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Foreign Investment Review – A Warning In The Time Of COVID-19 – Government, Public Sector – Canada – Mondaq News Alerts

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Canada:

Foreign Investment Review – A Warning In The Time Of COVID-19

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The Canadian government, concerned about the impact of
COVID-19 on corporate valuations, has issued guidance that it will
pay particular attention to foreign direct investments of any value
(meaning, even investments that are not subject to review under the
Investment Canada Act (the “ICA”)).  The
government’s announcement does not amend the ICA, nor any
thresholds for review.  But it does issue a warning that the
government intends to use the tools it has to review investments,
including the national security review provisions under the
ICA.

While the enhanced scrutiny is to apply to any acquisition
of an interest in a Canadian business involved in public health or
the supply of critical goods and services to Canadians or to the
Government of Canada, all foreign investments by state-owned
investors, regardless of value, or private investors assessed as
being closed tied to or subject to direction from foreign
governments, are also considered targets for such
review.  

One can expect that Canadian companies involved in
manufacturing needed supplies to address COVID-19 healthcare
requirements (for example manufacturers of personal protective
equipment), or companies involved in vaccine research or other
health technology would be of particular concern.  As to
critical goods and services, we can look to the Government’s
own Guidance on Essential Services and Functions in Canada during
the COVID-19 pandemic for assistance.  In that guidance, the
Government cites energy and utilities, information and
communication technologies, finance, health, food, water,
transportation, safety and manufacturing. 

The first real test, however, of the Government’s
application of its enhanced review will be a gold miner, TMAC
Resources Inc., which operates the Doris gold mine in Nunavut’s
Hope Bay.  In a deal announced two weeks ago, China’s
Shangdong Gold Mining Co. Ltd. will pay just over C$207 million for
TMAC, which has been struggling financially.  TMAC is listed
on the Toronto Stock Exchange and has lost significant value since
its IPO.  Control and the majority equity interest in Shandong
is owned by the Chinese Government.  Whether Shandong can
establish that the acquisition is of net benefit to Canada, and
particularly so with such declared enhanced scrutiny, remains to be
seen.  There has been certain concern expressed by the
security community in Canada about Beijing’s control over
critical metals and minerals.  Gold is, in volatile financial
circumstances, a safe haven investment. 

As a general caution, foreign buyers should consider the
guidance from the Canadian government on the ICA.  Foreign
investment is still recognized as beneficial with a compelling case
for the transaction.  But at the least, potential acquirors
should be alive to the potential for a greater degree of review,
and should consider the time-frame for review and when to submit an
application for review, including a pre-closing notification under
the ICA. 

Originally published May 25, 2020

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

POPULAR ARTICLES ON: Government, Public Sector from Canada

COVID-19: Cross Country Update (May 11, 2020)

Miller Thomson LLP

Today Prime Minister Justin Trudeau announced support for large and medium-sized businesses so they can keep their workers on the payroll and survive the COVID-19 pandemic.

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Big Oil's Investment Risk Is Spiking – OilPrice.com

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Big Oil’s Investment Risk Is Spiking | OilPrice.com

David Messler

Mr. Messler is an oilfield veteran, recently retired from a major service company. During his thirty-eight year career he worked on six-continents in field and…

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    The major integrated oil companies: Shell,(NYSE:RDS.A, RDS.B); ExxonMobil, (NYSE:XOM); BP, (NYSE:BP); Chevron, (NYSE:CVX), and a few others, so named for their vertical stewardship of the hydrocarbon molecule from initial extraction to final refining, have come under increasingly accurate fire from climate change advocates. In the past organizations like Greenpeace and a host of other conservation organizations, have used direct measures to interdict oil company operations. Measures that were flashy, as they drew a lot of attention from the global press, but over the long haul did little to achieve their goals of stopping oil and gas exploration. 

    Source

    The companies themselves have had considerable success in pushing back these operations through the courts. As an example a Scottish court has fined Greenpeace £80K for its boarding of a Transocean rig, enroute to a BP North Sea location, in 2019. A boarding the court held to be in direct violation of an earlier edict prohibiting this type of activity.

    “She said its breaches of the injunction were so serious she would be justified in jailing John Sauven, Greenpeace UK’s executive director, for up to two years or imposing a suspended sentence. He orchestrated the action from the start, knowing he was breaching a court order.”

    Source

    Now these activist organizations are increasingly turning to courts around the world, and with particular focus on U.S. courts, to further their aims. Filings in U.S. courts avail the claimants of the extensive body of American environmental law, and consumer protection legislation. A recent article in Reuters noted that this strategy held out new concerns for the big oils as activists became increasingly shrewd in their approach.

    “Cases now are being fought on arguments such as consumer protections and human rights. This shift has been especially pronounced in the United States, where more than a dozen cases filed by states, cities and other parties are challenging the fossil fuel industry for its role in causing climate change and not informing the public of its harms.”

