Trumping on a Pipe Dream

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Unocal Bid Opens Up New Issues of Security
By STEVE LOHR
July 13, 2005

The fate of the China National Offshore Oil Corporation's bid for Unocal remains uncertain, but one thing is clear. The takeover offer has prompted a gathering groundswell in Congress to make sure oil is defined as a product vital to America's national security.

If the political push gains momentum, it will change the mandate and reach of a little-known, secretive body with representatives from 12 government agencies, the Committee on Foreign Investment in the United States. The outcome of Cnooc's bid for Unocal may rest in the hands of that committee.

One salvo came at the end of last month with a House resolution that declared that permitting the Chinese company to buy Unocal would "threaten to impair the national security of the United States." It passed 398 to 15.

Now the members of a bipartisan advisory group to Congress are urging representatives and senators to amend the law that controls the work of the foreign investment committee. The Congressional advisory group wants the law to specifically expand the definition of America's national security to include matters of economic security, like energy and oil supplies.

"Is energy security national security? We certainly think it is," said C. Richard D'Amato, chairman of the United States-China Economic and Security Review Commission, which advises Congress.

Mr. D'Amato is scheduled to testify today at a House Armed Services Committee hearing on the national security implications of the Chinese company's pending bid for Unocal, a midsize American oil company.

The $18.5 billion bid by Cnooc competes with one from Chevron, which is lower at $16.8 billion. But the Chevron offer came before the Cnooc bid surfaced, and Cnooc faces regulatory and political hurdles that Chevron does not. The Unocal board has approved the Chevron offer, but is now talking with Cnooc as well.

To treat oil, a globally traded commodity, as a national security product would represent a departure for the Committee on Foreign Investment in the United States, known as Cfius (pronounced SIH-fee-us), created in 1988 to scrutinize foreign purchases of American companies for national security concerns. The committee, headed by the Treasury secretary, has representatives from 12 agencies including the State Department, Defense Department, Department of Homeland Security, Commerce Department, Office of the United States Trade Representative and National Security Council. Its proceedings are secret.

Over the years, in both Republican and Democratic administrations, the investment committee has typically focused on the potential of a foreign takeover to transfer military-related technologies used in arms like fighter jets, precision bombs and nuclear submarines.

The committee, according to foreign trade specialists and former government officials, routinely looks for so-called dual-use technologies that have advanced industrial and military applications. To satisfy those security concerns, mergers have often been modified - to spin off a small but sensitive operation, for example, or restrict access to a plant to American employees. In some cases, bidders drop their offers when confronted with the committee review and its conditions.

Of more than 1,500 filings to the committee in 17 years, only about a dozen cases, trade experts say, have gone through a 30-day preliminary inquiry and a 45-day investigation, and then been referred to the president with a recommendation to approve or block the deal. Only one deal has been blocked on national security grounds: the 1990 sale of a airplane parts maker based in Seattle, Mamco Manufacturing, to the China National Aero-Technology Import and Export Corporation.

A Cnooc-Unocal deal, trade and security analysts say, could raise some traditional national security concerns that the investment committee would want to investigate. For example, the analysts said that Unocal had underwater terrain-mapping technology used for offshore oil exploration that might also be useful in navigation for the Chinese military's growing fleet of submarines.

"There could be national security issues in the Cnooc deal, but locking up oil is not one of them," said Kenneth G. Lieberthal, a former senior official on the National Security Council in the Clinton administration, who is a China expert at the University of Michigan.

Many economists and oil specialists are skeptical that owning oil is vital to national security. Controlling the oil and gas reserves in the ground, they say, does not increase a nation's energy security as long as there is a deep worldwide market for buying it by the barrel or tanker.

But the national security concern raised by members of Congress, their advisers and some oil experts is that the petroleum market may be changing because of tight supplies, rapidly rising demand from fast-growing nations like China and India, and the increasing strategy among state-owned oil companies to control reserves.

As a result, they warn, less oil will be bought and sold on the free market, while more will be locked up by national interests.

"I'm generally a free-trader, but I do think that we need to understand our security differently," explained 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.

Another member of the Congressional commission, Michael R. Wessel, said: "I think most people would agree that oil is a national security issue. What is still to be determined, of course, is what to do about it."

That would be a politically difficult call, if the Bush administration had to make one in the Cnooc case. Both the Chinese company and its critics in Congress have asked the foreign investment committee to review the Cnooc bid. The Chinese company made its lengthy voluntary filing to the committee on June 29.

"Everybody in Congress was calling for a national security review," observed Daniel L. Spiegel, a partner in the law firm Akin Gump Strauss Hauer & Feld, which represents Cnooc. "We heard the calls and we moved forward. We made the filing."

The Cnooc side has heard nothing yet from the investment committee, which has apparently not begun a review. Cnooc contends that delay favors Chevron, and its own bid is hardly "hypothetical," as Treasury Secretary John W. Snow termed the Cnooc offer.

The Treasury Department position is that an inquiry will not start until "the committee has made a determination that a transaction is likely to be successful," said Tony Fratto, a department spokesman.

In the past, the foreign investment committee has conducted reviews of unsolicited takeover bids. It did so in 1990 when BTR of Britain bid for Norton, a producer of industrial abrasives whose products were used to make aircraft parts and missile domes. Later, when Saint-Gobain of France joined the contest, the foreign investment committee conducted the two reviews simultaneously. Saint-Gobain eventually won with a higher bid, and President George H. W. Bush approved the sale.

The administration, foreign policy specialists say, wants to put off a decision on Cnooc if it can. The United States, they note, faces a series of thorny issues with China on other fronts. Washington wants Beijing to put pressure on North Korea in coming nuclear disarmament talks; the United States is pressing China to restrain its digital pirates, who illegally copy movies, software and other goods; and there are the continuing tensions over China's huge trade surplus with the United States, manufacturing jobs lost to China and Washington's call for China to loosen its fixed-rate currency policy.

"The Bush administration would rather see the Cnooc bid and the issues surrounding it just go away somehow," said Mr. Lieberthal of the University of Michigan. "The administration is not anxious to put another issue - a potentially negative one - on the U.S.-China agenda."

http://www.nytimes.com/2005/07/13/business/worldbusiness/13unocal.html