Order Code RL33093
CRS Report for Congress
Received through the CRS Web
China and the CNOOC Bid for Unocal:
Issues for Congress
Updated February 27, 2006
Dick K. Nanto,
James K. Jackson,
Wayne M. Morrison
Foreign Affairs, Defense, and Trade Division
Resources, Science, and Industry Division
Congressional Research Service ˜ The Library of Congress
China and the CNOOC Bid for Unocal
The bid by the China National Offshore Oil Corporation (CNOOC) to acquire
the U.S. energy company Unocal for $18.5 billion raised many issues with U.S.
policymakers. Even though CNOOC ultimately withdrew its bid in the face of
considerable opposition from some Members of Congress and other commentors,
many economic, financial, and security issues are still to be resolved.
The CNOOC bid came at a time when China had become the second largest
consumer of petroleum in the world and, rather than being a net oil supplier to the
world, had become heavily dependent on imports. This new strategic challenge for
Beijing had apparently caused it to pursue a more secure energy supply. The
CNOOC bid also coincided with a period of high oil prices caused partly by China’s
increasing demand, growing uneasiness in the United States over the rise of China
and the security and economic challenge it was presenting, the large bilateral trade
deficit with China, and concerns about whether Beijing was playing by international
trade rules — particularly giving insufficient protection to intellectual property rights
and systematically holding down the value of its currency.
CNOOC Ltd is a majority-owned subsidiary of CNOOC — one of three large
state-owned Chinese petroleum companies. Unocal is a relatively small U.S.
petroleum company (gross revenues of $8.2 billion in 2004) with assets primarily in
the Gulf of Mexico and Southeast Asia. The combined CNOOC and Unocal oil
production in 2004 amounted to 0.3% of domestic U.S. petroleum consumption.
CNOOC would have followed BP (British owned), Shell (Dutch owned), and
Venezuela’s state oil company in investing in U.S. petroleum assets.
The question of whether the proposed acquisition would have posed a security
threat to the United States ultimately would have been decided by the President after
a review by the Committee on Foreign Investment in the United States (CFIUS). The
policy debate centered on whether a company that is majority owned by China — a
country some view as a potential military threat — should be allowed to acquire
American assets that include vital energy supplies, dual use technology, or access to
sensitive geographical locations. Would CFIUS give sufficient consideration to U.S.
economic security? Should CFIUS be strengthened? Out of 1,500 transactions
notified to CFIUS since 1988, it blocked only one. Other questions touched on
whether blocking the bid would push the Chinese quest for secure oil supplies farther
into countries such as Iran or the Sudan? Also, would blocking the bid affect
Beijing’s approval for U.S. investments in China? Are American companies seeking
to invest in China given equivalent opportunities in that market?
The withdrawal of the bid by CNOOC stopped formal action against the
proposed acquisition, but it left unanswered most of the questions raised by the bid.
It is likely, moreover, that similar cases will arise in the future, such as the deal to
allow the takeover of operations of certain U.S. ports by a United Arab Emirates
company in 2006. China and other nations have large holdings of foreign exchange
reserves and growing needs to recycle dollars back into the U.S. economy. This
report will not be updated.
China’s Energy Security and Oil Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Foreign Holdings in Chinese Energy Companies . . . . . . . . . . . . . . . . . . . . . . . . . 7
Unocal As a Strategic Asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Unocal’s North American Oil and Natural Gas Operations . . . . . . . . . . . . . 10
Unocal’s International Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Review by the Committee on Foreign Investment in the United States
(CFIUS) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Congressional Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
H.Res. 344 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
H.Amdt. 431 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
S. 1412 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
H.R. 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Unresolved Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
List of Figures
Figure 1. China’s Imports of Crude Petroleum by Major
Suppliers, 2004 (In Percentage Shares of Total Imports) . . . . . . . . . . . . . . . 5
China and the CNOOC Bid for Unocal
On June 23, 2005, the China National Offshore Oil Corporation (CNOOC) —
through its Hong Kong subsidiary (CNOOC Ltd.) — announced an unsolicited bid
to acquire the U.S. energy company Unocal for $18.5 billion in cash. This attempted
acquisition raised several questions among U.S. policymakers. Even though CNOOC
ultimately withdrew its bid in the face of considerable opposition from some
Members of Congress and others, this episode raised certain economic, financial, and
security issues that are yet to be resolved. (On August 10, 2005, Unocal stockholders
voted to merge with and become a subsidiary of Chevron Corporation.)
