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Why CNOOC should get green light for Nexen

Flags of China National Offshore Oil Corp. (CNOOC) fly beside the China flag in front of its headquarters building last week.

JASON LEE/REUTERS

The bid by China's state-owned CNOOC to acquire Canadian oil company Nexen prompted the University of Calgary's Jack Mintz to suggest a number of policy changes. Specifically, he is concerned "that state-owned enterprises perform less efficiently than privatized companies" and that allowing such firms to operate in Canada may not be in our nation's interest.

Prof. Mintz is correct that state-owned enterprises are almost always less efficient than private companies. This is certainly a concern if you are a shareholder of that company, that your investment may not be receiving optimal returns. If I were a taxpayer in China I would have concerns about this investment. But how does that affect Canada?

The argument must be that this inefficiency causes some sizeable form of economic spill-over that does not exist if the company were privately owned. I am not convinced there is a sizeable spill-over and if it does exist, that it is negative and not positive. Prof. Mintz cites easy access to capital as one advantage state-owned firms have. Suppose CNOOC uses this access to capital to overinvest in physical infrastructure. That may do environmental harm to Canada, but it is hard to see how it does economic harm.

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Alberta's royalty regime is perhaps the most vulnerable to inefficiency. Royalty payments to the province are partly based on net revenue, so a company that is operating less efficiently will have less net revenue and therefore make lower royalty payments. That is a concern for the province, but Alberta's choice of policy instrument should not be allowed to trump federal trade policy.

But there are positive benefits that need to be considered. If Canada excludes some bidders from acquiring Canadian companies, this will lower the returns Canadian investors obtain when selling these assets. Starting a new enterprises would be less attractive and lead to lower federal and provincial government revenue from asset sales.

There is no reason for the federal government to be concerned that the presence of a foreign state-owned enterprise would hurt the Canadian economy. Any policy change in this area is likely to do more harm than good. It's hard to see any clear downside for Canada in this deal.

Mike Moffattis an Assistant Professor in the Business, Economics and Public Policy (BEPP) group at the Richard Ivey School of Business – Western University

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About the Author

Mike Moffatt is an Assistant Professor in the Business, Economics and Public Policy (BEPP) group at the Richard Ivey School of Business – Western University. Mike also does private sector consulting for the chemical industry. More

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