The bid by the Chinese National Offshore Oil Company (Cnooc) for Unocal has caused political combustion in Washington. A careful examination of the facts may clear the air. The rise of China is a transformational event in the international oil industry. Its growing economy has created a surging demand for oil. Cnooc is a state enterprise with the clear purpose to further the interests of the Chinese state, including increasing its energy security.
Cnooc and its sister National Oil Companies (NOCs), PetroChina and Sinopec are moving aggressively to acquire reserves and production outside China, with only modest successes to date. They are actively competing against international oil companies (IOCs) and also trying to negotiate directly with governments. Chinese companies are also prepared to enter areas which are either highly risky or otherwise unattractive to IOCs such as Sudan or Iran.
Since they are coming late to the game, Chinese companies use whatever political or financial tools are available to compete. In Angola, for example, a large Chinese government loan package helped obtain oil licenses. In Australia, Cnooc used its government ties to force its way into the Gorgon LNG project in Western Australia in exchange for access to the domestic gas market in mainland China.
Some argue that China should be allowed to invest in the U.S. because Westerners can invest in China. For international oil companies to invest there, however, they enter on terms dictated by the Chinese government. Foreigners do not demand expedited treatment from the government. The negotiations are excruciating and by no means reciprocal or transparent. Foreign companies can only obtain minority interests where Chinese state companies control the majority and are the operator. The Chinese want Western technology and know-how, particularly in project management. They seek to extract the maximum from international investors, and give back the minimum. These are not arms'-length commercial transactions; they are highly political.
The case is made that other NOCs such as Saudi Aramco and PDVSA of Venezuela invest in the U.S. and the Cnooc deal is the same. Not so. Aramco and PDVSA invested in refineries to assure markets for their crude oil in the U.S. The investments were on a friendly, uncontested basis, with no competing bids. The U.S. consumer clearly benefits from these downstream investments. The Cnooc investment is entirely different, since it brings no benefit to the U.S. consumer. Furthermore, due to the delay of the Cnooc bid, caused solely by Cnooc, they chose to enter into a contested bid, late. Now they seek expedited treatment to overcome delays initially imposed by themselves.
The financing of the transaction must be reviewed by the U.S. government. The Chinese government is providing low or no interest rate financing for $7 billion of the total financing of $18.5 billion; otherwise, Cnooc, with a market capitalization of $21.9 billion at the time of the bid could not possibly afford this offer. This financing is a breach of the spirit, if not the letter, of international rules on subsidies. It poses complicated issues that U.S. policy makers must address, namely, how should the U.S. government deal with state-owned enterprises -- which have the treasuries of their countries unfairly backing them -- when these companies start competing for assets outside their home market. All U.S. companies should be interested in how the U.S. government deals with this new and emerging challenge.
A fundamental rationale for this bid is that it would help the energy security of China. How? Should the bid by Cnooc be successful, then Cnooc will be much larger, a national champion, but it does nothing to assure more Asian oil and gas flowing to China. The gas reserves in Thailand and Myanmar will be delivered to the Thai market by pipeline. To build a pipeline from Thailand to China makes no sense, and local Thai demand will absorb all the production. Likewise, the substantial gas production of Unocal in Indonesia flows to the Bontang LNG plant and is then moved by ship to Korea, Japan and Taiwan. This gas is under contract through 2010. Pertamina, the Indonesian state company, will then market the gas after 2010. If China or Cnooc wants to get it, they must be the highest bidder. Being a reserve holder in Indonesia will give Cnooc little advantage in obtaining this gas.
The energy security of China is a very serious and legitimate issue which the U.S. should address on a cooperative, not competitive, basis. It is clear how the Cnooc-Unocal transaction would further the ambitions of China, but not its energy security. I would urge a more constructive approach than contested bids. China is clearly willing to provide substantial debt financing to further its energy program. This is amply demonstrated in its Unocal bid. Likewise, there are large petroleum provinces not open to investment by IOCs. These closed countries control 77% of the world's oil resources and include most of the Middle East and Mexico. The U.S. should encourage the Chinese to provide attractive debt financing of petroleum projects in these closed countries. The increased production from such investments could be integrated with China. Such investments would benefit China, and benefit the U.S., since it would result in more oil on world markets. This is a win-win situation for both nations, as well as for consumers world-wide.
The Cnooc bid should be seen for what it is -- an aggressive, contested bid filed late. Now the Chinese are demanding exceptions to the rules and sliding past uncomfortable facts. It is not a commercial deal, but rather a government deal financed with cheap government money. The Chinese cannot demand fairness on the one hand, but not play fair with the other. The Unocal deal is also an unfortunate distraction to the vital question of Chinese energy security. The U.S. should cooperate with China, not compete with it. There are ways this can be achieved which can increase not only the mutual energy supply but mutual trust as well. Washington should take this approach, and not be stampeded by Cnooc into an unfair deal.
Mr. West, a former assistant secretary of the Interior in the Reagan administration, is chairman of PFC Energy.