The report provides an overview
and analysis of the CNOOC bid, U.S.
interests, implications for U.S. energy
security, U.S. investment in the PRC’s
(People’s Republic of China’s) oil
industry, the process for reviewing the
security and other implications of
foreign investment in the United States,
Congressional activity, and a listing of
For many in Congress, the
proposed acquisition raised a number of
questions regarding three vital U.S.
national interests. These are security
(protection of life and property),
prosperity (protection of economic well
being and commerce), and value
preservation (protection and projection
of core values of democracy, freedom,
human rights, etc.).
Time Line of The CNOOC Bid
April 4, 2005 Chevron announces
agreement to acquire Unocal for about
June 10 U.S. Federal Trade Commission
gives Chevron acquisition antitrust
June 23 CNOOC announces $18.5 billion
bid for Unocal
June 30 House passes H.Res. 344
(Pombo) calling for a thorough CFIUS
June 30 House passes H.Amdt. 431
(Kilpatrick) to appropriations bill (H.R.
3058) prohibiting use of Treasury funds to
approve sale of Unocal to CNOOC
July 2 CNOOC files CFIUS notice
July 20 Chevron raises its offer to about
$17 billion with 40% cash
August 2 CNOOC withdraws bid
August 8. H.R. 6/P.L. 109-58 signed into
law requiring a study of PRC energy
needs and delaying CFIUS consideration
of CNOOC bid
August 10 Unocal votes to accept
With respect to the first vital
interest of national security, the
questions raised by the CNOOC bid
were several. Should a company that is
majority owned by a foreign
government (directly or indirectly) be allowed to acquire American assets that could
include vital energy supplies, dual use technology, or access to sensitive geographical
locations?1 This was particularly cogent in the case of CNOOC, since China is
An example of this concern was expressed by Rep. Joe Barton, the Chair of the House
Energy and Commerce Committee, who said that it is not in our “strategic interests to let a
considered by many to be a possible future adversary and is building military
capability to counter potential third-party intervention — including that from the
United States — in a crisis between the PRC and Taiwan.2 Should a Chinese
company be allowed to acquire deep-water drilling equipment, technology (similar
to that used in underground nuclear tests), underwater mapping capability, and
platforms that could be used to observe underwater activities in the Gulf of Mexico
or in assisting the Chinese navy? Should a Chinese company be allowed to gain
control over a rare U.S. natural resource? (Unocal also owned a mine for a rare earth
mineral. CNOOC indicated it would sell this operation.) A related question revolved
around the larger Chinese quest for sources of petroleum and whether denying a
Chinese company ownership of U.S. oil wells would induce them to seek supply in
countries either under U.S. and other country sanctions or where the oil revenues are
likely to support corrupt governments or terrorist activities. Another question dealt
with the U.S. Committee for Foreign Investment in the United States (CFIUS). Is
that committee sufficiently staffed to do a thorough review of such proposed
mergers? Should it be strengthened? Are U.S. government review procedures
adequate to deal with the complexities of the CNOOC bid as they apply to U.S.
national security? Would CFIUS adequately consider economic security?
With respect to the second national interest of U.S. prosperity, the questions
revolved around the operation of the free market system, the role of central
governments in providing finance for market transactions, issues of fairness and
reciprocity, and the balancing of stockholder and company management interests
with national interests. A key question was whether a Chinese company backed by
government-owned banks should be allowed to outbid a private, American company
that has no direct governmental support? Much of the financing for the CNOOC
acquisition would have come from Chinese state-owned or state-directed banks.
Another question centered on reciprocal access. Are American companies seeking
to invest in China given equivalent opportunities in that market? Are Americans able
to buy into Chinese petroleum or other companies? Should this be a factor in
deciding whether to allow foreigners to invest in the United States? A further
question dealt with fairness in the operation of a free market. Should the U.S.
government intervene to stop company stockholders and managers from receiving a
higher offer for their assets because of political or security concerns? A related
question touched on efficiency. Would government intervention into the marketplace
create inefficiencies, or would U.S. intervention merely offset intervention by the
With respect to the third national interest of value preservation, the questions
related to the CNOOC bid were less specific. They extended to broader issues of
whether allowing CNOOC to purchase Unocal would further U.S. goals of
democracy and human rights. How would the takeover of Unocal by a Chinese
front company for the communist Chinese purchase a strategic asset, which in this case
would be oil reserves and pipelines in the United States.” CNN: Lou Dobbs Tonight
Barton Discusses Chinese Bid for Unocal, July 1, 2005.
See, for example: U.S. Department of Defense. The Military Power of the People’s
Republic of China, 2005. Annual Report to Congress.
company affect human rights, labor conditions, and democracy in other countries —
particularly in Burma and Cambodia where Unocal has investments? Would
blocking the acquisition cause China to negotiate more deals for oil supply with
nations with which the United States had major foreign policy concerns?
