Bid for Unocal a test for US
Chinese firms in takeover mode
By Jehangir S. Pocha, Globe Correspondent | June 30,
2005
005
BEIJING -- The US reaction to the China National Offshore Oil Corp.'s unsolicited bid to buy energy giant Unocal will send a strong message about whether Washington is more interested in its commitment to free trade or in containing the growing might of China, government officials and business specialists here say.
''Right now CNOOC is only following the rules of free trade," said Han Xiaoping, senior vice president of Falcon Pioneer Technology Company Ltd., an energy research firm in Beijing.
CNOOC's all-cash offer of $18.5 billion for Unocal, which ups a $16.6 billion stock bid for the company from Chevron Corp., comes shortly after Chinese computer maker Lenovo's $1.75 billion purchase of IBM's PC unit and is expected to be followed by Chinese appliance maker Haier's $2.25 billion offer for Maytag Corp. Together, the deals reveal the determination with which Chinese companies, backed up by their government, are following what they call a ''go out" strategy -- a plan to use China's $650 billion in foreign exchange reserves to acquire leading companies and brands in several key industries.
That is proving ''unsettling and disruptive" for many US leaders and corporations, said James Brock, an independent adviser to the energy industry in Beijing.
Until recently, Chinese firms were seen merely as cheap manufacturers, and the Chinese government invested most of its cash in low-yielding US government treasury securities. But now the best Chinese firms are proving as adept as their Japanese and Korean counterparts did in the 1970s and 1980s at moving rapidly up the value chain, and local state-owned banks are eschewing the 4.2 percent return they earn on a 30-year US Treasury bill to bankroll their dreams of global expansion.
''Buying oil reserves is much better than buying T-bills, and CNOOC is one of the best companies," said Han. ''It's much better for a Chinese bank to lend money to a Chinese company like this than to the US government."
Jing Huang, a senior fellow at the Brookings Institution, said CNOOC's bid for Unocal ''is part of China's strategy to integrate itself into the world."
But Brock said the Chinese government, which owns 70.6 percent of CNOOC, had endorsed the ambitious bid for larger strategic interests, such as Beijing's desire to acquire energy fields at a time of uncertain energy supplies and diminishing energy stocks. Beijing's desire ''to wrest control of as many energy fields as it can" from other major energy consumers such as the United States and India is driven by China's spiraling energy consumption, Brock said.
China is now the second-largest energy consumer in the world, behind the United States, burning the equivalent of 1.5 billion tons of oil this year. Even conservative estimates expect this figure to double over the next decade. Over the next year alone, China will bring online new power plants that are expected to produce about 80 gigawatts of electricity, more than the entire power capacity of the United Kingdom.
*
That's why Chinese firms such as CNOOC are desperately trying ''to replace the energy supplies they've used up with reliable sources of new reserves," Brock said.
''They feel that by owning their own reserves, they can add some stability to their energy supply."
CNOOC executives estimate that merging with Unocal would more than double CNOOC's current oil and gas production and increase its reserves by nearly 80 per cent, or 4 billion barrels of standard oil. With about 70 percent of these combined reserves located in China and nearby Asian countries such as Indonesia, the merger makes sense on a strictly commercial basis.
''I don't think the color of their money should be an issue in OK'ing the deal," Brock said. ''Energy is almost always sold to the nearest consumer, so this deal makes sense for both companies."
But the battle for the control of energy resources also has significant political dimensions, and most countries guard their energy industry from foreign or unwanted buyers. China itself does not allow foreign investors to own more than 50 percent of most oil and natural gas-related companies, though it does allow foreign firms full ownership of energy exploration ventures. In fact, the reason it is paying for Unocal in cash instead of stock is because the Chinese government does not want to dilute its own holding in CNOOC.
William Overholt, director of the Center for Asia Pacific Policy at Rand Corp., said such thinking is misplaced.
''Buying oil wells does nothing to enhance China's energy security," Overholt said. ''Oil is an internationally traded commodity and, in a time of squeeze, whoever has enough money will get the oil."
China's purchases, he said, do nothing for China except deplete its reserves. ''If the Chinese want to pay over the top for US assets, then the sensible response for us Americans is to gleefully celebrate the resultant windfalls," he said.
That's not in line with the current mood in Washington, where voices have already been raised against allowing a state-owned Chinese entity to control Unocal. The company owns several strategic assets, including energy fields in Mexico; the rights to cutting-edge deep water drilling technology, and interests in strategically important pipelines in Afghanistan and Central Asia.
''The US should be shoring up our reserves, not divesting them to global competitors seeking to fuel their own tremendous economic growth," said US Representative Richard Pombo, California Republican, who is chairman of the House Resources Committee and is demanding an investigation into the proposed deal.
To soften such critics, CNOOC's savvy US-educated chief executive, Fu Chengyu, has said that the company will retain its entire US staff and that all the existing oil and gas Unocal sells in the United States will continue to be sold there and not be diverted to China. The company has also stated that if necessary, it would be willing to consider divesting Unocal's North American assets and consider ''special management arrangements" for its pipelines.
Brock said it was understandable that the US public and some in Congress are having difficulty understanding the complex issues raised by CNOOC's bid. |
