China Escalates the Rhetorical War over Unocal

In the escalating rhetorical battle over the attempted takeover of Unocal, China plays the Adam Smith card:

China Tells Congress To Back Off Businesses, By Peter S. Goodman, Washington Post:  The Chinese government on Monday sharply criticized the United States for threatening to erect barriers aimed at preventing the attempted takeover of the American oil company Unocal Corp. … Four days after the House of Representatives overwhelmingly approved a resolution urging the Bush administration to block the proposed transaction as a threat to national security, China's Foreign Ministry excoriated Congress for injecting politics into what it characterized as a standard business matter.  "We demand that the U.S. Congress correct its mistaken ways of politicizing economic and trade issues and stop interfering in the normal commercial exchanges between enterprises of the two countries," the Foreign Ministry said in a written statement.  … Those words, the latest rhetorical volley in an escalating trade battle, officially elevated the takeover battle for Unocal into a bilateral issue involving Washington and Beijing, raising the stakes of the outcome.  … some members of Congress have taken to portraying China's appetite for energy as a threat to U.S. interests. They are painting CNOOC's effort to capture Unocal as an attempt to siphon off energy that would otherwise land in the United States, a proposition that analysts call dubious because most of Unocal's outstanding contracts supply customers in Asia. …

This statement puts it into perspective:

But analysts say the issue has thus far produced little that could alter the relationship between the two governments, because Beijing has grown sophisticated at distinguishing between rhetoric from Capitol Hill -- where Thursday's resolution was nonbinding -- and policy from the White House, which has said little on the subject….

And I found this quote, which implies China’s appetite for U.S. debt is waning and Unocal is the first in a long string of attempted acquisitions, interesting:

… the quest for Unocal and other foreign companies is being construed by some as a sign of diversification.  "We invest too much in U.S. federal bonds, and they don't make us much money," said Pan Rui, a professor at the Center for American Studies at Fudan University in Shanghai. "Now we're learning to invest more wisely, to try to invest in American companies and industries."

For me, the Unocal issue comes down to the future strategic importance of China's proposed acquisition.  National defense is a valid reason for protecting an industry.  There are good reasons to maintain a steel industry or an auto industry that can be easily converted into the production of airplanes and tanks or other military necessities in the event of war.  An island nation may wish to retain the ability to feed itself as insurance against embargoes even though its farms aren't as productive as those elsewhere. Does Unocal fit this profile? People whose views have earned my respect disagree on this one.   Paul Krugman believes the strategic importance is sufficient to block the merger while others such as  Alex Tabarrok hold the opposite view. For now, my mind remains open and I have yet to be convinced one way or the other.  I need to spend some time sorting this out.  But I do believe in free trade and that is my position until the evidence before me convinces me otherwise.

Comments

[Dave Schuler]

Isn't CNOOC state-owned? That would seem to make a difference to me. And, of course, the Chinese lecturing us about interference with the market in discussing the purchase of a private U. S. corporation by a state-owned Chinese corporation is pretty darned funny.

[pgl]

I agree with Alex. Check out Kash's Angrybear post for more.

[Movie Guy]

I believe that China's CNOOC proposed purchase of Unocal should be analyzed in two ways.

First, apply the legal provision of Exon-Florio to satisfy all U.S. national defense and national economic security concerns. Second, apply a broader analysis to the overall crude oil and natural gas strategies of China. In other words, what other moves by China are ongoing, and how will Unocal lease resources and deepwater technologies fit in. CNOOC does not have deepwater technology at this time, so the proposed acquisition is significant. Moreover, a technical review of Chevron reveals that its ability to grow in the future is limited without consolidation of its assets with those of Unocal. The better future producing leases appear to be held by Unocal, not Chevron.

Perhaps the following articles and documents will help others conduct a more thorough analysis of the issues under consideration. Note the developments in Russia, Eurasia and Japan as relate to China's quest for crude oil and natural gas.