The CNOOC bid also coincided with other concerns being expressed about
China. There was growing uneasiness over the rise of China and the competitive
challenge it was presenting to a number of U.S. industries — not only makers of
labor intensive products but high-technology firms as well. Just a few months earlier,
some Members of Congress had expressed concern over the acquisition of IBM’s
personal computer business by the Chinese company Lenovo.3 There were related
concerns that China was creating national champion companies — many of them
state-owned and subsidized — and that the country was not abiding by the
commitments it made as a condition for accession to the World Trade Organization.
This also was a period of rising prices for petroleum, copper, steel, and other
commodities in short supply partly because of rising demand from China. China had
become the world’s second largest consumer of oil.
The withdrawal of the bid by CNOOC stopped formal action against the
proposed acquisition, but it left unanswered most of the questions raised by the bid.
It is likely, moreover, that similar cases will arise in the future given China’s large
holdings of foreign exchange reserves (more than $800 billion), growing needs for
industrial resources, and a willingness by Beijing to back its major industrial
corporations. A case with similar overtones has arisen in 2006 with the deal to allow
the takeover of operations of certain U.S. ports by a United Arab Emirates company.4
China’s Energy Security and Oil Industry
According to the U.S. Department of Energy, China’s oil consumption
surpassed Japan’s in 2003, when it reached 5.6 million barrels per day (mbd). This
ranked China as the world’s second largest oil consumer, after the United States.
Current consumption is estimated at 7.2 mbd and is projected to rise to 12.89 mbd
by 2025. At that time, imports are estimated to be 9.4 mbd, and China’s call on the
worlds crude supply will rival that of the United States.5
China is a relative newcomer to the world oil market, and it does not have well
established historic supply links. China’s arrival as the second largest consumer of
oil coincides with a tight global supply-demand situation. This unprecedented
dependence on imports of petroleum has added a new strategic imperative to
Beijing’s security planning. It has led Chinese companies into ventures aimed at
Lemon, Sumner. Concerns Mount Over Lenovo’s IBM Deal. PC World, January 27,
2005. Internet edition at [http://www.pcworld.com/news/article/0,aid,119476,00.asp].
Sanger, David E. and Sheryl Gay Stolberg. Dubai Deal Will Undergo Deeper Inquiry Into
Security. New York Times, February 27, 2006. pg. A.15.
U.S. Department of Energy. Energy Information Administration. China, Country Analysis
Brief — July 2005.
establishing supply arrangements with countries having the potential to develop new
oil reserves. It has concluded deals, or is attempting to do so, in a number of
countries, including Iran, Venezuela, Nigeria, San Tome, Angola, and Sudan.
In order to assure its energy future, China also needs access resources —
including important technologies, such as deep water drilling and human skills in
project management. Unocal, therefore, could have been seen by CNOOC as
offering a number of attributes, beyond its existing production, in lining up a future
supply of oil. Unocal management skill in dealing with multinational projects, its
deep water drilling knowhow, the ability to operate complex pipeline systems, as
well as its access in Pacific Rim producing countries close to China all would
become assets whose value extends beyond Unocal as it is presently structured.
China has been a net oil importer since 1993, and its petroleum industry is
focused on meeting domestic demand. Nearly 90% of Chinese oil production
capacity is located onshore with nearly a third (about 1.0 million out of a total of 3.4
million barrels per day) coming from the Daqing field in northeast China (5 billion
tons of proven reserves). Given the geophysical limits on increasing domestic
production, China has recently been exploring for oil offshore and acquiring interests
in exploration and production abroad.
China’s petroleum industry is dominated by four large corporations whose
shares are owned mostly by the state. In 1998, the Chinese government reorganized
most domestic state-owned oil and gas assets into two vertically integrated firms: the
China National Petroleum Corporation (CNPC with its subsidiary PetroChina)
operating primarily in the north and west of China and the China Petroleum &
Chemical Corporation (Sinopec) operating mainly in the south. The China National
Offshore Oil Corporation (CNOOC) handles offshore exploration and production
while a new company, China National Star Petroleum, was created in 1997 and in
2000 merged with Sinopec.
CNPC has acquired oil concessions in Kazakhstan, Venezuela, Sudan, Iraq, Iran,
Peru, and Azerbaijan. Sinopec owns a stake in Sudan, while CNOOC has purchased
an equity stake in an oilfield in Indonesia. Still roughly half of China’s oil imports
comes from the Middle East and North Africa. In 2004, 14% of China’s crude oil
imports ($4.7 billion) came from Angola, 14% from Saudi Arabia ($4.6 billion), 13%
from Oman ($4.3 billion), and 10.4% from Iran ($3.5 billion). Crude oil imports
from the United States accounted for 0.08% ($27 million).6
China also is eyeing Russia as a source of additional crude oil and electricity
imports. The two governments have been holding regular discussions on pipelines
to carry Russian crude oil to China. One pipeline is to run from eastern Siberia to the
oil-rich Daqing area (where China has an existing pipeline). A competing proposal
backed by Japan would run from Russian Taishet to the Pacific seaport of Nakhodka.
