CHINESE BID FOR UNOCAL: More Than Meets The Eye

By Diane M. Grassi June 28, 2005

The June 23, 2005 announcement by China’s largest state-owned company, China National Offshore Oil Corp. (CNOOC), of an unsolicited bid for Unocal, a California-based United States oil company and ninth in U.S. oil production, has been received with considerable reservations. It is that which is not known about the bid and its motivations which present a tremendous task ahead for the U.S. Congress and Wall Street. A Communist country wishing to embed itself in the U.S. economy with ramifications tied to national security is unprecedented, along with it actually being taken seriously by the U.S. government.

In April of 2005 Unocal agreed to a $16.4 billion merger with U.S. owned Chevron Corp., one of the largest oil companies in the world. On the heels of the merger comes CNOOC hoping to break up that deal with a $20 billion all-cash bid. The CNOOC bid follows the June 2005 Chinese take-over bid for the Maytag Corp. by Haier America Trading, a unit of China’s Haier Group. Competing with the Haier Group in their $1.3 billion bid is Ripplewood Holdings, managed out of New York with production facilities in Newton, Iowa. Unlike the Maytag bid, however, CNOOC “Raises questions about how much of the country we are willing to sell to a Communist country that we might be fighting someday,” said Michael O’Hanlon, an international military specialist at the Brookings Institution.

For years the U.S. government has had restrictions placed upon ownership of industries such as airlines, the media, and military contractors, although China is now a subcontractor for many U.S. military weapons manufacturers. But never has the U.S. government entertained outside ownership of U.S. assets by a Communist regime which continues to build up its military arsenal as its economy has grown ten-fold over the past decade. And in order to assure the continual growth of its manufacturing base, largely from the U.S. and the West, China needs oil. Second only to the U.S. in consumption of energy, China now is the fastest growing consumer of oil.

Of importance is that more than half of Unocal’s reserves are concentrated in Southeast Asia and has a pipeline hooked up to strategic American oil reserves as well as a rare-earth mine which remains the only one in the U.S. William A. Reinsch, president of the National Foreign Trade Council states “When you talk about energy supplies, and the market is tight, there is a national security issue.” Yet the U.S. government has an interest in publicly quieting talk about the threat of China both militarily and technologically, which go hand in hand in threatening U.S. competitiveness. And unlike the U.S., China does not distinguish between civilian and military development as profits for both go into supporting the Chinese Communist state.

Not too long ago there was much scrutiny and debate about whether the International Olympic Committee should award Beijing as host of the 2008 Summer Olympics due to China’s continued practice of human rights violations, including slave labor conditions for its people. The Chinese somehow have that covered too making this whole bidding process not such a long shot but a well orchestrated campaign largely with the help of U.S. government insiders and corporate entities lending a willing hand.

Earlier this year International Business Machines Corp. was sold to the Lenovo Group of China, which met with disapproval from Congress. As a direct result IBM sought out former National Security Advisor to both President Ford and President H.W. Bush, Brent Scowcroft, to help seal the deal. But in the Unocal deal, CNOOC CEO, Fu Chengyu, has engaged no less than three U.S. investment banks, four law firms, two media communications groups and some with direct connections to the White House.

The investment banking firms presently on board are J.P Morgan Chase & Co. and Goldman Sachs Group Inc. To deal with political and policy hurdles CNOOC hired lobbying law firm, Akin, Gump, Strauss, Hauer & Feld, located in Dallas and well connected to both Democrats and Republicans and which represented Halliburton when Vice President Dick Cheney was Chairman. Media firm, Public Strategies, Inc., a public relations company out of Austin, TX led President Bush’s 2004 re-election media campaign and its point person is Mark Palmer, former Enron Corp. communications director. The Brunswick Group which specializes in mergers and acquisitions will also oversee public affairs work.

Federal Reserve Chairman Alan Greenspan and Treasury Secretary John Snow appeared before a Senate committee just days before the announced CNOOC bid, and conveniently made a comparison to Japan’s U.S. investments of the 1980’s. But the current Chinese agenda is actually quite different. Japan remains an ally of the U.S. Japan depended on the U.S. for help on defense with U.S. military bases throughout Japan and was not a major competitor for rare resources or strategic assets which impact national security.

In addition, China continues its practice of theft of American intellectual property primarily in the entertainment sector and patent violations with knockoffs of Dell computers and Nike clothing for example, costing the U.S. more the $30 billion dollars a year. And the loss of U.S. manufacturing to China for the sake of corporate desires to pay wages so low the U.S. cannot possibly compete with continues to eat away what is left of the U.S. industrial base, thus leaving the U.S. with a ballooning trade deficit with China.

It will ultimately be up to the Committee on Foreign Investment in the U.S. (CFIUS), an arm of the Treasury Department, which must scrutinize and review the CNOOC bid. Such has already been called for by several members of Congress raising speculation as to how much of a surprise the bid was to lawmakers. According to a 1988 law, CFIUS has the power to stop a foreign country from such a takeover if evidence is found that such will threaten national security and that relevant laws do not have adequate authority in order to protect U.S. security. One such scenario could be the under-sea oil drilling or oil prospecting which might help China’s nuclear testing capabilities. Most CFIUS reviews take about 30 days.

Yet the fear in Washington is that if the CNOOC bid is not accepted that China would then become closer to oil-producing Russia and Venezuela in addition to the rogue states of Iran and Sudan. And of course U.S. interest in protecting Taiwan is at the forefront as well as South Korea. The bigger China grows economically its military prowess likewise grows.

With technology manufacturing along with outright ownership of U.S. and Western firms combined with technological weaponry buildup the missing component now remains energy in order for China’s global power to continue to thrive. Perhaps finally the CNOOC offer will bring the matter of U.S. sovereignty back to the halls of Congress as well as to the boardroom, as the American economy and national security clearly appear to be interwoven. Symbolically this bid and unprecedented deal could press the U.S. government to seriously measure its long-term consequences and is an opportunity to do the right thing, rather than that which merely benefits Wall Street for a short-term gain.