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Why China has its eye on Canada's oil patch

Karl Moore: This is Karl Moore of the Desautels Faculty [at McGill University]Talking Management for The Globe and Mail. Today I am in Calgary, Alta., where I am sitting with Adam Waterous, who is the global head of investment banking for Scotia Capital, the investment banking part of the Bank of Nova Scotia, and is also the president of Scotia Waterous, which is one of the leading firms in the world for M&A [mergers and acquisitions]in the oil and gas business. Good morning, Adam.

When we look around the world, what are the top cities for the oil and gas businesses? Calgary is one of them; what are some other cities? We think of Porter's "cluster theory" - what are the cities that are really critical for that?

Adam Waterous: Today there are really three cities that really drive the oil and gas business. The most important city is actually Houston: it's the real No. 1, it's the capital of the U.S. industry, and the U.S. industry remains today the most important industry in terms of depth of market, number of companies, and number of transactions. It is followed by London; not by number of companies or transactions, but just sheer market size in terms of companies doing business there. The third most important city would be Calgary, but I quickly would say that Calgary is … I don't want to say it's third of three in a pejorative sense because Calgary remains a very important centre in the global picture.

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Now, those are the three and those three have been the most important for a long time. What is quickly coming up in relative importance is Beijing. Four of the largest Chinese companies' headquarters are in Beijing: Sinochem, Sinopec [China Petroleum and Chemical Corp.] CNOOC [China National Offshore Oil Corp.] and CNPC [China National Petroleum Corp.] I was in Beijing earlier this week and we have people from our firm in Beijing virtually every month now working on transactions because, generally speaking, the Chinese companies are amongst the most active acquirers of oil and gas companies and assets in the world today.

KM: So why are the Chinese doing that? What's the Chinese view of the oil and gas business?

AW: It's being driven by two or three outlooks on behalf of the Chinese. The first, and most obvious, is energy security. On a comparative basis, relative to the size of their economy, they are not blessed with that many natural resources themselves, so they want to get access themselves to the physical barrels, if possible.

The second thing, which drives the importance to the Chinese, is their own view that the industry is running short of natural resources and so it would be a good long-term investment, in and of itself.

The third thing that is really driving the importance of the Chinese market is the fact that that they've got the money! They can finance these deals and, particularly in today's marketplace where raising capital is more difficult than it was a year ago, this ends up being a critical factor in deciding if you're a seller that we want to do business with.

KM: From a Canadian viewpoint, should we be nervous about doing business with the Chinese and the Chinese owning large parts of Canada's resources as opposed to, let's say, the Americans or the Brits or whoever?

AW: My own view, no. There are already several Chinese investments in Canada, albeit they are smaller and they are mostly confined to the oil sector. I think ideally, from a public policy perspective, I think what Canada wants to encourage is large world-beating companies that are headquartered here, that's the ideal situation. So something like the recent Suncor and Petro-Canada merger I think is great for the country and would even try to encourage that.

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Having said that, at the same time we don't have the depth of capital markets to fully develop our own natural resources meaning, depending on the numbers you use, the total amount of capital that's going to be required to be able to develop the oil sands business is well over $100-billion. It depends on what time-frame you use, but over the next 15-20 years, it's well over $100-billion; it'll be by far the largest capital expenditure program in a single sector in Canadian history. The Canadian capital markets are simply not deep enough to be able to finance that, so we have to be prepared to welcome foreign investment if we want to be able to develop this important strategic resource.

So if you accept that as a premise, then it's a question of, 'Well, where is it prepared to come from?' Well, it really comes from companies; your selection of that is going to be driven by what entities are prepared to provide the most benefit to the country. Part of it is, who are they going to hire locally? And, to stop there, I think there is this misplaced notion that if a Chinese company makes an investment, then suddenly there are going to be all these Chinese workers running around to take jobs from domestic employees. I think that's a real fallacy. The Chinese, and others, are coming to Canada and having to rely on much of the engineering and technical prowess that is already here, so I think that's really just a strong fallacy. The resources are here and it's very difficult to export that expertise somewhere else.

I think the second thing that you want to look at is someone who actually has the ability to make very large investments. Of course the United States historically has been the most important investor in Canada but today, on a relative basis, while they remain critically important, that importance is shifting to other parts of the world. So as a consequence, I don't think Canada can insulate itself from the fact that some of the most important investors globally in the world are Asian investors: not just Chinese, but Japanese are important, and [South]Koreans are important.

So that's a long way of saying that I don't think we have anything to fear by having Asian, whether it's Chinese, Japanese or Koreans, investing in our oil sector.

KM: This has been Karl Moore, Talking Management for The Globe and Mail. Today I've been in Calgary talking with Adam Waterous, who is the global head of Scotia's investment banking as well as the president of Scotia Waterous, one of the leading M&A firms in the global oil patch. Thanks for your time, Adam.

AW: Thank you, Karl.

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