World Trade Atlas (using Chinese data).
This may initially end at Skovorodino where the oil could be shipped by rail to
Figure 1. China’s Imports of Crude Petroleum by Major Suppliers,
2004 (In Percentage Shares of Total Imports)
Source: Data from World Trade Atlas
A related factor in the Chinese attempt to establish secure sources of supply
could be the threat of economic sanctions should it attempt to force unification with
Taiwan or for other reasons. It is clear that a major disruption in the Middle East or
a blockade of China’s ports would pose a severe threat to China’s economy and the
operation of its military. This arguably underlies some of China’s quest for secure
supply sources. However, even if CNOOC Ltd. were to have acquired Unocal, the
U.S. operation still would be required to abide by U.S. law — including regulations
on economic sanctions — although CNOOC might have been aided by ownership of
Unocal’s assets in Asia.
Economic planners in Beijing also are likely being pulled in two directions: first
by a communist tendency toward central control and second by the centripetal forces
of market globalization. In global oil markets, it matters little who owns the wells.
Once the crude oil has been pumped, it can be sold almost anywhere. Still, Beijing
has a long legacy of central planning and the political benefits that accrue from
Goncharov, Sergey N. East Asia Energy Partners — China and Russia Reach New
Agreements To Boost Collaboration in Energy Projects, Beijing Review (Internet version
in English). August 5, 2005. Mortished, Carl. Oil Pipeline Route Keeps Asia Guessing,
The Times (London), July 23, 2005. P. 65.
possession and control. It may, therefore, be putting excessive emphasis on
ownership, and it may be uncomfortable leaving a vital energy supply to market
During the congressional debates over the CNOOC bid, some Members pointed
out that blocking the CNOOC deal would merely push China into making
acquisitions or supply arrangements elsewhere in the world — possibly with
countries such as Iran that are not in accord with U.S. interests.8 A week after the
CNOOC deal fell through, the China National Petroleum Company announced that
it would acquire PetroKazakhstan for $4.18 billion (PetroKazakhstan produces about
150,000 barrels of oil per day). Citigroup agreed to provide CNPC with a letter of
credit for the entire value of the deal, so the state-owned Chinese oil company would
not have to borrow money from other Chinese government agencies (as CNOOC
would have done in the Unocal deal).9
On January 9, 2006, CNOOC announced a $2.27 billion deal to buy a 45% stake
in a substantial offshore oil field in Nigeria, its first major purchase since its failed
attempt to purchase Unocal.10 On February 17, 2006, CNOOC announced that its
subsidiary CNOOC Africa had signed a five-year production sharing contract with
the National Oil Company of Equatorial Guinea to explore an offshore area of about
2,287 square kilometers.11
Some Members also pointed out that at the time China held more than $600
billion ($818 billion in December 2006) in dollar denominated foreign exchange
reserves and $256.7 billion in U.S. Treasury securities. It is not surprising that China
should try to diversify its dollar-denominated investments. They also argued that
U.S. borrowing from China may give Beijing some leverage and weaken the U.S.
ability to influence Beijing on human rights, proliferation, and other issues. The
need, they said, is for the United States to put its fiscal house in order and reduce its
budget and trade deficits.12
Some who argued against attempts to block the CNOOC bid pointed out that the
U.S. economy has benefitted greatly from being open to foreign investment and
having a liberal foreign investment policy. They feared that blocking takeover bids
primarily because of political factors could hurt the U.S. investment climate.
Statement by Rep. Nancy Pelosi, Congressional Record, June 30, 2005. P. H5515.
Guerrera, Francesco, Khozem Merchant, Bernard Simon, and Enid Tsui. Chinese Energy
Group Wins Petrokaz in Dollars 4.18bn Deal. Financial Times, August 23, 2005. p. 17.
Bradsher, Keith and Christopher Pala. Chinese Beat India for Kazakh Oil Fields But
Shadow Emerges over $4.2 Billion Deal. International Herald Tribune, August 23, 2005.
Goodman, Peter. Cnooc Buys Oil Interest in Nigeria; Overseas Deal First Since Unocal
Bid. The Washington Post, January 10, 2006.
CNOOC Limited. A New PSC Signed by CNOOC Limited for Block S in Equatorial
Guinea. Press Release. February 17, 2006.
Statement by James P. Moran, Congressional Record, June 30, 2005. P. H5515-H5516.
