July 1, 2005

July 1, 2005 | Commentary on Asia

Not Strictly Business: China's Bid to Buy Unocal

It's a heck of an offer. In an 11th hour bid to buy Unocal, China's state-run CNOOC Ltd. last week offered $19.6 billion, cash, for America's ninth largest oil company.

 

That's a lot of yuan in anybody's book. For CNOOC, it's downright staggering. If accepted, the deal would put the Chinese oil and gas giant in hock for an amount equal to 90 percent of its market capitalization. Maybe CNOOC knows something about a Yuan revaluation that the rest of us don't. But still . . .

 

If this deal strikes you as being a little fishy, relax: You're not alone. It didn't make sense to CNOOC's foreign directors either. At least not as recently as April, when one of CNOOC's four independent, non-executive directors (Kenneth Courtis), dismissed the notion of bidding on Unocal as something that made little economic sense for the company.

 

And, lest anyone think Courtis had an axe to grind for his employers at Goldman Sachs, think again. Goldman Sachs stands ready to manage the requisite financing, which would involve borrowing $16 billion from CNOOC's parent company, assorted Chinese banks, and corporate bond sales -- with the entire loan package sure to be guaranteed by the Chinese government.

 

So what accounts for the company's change of mind? The four executive directors who make up the rest of CNOOC's board. The same executive directors who represent the Chinese government's 71 percent stake in the company. 

 

Could it be that the Chinese directors' decision to make a play for Unocal hinged on "other than market" considerations? There can be no dounbt that the Chinese Communist Party Politburo in Beijing ordered CNOOC to move on Unocal.

 

Let's take a closer look at Unocal's assets. Unocal has major holdings in Asia. By gaining control of its energy reserves in Thailand, Burma, Indonesia, Vietnam and Bangladesh, China would beef up its already considerable petroleum holdings in Southeast Asia -- holdings that readily translate into political clout. The acquisition would significantly help China achieve its goal of dominating the entire region.

 

Similarly, Unocal's operations in Azerbaijan would give Beijing just that much more influence in the Caspian and Central Asia.

 

And then there are Unocal assets far closer to American shores. The company operates 10 platforms in Alaska's Cook Inlet, the bay providing access to Anchorage -- and Elmendorf Air Force Base. At the mouth of Cook Inlet stands the Kodiak Island Launch Center. Both it and Elmendorf provide key support services to our new National Missile Defense facilities. There's not a member of the Chinese intelligence service who wouldn't salivate at the prospect of controlling these strategically located platforms.

 

As an extra bonus, Unocal boasts deep-sea exploration platforms in the Gulf of Mexico, just off the Litton-Ingalls submarine yards at Pascagoula, Miss., and the Navy facilities at Galveston, Texas.

 

Could it be that geopolitical and intelligence gathering considerations over-rode economic calculations in the CNOOC boardroom? That might explain why, after initially passing on Unocal's invitation to bid, the Chinese firm reversed course and made a last minute offer after Unocal's board had already agreed to submit a $16.6 billion deal with Chevron Corp. to a shareholder vote.

 

Otherwise, why would a deal that made little economic sense two months earlier suddenly become so desirable that it's worth paying not only top dollar to Unocal but an additional $500 million in breakup fees to Chevron? Small wonder that Chevron Vice Chairman Peter Robertson complains, "Clearly, this is not a commercial competition. We are competing with the Chinese government."

 

Members of Congress have asked the Bush administration to have the Committee on Foreign Investment in the United States investigate CNOOC's bid and assess how the deal would affect national security. It seems the Treasury-chaired, interagency CFIUS would have ample cause to deny a foreign power's bid to acquire any major oil company with offshore assets adjacent to strategic U.S. military facilities.

 

That may not sit well with free-trade purists or some free-trade pragmatists. But this may well be a case where vital security concerns outweigh economic ideology.

 

And the pragmatists need not lose sleep over Chinese retaliation. CFIUS can rightly call a denial of CNOOC's offer American retaliation for Beijing's even more stringent ban on U.S. investment in China's oil sector. If Beijing lets Exxon-Mobile buy China National Petroleum Corporation, maybe we can reconsider.

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

Distributed nationally on the Knight-Ridder Tribune Wire