CALGARY - The proposed $6 billion takeover of Canadian natural gas producer Progress (TSX:PRQ) by Malaysian state-owned energy giant Petronas has hit a potentially lethal snag.

After reviewing the deal, Federal Industry Minister Christian Paradis has given it the thumbs down.

"I can confirm that I have sent a notice letter to Petronas indicating that I am not satisfied that the proposed investment is likely to be of net benefit to Canada," Paradis said in a statement issued late Friday night.

The minister did not explain his decision, saying only that it was made after "a careful and thorough review of the proposed transaction."

Under the terms of the Investment Canada Act, Petronas now has up to 30 days to make any changes to the proposed deal and send it back to Ottawa for another review.

"Canada has a long-standing reputation for welcoming foreign investment. The Government of Canada remains committed to maintaining an open climate for investment," Paradis said at the end of his statement.

At $6 billion, Petronas' offer for Progress is substantial, but it's eclipsed by the $15.1 billion China National Offshore Oil Co. is offering for Nexen (TSX:NXY).

And observers had been looking for signals from the review of the Petronas deal about the government's thinking on the more controversial deal to buy Nexen Inc.

Both takeovers are by Asian state-owned players, are worth billions of dollars and sprang from joint-venture partnerships with Canadian firms, but the Chinese bid has stoked a great deal more political furor than the Malaysian one.

"China comes with more baggage, as befits a great power," said Gordon Houlden, director of the University of Alberta's China Institute.

Political scientist Wenran Jiang said the challenge for Ottawa will be to show consistency in how it applies the Investment Canada Act's key net benefit test to foreign deals.

"They will have to appear that they use the same set of rules to evaluate, rather than using different tailor-made rules," said the senior fellow at the Asia Pacific Foundation of Canada.

"They will have to show some seriousness as well as consistency."

Paradis has extended the review of the CNOOC-Nexen deal until mid-November. The reviews can be extended by further 30-day increments, with the buyer's consent.

Jiang said the perception of Chinese firms compared with other state-owned counterparts is unfair in many ways.

"The Chinese state-owned companies are considered more menacing in a sense by some people than, say, a national oil company of Malaysia," he said.

"We need to figure out how do we treat China? Is this potentially treating China as an enemy? Or do you treat China as a business partner?"

A year before their acquisition deal was announced, Progress and Petronas formed a partnership to jointly develop shale natural gas in northeastern B.C. and look at exporting the gas off the West Coast in liquid form.

CNOOC and Nexen also had a pre-existing relationship. Last year, CNOOC scooped up Opti Canada, Nexen's beleaguered minority partner in its troubled Long Lake oilsands project. The two firms also worked together in the Gulf of Mexico.

While Nexen's headquarters are in Calgary, its strategic importance to Canada is questionable. Only about 30 per cent of its forecasted daily production in 2012 is from its Canadian operations, with the vast majority coming from offshore platforms in the North Sea and elsewhere around the globe.

"I don't see these companies as being that material to the Canadian landscape," said John Stephenson, portfolio manager at First Asset Investment Management in Toronto.

"The government, I would suspect, would give its blessing to both deals...If you look at our oil and gas industry, we need hundreds of billions of dollars to develop the resource, to do the infrastructure. We just simply don't have the ability to finance all of that here."

Canada's spy agency raised a red flag on foreign investment by state-owned firms in its annual report earlier this year.

Though CSIS didn't name specific countries or companies it said certain state-owned enterprises have pursued what it called opaque agendas or received clandestine intelligence support for their pursuits in Canada.

Prime Minister Stephen Harper has said the Nexen-CNOOC deal "raises a range of difficult policy questions."

At a news conference in Senegal last week, he said there's a national security angle that factors into Canada's relationship with China.

"The relationship with China is important. At the same time it's complex. It's complex because the Chinese have obviously very different systems than we do — economic and political systems," he said.

"Of course, as you know, there's a national-security dimension to this relationship, in fact to all of our activities, that we take very seriously."

While the NDP doesn't have a position specifically on the Petronas-Progress takeover, it has raised a litany of national security, environmental and human rights concerns with the CNOOC deal.

What the two deals have in common, though, is that the federal review process is too secretive and doesn't set out clear enough guidelines on what constitutes a net benefit, said NDP natural resources critic Peter Julian in an interview.

"There is a deplorable process in place. It's a mess," he said.

"It's difficult for Canadians to determine whether it's in the best interest of the country because they haven't put forward that clear definition of net benefit and a process that allows for public consultations."

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