October 23, 2012 / 8:33 AM / in 5 years

COLUMN-Petronas burned by Canadian nationalism; JVs may be salve: Clyde Russell

--Clyde Russell is a Reuters market analyst. The views expressed are his own.--

By Clyde Russell

SINGAPORE, Oct 23 (Reuters) - Petronas and other state-owned companies from nations not necessarily friendly to the West are going to have to learn to play a smarter game if they want to acquire strategic assets such as oil reserves.

The real lesson from the surprise rejection of the Malaysian national oil company’s takeover of Progress Energy Resources Corp isn’t that Canada is closed for business; it’s that the traditional model of capitalist mergers and acquisitions is changing in Western democracies.

While Petronas and Progress Energy are trying to work out ways to salvage the $5.2 billion deal, concern has been raised that Canada may also nix the $15.1 billion takeover of Nexen Inc by China’s state-controlled CNOOC Ltd.

What both these deals have in common is that they are full acquisitions of energy assets, a sector that is strategic, and probably more easily subject to national interest and resource nationalism arguments.

There seems to be a recent trend of Western, capitalist countries rejecting full takeovers of such assets, with Australia another example.

But, while full takeovers valued in billions of dollars appear to be struggling, joint venture investments seem to be flourishing.

Petronas successfully bought into the Gladstone liquefied natural gas project in Australia’s Queensland state in 2008, paying $2.5 billion for a 40 percent stake. The project is operated by Santos, an Australian oil and gas producer.

Gladstone is one of four coal-seam gas to LNG plants under development in Queensland, and two of the others boast Chinese companies as equity partners.

PetroChina is in a 50-50 venture with Royal Dutch Shell in the $26 billion Arrow LNG project, while Sinopec has 25 percent of the Asia-Pacific LNG development, with ConocoPhillips and Australia’s Origin Energy splitting the rest.

These haven’t been overly controversial investments, and they give the Malaysian and Chinese partners significant shares in projects that will make Australia the world’s biggest LNG exporter.

In contrast, Rio Tinto was forced into an embarrassing U-turn in its proposed sale of 18 percent of itself to Chinese state-owned Chinalco for $19.5 billion in 2008.

Even though this wasn’t a full takeover, many of Rio’s biggest shareholders believed that it was wrong to sell a major stake in the company to a customer.

In effect, Rio was forced to cancel the deal and undertake a $15 billion rights issue which ensured that while existing shareholders had to bail out the world’s second-largest iron ore miner, they kept control of the company.

Like Australia, Canada can’t provide enough capital to develop energy projects, with up to C$630 billion needed in the next decade.

But there appears to be a reluctance to allow control of the assets to pass into foreign hands, especially if those hands belong to state-controlled companies in countries whose governments are not always friends with Canada and its allies.


It is all too easy for politicians in Western democracies to drum up popular dissent against foreign investments if 100 percent of the asset is going to overseas interests.

All a wily politician would have to do is to point out that Malaysia’s former prime minister, Mahathir Mohamad, said in 2010 that the Sept. 11, 2001, attacks in the United States were staged by the Americans as an excuse to wage war on Muslims.

While Malaysia is in reality a moderate Muslim-majority country, it would be easy enough to use Mahathir’s offensive comments as a wedge to advance a domestic political agenda.

It’s far less easy to do this if one of your own companies is involved in the deal, and thus there is a local business and community that has an interest in seeing the foreign investment is successfully made.

It may be ironic, but developing resources seems to have come full circle.

It used to be that Western corporations went into developing nations to own and exploit resources.

Then as those nations gained in confidence and experience, they either kicked out the Western companies, as in much of the Middle East, or reduced them to junior partners, as in Malaysia.

Now many of the new resource provinces that can be exploited are in Western nations such as Canada and Australia, but the available capital belongs to the developing world.

You would expect public outrage in the West if resources were to pass into foreign hands. But if Western nations want the capital to exploit the reserves, then they need to do business with companies like Petronas and CNOOC.

Partnerships, however, would be more appealing than takeovers.

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