    Source

    Related: Apple’s “Holy Grail Of Data” Leaves Oil Traders Disappointed

    State and Local governments are also jumping into the fray as costs mount to comply with air and water quality federal mandates. Using tactics that had proved so successful twenty years ago with cigarette manufacturers, the State of Minnesota and the District of Columbia filed suit against ExxonMobil last month. Among the allegations are that the company had misled the public on the adverse environmental impact of its products, and accusing it specifically of engaging in deceptive practices and false advertising. Reuters in an interview with Kate Konapka, Deputy Attorney General for Washington, D.C., noted-

    “As awareness of climate change grew in the general public to the extent that their disinformation campaigns were no longer acceptable, there was a pivot to greenwashing,” 

    Source

    It remains to be seen how this approach will play out for the companies affected as it is early innings and the companies have had some success in pushing back. ExxonMobil in December of last year prevailed in a 4-year court battle with the State of New York, where it had been alleged that the company had failed to disclose what it knew about the effect its products were having on climate change.

    The big funds are decarbonizing their portfolios

    Pressure on the big oil companies also comes from the investment community, as major funds have begun limiting carbon based investing, or engaging in outright divestiture in legacy oil companies. As an example Norway’s $1 trillion dollar national wealth fund, rocked the energy world in 2019 by declaring it would no longer invest in companies primarily in the hydrocarbon energy business. They were followed in early 2020 by Blackrock’s similar decision to decarbonize its lending portfolio. In his annual letter to corporate executives, Larry Fink, CEO of Blackrock, put forth a sustainability rallying cry- “Climate change has become a defining factor in companies’ long-term prospects. Awareness is rapidly changing, and I believe we are on the edge of a fundamental reshaping of finance.”

    A capital intensive business from the outset, hydrocarbon energy development has always depended on outside capital fund expansion. Those days could be coming to an end if this practice becomes widespread.

    The big oil companies are taking note

    Net Zero 2050 has become a catchphrase in recent times, as big oil companies led by BP have pledged to reduce their net emissions to zero by mid-century. Other major international and national oil companies such as Shell, Total, (NYSE:TOT), Equinor, (EQNR), Eni, (NYSE:E) and others have followed suit with similar pledges. This marks a shift in policy from these organizations from their past stance of not being able to control what became of their products after they were produced and sold. A recent article in Reuters noted this shift-

    “Many oil and gas chiefs remain reluctant to commit to reduce emissions from the use of the oil they extract, arguing that they cannot control whether the cars Ford builds or planes Boeing designs run on oil. Commitments like BP’s move beyond that debate over responsibility for so-called Scope 3 emissions, which are indirect emissions in a company’s value chain including from use of products sold, by signaling a fundamental shift in corporate strategy toward new and cleaner energy businesses”

    Source

    In the case of BP what this means is likely to be a fundamental shift in the products that make up the company’s value chain. A shift that is noteworthy to investors as it signals a fairly abrupt about-face on major investments to achieve the goal of net zero carbon by 2050.

    As a sign that they are intent on taking affirmative steps toward this goal major impairments have been announced in recent months by BP and Shell. In the case of BP specific aspects of its up to $17.5 bn impairment charge to be reported on second quarter earnings haven’t been disclosed as yet, but perhaps their announcement last week of the sale of their petrochemicals business is instructive in that area. BP’s CEO, Bernard Looney noted in a press release-

    “This is another significant step as we steadily work to reinvent bp. Strategically the overlap with the rest of bp is limited and it would take considerable capital for us to grow these businesses. As we work to build a more focused, more integrated bp, we have other opportunities that are more aligned with our future direction. Today’s agreement is another deliberate step in building a bp that can compete and succeed through the energy transition.”

    For its part Shell has been a little more specific with its comparable $22 bn asset write-down for Q2. Approximately $9 bn of that charge will be allocated to the company’s Western Australia LNG business, including their marquee Prelude Floating LNG ship. A bitter pill for a project that only came on line in 2018.

    Source Next to the Prelude FLNG vessel a full-sized LNG tanker appears miniaturized.

    In summary, while fighting these court cases one-by one on their merits companies like Shell and BP seem only to be resigned to, but rather are embracing these decarbonization initiatives. Investors may have cause to worry over the short haul as companies go about the task of “Reinventing” themselves. 

    Stranded Assets

    This brings us to one of the most troubling aspects of these companies for investors. The prospects of key assets carried on the books for billions being written-down (their market value reduced due to circumstances) is jolting. For example both Shell and BP have said that natural gas, a lower carbon intensive energy play than crude oil, will be a central element in their long-term energy mix. Whether that will prove a success remains to be seen as one of the key final forms natural gas often takes is as Liquefied Natural Gas, or LNG. Overbuilding in this space is causing project delays as companies deal with pandemic reduced demand. The unusual step of LNG exporters or importers cancelling LNG cargoes has been on the rise in 2020. This has led to a number of major LNG project cancellations or deferrals have been announced globally, as producers attempt to rein in oversupply.

