Canada Rejects Petronas-Progress Energy Tieup

Canadian government authorities have rejected a proposed C$5.2 billion (US$5.23 billion) merger between Malaysian energy giant Petroliam Nasional (Petronas) and Canadian natural gas company Progress Energy Resources Corp.

The companies have 30 days to restructure the deal to appease the Canadian Ministry of Industry, although the government agency did not mention a reason for its rejection, except that it was not a “net benefit” for Canada, in a statement released late last Friday.

The Kuala Lumpur, Malaysia-based Petronas is state-owned, which could have been a factor in the Canadian government’s decision.

“Progress will be working over the next 30 days to determine the nature of the issues and the potential remedies,” according to a statement from Michael Culbert, CEO of Progress.

According to a Wall Street Journal report, the Canadian government had asked Petronas for a time extension for its review, but Petronas refused. The unnamed source said that was partially responsible for the rejection.

The Canadian government hasn’t used its powers to reject business deals often, but its last rejection was a big one—BHP Billiton Ltd.’s 2010 proposed acquisition of fertilizer giant Potash Corp. Billiton also received a 30-day review period, but backed away from the deal.

The outcome of this Petronas-Progress merger will be closely watched not just in the context of this transaction, but also because Canadian authorities are also reviewing another far larger deal—Chinese state-owned oil firm CNOOC Ltd.’s C$15.1 billion purchase of oil giant Nexen Inc.

If the Canadian government rejects that deal—and it very well could given the recent trade and currency tensions between the Chinese Communist Party and the West—it could further strain the already tenuous trade relations between China and North America. Conservative government officials in Canada have been outspoken regarding what they perceive as China’s unfair trade practices.

In addition, as most Chinese firms are state-controlled, it gives rise to a national security issue. United States House of Representatives’ Intelligence Committee issued a report warning against doing business with Chinese telecommunications firms Huawei Technologies Co. Ltd. and ZTE Corp. over security concerns.

Despite the initial rejection of the Petronas deal, the Ministry of Industry’s statement reiterated that Canada welcomes foreign direct investment. Prime Minister Stephen Harper has openly courted foreign capital in recent months, as the Wall Street Journal estimates that Canada needs C$650 million over the next ten years—either from domestic or foreign companies—to adequately develop its oil-rich Canadian oil sands.

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