Canada's Oil Industry May Slow After Government Limits Foreign Investments

Foreign investment in Canada's oil-rich tar sands industry fell more than 90 percent in the past year after the government tightened regulations to assure its control over resources, said CIBC Vice Chairman Jim Prentice on Tuesday.

Prentice told an audience at the Oil and Money 2013 Conference in London that foreign direct investment in the Canadian energy sector fell dramatically, to $2 billion from $27 billion. In addition, merger and acquisition activity in the sector dropped to $8 billion this year from $66 billion.

In a press release detailing the presentation, Prentice pointed out that foreign direct investment over the past five years has accounted for 26 percent of the capital injected into Canadian energy projects via mergers and acquisitions, but over the past year, in-bound foreign investment in Canadian energy has dropped off dramatically.

"Simply stated, our ambitions and resources exceed our supply of domestic capital," Prentice said.

Recently, Conservative Canadian President Stephen Harper signed new laws that would trigger the review of any investment by a foreign state-controlled company that’s greater than $344 million in asset value. Harper wants to make sure that foreign state-owned companies’ control of oil sands will benefit Canada, not just their own bottom-line interests.

Harper’s tune has changed since last year when he approved a takeover of Calgary-based oil producer Nexen Inc. (TSE:NXY) by China-owned energy giant CNOOC Limited (HKG:0883). The prime minister does not want foreign state-owned companies to gain too much power and influence over the world’s third-largest reserve of oil, which could stifle competition.

Foreign investment, however, is crucial for Canada as it accounts for one-quarter of all the capital injected into Canadian energy projects. Without foreign investment, expansion in the energy sector will likely slow.

“This is something that has greater attention than ever before, and we want to make sure that any decision is given the weight and consideration that it’s due and the department is allocating the resources and talent to these kinds of decisions,” James Moore, Canada’s industry minister, said in an interview with Bloomberg.

China, on the other hand, is looking to secure as much of the world’s energy reserves as possible. It's the world's second-largest economy and accounts for approximately half the world’s consumption growth.

TransCanada Corporation (TSE:TRP) and a unit of PetroChina Company Limited (HKG:0857) planned to work together on a $3 billion oil pipeline that would run through Alberta, but the government has asked the companies to stop the project while it reviews whether the project poses a national security threat.