    Related: The Death Of The $2 Trillion Auto Industry Will Come Sooner Than Expected

    Another example of a shift away from a previously orderly Final Investment Decision- FID, approval process for its GoM projects, Shell announced in April it would defer a decision on its massive Whale prospect. Previously anticipated by the EOY 2020, Shell slashed pre-FID spending and deferred the FID to 2021. With billions already sunk in seismic, leasing, and drilling and appraisal costs, a thumbs down on Whale development would be the very definition of a stranded asset. In that case, hundreds of millions of barrels worth as much as $20 bn in today’s market, would be left untapped.

    What other forms these stranded assets may take, remains to be seen as the companies involved fine tune their product mix strategies going forward.

    Your takeaway

    The “Investability” of these oil giants is being increasingly called into question as they face battles on so many fronts around the world. Be it in U.S. or European courts, they are going to be confronted with thousands of climate change lawsuits with the advantage moving in the claimants direction. A single adverse decision could run into the billions. In spite of there being a clear need for hydrocarbon forms of energy well into the latter part of this century, increasingly the companies that produce it are being forced to alter their business practices to meet non-market, stakeholder demands.

    Whether this will create or destroy value in these companies long term is yet to be determined. In some senses however, the market may have already spoken devaluing shares of Shell and BP by about 50% over the last six months.

    Investors considering initiating new positions in these companies might take pause, as a single adverse court ruling could have long term consequences for the stock’s valuation. As we have noted in this article the environmental adversaries of the legacy oil companies have become increasingly cagey in their plans of attack.

    By David Messler for Oilprice.com 

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      Alberta government proposes new agency to attract foreign investment

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      The Alberta government will create a new provincial corporation tasked with attracting foreign investment if a bill introduced Tuesday becomes law.

      The Invest Alberta Corporation would have a budget of $18 million over the next three years to fulfil a mandate of pulling foreign dollars into Alberta as part of an effort to recover from the COVID-19 pandemic and economic downturn.

      Bill 33, the Alberta Investment Attraction Act, would allow for the creation of the corporation, which would be governed by a board that would have up to seven members. The bill was introduced in the legislature on Tuesday by Tanya Fir, the minister of economic development, trade and tourism.

      “There will be fierce competition as economies begin to re-open to attract this investment,” Fir said. “We know many other jurisdictions across the world, across Canada, already have these arms-length agencies in place that focus on investment attraction.”

      Fir said other jurisdictions — such as British Columbia, Saskatchewan, Ontario and Quebec — already have organizations set up to do similar work, and that Alberta needs its own to compete.

      “We need to be able to aggressively, proactively, eyeball-to-eyeball be communicating that message to investors around the world,” she said.

      One such Invest Alberta office would be set up in Houston, Texas, where Dave Rodney will be Alberta’s agent general. Rodney, a former UCP MLA, stepped down from his Calgary-Lougheed riding in 2017 to allow Jason Kenney, now premier, to run for the seat. Fir announced Rodney’s appointment Tuesday.

      Rodney will be paid a bi-weekly salary of $9,635. Though his three-year assignment will start immediately, he won’t relocate to Houston until the Canada-U.S. border reopens. In the role, he’s expected to work on creating closer business relationships and to pursue new investment opportunities to benefit Alberta’s energy sector.

      Alberta already has existing international offices, and Fir said that, with the exception of the Ottawa and Washington, D.C., offices which are focused on advocacy, will begin reporting to Invest Alberta.

      “That will allow for a more strategic and co-ordinated approach as we focus on investment attraction,” she said.

      Fir also said the new corporation won’t duplicate efforts of existing agencies that promote specific industries, such as Alberta Innovates or the Canadian Energy Centre. She said her ministry will look for ways the different groups can collaborate.

      If the legislation passes, cabinet will appoint up to seven board members, one of whom will be a member of executive council. The board will in turn select a CEO.

      Source:- CBC.ca

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      Province proposes creation of investment-attraction agency – Lethbridge News Now

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      The government will refocus its teams in the world’s largest capital markets like London, New York, Hong Kong, Singapore, Toronto, and Houston to communicate more effectively.

      She believes this is especially important now Alberta’s economy has become increasingly-reliant on international markets in the last several decades.

      The province believes the agency will help the province to rebound from the economic downturn caused by the COVID-19 pandemic.

      “New investments into Alberta will help to increase economic development, job creation, and expand the competitiveness of our province’s leading industries – energy, agriculture, and tourism, and for Alberta’s high-growth industries such as technology, aviation and aerospace, and financial services.”

      As part of these efforts, Bill 33 will also establish a public board that will oversee the corporation’s operations.

      Fir adds that Premier Jason Kenney has appointed Dave Rodney, the former MLA for Calgary-Lougheed from 2004 to 2017, as Alberta’s Agent General to Houston, Texas.

      “Texas is Alberta’s second-largest export market in the United States and it is vital we have an in-market presence to lead Alberta’s efforts to expand our commercial ties to the region.”

      The overall goal of these initiatives is to highlight things like Alberta’s low tax rates, highly-skilled workforce, and “business-minded” government policies that make Alberta a great place to invest.

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