Foreign Holdings in Chinese Energy Companies
Even though the big three Chinese oil companies are majority-owned by the
Chinese government, considerable foreign investment has gone into the energy sector
in China. PetroChina, Ltd., Sinopec, Ltd., and CNOOC, Ltd. all successfully carried
out initial public offerings of stock between 2000 and 2002. Large blocks of shares
were bought by BP, ExxonMobil, and Shell even though these minority stakes have
not provided outsiders a major voice in corporate governance (e.g. no seats on boards
of directors). The Chinese government retained majority positions in all three largest
As part of the reorganization of the government-owned China
National Petroleum Corporation in 1999, CNPC injected into
PetroChina Company, Ltd. most of its assets related to exploration
and production of petroleum and natural gas. CNPC owns about
90% of the shares of PetroChina. Other shareholders include
Brandes Investment Partners, BP Investments China, Ltd., and
Berkshire Hathaway, Inc. When CNPC carried out its initial public
offering (IPO) of PetroChina in early 2000, it raised over $3 billion
with BP purchasing 20% of the shares that were offered.
The government-owned China Petroleum & Chemical Corporation
retains ownership of about 55% of the shares of Sinopec, Ltd. Other
shareholders include ExxonMobil (with 19%),14 China Development
Bank, China Xinda Asset Management Corporation, BP, Shell, and
the general public.
The government-owned CNOOC retains ownership of about 70% of
the shares of CNOOC, Ltd. CNOOC, Ltd. carried out its initial
public offering (incorporated in Hong Kong) in February 2001 of
27.5% of its shares at which time Shell bought a large block valued
at around $200 million.15
Other than the shares bought at the time of the initial public offerings of China’s
three largest oil companies, most foreign investments in China’s oil and gas sector
have not been to purchase shares of existing companies but to establish cooperative
joint ventures in exploration, production, and distribution. Beijing has encouraged
this activity in order to meet the country’s growing energy needs. For example, in
offshore oil exploration, recent interest in China has centered on the Bohai Sea area
east of Tianjin (believed to hold more than 1.5 billion barrels in reserves) and the
Pearl River Mouth area.
U.S. Department of Energy. EIA Country Analysis Brief: China. July 2004.
Mergent Online. Industry Report — Oil and Gas, January 2005. P. 18.
U.S. Department of Energy. EIA Country Analysis Brief: China. July 2004. P. 3.
ConocoPhillips announced in March 2000 that it had completed its
appraisal drilling of the Peng Lai find in the Bohai Sea and began
production in 2002.
Canadian independent Husky Oil signed a production sharing
contract in July 2001 with CNOOC.
A consortium including ChevronTexaco and CNOOC has developed
a major offshore oilfield in the Pearl River Mouth area.
ChevronTexaco concluded an agreement with CNOOC in October
2002 for the development of the Bozhong field in the Bohai Sea.
ExxonMobil is helping Sinopec establish more than 500 gas stations
across China and is building at least two refineries in southern
Over the past two decades, China’s economy has been relatively open to many
types of foreign investment, and it continues to improve its investment climate under
the commitments it made in its accession agreement for joining the World Trade
Organization. However, many sectors, especially those dominated by state-owned
companies, are still closed or restricted to foreign direct investment. (Many nations
block foreign investments in sectors such as broadcasting, telecommunications,
nuclear power generation, or military equipment.)
In non-petroleum sectors of the Chinese economy, major recent foreign
acquisitions include HSBC with a 20% stake in the Bank of Communications;
Newbridge Capital Group with its 18% share of the Shenzhen Development Bank;
Anheuser-Busch Co. with a controlling share (more than 50%) of Harbin Brewery
Group, Ltd. as well as a 9.9% share of Tsingtao Brewery Co. Ltd.; and the purchase
by Kodak of 20% of the shares of Lucky Film, the first acquisition of a non-tradable
State-owned company by a foreign investor.17 Goldman Sachs and Allianz of
Germany are in talks to acquire a $1 billion stake in China’s largest state-owned
bank, the Industrial and Commercial Bank of China.18 In June 2005, China
Construction Bank sold a 9% stake to Bank of America for $3 billion. In August, the
Bank of China announced it was selling 10% of its shares for $3.1 billion to a group
of investors headed by the Royal Bank of Scotland, Merrill Lynch, and the Li Kashing Foundation (Hong Kong).19
Industry Report — Oil and Gas, January 2005. p. 18.
The U.S.-China Business Council, Foreign Investment in China, First Half 2004. Eastman
Kodak, Lucky Form Partnership. China Daily, October 30, 2003.
Barboza, David and Keith Bradsher. Another China Bank is Courted by the West. The
New York Times, July 11, 2005. Online version.
