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Why not just nationalize
Unocal?
By Todd Crowell
Congress is becoming just a little
hysterical on the subject of China. Just as the
people's representatives were working up a pretty
good head of protectionist steam over the yuan
revaluation issue, the China National Offshore Oil
Co (CNOOC - pronounced sea-nook) suddenly decided
to try to buy California-based Unocal Corporation,
giving them even more to worry about.
Unocal had been on the market for a while
and seemed destined for incorporation into
Chevron's growing energy empire, when state-owned
CNOOC, China's third-largest petroleum company,
unexpectedly entered the picture by topping
Chevron's offer of $16.4 billion by 10%. The offer
came on the heels of Haier's announcement that it
wanted to acquire Maytag, the Iowa-based maker of
major appliances, and Beijing-based Lenovo's
purchase of IBM's PC unit. Now, not even the most
avid China basher would argue that the purchase of
a washing machine maker is a threat to national
security, and anyone who has been paying attention
to the PC industry knew that IBM's PC business had
become a commoditized millstone around the
company's neck. But by coming so close together,
the acquisition attempts contributed to the
growing anxiety in America that China wants to buy
up the country.
The agitation in Congress,
then, was not surprising. Two days before the July
4 recess, Representative Richard Pombo, a
California Republican whose constituency includes
El Segundo, the headquarters city of Unocal,
introduced a resolution stating, "The US
increasingly needs to view meeting its energy
requirements within the context of our foreign
policy, national security and economic security
agenda. This is especially the case with China."
The same week, in an unrelated matter, the
House voted 313-114 to block the US Export-Import
Bank from underwriting a $5 billion loan to the
China state nuclear power corporation so that it
can buy reactors and steam generators from the
Westinghouse Corporation, a shoot-yourself-in-the
foot action if there ever was one (although the
Westinghouse nuclear unit has been owned by
British Nuclear Fuels Plc since 1998, most of its
employees are still based in Pittsburgh,
Pennsylvania).
Yet for all the fuss and
bother it has raised in Washington, it is far from
clear that CNOOC could prevail even in a straight
commercial fight with Chevron. The American
company's officers are complaining that the
playing field is tilted in China's favor because,
being a subsidiary of a state-owned corporation
(70% of CNOOC's equity is owned by the Chinese
government), the Chinese oil giant supposedly has
unlimited deep pockets. "Clearly this is not a
commercial competition," protested Peter
Robertson, Chevron's vice chairman. "We're
competing with the Chinese government, and I think
that's wrong." In reality, the bulk of CNOOC's
borrowing will likely come from foreign investors,
and the company anticipates repaying its parent's
contribution through a stock issue a couple of
years down the road.
Furthermore, Chevron
has pretty deep pockets of its own. The company's
total market capitalization of about $115 billion
and cash reserves gives it access to resources
five times that of its Chinese rival. Moreover, to
pull off the deal, CNOOC would have to borrow
about $13 billion, causing its debt-to-earnings
ratio to shoot through the roof. Indeed, several
international credit agencies have already lowered
the Chinese company's credit ratings in
anticipation of just this eventuality.
That's one reason why some analysts in
Asia look on the CNOOC's bid as foolish to the
point of recklessness. "You have to wonder why
CNOOC is banging its head against the wall," says
Foo Choy Peng at UOB Kay Hian Securities in Hong
Kong. He doubts the sale will pass muster with US
regulators. The company's acquisition attempts
have run aground before: two years ago, CNOOC's
attempt to buy a stake in the $7.4 billion Caspian
Sea Kashagan oil field failed even though CNOOC
teamed up with Sinopec, China's second-ranked oil
company. Their joint effort was rebuffed when
Exxon Mobil and Conoco Philips upped their bids.
It may be that Chevron will have to raise its bid
to acquire Unocal, but that's business.
Nevertheless, CNOOC persists, and it is
easy to see why. Unocal's reserves, mostly in the
form of natural gas, are mainly concentrated off
the shores of Vietnam, Indonesia and Myanmar. They
would increase the Chinese company's total
reserves by a significant amount and feed its new
refineries along China's southern coast.
On July 1, the company took the unusual
step of directly asking the Treasury Department's
Committee on Foreign Investments in the United
States to scrutinize their project expeditiously.
They are hoping to put that inevitable review
behind them before Unocal acts on the Chevron bid;
Unocal shareholders are scheduled to meet to
discuss the deal on August 10. It is difficult to
see exactly what the committee might find in the
deal that directly endangers national security. It
has been claimed that the deal would give China
access to underground seismic testing technology
that might be applied to nuclear weapons. But
Unocal finds this contention laughable: "We
contract that work to outside firms," said
spokesman Barry Lane.
If keeping Unocal
out of Chinese hands is so important for national
security, foreign policy and energy independence
reasons, why doesn't the Congress take the next
logical step and consider having the US government
itself buy a controlling interest in Unocal? In
other words, nationalize Unocal. That way, the
country would have undisputed control over
Unocal's resource base.
You won't hear
many of the nation's representatives advance that
argument: why, nationalization would be government
interference in the free market! Yet these very
same people think there is nothing wrong with the
government interfering to stop what is basically a
straightforward commercial transaction on
exaggerated concerns about national security. It
is very unlikely, given today's political climate,
that the China National Offshore Oil Corporation's
bid to buy the Unocal corporation will succeed.
The deal is too sensitive, so some excuse will be
found to disallow the purchase. But it may be
blocked for all the wrong reasons.
Veteran Asia correspondent Todd Crowell
comments on Asian affairs.
(Copyright
2005 Asia Times Online Ltd. All rights reserved.
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