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By David Ljunggren and Charlie Zhu
OTTAWA/HONG KONG (Reuters) - Canada approved China's biggest ever foreign takeover, the $15.1 billion bid by CNOOC Ltd for energy company Nexen Inc, after the Chinese giant agreed to various conditions, but drew a line in the sand against future purchases by state-owned enterprises.
In a fierce defense of a tough, new foreign investment framework, Prime Minister Stephen Harper said Canada would not deliver control of the country's oil sands - the world's third-largest proven reserves of crude - to a foreign government.
The ruling, anxiously awaited by investors and politicians alike, followed months of heated debate about how much of Canada's energy sector could and should be absorbed by companies run by other nations.
The bid had triggered unusually open dissent among legislators in the ruling right-of-center Conservatives, many of whom were particularly nervous about the idea of allowing China to gain control of the oil sands.
Canada agreed to this deal, but will not do so next time.
"To be blunt, Canadians have not spent years reducing the ownership of sectors of the economy by our own governments, only to see them bought and controlled by foreign governments instead," Harper told reporters after Ottawa gave the deal the green light, along with approval for the less controversial takeover of gas company Progress Energy Resources Corp
"Foreign state control of oil sands development has reached the point at which further such foreign state control would not be of net benefit to Canada," he added.
Top executives at CNOOC <0883.HK> welcomed Canada's greenlight for the deal.
"We believe the transaction provides opportunities for Nexen employees, partners and for CNOOC," CNOOC Chief Executive Li Fanrong said in a statement.
The approval came after CNOOC made a new commitment, on transparency. That added to other concessions on employment and capital investments, which it had outlined in July when it announced its bid for Nexen
CNOOC said on Saturday it will provide an annual compliance report to the Canadian government. Other commitments include making Calgary the headquarters of its North and Central American operations, retaining Nexen's management team and employees, seeking a secondary listing in Toronto and investing in Canadian oil sands over the long term.
The bid by CNOOC, China's third-largest oil company, had raised huge questions for Harper's Conservative government, which sought both to appear open for investment and to diversify Canadian energy exports toward Asia and away from the United States.
The tougher new approach restricts state-owned enterprises to minority stakes in Canadian enterprises except in what Harper described as "exceptional circumstances".
Ottawa has yet to clarify the meaning of "exceptional circumstances", but its stance was met with some skepticism not least because much of the C$650 billion in investment it says it needs in the natural resources sector in the next decade alone will probably have to come from abroad, including cash-rich China.
"To simply say you won't sell in the future is not reliable," said Lin Boqiang, director of the China Centre for Energy Economics Research at Xiamen University. "They probably said it to satisfy the views of some Canadian citizens."
Still, analysts said the new rules could please market operators who complain Ottawa is too vague about the kinds of foreign investment it wants. Investment Canada, part of the industry ministry, must decide if takeovers are a net benefit for Canada, but critics say the process is opaque.
The Conservatives shocked markets in October 2010 by unexpectedly blocking a bid by BHP Billiton Ltd
"This approval helps overcome some of the stigma that was associated with Investment Canada after the BHP rejection. I think it is good news for the perception of Canada as a destination for capital," said Oliver Borgers, a partner at McCarthy Tetrault in Toronto.
STATE RUN, BUT WHICH STATE
Harper said he was confident other firms would want to invest in the oil sands, third only to OPEC members Saudi Arabia and Venezuela in crude reserves.
"What we're doing here is preventing a situation which I see developing, I have been worried about for a while now, ... where in the name of an open, globally competitive economy, we could see the transformation of our economy into a state-run economy, just a state-run economy not (run) by our government," he said.
Nexen, long viewed as a takeover target, is involved in oil sands in Canada and offshore production operations around the world. It was an ideal target for CNOOC, especially since no Canadian firms had tried to buy it.
Petronas offered C$5.2 billion for Progress, a mid-size gas producer. Both suitors offered hefty premiums.
The shares of both takeover targets went on a wild ride, slumping late in the Canadian trading session on speculation that an after-market announcement could be negative.
Nexen's New York-listed shares then surged in after-hours trading on a Reuters story that the deal had been approved. The Canadian dollar firmed.
CNOOC's all-cash offer and commitments are generous, some China and Hong Kong-based analysts said. But CNOOC had drawn lessons from its failed $18.5 billion bid for U.S. oil producer Unocal in 2005.
"CNOOC has been careful to address the net benefits to the Canadian authorities and regulators after its Unocal experience," said Scott Darling, head of Asia ex-Japan Oil & Gas Equity Research with Barclays in Hong Kong.
CNOOC has said the acquisition would make it the operator of a major oil sands project for the first time, would boost production by 20 percent and proven reserves by 30 percent. The company has nine years of reserves based on current production -- one of the lowest ratios among major oil companies worldwide.
"For Nexen this is a fantastic deal," said Simon Powell, head of Asian oil and gas research at CLSA in Hong Kong. "What the big concern to me is that Nexen does not have the production growth that people think it does."
The takeover gives CNOOC control of Nexen's 43 percent stake in the Buzzard field in the North Sea, the most important contributor in the crude blend used to for Brent international pricing benchmark.