquisitions by Chinese state-owned firms, while separately its ambassador to Canada, Zhang Junsai, warned against politicizing the Nexen deal.
In turn, Canada's ambassador designate to China, Guy Saint-Jacques, said on Wednesday that Canada must "continue to address very forcefully" its large trade deficit with China and will also press for Canadian companies to get more access to the Chinese market.
One cabinet member with many questions about the deal is Immigration Minister Jason Kenney, an influential member of the party from Alberta and a man seen as a possible successor to Harper, according to political and business sources with knowledge of the situation.
Kenney, who is deeply critical of China's human rights record, on Monday said Ottawa should pay close attention to proposals by state-owned foreign companies to take over big Canadian resource firms.
Under the terms of the Investment Canada Act, Industry Minister Christian Paradis has an initial 45 days to decide whether the bid is in Canada's net benefit.
That period expires on October 12 and Paradis looks set to exercise his option to extend it for another 30 days, making November 9 the likely new deadline. That said, no one doubts Harper will take the final decision.
Former Conservative industry minister Jim Prentice, now at Canadian bank CIBC, predicts Ottawa will approve the deal, in part because Nexen is only a small player and because a takeover will leave China, which already has a stake in some oilsands assets, controlling less than 10 percent of Canada's oil sands.
"It's not yet (at) the threshold where it starts to raise some of the big policy questions ... which will definitely come, but we're not there yet," Prentice told a business forum in Ottawa on Tuesday.
CNOOC's defenders note that the firm is traded on the Hong Kong stock exchange and is responsible to all its shareholders, not just the Chinese government.
It's an argument that falls on deaf ears from some in the right-of-center Conservative Party, where suspicion of China and its motives are easy to find. Skeptical parliamentarians cite their dislike of communism and China's human rights record.
"For all the talk of CNOOC being floated on the Hong Kong stock exchange, let's not forget these are state-owned companies. Beijing can call them up and tell them what to do and what to buy," said a leading Conservative, who asked not to be identified.
Although portfolio managers say they expect the deal to go through, there is clearly some doubt among investors. Nexen shares were trading at $24.75 on Wednesday, 10 percent below CNOOC's cash offer of $27.50 a share.
"The harsh memory of Potash is in everyone's rear view mirror," said one U.S.-based fund manager who holds shares in Nexen.
Ottawa vetoed the Potash bid on the grounds that it was not to Canada's net benefit, though opposition from Conservative parliamentarians in the province of Saskatchewan, where Potash is based, may have been critical to the decision.
CNOOC's bid for Nexen is very different from the Potash case - BHP lodged a hostile bid for a company that held 40 percent of the world's potash supply, whereas Nexen owns less than 5 percent of the oil sands. But the affair showed that Harper is very sensitive to political criticism.
Still, most of Nexen's Canadian assets are in Alberta, where the Conservatives dominate and where some of the most outspoken critics of the deal are based.
Facing Kenney across the cabinet table are players such as Natural Resources Minister Joe Oliver, who says Canada needs C$630 billion ($643 billion) of foreign investment in the energy patch over the next decade alone.
Oliver is tilting toward supporting the deal on the grounds that Nexen only controls a fraction of Canada's proven oil reserves, political sources said. This echoes the line of Foreign Minister John Baird, who says Nexen's assets in Canada are "only two or three billion (dollars) before the merger."
Harper says that when the government releases its decision on CNOOC, it will spell out in detail its approach to takeover bids from foreign companies.
Peter Harder, president of the Canada China Business Council and a former top bureaucrat at the industry ministry, said Ottawa could set a limit of Canadian-based assets that any foreign based firm is allowed to own. Any bid above the limit would either be ruled out automatically or face particularly close study, he told Reuters.
Reporting by David Ljunggren; Editing by Janet Guttsman, Martin Howell and Bernard Orr