The Economist Intelligence Unit Newswire, China industry: Banking on China, Country
Briefing, August 24, 2005.
During the CNOOC bid for Unocal, a question relating to reciprocity and
fairness in U.S.-China relations arose: can a U.S. company acquire a Chinese oil
company? An example of this concern was a study released by Senator Charles
Schumer detailing various barriers to foreign investment and business in China.20
Under PRC regulations, foreign investors may acquire PRC companies — in any
permitted industry — either by equity or asset acquisitions. Where the target Chinese
company is one in which the PRC has a state-owned equity interest, the acquisition
must be approved by both a board meeting of the target and a shareholder’s meeting.
Since the Chinese government is the largest shareholder in CNOOC, CNPC, and
Sinopec, it could control the outcome of any board or shareholder meetings of these
companies. If a company agrees to a foreign acquisition, the transaction must be
approved by the State-owned Assets Supervisory & Administrative Commission
(SASAC). This commission oversees the operation of all state-owned assets in
China. In essence, any takeover of a major Chinese oil company would require
approval by Beijing.
Further approvals are required by the Ministry of Commerce (for compliance
with the Foreign Investment Industrial Guidance Catalogue and for review of the
establishment of a foreign-invested enterprise as a result of an acquisition). The
foreign firm must also file an antitrust report with the Ministry and a report to the
China Securities Regulatory Commission.21
Unocal As a Strategic Asset
Unocal (formerly the Union Oil Company of California) is a familiar name in
the United States, although the company today has streamlined itself and downsized
by shedding refining and other assets as well as gasoline stations. Its gross revenues
were $8.2 billion in 2004. When it was placed on the market in 2005, most observers
no longer categorized it as a major oil company. For example, well known integrated
major ConocoPhillips’ gross revenues totaled $135.4 billion in 2004; much less well
known independent producer Anadarko Petroleum grossed $6.1 billion last year.
Viewed in this context, Unocal is more like a large independent producer than the
major multinational oil company it once was.
During 2004, Unocal produced a total of 159,000 barrels per day of petroleum
and 1.5 billion cubic feet per day of natural gas from domestic and foreign locations,
including Canada, where it has significant oil and gas production. North American
production accounted for 38% of Unocal’s natural gas production and 44% of its
Schumer, Charles E. China’s One-way Street on Foreign Direct Investment and Market
Access, August 18, 2005, 15 p. Available at
Liu, David and Roger Yao. Procedures for Acquisition of State-owned Equity by Foreign
Investors. China Law & Practice, June 2004. P. 1-2.
petroleum output. It also operates a domestic and Canadian pipeline system, with
storage and marketing capabilities for natural gas and petroleum liquids,22 the firm’s
Midstream & Trade division.
On July 11, 2005, Unocal announced the sale of its Canadian oil and natural gas
subsidiary, Northrock Resources Ltd., to U.S. independent Pogo Producing Company
for $1.8 billion. Northrock operates nearly all of Unocal’s oil and gas assets in
Unocal’s North American Oil and Natural Gas Operations
Unocal produced 577 million cubic feet of natural gas and 69,700 barrels per
day of petroleum in 2004. This is the equivalent of about 1% of U.S. natural gas
consumption. Similarly, the company’s liquid petroleum production amounts to
about 1% of U.S. liquid hydrocarbon production, but only 0.3% of petroleum
products consumed. The United States produces about 7.6 mbd of crude oil and
Aside from the Canadian assets scheduled to be sold, Unocal has a number of
other U.S. operations, including:
Gulf of Mexico exploration and development, which includes both
deep water drilling (water depths of 1,000 to 10,000 feet) and deep
well drilling operations (to sub-surface depths of up to 35,000 feet).
The company commercializes proven reserves and also drills
“wildcat” or exploratory wells.
Unocal operates 10 platforms in Alaska’s Cook Inlet. Additionally,
the company holds interests in two North Slope fields, Endicott
(10%) and Kuparak (4.95%). Unocal’s share of the production of
these two fields is about 20,000 barrels per day.
Pure Resources is a wholly owned subsidiary firm, producing natural
gas in the U.S. mid-Continent (Permian and San Juan Basins) area.
Unocal’s International Operations
Unocal produces and/or explores for oil and gas in eight countries outside North
America. These are Thailand, Indonesia, Bangladesh, Myanmar, the Netherlands,
Azerbaijan, Congo, and Brazil. The company operates 100 platforms in the Gulf of
Thailand, where it has had operations since 1981. Production is mostly natural gas,
but includes 16,000 barrels per day of crude oil. It also operates fields in the region
Petroleum liquids, or Natural Gas Liquids (NGL) include propane, butane, and similar
AP, Unocal Sells Unit to Pogo for $1.8 billion. July 11, 2005; 8:25 am.
for other firms and has access to unexplored offshore tracts which are seen as having
The company has also been active in the Congo. In 1984, it acquired a 17.72%
working interest in exploration and development rights to the whole offshore.
