Foreign investment rules hurting oilsands, especially small players: study

CALGARY – Rules imposed on foreign state-owned investment in the oilsands are having some unintended consequences, says a new study by the University of Calgary’s School of Public Policy.

The report analyzes share prices of oilsands companies since the regulations were announced in December 2012. That’s when the Harper government approved Chinese-owned CNOOC Ltd.’s $15-billion takeover of Calgary-based Nexen Inc., but imposed limitations on further ownership of oilsands resources by state-owned firms.

“The findings of this paper indicate the federal government’s policy change has resulted in the material destruction of shareholder wealth,” the study’s authors write.

The biggest impact has been on junior oilsands companies, whose stocks dropped by as much as 50 per cent in the first half of 2013, diverging greatly from where oil prices and the wider stock market were heading at the time.

“There’s a significant cost and that cost is borne disproportionately by juniors,” Eugene Beaulieu, director of the school’s international economics program, said in an interview.

The study was co-authored by Matthew Saunders, a senior analyst with early-stage oilsands firm Laricina Energy.

Small oilsands companies rely on outside investment to grow their operations much more than their larger counterparts. Much of that financing comes from joint ventures in which a partner buys a ownership stake in a project and reaps a proportionate share of its returns.

In theory, those types of deals are still allowed under Ottawa’s new rules, provided the foreign state-owned entity doesn’t have control. Put in practice, that investment seems to be slowing down.

“Joint ventures and other kinds of investments that weren’t targeted by the policy have been affected,” said Beaulieu. “It wasn’t intended by the policy, but it seems to be having that effect.”

Beaulieu said he understands the need for the Investment Canada Act to address concerns about foreign ownership of Canadian resources. But a lack of clarity over how those restrictions are applied is scaring away investment.

“That uncertainty creates consequences for the investment climate,” he said.

“We have to have transparent and clear rules on how it operates and I think targeting ownership instead of targeting behaviour is not the right approach.”

Citing figures from the Canadian Energy Research Institute, the study’s authors say about $100 billion in investment will be needed in the oilsands over the next five years.

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