Canada says to continue talks with Petronas

Canada could still approve the C$5.17 billion ($5.22 billion) acquisition of Progress Energy Resources Corp by Malaysian state oil company Petronas , the country's finance minister said on Sunday, despite blocking the bid late last week.

While observers predict a chaotic market reaction following the federal government's statement late on Friday that the deal did not provide the "net benefit" required from foreign buyers under the Investment Canada Act, Finance Minister Jim Flaherty said on Canadian television that negotiations continue.

"I'm not involved in those discussions directly. The minister of industry is," Flaherty said in an interview on CTV's "Question Period". "I'm sure they'll continue to work on it. There's another period of time during which they can continue to have discussions and try to satisfy the concerns that the Department of Industry has."

The government's Friday announcement, minutes before a deadline, was a blow to Petronas, whose domestic oil supplies are shrinking and which has been seeking to boost its resources beyond Malaysia and volatile areas such as Sudan.

It also raises doubts over Chinese oil group CNOOC's <0883.HK> C$15.1 billion offer for oil producer Nexen and could weigh on other Canadian firms hoping for foreign investment to tap their vast energy reserves.

"We're going to see sell-offs all around and gore on the floor for Progress and Nexen," said Chris Damas, an independent analyst with BCMI Research.

Along with Progress and Nexen, some analysts believe that mid-sized energy companies operating, like Progress, in the Montney shale-gas region of northeastern British Columbia are most likely to be hit by selling pressure when the Toronto Stock Exchange opens on Monday.

"The intermediate (oil exploration and production) group is significantly impacted by the Progress/Petronas decision, reflective of a high weighting to gas-focused Montney producers," Greg Pardy, an analyst with RBC Capital Markets, said in a research note.

"We expect the group to be under considerable pressure during Monday's trading session and believe that as of Friday's close, about 15 to 20 percent of a (merger and acquisition) premium is currently 'baked in' to the Montney stocks."

Canada's tar sands are the world's third-largest crude oil reserve, behind only Saudi Arabia and Venezuela, while the country's vast shale oil and gas deposits are still in the early stages of development.

The government has said the oil sands alone will require C$650 billion in investment over the next decade, much of which will have to come from foreign sources.

However, the willingness of Prime Minister Stephen Harper's Conservative government to stomach foreign ownership of the country's strategic resources has been an open question since it blocked BHP Billiton's $39 billion bid for Potash Corp , the world's largest fertilizer maker, in 2010.

At that time, the government pledged to clarify what constituted a net benefit under the Investment Canada Act but has yet to do so. Observers are saying that after the Petronas decision, the Conservatives must offer clear guidelines on the rules for overseas investors.

"The next message they have to send out is that 'We are still open for business, but here are the terms in which we are open for business. We'd love to work with you and take on foreign capital' and we haven't seen that yet," said Martin Pelletier, a portfolio manager with Trivest Wealth Counsel. "Hopefully we'll get some clarity on that in the next month or so with the Nexen-CNOOC deal."

($1 = $0.99 Canadian)

(Additional reporting by Jeffrey Jones in Calgary and David Ljunggren and Randall Palmer in Ottawa; Editing by Maureen Bavdek and Marguerita Choy)