Silence is Golden: Is CFIUS Promoting FDI in Shale Gas Deals?
Foreign direct investment (FDI) in a formidable natural gas deposit located under the northeastern United States is occurring at a breath-taking – perhaps even breakneck – pace this year. There is no indication that the U.S. government has reviewed any of these transactions for national security considerations. If it has not, then that is a plus, as review would hinder the accumulation of needed capital. This is a case where the government aids U.S. national security by abstaining from exercise of authority.
To date in 2010, foreign investments in the Marcellus Shale formation have included transactions between U.S. companies and Japan’s Mitsui & Co., Norway’s Statoil, Britain’s BG Group, and Chinese and Korean sovereign wealth funds, to name a few. If the shale gas that lies below New York, Pennsylvania and West Virginia can be safely extracted at a competitive price, in terms of both economic and environmental costs, the United States may be able to radically decrease its reliance on imported oil. Funding the development costs and building the extraction technology are the primary challenges. Meeting these challenges requires significant investment capital.
That’s where foreign partners come in. Just as U.S. entrepreneurs were willing to seek significant amounts of foreign investment capital for the building of U.S. railroads in the nineteenth century, their exploration and production descendents have wisely decided to partner with worldwide sources of investment capital. And the current low price environment for natural gas makes these deals attractively priced for foreign investors. Throw in the ability to learn (or even copy) the hydraulic fracturing technology used to access the shale gas, and the investment almost sells itself.
Although the U.S. government has the authority to regulate, it has wisely chosen not to do so. Marcellus transactions are closing at a record pace, allowing U.S. owners to accumulate the dry powder they need to convert the prospect of energy independence into the real thing.
Take for example one of the 2010 Marcellus transactions. Mumbai-based Reliance Industries acquired a 40% interest in Pennsylvania-based Atlas Energy Resources. Did the parties file with the Committee on Foreign Investment in the United States (CFIUS)? Their press releases don’t mention a filing. The purchase agreement did not reference any requirement that either party make the voluntary filing with CFIUS. CFIUS clearance was not a condition to closing. The deal was signed on April 9 and was closed on April 21, 2010. CFIUS review generally takes at least 30 days. The time frame suggests no review and no filing.
In another deal—the investment by the UK’s BG Group plc in EXCO Resources—the investment agreement references antitrust review but not foreign investment clearance. Purchase agreements for the other 2010 Marcellus Shale deals are not publicly available. It is difficult to assess whether the parties subjected their deals to voluntary CFIUS scrutiny to avoid a regulatory challenge to the transactions after their completion.
Why is there any doubt about CFIUS review? CFIUS screens FDI transactions to identify U.S. national security risks. The official guidance it published in December 2008 states that U.S. requirements for energy sources is a factor it considers. Effects on critical technologies is another. Effects on physical critical infrastructure “such as major energy assets” is a third. CFIUS has given fair warning that those investors who come to the U.S. to invest in U.S. major energy assets fall within its purview.
It is therefore not surprising that foreign buyers of U.S. oil and gas interests have invoked CFIUS review. The 2009 Annual Report of CFIUS (unclassified edition) specifies that four of the 404 notices filed with CFIUS in 2006-2008 were for oil and gas extractive industry transactions. The annual report does not identify the transactions. Whether any of them involved Marcellus Shale is simply not known.
CFIUS does not announce its decisions on specific deals. There nonetheless is precedent. At the end of 2009 CFIUS blocked a proposed Chinese investment in a failing U.S. gold miner, FirstGold. Whatever the basis for the regulatory position, FirstGold made clear that CFIUS can wield its authority in extractive industry deals.
CFIUS may have it just right this time. U.S. national security requires that not only the U.S., but also the world at large, develops as many safe alternatives to oil in as many locations as possible. According to a recent special report in The Wall Street Journal, shale gas discoveries in the U.S. and elsewhere will prevent energy cartels from forming and deprive the petro-states of their influence in world affairs. Financial Times columnist Gideon Rachman argues that national security of the U.S. and other countries as well requires development of shale gas wells and that accordingly any investment – domestic or otherwise – that develops these resources should be encouraged.
It’s a safe bet that the regulators are aware of these views as well. Seeming inaction may be saying more than any articulated policy could. There is more than one way to announce, “Open for business.”
Or, contrary to our view, does the U.S. need to be more protective here? Is there a case to be made for screening to insure that we are not allowing other nations to strip our prized assets? If you believe there is, your comment is welcome.
Recent Canadian statutory enactments and proposed regulations introduced a new national security review mechanism into the screening process. In 2007, FINSA amended the then-existing U.S. statute, known as Exon-Florio, to specify that national security was to be the sole focus of U.S. regulation. The new Canadian structure authorizes the government to review, block or limit inbound investments by non-Canadians based on national security concerns. 
The principal question is whether the connection between the U.S. automobile industry and U.S. national security is sufficiently strong for Treasury and Homeland Security policymakers to consider. One might well begin by assessing what portion of the tanks, armored personnel carriers, other transport vehicles or parts that the Department of Defense purchases are made by Chrysler or GM. The U.S. automobile industry today is a distant cry in many ways from the Second World War. But those with long memories will recall that the Roosevelt Administration turned to our domestic automobile manufacturers to produce tanks as well as airplanes during that war. There are alternative sources for production today, to be sure, including defense contractors whose core business it is to manufacture the equipment that our armed forces rely on. But, with two ongoing wars and the world far from peaceful, is it prudent to assume no risk of impairment to U.S. national security from the transfer of these assets into foreign hands? 