The Unocal Bid: China’s Treasure Hunt of the Century

Publication: China Brief Volume: 5 Issue: 16

The operation is code-named “Treasure Hunting Ship;” the target is a major piece of U.S. energy real estate. The $18.5 billion cash offer is the largest corporate expansion ever in Chinese history. The strategy is to play the free market game with a lobbying effort worth several hundred million dollars. But so far the deal is unfolding like a drama, full of suspense. This is the on-going acquisition war for the control of Unocal Corporation by China National Offshore Oil Corporation Ltd. (CNOOC), China’s third-largest oil/gas company. In the takeover bid for Unocal, CNOOC is competing with Chevron, the second largest U.S. energy company, whose earlier cash plus stock offer of $16.4 billion was accepted by the Unocal board of directors and received necessary regulatory approval.

The CNOOC bid came at a sensitive time in U.S.-China relations. Since earlier this year, the members of the second Bush administration have repeatedly warned that the United States had previously underestimated the speed of the Chinese military’s modernization drive. With the U.S. trade deficit going further into the red, Washington has put more pressure on Beijing, calling for the appreciation of the Chinese currency. And the U.S. government has recently imposed duties on a range of Chinese textile products. No wonder when CNOOC, 71 percent controlled by the Chinese government, made a “friendly merger” offer to the 9th ranking U.S. energy firm Unocal, American politicians and the public in general reacted as if a “red storm” was coming to the U.S. shores. However, an examination of the Chinese perspectives and Chinese press, both official and unofficial, reveals substantially different concerns than the kind of debate the bid has generated in the United States.

Beijing’s Growing Energy Insecurity Syndrome

According to Fu Chengyu, Chairman and CEO of CNOOC, the bid is simply a normal business activity based on the principles of the free market, nothing else. It provides much better value to the shareholders of Unocal than the Chevron offer; the merged venture will be more efficient, beneficial to all parties involved, including the United States; the new management team will keep all the jobs at Unocal; and the Chinese side is ready to cooperate to meet all the U.S. regulations in the review process and to address all the concerns of the United States. [1]

But the Chinese considerations are certainly more than just a “commercial transaction,” as the spokesperson of China’s Ministry of Foreign Affairs put it. In recent years, energy shortages have become a major barrier for the Chinese economy. China’s State Council Information Office released a booklet on energy in the recently held Fortune Global Forum in Beijing, outlining a severe energy situation facing China. In the past ten years, China’s dependence on imported oil has grown from 6 percent to 42.6 percent in 2004; Chinese demand for oil will double in the next 10 years, from the current 6 million barrels a day (bdp) to about 11.5 million bpd; and China is projected to import 60 percent of its oil supply by 2020. At the same time, the production of coal, which accounts for 67 percent of China’s energy supply, cannot meet the increasing demand, nor can the transportation infrastructure keep up with the volume of shipments to other parts of the country. By the end of 2004, China’s installed gross capacity of power generation had reached more than 440 million KW, over half of the U.S. capacity of 800 million KW and more than the total capacity of 300 million KW produced by Britain, France and Germany combined. Yet, China experienced a severe electricity shortage last year, and the prospect for this year is worse. [2]

Alarmed by the so-called “coal-electricity-oil-transportation bottleneck,” the Chinese leadership is implementing a medium to long term energy plan to secure China’s energy supply, including the establishment of a strategic oil reserve. Under Premier Wen Jiabao, a higher-than-expected level task force on energy was formed in May with a new State Energy Office, directly under the leadership of the State Council, China’s cabinet. But the Chinese feel that their efforts to cope with the growing domestic energy crisis are hampered by a number of negative international factors.

First, China is paying a high penalty for the sharp increase in international oil prices, so Beijing sees it as “unfair” to blame the rise of oil prices on China. In 2004 alone, China had to spend an extra $7 billion of its foreign exchange due to climbing oil prices, with payment totaling $43.16 billion, making crude oil and product oil China’s largest single import product. With the worldwide increase in demand and decreasing spare production capacity, China does not expect oil prices to come down any time soon, and feels extremely vulnerable with the continuous speculations on oil prices by the “international petroleum crocodiles” for profit.

