Intelligence Brief: Unocal
Unocal bid highlights globalist-nationalist conflict
By Michael A Weinstein
Jul 20, 2005
During the week of July 11, the bidding war between US-based oil giant Chevron and the Chinese National Offshore Oil Corporation (CNOOC) to purchase US oil company Unocal heated up, with both adversaries mounting major public relations and lobbying campaigns, and US congressional opposition to a CNOOC takeover ratcheting up to a fever pitch.
Until CNOOC weighed in with an unsolicited US$18.5 billion cash offer, it appeared that Chevron's $16.6 billion bid for Unocal would face clear sailing. The Chevron acquisition had already gained approval from Unocal's board, pending an August 10 stockholder vote, but CNOOC's intervention sent the deal off course. At a July 17 meeting, Unocal's board rejected CNOOC's offer in its present form, but the decision was not final. Analysts believe that Unocal's board is trying to play the two sides off against one another, seeking to get the adversaries to raise their bids.
Although Unocal accounts for only 0.23% of world oil production and 0.3% of US consumption, the company has 1.75 billion barrels of reserves, 980 million of which are in Asia and 447 million of which are in the US. Unocal is particularly attractive to CNOOC and to China's government, which owns 70% of CNOOC, because of its Asian reserves, which are located in Indonesia, Myanmar and Thailand. As the global oil industry consolidates and competition for reserves becomes more intense, Chevron sees Unocal - a California neighbor - as a prime strategic acquisition.
Neither of the adversaries seems willing to give way and, having been placed on the defensive, Chevron has politicized the conflict, exerting pressure in the US Congress on a broad front to ban the CNOOC takeover outright or to delay it sufficiently to persuade Unocal shareholders to accept Chevron's offer, which already has regulatory approval. Chevron's lobbying effort, which has met with impressive success, has been countered by a similar CNOOC campaign. Vice Chairman of Chevron, Peter J Robinson, openly admits trying to turn the company's conflict with CNOOC into a "geopolitical" issue. CNOOC strives to interpret the bidding war as simply an ordinary business deal.
Despite the Congressional outcry, the Bush administration has remained neutral in the Unocal dispute, promising that CNOOC's bid - if it is accepted - will be reviewed by the Committee on Foreign Investment in the US (CFIUS), which vets foreign takeovers of US companies on security grounds. The administration's silence reflects the conflicting interests at play in Washington's global economic policy, which the Unocal fight has highlighted.
Globalization or economic nationalism?
In its attempt to portray its conflict with CNOOC as a geopolitical issue, Chevron has brought to the fore the increasingly difficult decisions faced by Washington in responding to China's rising economic power. Writing in US News and World Report, Matthew Benjamin summarized the problem succinctly: "Essentially, the United States and its politicians are learning that globalization is not pain free."
Sino-US relations are among the most complex bilateral ties in the world and are marked by subtle patterns of dependency, interdependence, competition, cooperation and conflict. Prior to the Unocal dispute, economic relations between the two great powers had achieved a highly unstable equilibrium based on Chinese exploitation of the US market for its exports in return for China buying US debt. That tacit bargain had already come under stress through the loss of US manufacturing jobs to China, ballooning Chinese textile exports, Chinese violations of intellectual property rights of US companies, technological transfers and mounting opposition to the low currency valuation of China's yuan relative to the US dollar.
Resistance in the US to the domestic impact of China's growing strength has crystallized around the Unocal dispute because CNOOC's bid is the most serious instance of recent Chinese moves to acquire US assets rather than simply to fund its debt. The recent rise in the price of oil and the high probability that elevated price levels will persist has made energy a sensitive political issue in the US. By going to Congress, Chevron has succeeded in making Unocal a strategic issue.
Chevron's campaign against the CNOOC bid found access points in every congressional committee concerned with foreign trade, resources and military security, and culminated at a July 13 hearing of the House Armed Services Committee, at which congressmen favorable to Chevron joined with anti-Beijing defense hawks to commit to introducing a bill blocking a CNOOC takeover. Linking fears that Beijing might use its acquisitions to disrupt the US economy and the arguments that US energy companies are barred from buying Chinese firms and that Beijing's financing of CNOOC's bid with low-interest loans violates fair trade principles, congressional opposition to the bid spread beyond its original base in California to include every region.
The wave of economic nationalism set in motion by Chevron's lobbying carries with it the long-term possibility that US resistance to asset acquisition might place the foreign investments of US corporations in jeopardy, stalling or even reversing economic globalization. Analysts agree that CNOOC's bid, which came in the wake of Lenovo's acquisition of IBM's personal computer business and Haier's bid for Maytag, will be followed by many more efforts by Chinese firms to acquire US assets. As time goes on, Washington will be increasingly forced to choose between globalization and nationalism.
Whether or not CNOOC succeeds in making an offer generous enough to persuade Unocal's shareholders to acquiesce in a takeover, the bidding war has brought to the surface an underlying strain of economic nationalism in the US that is unlikely to abate. As interests in the US are affected adversely by Chinese economic initiatives, the alliance between those interests and anti-Beijing security hawks will strengthen, placing strains on Washington's support of globalized investment markets. Look for a series of difficult decisions on asset acquisition to emerge in the years ahead that will significantly determine the future of globalization and the shape of Sino-US relations.
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