Chevron (with a 50% share) is currently the operator in this venture, which also
includes the Teikoku Oil Company (32.18% share). This concession is currently
producing 18,000 barrels per day.
Unocal also has a well established position in Indonesia, where it began
operations in 1968. It has production in ten offshore areas; it is operator of seven.
Of perhaps greater importance are a number of exploration concessions, which offer
both crude and natural gas potential.
Unocal activity in Azerbaijan began in 1991 as one of ten partners in the
Azerbaijan International Operating Company (AIOC). Production from fields
operated by this consortium is growing. Unocal is a partner in the Baku-TbilisiCeyhan pipeline, which has just started operations. This pipeline transports crude
from the Caspian Sea to the Mediterranean port of Ceyhan in Turkey and provides
economical access to world oil markets, allowing Caspian production to grow.
Unocal owns no refineries, so it does not import crude oil into the United States
(nor does it produce gasoline or other fuels). Therefore, a merger with CNOOC
would not cause a direct loss of imported supply — at least in the near term. Longer
term, however, both the United States and China will be competing for larger
amounts of crude oil. To the extent that Unocal assets would have assisted CNOOC
in forming exclusive supply arrangements for new oil production, that oil might not
have been accessible to other participants in the world oil market. As part of the
proposed deal, however, CNOOC stated that all U.S. production of crude oil would
remain in the United States.
With regard to Unocal’s existing North American production, the Canadian
properties were in the process of being sold to another U.S. producer. As far as U.S.
production is concerned, that production has its highest value in this country, since
the shipping cost to a foreign destination, assuming transport links exist, and they
may not, would reduce the effective price received by CNOOC.
If the deal had gone through, the combined CNOOC-Unocal’s natural gas
production would have amounted to about 1% of U.S. consumption (based on North
American production in 2004), and combined oil production would have been
equivalent to about 0.3% of domestic U.S. consumption.
With respect to other foreign investments in the U.S. energy supply, the United
States does not ban foreign investment in U.S. hydrocarbons. There are myriad
foreign holdings of U.S. properties. Among the largest is BP Plc., which owns
among other producing assets, a significant stake in Alaska’s North Slope
production. Royal Dutch Petroleum (better known as Shell), a Dutch firm, also owns
substantial U.S. production, including output from Federal lands. Both firms own
a considerable refining capacity, as well as large assets in all phases of the oil and
natural gas business. Venezuela’s national oil company, PDVSA, also has acquired
CITGO, which owns about 7% of U.S. refining capacity.
Review by the Committee on Foreign Investment in
the United States (CFIUS)
The question of whether the CNOOC acquisition would have threatened to
impair U.S. national security would ultimately have been addressed by the Executive
Branch through an established review process. In 1988, amid Congressional
concerns over foreign acquisitions of certain types of U.S. firms, Congress approved
the Exon-Florio provision of the Defense Production Act. This statute grants the
President the authority to block foreign acquisitions of “persons engaged in interstate
commerce in the United States”firms that threaten to impair the national security.
Congress was concerned at the time that foreign takeovers of U.S. firms could not be
stopped unless the President declared a national emergency or regulators invoked
federal antitrust, environmental, or securities laws.
The Exon-Florio provision grants the President the authority to take what action
he considers to be “appropriate” to suspend or prohibit foreign acquisitions, mergers,
or takeovers of persons engaged in interstate commerce in the United States which
threaten to impair the national security. In addition, Congress amended the statute
in 1992 through section 837(a) of the National Defense Authorization Act for Fiscal
Year 1993. Known as the “Byrd” amendment after the amendment’s sponsor, the
provision requires CFIUS to investigate proposed mergers, acquisitions, or takeovers
in cases where (1) the acquirer is controlled by or acting on behalf of a foreign
government; and (2) the acquisition results in control of a person engaged in
interstate commerce in the United States that could affect the national security of the
United States.24 Congress directed, however, that before this authority can be
invoked the President is expected to believe that other U.S. laws are inadequate or
inappropriate to protect the national security and that he must have “credible
evidence” that the foreign investment will impair the national security. For the
purposes of this legislation, Congress purposely did not define national security, but
it apparently intended to have the term interpreted broadly without limitation to a
The authority to administer the Exon-Florio provision was delegated to the
Committee on Foreign Investment in the United States (CFIUS), which is housed in
the Department of the Treasury. The Committee had been established under a
previous Executive Order with broad responsibilities, but few powers. It was
originally established with eight members, but it has expanded to twelve. The
members include the Secretaries of State, Treasury, Defense, Commerce, and
Homeland Security; the United States Trade representative; the Chairman of the
Council of Economic Advisers; the Attorney General; the Director of the Office of
Management and Budget; the Director of the Office of Science and Technology
Policy; the Assistant to the President for National Security Affairs; and the Assistant
P.L. 102-484, Oct. 23, 1992.
