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US: $18bn Bid by Chinese for Unocal Has US Policymakers Worried

by Jonathan Watts and David TeatherThe Guardian
June 24th, 2005

China yesterday made its most aggressive move yet to challenge US dominance of the global energy market with an $18.5bn (10.1bn) bid by state-run firm Cnooc for the American petrochemical company, Unocal.

The takeover attempt - by far the most ambitious in a recent wave of overseas deals by Chinese corporations - is likely to raise political hackles in Washington where senior policymakers are increasingly expressing concern about the rising power of the world's most populous nation.

It is far from certain that the buyout offer will be accepted. Unocal's California-based board have recommended a rival bid by US oil giant Chevron. The US government would also need to approve any deal that may pose a threat to national security.

Two congressmen from California, Chevron's home state, have urged president George Bush to block the offer. Richard W. Pombo told reporters it was not in the best interest of the US to have Unocal owned by the Chinese national government. He said the deal could have "disastrous consequences for our economic and national security". Cnooc signalled its seriousness yesterday with a cash bid that was 10% higher than Chevron's. Shareholders are expected to choose at a meeting in August.

Although it is offering a considerable premium, the Chinese firm, which is 100% state owned, would gain strategically important oil and gas fields, mostly in South-East Asia and the Caspian Sea region. Cnooc said the deal would more than double its production and increase reserves by nearly 80%.

Analysts gave the deal, which would have to be financed by a huge loan, the thumbs down. Ratings agencies downgraded the Chinese firm and investors dumped shares. But it is in keeping with a wave of recent strategic acquisitions by Chinese energy companies.

Last month, Sinopec, China's second biggest oil firm, agreed to buy a 40% stake in an oil sands project in Canada for $83m. In February CNPC, the country's leading energy company, signed a deal with Brazil's state oil firm Petrobras on refining, pipelines and exploration and oil production projects. In January, CNPC signed a deal to exploit more than a dozen oil and gas wells at Zumano in eastern Venezuela.

While many of these have been at over market prices, China's industrial planners clearly believe that they are necessary investments to ensure future supplies for the world's fastest expanding economy. Less than 15 years ago, China was a net exporter of oil. But demand has grown so fast that it has overtaken Japan as the world's second biggest importer of crude after the US.

This has contributed to a steep rise in world oil prices, which recently hit a record $60 a barrel. It has also pushed China into closer relationships with politically controversial oil-exporting states, such as Sudan, Iran, Burma and Kazakhstan, and a bitter rivalry with Japan over an oil pipeline from Russia and gas fields in the East China Sea. China has also been acquiring some of the best known names in American capitalism. Lenovo acquired the personal computer business of IBM at the end of last year while another of China's leading companies, Haier Corporation, has made an offer for Maytag, the owner of Hoover.

Amid growing tensions with the US over the trade deficit, military spending and the currency rates, there is also growing concern in Beijing about the country's vulnerability to a blockade. To counter this, China has started to build a 100m barrel petroleum reserve - sufficient to supply national needs for one month. The first 16-tank facility will be filled in Zhenhai, Zhejiang province, later this year.

The Cnooc chairman, Fu Chengyu, insisted national security was not an issue in the proposed buyout of Unocal. "This transaction is purely commercial," he told reporters. "It is a good offer for Unocal and it is good for America." The two Californian politicians wrote to Mr Bush last week when speculation first emerged about Cnooc. They wrote: "As the world energy landscape shifts, we believe that it is critical to understand the implications for American interests and most especially, the threat posed by China's governmental pursuit of world energy resources".

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