Oct 23, 2012

Malaysia - Resource Nationalism in Canada Blocks Malaysia's PETRONAS

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SYDNEY/SEOUL/SINGAPORE, October 23 (Fitch) The government of Canada's decision to block the takeover of Progress Energy Resources by Malaysia's PETRONAS ('A'/Negative) illustrates the rising global trend of resource nationalism.

Governments are under pressure to maximise control of their natural resources as a buffer against the rise in commodity prices over the past 10 years, stalling global economic growth and the ultra-easy monetary policies adopted by major central banks including the US, Europe and Japan.

This decision increases the likelihood that the Canadian government will also reject China's CNOOC Ltd's (CNL, 'A+'/Stable) bid to acquire 100% of Nexen, a Canadian upstream oil and gas producer, for an equity value of CAD15bn.

The Canadian government's decision to block PETRONAS's CAD5.5bn takeover was notwithstanding the fact that PETRONAS had offered a 77% premium to Progress's pre-bid share price - which had been approved by the shareholders.

Canada's industry minister commented that the government "was not satisfied that the proposed investment is likely to be of net benefit to Canada."

Details behind the government's decision are not available, but PETRONAS has 30 days to modify its proposal before the government's decision is finalized. Progress has indicated its willingness to consider the issues behind the rejection, but both Progress and PETRONAS claimed in June 2012 that the deal would provide a net benefit to Canada. Fitch Ratings believes possible reasons for the rejection include the government's desire to ensure that sufficient control and profits remain in Canada, as well as guaranteeing local jobs.

This is in line with the current global wave of "soft" resource nationalism, in which governments are opting to gain a greater share of resource company profits through changing regulation, taxation and contractual terms.

The deal with Progress would have provided PETRONAS with an opportunity to enlarge its reserves, diversify its product range, and potentially commence LNG exports from North America to Asia. Tapping higher-priced and strong LNG demand from Asian utilities would be a strategic alternative for Progress away from its traditional outlet of the North American pipeline gas market.

Progress Energy is an upstream gas producer owning gasfields in the Montney shale areas of British Columbia and Alberta. The company has been unable to expand due to the relatively small size of its operations and financial resources required for development.

Fitch believes that PETRONAS's ownership would provide the required infrastructure investment to commence exports of LNG to Asia. In September, Fitch affirmed PETRONAS's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'A', which remains one notch above that of Malaysia at 'A-'.

However, the agency changed the Outlook on PETRONAS to Negative, as growing government influence over the company's financials and strategy weakens the case for this state-owned entity to be rated above that of the Malaysian sovereign.

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