Opportunity for formal national security review of CNOOC-Nexen lapses

OTTAWA – The opportunity for Ottawa to undertake a formal national security review of the CNOOC-Nexen proposal has lapsed without a challenge.

New federal regulations brought in by the Conservative government in 2009 allow for a national security review of any foreign takeover and critics of the deal have frequently raised concerns about foreign control of Canada’s oil.

But the 45-day window for a review of the $15.1-billion friendly takeover of the Calgary oil company by a state-controlled Chinese firm has already closed, with no mention of anything that may have triggered a national security concern.

In effect, the expiry of the review period means CNOOC has essentially by-passed a major hurdle, Ottawa insiders said on the basis of anonymity. (The approval process is so sensitive that no one involved is free to speak about anything related to the proposal.)

“There is absolutely no doubt that (national security) should have been a consideration,” said Peter Julian, the NDP natural resources critic who opposes the deal.

CNOOC has acted as a foreign-policy arm of the Chinese government in the past and this pattern of behaviour needs to be taken into account, he said in an interview.

“I would not be able to understand any green-lighting on this front.”

In the House of Commons on Wednesday, Julian accused the government of having “dropped the ball.” But Industry Minister Christian Paradis said the government “will always act in the best interest of Canadians.”

Legal experts say that just because a process has been left dormant does not mean regulators are ignoring national security. They say the ongoing “net benefits” test of the deal is broad enough that national security could be considered in the wider context of whether the takeover is good for Canada.

“Arguably, the net benefit test is so broad, if there was a real national security concern I think they could work it into that analysis, said lawyer Catherine Pawluch, a partner at Davis LLP in Toronto.

But several government sources say that while the deal remains controversial among decision-makers for many reasons, national security does not figure prominently in internal debates.

“There are no national security issues that are really being discussed,” one Conservative said on condition his name not be used. “By that I mean China as a potential adversary. Instead it’s being viewed in terms of markets and what’s best for the Canadian economy.”

A letter from Conservative MP James Bezan made public this week by ipolitics.ca lists several concerns about the deal, but national security is not among them.

CNOOC – controlled by the Chinese National Offshore Oil Corp., which is wholly owned by the Chinese government – and Nexen Inc., put the terms of their deal before federal regulators in August.

Under the Investment Canada Act, regulators have to approve the deal based on whether it meets a net benefits test and follows guidelines for state-owned enterprises. They have been granted two extensions for this review, and the next deadline is Dec. 10.

There is a separate process under the act, with separate timelines, that allows the federal government to study a transaction through a national security lens.

The national security provisions were added to the law in March 2009, in the wake of Ottawa’s nixing of a deal that would have put key Canadian space technology in foreign hands. The federal government partly justified its rejection on grounds of national security and followed up with a change to investment regulations to give weight to such reasoning.

The national security provisions are quite vague, however. There are no specific triggers for a review, nor is there a set test for companies to pass.

“The legislation does not identify any factors to be considered by the government in assessing whether an investment may be injurious to national security,” corporate lawyers from Davis LLP wrote in a recent analysis in The Competition Policy International Antitrust Journal.

Use of the provisions has been so rare and so secretive that corporations and lawyers are having a hard time figuring out when they apply, according to an analysis by lawyers at Torys LLP.

“Despite some uncertainty about the scope of the new national security review powers, it is clear that national security concerns are unlikely to play a material role in the vast majority of transactions,” says the paper by Omar Wakil and Phil Mohtadi.

“Early signs indicate that the Canadian government will use its powers sparingly and that it will not be unduly influenced by popular opinion or motivated by a desire to advance broader national interests.”

Still, since the regulations allow for an investigation, they should be used accordingly, especially since the CNOOC proposal could raise questions about energy security, said Reid Morden, a former director of the Canadian Security Intelligence Service.

“If the window has closed, I’m a little surprised that they haven’t taken a look at that,” he said in an interview.

“I guess I feel that if you put in a provision that foreign takeovers should be looked at from this point of view, then you should exercise that if only to say OK, we’ve satisfied ourselves that this isn’t a problem.”

Other legal experts said, however, that a formal national security review of CNOOC would send a very negative diplomatic signal to China – a cost Ottawa may not want to incur given that regulators can consider national security issues through the net benefits test.

In its latest annual report, CSIS warned explicitly that state-owned enterprises can pose a threat to national security.

Without mentioning China or CNOOC, the report tabled in September said certain state-owned enterprises and private firms “with close ties to their home governments have pursued opaque agendas or received clandestine intelligence support for their pursuits here.”

In the United States, several senators have raised national security concerns about the Nexen takeover as well. But experts point out that national security comes up frequently south of the border because the United States does not have a net benefits test and only reviews foreign takeovers through a national security lens.