June 29, 2005

June 29, 2005 | Commentary on Asia

Say No to Cnooc's Bid for Unocal

China National Offshore Oil Corporation presumably chose the codename "Operation Bao Chuan" for its Unocal offer to conjure up national pride in its bid to buy America's ninth largest oil company. For bao chuan were the huge treasure ships that traveled across the Indian Ocean to Africa in the early 1400s, and played a crucial role in spreading Chinese influence overseas.

Now the Chinese government-owned company is trying to perform a similar feat by purchasing a vital strategic asset -- unless the U.S. Treasury-led Committee on Foreign Investment in the United States (Cfius) wakes up to the threat this poses to American national security and blocks Cnooc's bid.

That's certainly what Beijing would do if the tables were turned. China has always treated energy matters as issues of national security and would never dream of allowing foreigners to control a Chinese offshore oil company. While Cnooc and Beijing's two other oil giants list minority stakes on international bourses, foreign investors are not allowed any significant say in corporate governance and majority control remains firmly in Chinese government hands.

Western oil companies are kept on a short leash when they operate in China. While reporting on South China's economy for the U.S. Consulate in Guangzhou 15 years ago, I witnessed how Cnooc exercised tight control over joint ventures with foreign oil companies to develop China's offshore fields. The foreign partners generally assumed all the risk and responsibility in return for a minority stake that ensured Cnooc maintained a controlling interest in every venture. All the foreign companies involved had to put up with Chinese participation in every aspect of exploration, surveying, mapping and drilling. Half the production crews were Chinese "in training," and a party commissar oversaw operations.

At that time, Beijing posed no military threat. In the early 1990s, China's navy was at least three decades behind the U.S. Pacific Fleet. Now the gap has shrunk to a decade -- perhaps even less. Last November, a nuclear-powered Chinese Han-class submarine was spotted carrying out a reconnaissance of the U.S. base in Guam -- a first for the noisy Chinese Han subs. As China's nuclear submarine fleet is augmented this year with quieter Type 093 and 094 class boats, the People's Liberation Navy will find it easier to probe American coastal defenses on extended underwater endurance missions.

In allowing a Chinese-government owned entity to purchase Unocal, the U.S. will be handing Beijing an asset of potentially strategic significance if it ever came to a military conflict. The California oil company operates 10 platforms in Alaska's Cook Inlet, the bay governing access to Anchorage -- and Elmendorf Air Force Base. Cook Inlet is also home to the Kodiak Island Launch Center, and both facilities are key to the National Ballistic Missile Defense system. In addition, Unocal's deep-sea exploration platforms in the Gulf of Mexico provide an ideal vantage point for observing activity in the submarine yards of Pascagoula, Mississippi, and the U.S. Navy's facilities of Galveston, Texas.

Cnooc insists that its bid is motivated solely by commercial considerations. But the reservations of its own nonexecutive directors, who blocked its earlier attempt to make a bid for Unocal in April, tell a different story. According to The Wall Street Journal, nonexecutive director Kenneth Courtis opposed as excessive the then proposed offer of $16.7 billion. That is substantially less than the $18.5 billion bid that Cnooc finally put forward last week (and which swells to $19.6 billion if other attendant costs are included, such as half-billion dollar fee that Cnooc is obliged to pay Unocal's existing suitor Chevron Texaco for its eleventh-hour interference).

In the end, it was not the nonexecutive directors who took last week's decision to go ahead (Indeed Mr. Courtis reportedly recused himself to avoid a conflict of interest with his employers at Goldman Sachs, who are advising Cnooc on the bid). Rather it was Cnooc's directors, representing the Chinese government's 71% ownership of the company, who chose to go ahead with a cash bid equivalent to 90% of the company's market capitalization. One which will require Cnooc to borrow $16 billion from its parent company, Chinese banks and through Cnooc bond sales, all of which would have to be guaranteed by the Chinese government. These men obviously have other than economic interests in mind. So one can sympathize with Chevron vice Chairman Peter Robertson when he complained last Friday, "clearly, this is not a commercial competition, we are competing with the Chinese government."

A Chinese takeover of Unocal's holdings in Thailand, Burma, Indonesia, Vietnam and Bangladesh would hasten the day when the entire region drifts into China's orbit. If the Bush administration quietly acquiesces, the unintended message to Southeast Asia will be that America is on the wane here. And Cnooc's acquisition of Unocal's Azerbaijan operations will give Beijing more influence in Central Asia.

Western democracies are ill-equipped to deal with long-term strategic and economic challenges from centrally-controlled but market-oriented dictatorships in the post-Soviet era. The only tool left in Washington is the Cfius, which must review Cnooc's "treasure ship" bid for Unocal to determine whether it threatens national security. It could simply require a Chinese-owned Unocal to divest itself of any assets in the U.S. But ideally Cfius's members will also consider the long-term strategic erosion of America's global position posed by "Operation Treasure Ship" -- and reject Cnooc's bid altogether.

John Tkacik a senior research fellow at the Heritage Foundation in Washington, D.C., is a retired officer in the U.S. foreign service who served in Beijing, Guangzhou, Hong Kong and Taipei.

About the Author

John J. Tkacik, Jr. Senior Research Fellow
Asian Studies Center

First appeaered in the Asian Wall Street Journal