Chinese Bid for Unocal Stirs Up Issues

This week’s bid by a leading Chinese oil company for Unocal Corp. is forcing U.S. policymakers to confront two sensitive issues: America’s dependence on imported oil and its future relations with China, a rising economic and military power.

CNOOC Ltd.’s unsolicited $18.5-billion bid for El Segundo-based Unocal has sparked a vigorous debate among policymakers and analysts about American access to energy supplies in an increasingly interdependent global economy.

On Friday, 41 members of Congress from both parties sent a letter to Treasury Secretary John W. Snow, who heads the interagency Committee on Foreign Investment in the United States, urging him to immediately initiate a thorough review of a possible deal.

Among their concerns was whether CNOOC was using Chinese government funds to make the purchase and whether China would be acquiring sensitive technology.

Some observers, including a senior Energy Department official, contend that it doesn’t really matter who controls the wells as long as oil is traded globally. But others say it is dangerous for more oil supplies to fall into the hands of potentially hostile governments amid growing competition for scarce resources and instability in oil-rich regions such as the Middle East and Latin America.

The bid also is sparking debate about whether China, one of the few remaining communist governments, should be treated as an ally or a rival. That’s a sensitive question, in part because American firms want access to China’s huge market and the United States needs Beijing’s support for resolving thorny disputes in places such as North Korea. And some contend that China has already made great strides toward developing a market economy, and that a friendly approach would encourage it to do even more.

But others say Beijing doesn’t play fair in trade, steals American technology and thus can’t be trusted.

Although Chinese firms have made other pushes into the U.S. market, including a recent bid by Haier Group for Maytag Corp., the CNOOC deal would dwarf all other purchases and raise the stakes dramatically.

Opinions are divided on whether a CNOOC deal -- if accepted by Unocal over a rival $17-billion bid by Chevron Corp. -- would get the green light from the U.S. government given the highly charged atmosphere in Congress over China. There are more than a dozen bills pending that would penalize the Asian nation for alleged trade abuses. Concerns about China’s expanding military expenditures are also on the rise.

“The red flag associated with [China] is just growing and growing and growing, and it’s not just [in] the Congress,” said David Bachman, a China scholar at the University of Washington.

The controversy places the Bush administration, which has close ties to the global oil industry and has pushed for open energy markets around the world, in an awkward position. Any action against Chinese companies in the United States could trigger retaliation against U.S. firms.

Although U.S. officials have steered clear of commenting on the deal, the administration has said it supports global competition in energy and welcomes new investment that could expand fuel supplies. The administration has generally resisted calls for tougher sanctions on China -- except in the case of textiles -- arguing that diplomacy is a better way to open China’s markets and encourage financial reforms.

In an interview before this week’s CNOOC announcement, Karen Harbert, a senior U.S. Energy Department official, said China’s rising energy consumption and its quest for energy resources abroad did not pose a “threat to U.S. interests or a threat to U.S. companies” because oil was a “fungible global commodity” whose price cannot be set by one country.

Harbert said the Bush administration was concerned that investments by China or other countries into energy resources be made in a “fair and transparent” manner.

“We don’t dictate to China where it can invest, and they don’t dictate to us where we can invest,” said Harbert, the assistant secretary of energy for policy and international affairs.

Harbert said any Chinese bid would need to go “through the standard vetting process here. There are no pre-decisions, no policy determination that we would vote one way or another.”

The job of sorting through these thorny issues is likely to go to the Committee on Foreign Investment in the United States, an interagency group that vets foreign purchases of sensitive U.S. assets.

CNOOC has said it is ready to open its books for the committee and is prepared to address concerns about its possible ownership of Unocal assets.

Free-market supporters contend that it would be discriminatory for the U.S. to deny CNOOC access to the U.S. energy market when foreign firms, including BP and Royal Dutch/Shell, have been major players for decades.

But Gal Luft, executive director of the Washington-based Institute for the Analysis of Global Security, said the U.S. was endangering the future competitiveness of U.S. energy companies if it allowed them to be outbid by a Chinese state-owned firm with government financial backing.

Such a deal would give Chinese firms access to sophisticated deep-water drilling technology, he said.

“U.S. firms have some technological edge in off-shore operations, but they’re losing it very quickly,” he said. “This is only the first case in what could be a systematic effort by the Chinese to outbid American companies.”

The Committee on Foreign Investment in the United States was established in the 1970s after the Arab oil embargo amid concern about the rise of Middle Eastern oil powers.

One of its first cases involved the $2.5-billion acquisition of Santa Fe Petroleum by the state-owned Kuwait Petroleum Co., according to a Cato Institute study. That deal was approved after the Kuwaiti firm agreed to keep sensitive technology out of its government’s control.

The committee has largely taken a free-market approach. In its reviews of more than 1,000 cases, it has raised concerns about only a handful of deals. In most instances, foreign buyers backed off or agreed to amend their bids, said Daniel Griswold, Cato’s director of trade policy.

In 1988, congressional critics, worried that the U.S. was selling off family jewels, sought to beef up the process by giving the president authority to block foreign deals if they threatened national security.

That trigger has been pulled once, and the target was China, according to trade experts. In 1990, amid concerns over Chinese acquisitions of sensitive U.S. technology, then-President George H.W. Bush ordered China National Aero-Technology Import & Export Corp. to sell its interest in Mamco Manufacturing Co., an aerospace firm that supplied Boeing Co.