Calgary oil firm buying Canadian energy assets is backed by Chinese state

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A Calgary oil company backed by China's authoritarian Communist Party has emerged as a major buyer of distressed energy assets, prompting new concern over Canada's push to explore free-trade talks with China.

Corporate documents show the Party has an ownership stake in little-known Shanghai Energy Corp., giving China's powerful political apparatus a growing financial interest in a key Canadian industrial sector.

Read also: Aecon rivals urge Ottawa to block Chinese takeover

The company is among a handful of Chinese entities that has pumped nearly $4-billion into Alberta's oil and gas sector through the industry-wide downturn, ostensibly part of a new wave of private investment abroad. But an examination of Shanghai Energy's opaque ownership structure by The Globe and Mail shows at least some of the deal-making has previously unreported ties to Beijing.

The revelation comes at a time of heightened sensitivity over state companies buying up Canadian firms. Last week, a trio of Canadian construction companies urged Ottawa to block a takeover of Aecon Group Inc. by China Communications Construction Co.

The group cited security concerns and the acquirer's spotty record on safety and corruption.

Prime Minister Justin Trudeau has sought to forge a more expansive trading relationship with the world's second-largest economy amid mounting uncertainty over the fate of the three-way North American free-trade agreement with Mexico and the United States.

But efforts to launch formal free-trade talks with China have stalled. In December, a source told The Globe that sticking points included the scope of negotiations as well as disagreements over labour and environmental standards.

The Chinese government has said its state-owned firms should be treated like private enterprises in any free-trade deal, but the party's link to a Canadian energy company is a stark reminder of the competing interests inside Chinese acquirers, said Alicia Garcia-Herrero, chief economist for Asia Pacific at Natixis, a French corporate and investment bank.

Ms. Garcia-Herrero has served on the counsel to the executive board of the European Central Bank and last year co-authored a report entitled "How to handle state-owned enterprises in EU-China investment talks."

She said such firms must balance demands for profit with priorities such as: "How much can you help other Chinese companies? How much can you help China itself, or the Party?"

"The risk is real" that a Canada-China free-trade deal could bring more such state-run transactions, she said, unless Canada erects barriers to any company that does not operate in a market economy – "which basically means stop any purchase from China."

Because "for China, the distinction between party, state, government or even actual business is inexistent."

Under Canadian law, deals by state-owned entities are subject to stricter scrutiny than private corporations. Only in "exceptional circumstances" will a state-owned firm be allowed to acquire majority ownership in the oil sands, former prime minister Stephen Harper said in late 2012.

More recently, however, the Liberal government under Mr. Trudeau has said it welcomes investments from China, with Natural Resources Minister Jim Carr saying last June that Ottawa's "minds are open."

Chinese-controlled firms have a small share in the Canadian energy sector, which is overwhelmingly owned by companies headquartered in Calgary, Houston and Europe.

But Shanghai Energy and its affiliates have stepped up purchases of aging wells and other infrastructure as other sources of overseas capital have retreated.

The company is led by Wentao Yang, a China-born financier educated at the University of Calgary. Mr. Yang did not respond to phone and e-mail messages seeking comment. In an e-mailed statement last year, he called Shanghai Energy "a private Canadian company."

But corporate documents in Canada and China show that the firm is a subsidiary of Shanghai Sinooil Energy Holding Corporation, which is, in turn, owned by China Energy Reserve and Chemicals Group, or CERCG.

CERCG is a state-owned firm with an unusual ownership structure.

According to the Chinese public corporate registry, it is currently owned by two companies: Zhongyuan Hang Ranqi and Beijing Zhongyou Sanhuan Technology Development Co., Ltd.

The former is wholly owned by China Hualian International Trading Company, which is, in turn, wholly owned by the International Department of the Central Committee of the Communist Party of China – which goes by the name "China Economic Cooperation Center."

The latter, Beijing Zhongyou, is owned by Shanghai Guochu Nengyuan – which is itself owned by CERCG, a circular ownership structure.

A person who answered the phone at CERCG confirmed that the company is state-owned, but declined further comment, saying no one was available to answer other questions.

Direct control of corporations by the Communist Party is unusual in China, although the party wields unquestioned authority over China's economic life. It also holds substantial influence in the private sector, through party committees inside companies – including foreign multinationals. Those committees have been buttressed in the past year as a way of ensuring the Party can maintain a grasp on entities outside its formal ownership.

Deals by Shanghai Energy and its affiliates have tended to fall below the threshold that would trigger a review under the Investment Canada Act.

Many involve assets burdened with major environmental liabilities that require costly remediation work or hefty deposits to be posted with Alberta's Energy Regulator.

In 2016, the company scooped up oil and gas properties from bankrupt Endurance Energy Ltd.

The same year, Perpetual Energy Inc. sold unprofitable natural gas wells – including $133.6-million in future cleanup costs – to an unnamed buyer later identified by bankers as Sequoia Resources Corp.

Corporate registry filings list Mr. Yang as one of Sequoia's directors. They also show the company is controlled by a numbered firm that shares a suburban address west of Calgary that at one time served as Shanghai Energy's corporate headquarters.

Sequoia also picked up assets from bankrupt Waldron Energy Corp., according to court documents. Meanwhile, Husky Energy Inc. and Pengrowth Energy Corp. have, in recent months, transferred hundreds of well licences to yet another company called Sequoia Operating Corp.

A person familiar with the situation, who spoke on condition of anonymity because details of the transaction were private, said Sequoia's backers were the same group that bought assets from Perpetual Energy.

To be sure, it is not unusual for new companies to build up production by acquiring overlooked or distressed assets and redeveloping them over time. Indeed, the strategy could yield big gains as oil prices edge up.

"I don't think they're any different than any other acquirer," said Bill Andrew, who led Long Run Exploration Ltd. as chief executive officer before it was bought in late 2015 by a unit of Shanghai-listed Changchun Sinoenergy Corp.

"They just happen to have a headquarters in Beijing, or Shanghai, or Hong Kong or wherever they're coming from."

One concern with Chinese state-owned acquirers is the risk they could seek to escape liability for aging sites by saying their government ownership means they are not subject to foreign law.

This comes at a time Alberta is already struggling with a spike in the number of abandoned oil and gas wells in the province following a string of corporate bankruptcies.

"What it very easily could lead to are these claims of sovereign immunity," said Christopher Balding, a specialist in finance and economics at Peking University.

Several Chinese firms have made that argument in the United States, one after receiving a lawsuit about health problems related to Chinese-made drywall.

Others insist such fears are overblown and that Canada's resources and China's manufacturing prowess make for a tidy fit.

"We can exchange goods with each other – this is good. Don't be scared by this," urged Jiang Shan, who previously lead the economics section at the Chinese embassy in Canada.

In contemplating free trade, "there are more advantages than disadvantages. If that's the case we should go on," he said. China's ever-expanding economy and consumer demand are creating "lots of opportunities for Canada," he added. "Don't lose this opportunity."