China oil bid tests US free market rhetoric
By Emad Mekay
WASHINGTON - An unsolicited bid by the Chinese National Offshore Oil Co (CNOOC) to buy Unocal, a US oil company, has put Washington's free market rhetoric to the test, with disappointing results, some analysts say.
[snip] the CNOOC uproar demonstrates what happens on the rare occasion when a company from the developing world bids for one in the North. Even though the Chinese company has appeared to play by the rules set by Wall Street, the US Congress quickly recoiled into a defensive posture, calling the bid a threat to national security and urging the Bush administration to quash CNOOC's bid.
"From a public policy point of view, the bid raises serious national security issues as energy is a national security asset under any reasonable definition," said Michael R Wessel, a commissioner with US-China Economic Security and Trade Commission, an advisory group to the US Congress on relations with China. "CNOOC is a state-controlled company. It is not a free-market enterprise," he argued. Wessel said there is a strong chance that at a time of spiraling energy demand and limited supplies, "a state-controlled entity" could purchase a company and then "restrict access to other nations and other consumers of that asset".
he Bush administration, which will have the final say on the security issue, has been silent on the issue thus far. But Congress has been less hesitant. Two weeks ago, dozens of members of Congress sent a letter to the Treasury Department requesting a review by its Committee on Foreign Investment of CNOOC's $18.5 billion bid to buy Unocal, which topped the $16.5 billion bid by US oil giant Chevron. The congressional group, spearheaded by representatives from Texas and Louisiana, major oil-producing states, had warned that China's "aggressive strategy" to increase its energy sources could hurt the US because CNOOC was 70% owned by the Chinese government.
China responded by warning the US Congress to stop "politicizing economic and trade issues." CNOOC's chairman, Fu Chengyu, pointed out that Unocal accounts for just 1% of the total US oil and gas production, an amount that could not possibly pose a threat to US national security. The Chinese company also pledged to sell oil produced by Unocal inside the United States. On July 14, news reports indicated that CNOOC planned to raise its bid by paying an additional $2.5 billion into an escrow account, to further address the concerns of the Unocal board that any deal could be delayed or blocked on national security grounds.
None of this has appeased the critics of the deal. "China has entered into special arrangements with Sudan, with Iran and with other nations where it wants to own oil and other energy assets at the wellhead," said Wessel. "It is not looking long term to compete in the free market for energy assets like the US and other nations. So that raises serious concerns even if one did not have a concern about the 1.75 billion barrels of oil and gas equivalent energy that Unocal has. This is a seminal transaction that sets a precedent for future debates."
But Todd Malan, executive director of the Organization for International Investment (OFII), which represents foreign investments in the United States, said a move by Congress to block the deal outright would send a message that US rhetoric about open investment rules "is a one-way street".
This policy of openness has came to be known as the Washington Consensus, which forms the basis of the ideology governing most of the world economy and its patrons from international institutions, like the World Bank and the International Monetary Fund (IMF). But even the World Bank, viewed by some as an instrument of US foreign policy, has gently said it was natural for China to seek to acquire foreign assets, including in the United States. "China has reached a stage of development in which it makes sense for some of its companies to go global and invest worldwide," said David Dollar, the World Bank's country director in China. "As a US citizen, I think it is a good thing that Chinese companies are investing in the US, just as US companies have done in China for decades now."
Dollar said that aside from the economic benefits, such cross-investment means that each country has a greater interest in seeing the other's economy do well, encouraging governments to work together to maintain an open trading system and to coordinate their macroeconomic policies. "Integration between China and the US requires some painful adjustment on each side, but this integration is in the long-term economic and political interests of each country," he said.
Some US analysts, while acknowledging the right to protect national security, say CNOOC has made it difficult for Washington to argue that the bid poses any real threat. CNOOC, for example, has reportedly promised to divest Unocal assets or technologies, like seismic technology, deemed central to US national security. This may include facilities that Unocal owns and which are part of the US strategic oil reserves.
"To sort of wave your hand and say the Chinese represent a threat to the US and therefore we cannot sell anything that might be scarce in the world that they could use to strengthen themselves is hard to even imagine as justifiable by economics or by the logic of national security strategy," said Albert Keidel, a China expert with the Washington-based Carnegie Endowment for International Peace. "Certainly, purchase according to price has to be one of those rules that are pretty universal."
But US public opposition to the bid appear to be mounting in recent days. According to a Wall Street Journal/NBC News poll, the CNOOC bid is opposed by 73% of participants and supported by only 16%, with 11% unsure. Analysts say this will tend to strengthen the hand of Chevron in the competition for Unocal, and the company has not bothered to compete dollar-for-dollar with CNOOC. Chevron spokesman Donald Campbell said in a July 12 interview: "We have no plan to change our bid. We have the only [approved] merger agreement with Unocal.''
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