* Canada's spy agency warned about Chinese takeovers
* US intervention made approval of CNOOC deal more difficult
* CSIS seen satisfied with new foreign investment rules
OTTAWA, Dec 23 (Reuters) - In September, two months after
China's state-owned CNOOC Ltd made an unexpected $15.1
billion bid for Canadian energy company Nexen Inc,
Canada's spy agency told ministers that takeovers by Chinese
companies may threaten national security.
The rare warning from the Canadian Security Intelligence
Service (CSIS), which was disclosed to Reuters by intelligence
sources, did not stop the takeover. That was approved by
Canadian authorities earlier this month.
But the intervention and an influential U.S. lawmaker's
warning in October that Canadian companies should be careful
about doing business with Chinese telecom equipment companies
Huawei Technologies Co and ZTE Corp
made the approval process for the deal more
difficult than initially expected.
"CSIS did not like the Nexen bid and thought it was a bad
idea for Chinese firms to be investing in the oil sands. It all
played into their greater fears about firms like Huawei," said
one person familiar with the agency's concerns. "They do not
want to wake up one day and realize a crucial sector of the
economy is under the control of foreign interests."
And after listening to the spy service, which usually keeps
a low profile, Canada drew up surprisingly tough foreign
investment rules that were unveiled when approving the Nexen
deal, China's biggest-ever successful foreign takeover. In a
clampdown on companies it deems influenced by foreign
governments, Canada will block similar purchases in the future.
CSIS has been silent about what it said to Ottawa on the
Nexen transaction, and it declined to comment for this story. It
didn't specifically recommend the CNOOC deal be blocked, but
rather warned more generally about such deals with Chinese
entities, the person said.
In reality, the government was unlikely to want to block the
CNOOC bid, given a high-profile push by Prime Minister Stephen
Harper earlier in the year to boost ties with China, and given
that a lot of Nexen's assets are outside Canada, and it has
underperformed other energy companies.
SPECIFIC WORRIES
By pushing back aggressively, CSIS ensured that it got
foreign investment policy tightened significantly to deter
similar such takeovers by companies under the sway of foreign
governments.
"I think people at CSIS and elsewhere are going 'Good. That
was a very good response by the government'," said Ray Boisvert,
a former CSIS assistant director of intelligence, who retired
this year after almost three decades at the agency.
"It did reflect some of those deep strategic concerns that
practitioners have had about this kind of investment."
Specific worries include theft of Canadian intellectual
property, espionage, computer hacking and foreign companies
gaining too much influence over crucial sectors of the economy,
said the person familiar with the agency's views.
The government could, in theory, nationalize assets if it
thought foreign control was problematic. But the pro-business
Conservatives would likely find it politically unpalatable to
take such a step.
"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 said as he announced the new investment rules.
In October, the U.S. House of Representatives' Intelligence
Committee urged U.S. firms to stop doing business with Huawei
and another Chinese telecom equipment company ZTE on
the grounds that Beijing could use products made by the two
companies to spy.
The House Intelligence Committee's chairman, Rep. Mike
Rogers, a Michigan Republican, urged Canada to take a similar
stance, and two days later, the Canadian government indicated it
would not let Huawei help build a secure government
communications network because of possible security
risks.
"The Huawei business caused a lot of political complications
for the CNOOC bid," another person familiar with the CNOOC deal
said of the U.S. committee's report.
Both Huawei and ZTE have repeatedly denied the allegations
in the report, [ID: nL1E8L800L] [ID: nL1E8L86T5] and China's
foreign ministry dismissed as "baseless" the idea that security
concerns could impede commercial ties.
"We hope that the relevant party can objectively and justly
treat Chinese companies' overseas investment and cooperation
plans, and stop actions which harm Chinese companies' image and
do more to benefit the promotion of bilateral trade and business
cooperation," said ministry spokeswoman Hua Chunying.
CLANDESTINE SUPPORT
In its annual report, released in September, CSIS noted
risks that included espionage and illegal technology transfers,
and said some foreign state-owned enterprises had "pursued
opaque agendas or received clandestine intelligence support for
their pursuits" in Canada.
The agency did not give details, but added: "When foreign
companies with ties to foreign intelligence agencies or hostile
governments seek to acquire control over strategic sectors of
the Canadian economy, it can represent a threat to Canadian
security interests."
CSIS, hit by controversy in 2010 after its head suggested
China had too much influence over some Canadian provincial
politicians, did not mention any country or firm in its report.
It is unclear how much, if any, influence the United States
had on the Canadian authorities' foreign investment policy.
Fen Hampson, head of the global security program at the
Centre for International Governance Innovation in Waterloo,
Ontario, said he had learned that a U.S. official visited Ottawa
in the last few months to discuss mutual concerns about foreign
state-owned enterprises.
U.S. Ambassador David Jacobson told Reuters he was not aware
of such a meeting, but he noted that officials from the two
countries met constantly. "I would be surprised if almost any
issue you could think of has not come up in one or more of those
conversations," he said. "The United States has not sought to
influence Canada's decision with respect to that (CNOOC's
bid)... We respect that decision."
The Canadian government did not respond to a request for a
comment.
Chinese companies have bought up smaller Canadian energy
firms before, but the July 23 bid for Nexen was their first
attempt to buy one of the larger players.
Nexen has assets in Canada, the North Sea, Nigeria and the
Gulf of Mexico. Technology that Nexen and its partners use for
deep sea drilling could interest CNOOC.
Asked about the CSIS concerns, a spokeswoman for Industry
Minister Christian Paradis replied: "The government has the
authority to take any measures it considers necessary to protect
national security."
Yet two people close to the deal noted that the Canadian
government did not exercise its option to do a separate review
of the potential security risks of the CNOOC-Nexen bid, again
signaling its concerns were tied to overall Chinese investment
rather than to this particular deal.
Under the new rules, which Paradis is responsible for
enforcing, foreign state-owned enterprises can no longer buy
controlling stakes in assets in the oil sands, the biggest
reserve of crude oil outside Saudi Arabia and Venezuela.
Such enterprises can buy minority stakes in the oil sands,
or majority stakes in companies outside the oil sands. Companies
deemed to have strong government links will be treated with
particular caution wherever they propose to invest.
"When it comes to our security and intelligence services,
they would rather pull up the drawbridge than let it down," said
Hampson, co-author of a report on trade ties between Canada and
emerging nations that he discussed with Harper in June.