Chinese Oil Firm Bids for Unocal
A major Chinese oil company made a landmark offer to buy California-based Unocal Corp. for $18.5 billion on Wednesday, topping a bid by rival U.S. oil giant Chevron Corp. and setting the stage for an intense political debate over the future of U.S. energy, security and trade policies.
The unsolicited offer by CNOOC Ltd., an arm of state-owned China National Offshore Oil Corp., was the most dramatic example yet of China’s growing influence in global markets and would be China’s largest foreign acquisition by far.
The proposed buyout could raise hackles in the United States, which is heavily dependent on foreign oil. China’s fast-growing economy is consuming ever-larger amounts of crude, which is helping to drive the price to record heights on world markets, and CNOOC wants to add Unocal’s assets to its energy reserves.
Fu Chengyu, CNOOC’s chairman and chief executive, said his company’s $67-a-share cash bid “is a good offer for Unocal” and “it is good for America.”
In a telephone interview from Beijing, Fu noted that CNOOC’s proposal to Unocal included several pledges to assuage U.S. concerns, such as keeping most of Unocal’s 6,600 workers and selling its U.S.-produced oil and gas within the United States.
If people “have a better understanding” of CNOOC, “I think there will be less concern both politically and maybe economically,” said Fu, who earned a master’s degree in petroleum engineering from USC and once worked for Phillips Petroleum Co., now part of ConocoPhillips.
Still, CNOOC’s proposal is likely to incite a “firestorm” in Congress, said Mikkal Herberg, director of the Asian Energy Security program at the National Bureau of Asian Research, a Seattle think tank.
Herberg predicted that the CNOOC bid would “feed the fear that the Chinese are coming, the Chinese are coming,” and could further inflame tensions between the two countries over textile trade and currency issues.
One congressman, Rep. Richard W. Pombo (R-Tracy), said he didn’t believe it was “in the best interest of the United States to have Unocal owned by the Chinese national government,” adding that the deal could have “disastrous consequences for our economic and national security.”
Pombo and Rep. Duncan Hunter (R-El Cajon) sent a letter to President Bush last week urging him to look closely at any Chinese bid to acquire U.S. energy assets. Such an attempt “raises many concerns about U.S. jobs, energy production and energy security,” their letter said.
C. Richard D’Amato, chairman of the U.S.-China Economic and Security Review Commission, a congressional advisory panel that has been sharply critical of U.S. policy toward China, said his group would also ask President Bush to closely review the CNOOC offer.
“When we’re so dependent on foreign suppliers, giving away American sources of petroleum and hydrocarbons doesn’t make sense to me,” said D’Amato, an attorney and former member of the Maryland state legislature.
White House spokesman Trent Duffy declined to comment Wednesday on CNOOC’s offer.
Under U.S. law, the Committee on Foreign Investment in the United States -- an interagency committee headed by Treasury Secretary John W. Snow -- is responsible for reviewing any foreign purchases that could threaten U.S. security.
Herberg, of the National Bureau of Asian Research, said some specific security issues related to a CNOOC-Unocal deal could trigger U.S. concern. Unocal has some “very, very good deep-water exploration skills” developed in projects off Indonesia and Mexico that could have military applications, he said.
Critics are likely to “question letting that technology fall into the hands of the Chinese government,” said Herberg, who recently testified on China’s energy strategy before the Senate Foreign Relations Committee.
In a conference call with reporters, Fu said the transaction wouldn’t have “any negative impact to the national security interests of the United States.... People need to understand this is a purely commercial transaction, driven by market forces and market considerations.”
Chinese analysts and those connected with the government said that CNOOC’s bid for El Segundo-based Unocal was an independent commercial decision made by the company, not a move directed by Beijing.
“Through an acquisition of another company, CNOOC wants to expand their business in Asia,” said Han Wenke, vice director of the energy institute affiliated with the National Development and Reform Commission, a regulatory agency of the Chinese central government.
CNOOC’s move also could create crosscurrents for the Bush administration and its commitment to increased trade, free commodities markets and U.S. investment in China.
Indeed, Fu said during the conference call that he believed the transaction would prevail “with the U.S. government being the champion of global free trade ... and also with so many American companies making investments and acquisitions in China.”
In addition to U.S. government approval, any acquisition also must win the favor of Unocal’s stockholders, and some Wall Street analysts said CNOOC’s offer didn’t pass muster.