Second, Beijing is facing intensified geopolitical and geostrategic competition for access to global energy supplies. The U.S. occupation of Iraq, America’s hostile attitude toward Iran, and the refusal to withdraw U.S. military bases from Central Asian states are all signs to Beijing that Washington’s designs in the Middle East and Asia are to control oil and gas resources. Russia is playing China and Japan off each other on a potential oil pipeline in Siberia to maximize its own interests, thus making future Russian supply uncertain. Japan is taking a hard line in its dispute with China over the oil and gas fields in the East China Sea, and an escalation into potential military confrontation is possible. Beijing’s strategic planners have also interpreted a U.S.-Japan joint declaration in February treating Taiwan as a “common strategic objective” in the context of controlling the sea lanes for energy shipment.

Third, the overseas search for energy supply, as a part of China “going out” strategy by major Chinese energy companies, has not accomplished as much as expected. The Chinese are keenly aware that they are often forced to pay higher than market prices for equity in energy exploration around the world, and that they have to operate in countries (such as Iran, Sudan, and Venezuela) and regions (the Middle East and Africa) that are volatile and unstable. But they have come to realize that it is no longer enough to dance around the fringe of the international energy business.

These may well be the factors behind the decision that China must engage large U.S. energy companies head on for both competition and cooperation, in whatever form it may take. There is little doubt that the motivation for CNOOC’s Unocal bid is strategic, but it is more a reflection of Beijing’s unease about an inability to secure adequate energy supplies for its domestic economy, rather than the ambition to take over Uncle Sam’s property, one piece at a time.

Chinese Media Debating the Unocal Bid

While coverage in the United States has so far focused on potential national security implications of CNOOC’s bid for Unocal, the Chinese press is running a media frenzy of its own. There is little indication of government censorship over the reporting of the CNOOC-Unocal affair, so a vivid debate is taking place in both the printed media and cyberspace.

Puzzled by the strong and negative reaction of Congress, many Chinese question how U.S. politicians measure China’s threat to U.S. national security. They do not seem to understand why CNOOC’s merger with Unocal, which accounts for less than 1 percent of the total U.S. energy supply, could in anyway endanger U.S. national security. They point out that the U.S. Congress has not passed any bills limiting China’s continuous subsidies of the U.S. government deficit by purchasing and holding some $230 billion of U.S. government treasury bonds.

Others have accused the U.S. of hypocrisy and double-standards. A popular perception is that over the years Western countries have lectured the Chinese a great deal about free markets, comparative advantage, non-intervention of the government and open competition. But now the overwhelming opposition by both American politicians and the U.S. public demonstrates that these principles are only applicable to others for convenience. Many reports also complain that a potential block of the CNOOC takeover of Unocal based on national security grounds will be further proof of U.S. intentions to contain China’s rise as a global power.

Meanwhile, there are plenty of critical reflections on both China’s energy strategy in general and CNOOC’s bidding over Unocal in particular. Some challenge the wisdom of the large cash offer by CNOOC at a time of very high oil prices. The Unocal deal, they argue, is quite contrary to CNOOC’s previous low-risk strategy when it successfully purchased a major Spanish oil company several years ago at oil prices of about $20 per barrel. Critics also charge that not only is the CNOOC offer of $18.5 billion much higher than Unocal’s real value, its commitment of $500 million break-up fees to Chevron and up to $300 million fees for consulting is evidence of a government-backed company that does not feel much pain when it comes to “spending other people’s money.”

Still others claim that China is facing a long learning curve when it comes to playing the great energy game on the world stage. Whatever the outcome of the Unocal bid, they warn, the “China threat” has leaped from the realm of perception to the realm of policy, and China should be prepared to live with that reality. Instead of taking a confrontational approach that is likely to be to China’s disadvantage, many advocate that Beijing should get on the bandwagon with U.S. energy firms by creating a win-win environment, thereby easing the anxieties of the U.S. public. As such, China should ultimately pursue an energy strategy based on increased domestic supply, rather than pay out tens of billions of dollars to continue a treasure hunt abroad. Meanwhile, critics say Beijing may be wise to spend the money on energy conservation and reduce the tremendous waste of energy at home.


1. Fu Chengyu, “Why Is America Worried?” The Wall Street Journal, July 6, 2005.

2. The PRC State Council Information Office, China New Opportunity – Energy, “Comment on Hot Energy Problems of China,” Beijing, May 2005.