CRUDE OIL - GLOBAL ISSUES

Unocal - CNOOC

CNOOC Unocal purchase proposal presentation

Unocal press releases

Committee on Foreign Investment in the United States ("CFIUS") in accordance with the Exon-Florio provision

Sun Bin's blog: CNOOC/Unocal: the business perspective of the Rothschild proposal - 2 July 2005

Chinese Bid For Unocal: More Than Meets The Eye - 1 July 2005

China's Latest 'Threat' - 27 June 2005

Chevron Criticizes Rival Suitor - 25 June 2005

Global Outlook and Updates

Guardian - Oil and Petrol articles - Latest updates

Gas Exporting Countries Forum (GECF) unlikely to emerge as OPEC equivalent - 1 July 2005

OPEC Monthly Oil Market Reports - latest reports

Canada

Sinopec Buys into Canadian Oil Sands - 1 June 2005

Canada To Compete In Oil Market - 17 Feb 2005

Not elk, but oil: China's Canadian hunt - 24 December 2004

China

China's Costly Quest for Energy Control - 27 June 2005

David Stanway -- China on the International Oil Market - transcript of a presentation given at an American Chamber of Commerce event in Beijing - 23 June 2005

Eurasia

Revolution, geopolitics and pipelines (Eurasia) - 30 June 2005

Pipelineistan's biggest game begins - 26 May 2005

India

India-China-US and the Energy Conundrum - 30 June 2005

Japan

China Gorging and Japan-China Resource and Energy Conflicts - 29 June 2005

OECD Nations

Profiles of Petroleum Privatizations in OECD Countries - undated

Russia

Deals pave way for closer Sino-Russian links - 2 July 2005

Rosneft Opens Up Russian Fuel Sector for Chinese Oil Companies - l July 2005

Rosneft, CNPC plan long-term cooperation - 1 July 2005

MosNews (Russia) - Hu Jintao Seeks to Secure Deliveries of Russian Oil to Fuel China’s Economic Growth - 30 June 2005

Saudi Arabia

The Saudi oil bombshell - 29 June 2005

Turkey - Greece

Turkey, Greece launch pipeline project - Southern Europe Gas Ring Project - 4 July 2005

United States of America

Foreign Suitors Nothing New in U.S. Oil Patch - 1 July 2005

Venezuela

Venezuela looks to expand oil reserves - 2 July 2005

Chávez uses 'oil diplomacy' to build regional influence - 1 July 2005

The US and the Chavez question - 1 July 2005

Venezuela and China sign oil deal - 24 December 2004

[Mark Thoma]

Very nice Movie Guy. Thank you.

[Movie Guy]

You're welcome.

[ent lord]

The suits in the oil industry are saying that the Chinese offer makes no sense economically, making the offer more political than good business. However, since the President has indicated that Treasuries and other government paper isn't worth the paper it is written on, is it any surprise the Chinese start looking for a bigger bang for the yuan?

[Movie Guy]

The first article is worth a careful read.

China Oil Giants Crave Respectability and Power - 9 July 2005

Exxon Joins China Project With 2 Others - 9 July 2005

[Movie Guy]

CNOOC Approves Higher Unocal Bid, 07.14.2005, 02:21 AM

CNOOC Ltd.'s board has given its managers approval to increase its bid for Unocal and agreed to pay the U.S. oil company's shareholders up to US$2.5 billion (euro1.9 billion) if it signs a takeover agreement but a deal isn't completed, news reports said Thursday.

The news came as American lawmakers criticized the CNOOC bid at hearings in Washington, saying letting a Chinese state-controlled firm take over Unocal, the ninth-largest American oil company, could threaten U.S. national security. The Chinese government owns 70 percent of Hong Kong-based CNOOC's shares.

The CNOOC board also set aside money to compensate Unocal shareholders if the Chinese company signs a takeover deal but fails to complete it, the news reports said. That was meant to ease fears that shareholders would have no way to seek damages if they turn down the Chevron offer and CNOOC then walks away from a deal.

The Post put the size of the penalty payment at US$2.5 billion (euro1.9 billion), while the Journal and the Financial Times said it was in excess of US$2 billion (euro1.5 billion).

According to the Post, the money would be held in an escrow account in the United States and would apply only if the deal passes U.S. regulatory approval but isn't completed.

At hearings Wednesday in Washington, lawmakers said the CNOOC offer was part of a Chinese effort to gain control of foreign oil and gas sources, and that a deal would give China political leverage in areas where the oil company has resources.

"The simple fact is that energy is a strategic commodity," said House Armed Services Committee Chairman Duncan Hunter. He said Unocal's holdings, which include drilling rights and exploratory capabilities in Asia and elsewhere, "represent strategic assets that affect U.S. national security."

Lawmakers and witnesses dismissed CNOOC claims that its offer was a purely commercial deal.

To accept that it "is extraordinarily naive," said former CIA Director James Woolsey.