NEW YORK/OTTAWA (Reuters) - Canada approved China's biggest ever foreign takeover on Friday, the $15.1 billion bid from CNOOC Ltd (0883.HK) for energy company Nexen Inc. (NXY.TO), but drew a line in the sand against future buys 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 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 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 said yes 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 (PRQ.TO) by Petronas of Malaysia.
"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.
CNOOC's bid 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 strict new approach restricts state-owned enterprises to minority stakes in Canadian enterprises except in what Harper described as "exceptional circumstances".
It will raise questions about how Canada can raise the C$650 billion investment it says it needs in the natural resources sector in the next decade alone. Ministers say much of the money will have to come from abroad and cash-rich China is an obvious source.
Analysts said the new rules could please market operators who complain Ottawa was too vague about the kinds of foreign investment it wanted. Investment Canada, part of the industry ministry, must decide if takeovers are of net benefit to Canada, but critics say the process is opaque.
The Conservatives shocked markets in October 2010 by unexpectedly blocking a bid by BHP Billiton Ltd (BHP.AX) (BLT.L) for Saskatchewan-based fertilizer maker Potash Corp (POT.TO).
"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.
Harper said he was confident that other firms would want to invest in the oil sands, the world's third largest resource of crude after Saudia Arabia and Venezuela.
"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.
The main opposition New Democrats, who had wanted the Nexen deal blocked, said Harper had not done enough to clarify the net benefit test.
"What the decision today does is send a very clear signal that these types of transactions, that these kind of takeovers will be approved," said energy spokesman Peter Julian.
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.
In approving the deal, Canada said CNOOC made significant commitments on transparency, employment and capital investments.
"I realize there were a lot of politics that went into this thing ... I think they probably played it very well. By pushing back quite a bit they were probably able to get concessions in both these deals, in Nexen and in Progress," said Keith Moore, managing director at MKM Partners LLC in Stamford, Connecticut.
The acquisition will give CNOOC control of Nexen's 43 percent stake in the Buzzard field in the North Sea, the most important contributor to the crude blend used to set the Brent crude price that serves as the international oil price benchmark.
Nexen also has oil production from Yemen, offshore West Africa and the Gulf of Mexico.
CNOOC also gains full control of Nexen's Long Lake oil sands project in northern Alberta, properties containing as much as six billion barrels of recoverable crude and a 7.2 percent stake in the Syncrude Canada Ltd joint-venture.
The government's decision on the Petronas bid for Progress reversed an initial rejection by Industry Minister Christian Paradis, who gave the Malaysian state-owned energy company a chance to make new representations.
The companies, which already have a joint venture in the Montney shale gas region of British Columbia, said this week they are advancing an C$11 billion liquefied natural gas plant on Canada's West Coast. They held out the prospect of a bigger project if the takeover is approved, because Petronas would have access to all of Progress's gas reserves.
CNOOC also asked the U.S. government to review its bid for Nexen's offshore oil assets in the Gulf of Mexico. CNOOC said last week that the review was still underway, and a Washington spokesman declined further comment on Friday.
If the powerful and secretive Committee on Foreign Investment in the United States finds national security issues with the deal, it could require divestitures or other security-control agreements.
(Additional reporting by Solarina Ho, Euan Rocha and Alastair Sharp in Toronto, by Louise Egan and Randall Palmer in Ottawa and by Jeffrey Jones and Scott Haggett in Calgary; Editing by Janet Guttsman)