Is China Bidding Too High For Unocal?

June 23, 2005. A cyclist passes by the headquarters of state-run China National Offshore Oil Corporation (CNOOC) in Beijing. Photo: AFP

WASHINGTON—The China National Offshore Oil Corp. (CNOOC) bid to buy U.S.-based Unocal for U.S.$18.5 billion has renewed the debate over whether China has been paying too much for oil assets overseas.

Analysts who spoke to RFA also doubted that CNOOC would be able to manage such a massive expansion.

Last month, CNOOC stunned markets by trying to outbid Chevron's U.S.$16.4 billion offer, which Unocal directors had initially accepted three months earlier.

Critics have raised doubts about CNOOC's plan to pay a premium price, arguing that it has an advantage because some of its loans are backed by Chinese government-owned banks.

CNOOC chairman Fu Chengyu has denied that the company is using a government subsidy, insisting that any loans for the takeover will be strictly commercial.

Philip Andrews-Speed, a China energy expert at the University of Dundee in Scotland, said Chinese oil companies have developed a reputation of paying too much under government policies aimed at greater energy security.

Southeast Asian assets attractive

But he said the plan to bid on Unocal was first reported in January, then blocked by CNOOC's foreign non-executive directors until an analysis was undertaken by international investment banks.

The decision to go ahead is a sign that the investment makes more sense than some of China's earlier foreign ventures, Andrews-Speed said.

"This suggests that the deal is, in fact, commercially viable for CNOOC and therefore would be an exception to the caricature of the Chinese state oil company going overseas and paying too much," he told RFA reporter Michael Lelyveld.

Andrews-Speed said that CNOOC already has investments in Australia and Indonesia, as well as import projects for liquefied natural gas, or LNG.

Those interests are seen as a good fit with Unocal's holdings in the Southeast Asian region, making it especially attractive to China's third-largest oil company. As a result, Unocal may have more value for CNOOC.

"Unocal would allow it to double its size," Andrews-Speed said. "The location of Unocal's assets, particularly those in Southeast Asia, fits in very nicely with CNOOC's assets."

China's fuel prices may not stay fixed

Frank Verrastro, senior fellow and director of the energy program at the Center for Strategic and International Studies in Washington, said China had a deserved reputation for overspending in overseas energy deals.

"But in the case of Unocal, I would argue that it's probably better to buy a company with specific assets, especially in Asia, than to be going around the world and spending money on joint ventures to bring production on that may or may not occur over the next 15 years," Verrastro told RFA.

Both Verrastro and Andrews-Speed said the question of whether CNOOC's bid was too high depended on future oil prices.

Andrews-Speed said the policy of controlled prices in China was not really CNOOC's problem because it would be able to sell oil and gas from Unocal on the world market under existing contracts.

Even if the crude oil were sold in China, it would fetch nearly world prices, he said. China's price controls are mainly on fuel, which causes losses for Chinese refiners but probably not CNOOC, he said.

Verrastro said the policy of keeping prices of energy supplies artificially low on China's domestic market was likely to change.

A whole new ball game

"Even if they sold them in the world market, they'd be swapping off for other supplies going to China. There's a lot more investment targeted toward selling oil in China because it's such a rapidly emerging market, and I think the presumption is that over time the pricing structure will change, has to change," he told RFA.

But would CNOOC be able to cope with the expansion? Jing Huang, a senior fellow in foreign policy studies at the Brookings Institution in Washington, had his doubts.

"How can they really manage Unocal, if they acquire Unocal, effectively given the enormous differences between the company cultures, between the systems, between the environment of the two companies?" Huang said.

"I would argue that CNOOC may encounter enormous problems or difficulties in managing Unocal's operations all over the world."

Huang said that although CNOOC's top management was Western-trained, the company lacked the personnel that could take over and manage a company with as many operations as Unocal.

While the acquisition would roughly double CNOOC's market value, it would increase its operations by a far greater amount, he said.

CNOOC, which had a little over 1,000 employees in 2001, has reportedly grown to about 2,500 now. Unocal has some 6,600 employees in its operations worldwide.

By comparison, China's two giants, CNPC and Sinopec, employ hundreds of thousands of workers. CNOOC could be hard-pressed to handle the expansion.

Huang said the fact that CNOOC would sell most of Unocal's production on the world market meant that it would not really improve China's energy security at all.

"This [government] strategy really does not apply in my view on this because it will make CNOOC an international company, a company that can play in the international market, but to what extent it will really help China's resource security I really, really doubt."

On July 13, the U.S. House of Representatives Armed Services Committee held a hearing on the national security implications of a possible sale to CNOOC.

A committee spokesman said it was "the first time in recent memory" that it had met to discuss a major corporate merger.

Original reporting by Michael Lelyveld for the Wu dialect service. RFA Mandarin service director: Jennifer Chou. Produced for the Web in English by Luisetta Mudie.


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