A State-Owned Chinese Company Submits a Takeover Bid for an American Oil Company

JEFFREY BROWN:

For the first time, Chinese and American corporate giants will go head-to-head in a takeover bid. Yesterday, China National Offshore Oil Corporation, or CNOOC, made an $18.5 billion unsolicited bid for California-based Unocal. It's the largest offer ever made by a Chinese company for a foreign form. Unocal had previously agreed to be acquired by American energy giant Chevron for $16.5 billion.

Joining us to discuss the move is Barry Naughton, professor of Chinese economy at the graduate school of international relations at the University of California-San Diego.

Welcome, Professor Naughton. Could you first start and tell us a little bit about this Chinese company?

BARRY NAUGHTON:

Thanks. It's a pleasure to be here. CNOOC is a very, very interesting company. It's one of three Chinese oil companies, but it's a company that was set up at the beginning of China's economic reforms specifically to interface with foreign companies and to cooperate with foreign companies initially in the development of China's offshore oil fields.

So, it's a very different kind of creature from the other two Chinese oil companies. It's much more modern. It operates largely in English. It has a board of directors with four out of eight outside directors. And it's a much leaner and more efficient company as well. So it's a real flagship of China's opening to the outside world.

JEFFREY BROWN:

But it's important also to say that it is very much still a government-controlled entity with government financing and funding?

BARRY NAUGHTON:

Absolutely. It's slightly more than 70 percent owned by the Chinese government. The shares are listed on the New York Stock Exchange, but there's no question that the Chinese government is the controlling shareholder and has the final word over strategic decisions this company makes.

JEFFREY BROWN:

So why is it trying to buy UNOCAL? What's the interest there?

BARRY NAUGHTON:

Well, the fit is actually quite good in terms of the kind of oil and gas reserves that Unocal has. CNOOC has already made very substantial investments in terminals in southern coastal China to import liquefied natural gas, very large multibillion dollar projects that depend on liquefied natural gas primarily from Indonesia, Australia, other areas in Asia.

Unocal's reserves are, in fact, largely concentrated in that area, so as long as the price of oil stays high — I mean, if oil is above $50 a barrel — then this is a deal that makes a lot of commercial and business sense from the standpoint of CNOOC.

JEFFREY BROWN:

So it wants to get this Asian energy gas and oil. Would it be for use — for domestic use in China or for sale on the world market?

BARRY NAUGHTON:

Certainly the objective is to ensure stable and diversified sources of energy supply for the Chinese economy and for CNOOC's customers who are, after all, predominantly in China.

But, of course, there is a global market for petroleum and both China and the United States import through their own companies, but also buy and sell lots of oil on the global market, which is why we all pay so much attention to the price of a barrel of oil on the daily market.

JEFFREY BROWN:

Now, we have heard often about the incredible growth, economic growth in China and its need for energy. So should we see this story as part of that?

BARRY NAUGHTON:

Absolutely. When China started to become a net oil exporter in 1993, we looked ahead and we projected China's need to import petroleum into the future and even back then, you know, we came up with very large numbers of what China's ultimate import needs would be, as long as its economy continued to grow strongly and healthily.

What we're seeing today is those predictions are all coming true. China is importing oil pretty much the way we projected it. The difference is that the global oil supply has not evolved in as positive a way as we expected ten years ago and there's a lot — a great deal of tightness in the market that's led to the $60-a-barrel oil prices we've seen in the last week.

JEFFREY BROWN:

So — but given that this is a government-controlled corporation, should we think about this in terms of China's national interest as opposed to a typical corporate interest in a takeover?

BARRY NAUGHTON:

I think we should see this as a combination of the two. I mean, clearly the Chinese government strongly supports the effort by CNOOC and the other two oil companies to locate and to some extent control oil and gas reserves around the world.

I mean, the Chinese are looking at the same numbers that we're looking at for their dependence on oil imports and their interests, clearly their national interests are in stable, diversified oil sources.

CNOOC's commercial interests are coincident with us. I mean, they're really the same interest as long as we're looking at a world in which reserves really are valued at this kind of a price.

Now, if the price of reserves were to tumble, if the price of oil and gas were to tumble, then this would be a very bad commercial deal from the standpoint of CNOOC. But if you believe that oil prices will stay above $50 a barrel then it makes a lot of commercial sense as well as national security sense. So we really can't separate the two.

JEFFREY BROWN:

Now, there was a lot of immediate reaction in Washington, in the United States, about this kind of a deal and the questions that it raises. Tell us about those.

BARRY NAUGHTON:

Well, I think we have to see this in Washington as coming in the context of a — the last couple of months, in which a whole range of economic issues between China and the United States have been disturbing the political equilibrium between the two countries.

I mean, we're faced with surging imports of Chinese textiles, an already huge U.S. trade deficit with China, a Chinese currency that most people view as undervalued — very large accumulations of foreign exchange reserves, including U.S. dollar assets by the Chinese Central Bank.

So already the economic environment between the two countries is becoming tenser than it's been in a long time. And one of the underlying sources of tension is, of course, the fact that the Chinese economy has been performing so well, has been growing so strongly that, you know, to be honest there are many people in Washington looking ahead to the future and saying, "Well, China is really the only country in the world that has the possibility of challenging the kind of dominance that the U.S. currently has economically, politically and militarily." And it makes people nervous; the combination of a whole spectrum of specific issues right now and the long run rise of China. So people are nervous.

When they see a deal like this, a big deal that also involves the purchase of natural resources, some of which are in the United States, some of which are in Asia, it makes people uncomfortable and there's been a strong reaction. Some people in Congress, two U.S. representatives from California, have urged that we should block this on national security grounds.

JEFFREY BROWN:

All right, we'll stay tuned to see what happens. Barry Naughton of UC-San Diego, thank you very much.

BARRY NAUGHTON:

You're welcome. Thank you.