Trumping on a Pipe Dream

[BullNBear52]

The Big Tug of War Over Unocal
By STEVE LOHR
July 6, 2005

As the lobbying heats up in Washington over Unocal, a midsize American oil company, the battle lines in the takeover contest are now drawn clearly, if oddly, by its suitors.

In one corner stands the China National Offshore Oil Corporation, or Cnooc, a company controlled by a Communist government. Despite that, its pitch is straight out of the capitalist playbook: just let markets work, free of political meddling. And, yes, we have the higher bid, at $18.5 billion.

In the other corner is the American oil giant, Chevron, whose capitalist credentials date back to its days as part of the Rockefeller Standard Oil Trust. Its pitch is that the American government should get involved because the upstart has an unfair edge from Chinese government financing.

The state company, Chevron adds, would be likely to hoard Unocal's oil and gas for Chinese consumption. The strong suggestion is that America's energy security would be better served by the lower bid of Chevron, at $16.8 billion.

"They're not playing by commercial rules; it's not fair trading," Peter J. Robertson, the vice chairman of Chevron, said in an interview last week. "We will produce more oil and gas, and put it into the world supply."

Chevron, the sixth-largest corporation in America, has an established presence in Washington to make its case, with a sizable internal team and outside lobbyists and policy advisers like Wayne L. Berman, a principal of the Federalist Group who served in the administration of the president's father and has been a leading fund-raiser for President Bush. (Mr. Berman's wife, Lea, is the White House social secretary.)

Working for Chevron as well is Drew Maloney, the Federalist Group's chief lobbyist for House Republicans, who formerly was the legislative director for Tom DeLay of Texas, the No. 2 Republican in the House.

To counter Chevron's home-field advantage, the Chinese newcomer, Cnooc, has moved quickly to enlist lobbyists, policy and media advisers of its own. It has signed up the law firm of Akin Gump Strauss Hauer & Feld, whose partners include major fund-raisers for President Bush like Alan D. Feld and James C. Langdon Jr. Another major Bush fund-raiser, Bill Paxon, a former Republican representative from New York, is a senior adviser to Akin Gump.

The media adviser for Cnooc's takeover fight is Public Strategies, whose vice chairman is Mark McKinnon, who guided President Bush's media campaign in the 2000 and 2004 elections.

The Chevron side is certainly winning the early rounds in Washington. The House of Representatives, by huge majorities, passed two measures last Thursday that protest the Chinese bid - an amendment to cut off funding for any government review that might allow the Chinese offer to proceed, and a nonbinding resolution that lists objections to the bid and calls on President Bush to order an immediate investigation on national security grounds.

The competition for Unocal, to be sure, touches a host of American anxieties about China that have little to do with the merits of the bids by Chevron and the Chinese oil company. China's rapid rise as an economic power, its military ambitions and American jobs lost to efficient Chinese manufacturers are among the concerns.

"What we're seeing in Washington shows the hysteria about China," noted William A. Reinsch, a former trade official in the Clinton administration who is a member of United States-China Economic and Security Review Commission, an advisory group to Congress.

"It means that any deal like this is going to be debated in a red-hot rhetorical atmosphere."

Raising the decibel level in Washington works to Chevron's advantage. But with its global reach, including investments in China, Chevron has to be careful.

"This isn't about bashing China," Mr. Robertson of Chevron said. "But we've got to compete for this asset."

Exploiting the political qualms created by the Chinese bid is part of the game plan. Asked why Chevron's lower bid should be more appealing, Mr. Robertson emphasized the risk in the Chinese offer. "There's no certainty that they can get through the regulatory and political process," he said.

Uncertainty also helps Chevron because it moved first for Unocal in April, and the Unocal board has approved Chevron's offer. To open up a bidding war, Unocal shareholders must reject the Chevron stock-and-cash offer in a vote scheduled for Aug. 10. Cnooc made its higher, all-cash bid on June 23.

The Cnooc side says it offers the cool reason of the market, a higher bid, while portraying Chevron as fanning populist prejudice. "It's a lot easier to raise political uncertainty than to raise cash," said Mark Palmer, managing director of Public Strategies, who is the former head of public relations for Enron.

At Akin Gump, the Cnooc team is led by Daniel Spiegel, the partner in charge of the firm's international practice. Lobbying on behalf of Cnooc appears to be an uphill struggle so far. Take, for example, the House resolution last Thursday evening stated that allowing the Chinese oil company to buy Unocal would "threaten to impair the national security of the United States." It passed 398 to 15.

