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Investment rules hurting oilsands: study

CALGARY - Rules imposed on foreign state-owned investment in the oilsands are having some unintended consequences in the oilpatch, 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 study shows that between the announcement and March of this year, oilsands stocks were about 20 per cent lower than what would have otherwise been expected. For junior firms, it was about a 30 per cent hit.

"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 wrote.

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. Senior and intermediate players showed steadier performance.

"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.

"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.

The report also cites a warning last fall from Jim Prentice, a former federal industry minister who is now running to become Alberta premier.

Prentice, then a senior executive at the Canadian Imperial Bank of Commerce, told a London conference that foreign investment in Canada's energy sector had dropped 92 per cent year over year.

"Canada must make clear to the world that it continues to be open for business. This isn't a criticism of the government's new policy. It is more a question of tone," he said.

"Not everyone is getting the message that Canada remains open to the world. In fact, some are coming to believe the opposite."

However, federal Natural Resources Minister Greg Rickford took issue with that assessment.

"Canada is open for business, but that does not mean we're for sale to foreign governments," the minister said in a emailed statement.

"With our new rules, we have made a clear distinction between free market private investment and entities controlled or influenced by foreign governments," he said, adding that foreign government entities would not be permitted to acquire control of a Canadian oilsands business unless there are "exceptional circumstances."

"Our balanced approach ensures that foreign investment transactions are reviewed on their merits based on the long-term interests of the Canadian economy," he said.

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