Foreign investment restrictions are weakening Canada’s oil sands industry – new report

In December 2012, prompted by the proposed purchase of Nexen by the Chinese state-owned enterprise (SOE) CNOOC, the federal government announced revised guidelines for investments by SOEs in the oil sands. Declaring that the Nexen sale marked “the end of a trend and not the beginning of a trend,” Prime Minister Stephen Harper explained that, in the future, investments by foreign SOEs to acquire control of a Canadian oil sands business would only be approved on an exceptional basis. But given that SOEs control the bulk of the world’s proven production and represent the largest players in the world’s petroleum industry, is it feasible for Canada to exclude SOEs from the oil sands?

In a report released today by The School of Public Policy, authors Eugene Beaulieu and Matthew M. Saunders examine the impact of this policy change on the oil sands industry. They note that these revised policy guidelines have had their intended effect on SOE investment. In 2013, only a single SOE deal was announced. The deal, which took place outside of the oil sands sector, was worth approximately $320 million, considerably less than the $28 billion in SOE investment that flowed into Canada in 2012.

But as the authors explain, the oil sands are an integral component of Canada’s economy. And the sector has long relied on foreign capital to finance projects, meaning that any move to deter outside investment could have profound consequences for the development of this critical economic asset.

The authors examine the negative impact of this policy by measuring the stock returns of firms operating in the oil sands. Employing an event study analysis, they find empirical evidence that the government’s policy change has resulted in the material destruction of shareholder wealth, particularly in the case of the smaller oil companies. What is more, given the composition of the global oil industry has changed to one where SOEs dominate both reserves and production, the authors question if this policy is one Canada can afford.

The report can be found here.