The Cnooc side, Mr. Spiegel said, has been trying to talk to as many people in Congress and in policy research organizations as possible. "We're just telling them the facts, something that is in short supply," he said.

The Cnooc talking points are that 70 percent of Unocal's oil and gas reserves are in Asia, and mostly under long-term contract to Asian nations like Thailand and Indonesia; Unocal's American oil and gas production accounts for less than 1 percent of American consumption, and Cnooc has pledged that United States production will remain in the United States market; and Unocal jobs in America will not be cut, if Cnooc takes over.

Representative Jim Moran, a Virginia Democrat, was one of the 15 who voted against the House resolution, which he called "wrongheaded." Such moves, Mr. Moran said in an interview last Friday, risk "retaliation" from China, which holds vast investments in United States Treasury bonds as China recycles dollars it holds because American consumers buy so many goods made in China. Without the Chinese buying bonds, interest rates in the United States would rise, which in turn would probably increase inflation, threaten the booming housing market and depress consumer spending.

"If the Chinese are not going to be allowed to turn over $18.5 billion in return for stock in Unocal, they are going to be less inclined to invest their money in U.S. Treasury bonds," Mr. Moran said.

Yet Mr. Moran is in the minority in Congress these days.

With his resolution, Representative Richard W. Pombo, Republican of California, said in an interview last Friday that he wanted to "send a message to the administration about the depth of Congressional concern" about the Cnooc bid.

Mr. Pombo agreed with the Chevron complaint that about a third of the financing for the Cnooc bid came from low-interest or no-interest loans from Chinese banks, and that the financing was an unfair government subsidy. "But my biggest concern is the preservation of Unocal's energy assets in friendly hands," he said. "If a company is owned by a foreign government, its loyalty is going to be to that government."

Chevron's headquarters in San Ramon, Calif., is in Mr. Pombo's district. He is an advocate for the oil industry in Congress, and Chevron donated $10,000 to his campaign in 2004 (of the $1.5 million he raised).

Mr. Pombo said he did talk to a Chevron lobbyist before he wrote a letter of concern to President Bush in mid-June, when rumors of a Cnooc bid first circulated.

But Mr. Pombo said he had not talked to Chevron representatives in the last two weeks, and Chevron was not involved in drafting his resolution last week. His interest, said Mr. Pombo, who is chairman of the House Resources Committee, stems mainly from his belief that oil is a strategic asset.

By contrast, he said he saw no public policy issue with the recent $2.5 billion bid by Haier, a Chinese appliance maker, for Maytag, which he regarded as similar to the Japanese buying Rockefeller Center at the end of the 1980's.

"I didn't like it, but it was no big deal," Mr. Pombo said.

Many economists and oil experts question whether owning oil and gas in the ground really does increase a nation's energy security because there is a deep global market for buying it by the barrel or by the tanker. But that is a subject of lively debate, and the potential strategic significance of oil is why the Chinese bid for Unocal has stirred such interest.

"A lot of this is corporate self-interest and local politics, but there is also a legitimate question to ask," said Larry M. Wortzel, a former military attaché to the American Embassy in Beijing and a member of the Congressional United States-China Economic and Security Review Commission. "Do we want a foreign power, whose military intentions in the long term are not clear, to own energy assets inside our border?"

The answer to that question, if a Cnooc bid proceeds, will probably be made by President Bush, after an investigation by a multiagency group, the Committee on Foreign Investments in the United States.

The Chinese government has begun some lobbying of its own. At an energy conference in New Orleans last week, Zhang Guobao, vice chairman of the National Development and Reform Commission in China, declared: "To spread the 'China threat' and try to curb China's progress and starve its energy needs is not in the interest of world stability and development. Such attempts are doomed to fail."

In an angry statement on Monday, the foreign ministry chided Congress for its "mistaken ways" and told it to "stop interfering" in the takeover contest. "Cnooc's bid to take over the U.S. Unocal," the ministry statement said, "is a normal commercial activity between enterprises and should not fall victim to political interference."

Edmund L. Andrews contributed reporting from Washington for this article.


http://www.nytimes.com/2005/07/06/business/worldbusiness/06lobby.html?dlbk=&oref=login&pagew...