“That’s not much of a premium over what Chevron’s offering,” said Gene Gillespie, an analyst with investment firm Howard Weil Inc. “I don’t think this is attractive to the Unocal shareholders,” he said, partly because a portion of the Chevron deal would be tax-free to Unocal’s investors.
Fadel Gheit, senior energy analyst at investment firm Oppenheimer & Co., said Unocal’s investors might shoot down the deal.
“They should at least have upped it to $72” a share, said Gheit, who owns stock in both Unocal and Chevron. “This is a waste of everyone’s time.”
Still, Gheit said, “I would not be surprised if Chevron sweetened the offer one way or another. I think Chevron is committed and interested in Unocal, and it’s not going to let the deal collapse.”
The risk of U.S. resistance to the deal was not lost on CNOOC, whose shares trade on the New York and Hong Kong stock exchanges.
CNOOC (pronounced see-nook) said the offer was “friendly” and that it hoped to reach a “consensual” deal. The company also said it would continue Unocal’s practice of selling all or most of its U.S.-produced oil and natural gas in the United States, which CNOOC said accounted for less than 1% of total U.S. oil and gas consumption.
However, the majority of Unocal’s oil and gas is produced overseas and is sold to customers around the world. Indeed, CNOOC and Chevron both prize Unocal because of its substantial oil and gas exploration projects in the Asia Pacific region, including Thailand, Indonesia, Bangladesh and Myanmar.
Chevron, based in San Ramon, Calif., and the second-largest U.S. oil company, behind Exxon Mobil Corp., is offering about $62 a share in cash and Chevron stock -- or about $17 billion -- under a friendly agreement it reached with Unocal in April. That pact received antitrust clearance from the Federal Trade Commission this month.
Despite the lower price, Chevron said its offer was still superior because it “combines compelling value, regulatory certainty and accelerated timing” for Unocal’s stockholders, while the “CNOOC proposal must undergo an extensive regulatory process in the United States and elsewhere.”
Chevron declined to comment on whether it might sweeten its proposal, as some analysts have predicted in the event CNOOC joined the fray. Unocal said that its directors continued to recommend that its stockholders approve the deal with Chevron, but that they would “evaluate the CNOOC proposal” because of their fiduciary duty to investors.
As part of their agreement, Unocal and Chevron have a “breakup” clause under which another acquirer of Unocal would have to pay $500 million to Chevron. The fee is designed to thwart other suitors.
Before CNOOC’s announcement late Wednesday, which had been rumored for days, Unocal’s stock rose a penny to $64.86 a share, while Chevron’s stock fell 51 cents to $58.27.
Unocal, a 115-year-old company that was founded in California, once was known for its Union 76 gasoline. But it sold its retail and refining operations in 1997 to focus on exploration and production.
Unocal also operates in the Gulf of Mexico and the Caspian Sea area, and about 66% of its sales come from foreign sites. Bolstered by high oil and gas prices, Unocal last year earned a $1.2 billion, a record profit for the company, and had sales of $8.2 billion.
The company’s fields are strategically attractive to CNOOC because the Chinese company is aggressively looking for additional reserves. China is now the world’s second-largest consumer of oil, after the United States.
Stephen Leeb, president of Leeb Capital Management in New York, which owns some Unocal shares, called CNOOC’s offer “gutsy” because the Chinese “realize the political ramifications of making a bid.”
“That they would be willing to pay half a billion dollars to Chevron, and to court Senate disapprobation, it shows how desperate China is for oil assets,” said Leeb, who also wrote a 2004 book called “The Oil Factor.”
CNOOC’s financial advisors on the offer include the U.S. investment firms Goldman, Sachs & Co. and J.P. Morgan Securities.
Times staff writer Don Lee in Shanghai contributed to this report.
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CNOOC Ltd.
* Parent company: State-owned China National Offshore Oil Corp.
* Headquarters: Hong Kong
* Main business: Offshore oil and natural gas exploration, development, production and sales
* Major production areas: Bohai Bay, Western South China Sea, Eastern South China Sea, East China Sea and off Australia
* Reserves: About 2.2 billion barrels of oil equivalent*
* Daily average net production: 382,513 barrels of oil equivalent*
* Employees: 2,524*
* Traded: New York Stock Exchange and the Stock Exchange of Hong Kong
* As of Dec. 31
Source: Company reports
Los Angeles Times
