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SPEAKING
FREELY
Let Unocal take care
of itself
By Max Fraad Wolff
Speaking Freely is an Asia Times
Online feature that allows guest writers to have
their say. Please click here
if you are interested in
contributing.
China National
Offshore Oil Corporation's (CNOOC) US$18.5 billion
bid for Union Oil of California (Unocal) has
triggered security alarms and prompted an outcry
against the foreign purchase of a strategic
American company. But there is no evidence Unocal
needs or wants help suppressing a cash offer which
pledges no US job cuts and commits Unocal's
domestic reserves to US customers. Shareholders
might even prefer that upward pressure be placed
on Chevron Texaco's modest bid. This braying din
was remarkably mute in the course of the
acquisition of hundreds of billions of dollars
worth of US assets by state-owned Chinese
institutions: few were spooked by Chinese
purchases of $220 billion in Treasuries, $200
billion in agency debt, a trade shortfall of $162
billion and recent purchases of well-known US
businesses by Lenovo and Haier. Unocal is a
mid-sized oil company with a majority of its
assets and growth offshore. In 2004, 62% of its
natural gas and 56% of its liquids operations were
foreign. Why, then, the fiery rhetoric now?
Official statements from Congress and some
in the administration suggest that the vital
nature of Unocal's assets require state
intervention. But foreign purchases of US firms
with potential national security significance are
almost routine. Earlier this year, United Defense
Systems was sold to British BEA Systems despite
the fact that UDS is a major Pentagon weapons
supplier. Similarly, Mittal Steel's buyout of ISG
went unopposed. Deutsche Telekom's 1999 purchase
of VoiceStream represented the purchase of a US
firm by a company that was not only a foreign
firm, but partially owned by a foreign government.
But the deal went through to create T-Mobile.
Innumerable examples exist from the last 20 years.
Political gamesmanship and traditional
returns to xenophobia are certainly involved in
the CNOOC bid commotion, but curiously absent from
the discussion is Unocal's history. The El
Segundo, California-based company operates in
Thailand, Indonesia, Myanmar, Bangladesh, The
Netherlands, Azerbaijan, The Congo, Vietnam,
Alaska and the lower 48 US states. The firm
participates in exploration, production and
development of oil, natural gas and liquids. Two
interesting features about the nations where
Unocal operates are noteworthy: first, the diverse
list demonstrates Unocal's ability to operate
successfully in difficult and unstable regions.
Second, note the concentration of activity in
China's territorial vicinity. Given this
geographic focus, and China's economic rise, it is
hardly surprising that a Chinese oil company would
be interested in Unocal; indeed, a bid sooner or
later would have been inevitable.
Unocal
has intriguing connections with Afghanistan and
Iraq. It has been widely reported that Zalmay
Khalilzad, former US ambassador to Afghanistan and
now US Ambassador to Iraq, while working for
Cambridge Energy Research Associates in the
mid-1990s, conducted risk analyses for Unocal on
its ill-fated project to build a US$2 billion
natural gas pipeline from Turkmenistan to Pakistan
through Afghanistan. Other notables involved in
this effort included Robert Oakley (of Iran-Contra
fame), Henry Kissinger and Richard Armitage. In
December 1997, Unocal Texas hosted Taliban
officials during a US tour (during the Taliban
period, completion of the pipeline would have
required their cooperation). Clearly, this is no
fledgling family firm unable to reckon with
international friction.
Unocal's board of
directors is deeply involved with national
security issues - indeed, the board may have more
familiarity with policymaking and consulting
circles than Congress itself. Donald B Rice serves
as a fine example. Rice currently serves on the US
Commission on National Security and the Defense
Science Board. He was the Secretary of the US Air
Force, Deputy Assistant Secretary of Defense, and
the CEO of the Rand Corporation. Another board
member, Marina Whitman, who also sits on the board
of the Institute for International Economics, is
certainly able to understand the implications of
CNOOC's purchase. Ferrell McClean, board member
and former managing director of JP Morgan Chase,
and James W Crownover, former director of
uber-consulting firm McKinsey & Co, are on
board to help Unocal evaluate its options. Clearly
Unocal is competent to consider the national
defense and international economic ramifications
of its dealmaking activity. Which leads one to
ask, what is Congress doing? Given the risks of
politicizing the Unocal merger, why do it?
It is reasonable to make the inference
that rather than concerns over access to oil per
se, the calls for scrutiny of CNOOC's bid clearly
stem from fear of losing the strategic value of a
well-connected and internationally active firm.
Unocal's activities and influence in tumultuous
areas of Asia and the Caspian make it a valuable
asset. Are we thwarting the needs of enterprise,
and essential trade relations, by preventing the
free allocation of assets by market forces? If so,
this would be a significant message to our trade
partners and set a consequential precedent. In
this case it appears that the conventional wisdom
is anything but wise.
Tensions are
escalating in this conflict between a newly
regulation-minded Congress and China. The
oft-implied need for Washington to assist Unocal
is absurd. This is a savvy and capable firm with
an expert board of directors and a better track
record in its offshore activities than the Unites
States Congress. Objections based on congressional
concern for national security and the uniqueness
of the deal are not only hyperbolic, they are
economically dangerous.
A massive web of
economic relationships now links the US and China
and has become indispensable to both countries,
whether they realize it or not. The US is China's
second-largest trade partner, and China is
America's third-largest trading partner and its
fifth-largest and fastest-growing export
destination, going by 2005 figures. China is
liberalizing quickly, allowing foreign firms to
play a major role in its growth. Andy Xie of
Morgan Stanley Hong Kong estimates that foreign
capital accounts for 20% of China's GDP, the
highest proportion among large economies. China's
economy, much smaller and more trade-dependent
than the US, is the largest non-OECD recipient of
foreign direct investment; over $54 billion was
invested in China in 2004. According to 2004 OECD
records, US firms did almost half of all OECD
offshore investing - $252 billion of the $668
billion total.
China's import tariffs on
US agriculture and manufactures have been halved,
along with reduced restrictions on finance and
services. After China's 2001 accession to the WTO,
and pursuant to APEC and other agreements,
restrictions on foreign ownership and protected
sectors have been relaxed. More than 50% of
China's exports are done by offshore firms.
American Fortune 500 firms lead this process, and
are significant beneficiaries of China's growth
and openness. As this goes to press, more than 100
US national firms operate in China through tens of
thousands of joint and subsidiary ventures.
Thus, there is real danger attached to the
escalating tensions over CNOOC. It is the response
to this bid that we should be concerned with,
rather than the bid itself. The two countries are
mutually dependent and deeply intertwined, and
neither nation could extricate itself from the
other without incurring catastrophic economic
pain.
Max Fraad Wolff is a
doctoral candidate in economics at the University
of Massachusetts, Amherst. This article has been
republished with permission from
PrudentBear.com.
(Copyright 2005 Max
Fraad Wolff)
Speaking Freely is an
Asia Times Online feature that allows guest
writers to have their say. Please click here
if you are interested in
contributing. |
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