to the President for Economic Policy. The Committee has 30 days to decide whether
to investigate a case and an additional 45 days to make its recommendation. Once
the recommendation is made, the President has 15 days to act.25
Through the Exon-Florio provision, Congress directed that CFIUS, and
therefore the President, should consider a list of factors in deciding to block a foreign
acquisition, merger, or takeover. This list contains the following elements:
domestic production needed for projected national defense
the capability and capacity of domestic industries to meet national
defense requirements, including the availability of human resources,
products, technology, materials, and other supplies and services;
the control of domestic industries and commercial activity by foreign
citizens as it affects the capability and capacity of the U.S. to meet
the requirements of national security;
the potential effects of the transactions on the sales of military
goods, equipment, or technology to a country that supports terrorism
or proliferates missile technology or chemical and biological
the potential effects of the transaction on U.S. technological
leadership in areas affecting U.S. national security.
In November 1991, the Treasury Department issued final regulations, after
extensive public comment, implementing the Exon-Florio provision. These
regulations create an essentially voluntary system of notification by the parties to an
acquisition, but they also allow for notice by agencies that are members of CFIUS.
Despite the voluntary nature of the notification, firms largely do notify because the
regulations stipulate that foreign acquisitions that are governed by the Exon-Florio
review process that do not notify the Committee remain subject indefinitely to
divestment or other appropriate actions by the President. Under most circumstances,
notice of a proposed acquisition that is given to the Committee by a third party,
including shareholders, is not considered by the Committee to constitute an official
notification. The regulations also indicate that notifications provided to the
Committee are considered to be confidential, and the information is not released by
the Committee to the press or commented on publicly.
As a consequence of the confidential nature of the CFIUS review of any
proposed transaction, there are few public sources of information concerning the
Committee’s work. For the most part, information concerning individual
transactions that have been reviewed by CFIUS or any final recommendations that
have been issued by CFIUS have come from announcements made by the companies
For information on CFIUS, see U.S. Department of the Treasury’s website at
involved in a transaction and not by CFIUS. Therefore public information
concerning the outcome of CFIUS’s reviews are incomplete. According to one
source, CFIUS has received more than 1,500 notifications, of which it conducted a
full investigation of 25 cases. Of these 25 cases, 13 transactions were withdrawn
upon notice that CFIUS would conduct a full review, and 12 of the remaining cases
were sent to the President. Of these 12 transactions, only one was prohibited.
The transaction that was prohibited by the President involved the acquisition
of Mamco Manufacturing Company by the China National Aero-Technology Import
and Export Corporation (CATIC). Mamco was an aerospace parts manufacturer.
CATIC, which is owned by the Government of the People’s Republic of China, acted
as the purchasing agent for the Chinese Ministry of Defense. President Reagan
ordered CATIC to divest itself of Mamco under the authority of the Exon-Florio
provision because of concerns that CATIC might gain access to technology through
Mamco that it would otherwise have to obtain under an export license.
Most often, CFIUS has approved proposed transactions if the parties involved
agreed to certain conditions. For instance, in 2000, the Committee allowed Nippon
Telephone & Telegraph Company to acquire Verio, Inc, an internet service provider,
by obtaining a strict ban on involvement by the Japanese government in the firm.
Similar concerns arose with the proposed acquisition in 2003 of Global Crossing,
Ltd. by Hutchinson Whampoa Ltd. of Hong Kong and Technologies Telemedia of
Singapore. U.S. officials reportedly were concerned that foreign ownership of Global
Crossing’s fiber-optics network might make the U.S. government vulnerable to
eavesdropping from overseas, and some Members of Congress were concerned about
Hutchinson’s ties to the Chinese military. To ease these concerns, Hutchinson
offered to play a passive role in the company. Nevertheless, CFIUS decided to
conduct a full 45-day review of the transaction, at which point the Chinese firm
backed out of the deal. Eventually, CFIUS approved the acquisition by the Singapore
firm by itself, because it offered to put Americans on the board of Global Crossing.
CNOOC took steps to pass a CFIUS review. In response to potential objections,
CNOOC stated that it was fully prepared to participate in a CFIUS review of the
transaction and that it had made assurances to Unocal to “address concerns relating
to energy security and ownership of Unocal assets located in the United States.”
CNOOC said that it was prepared to sell or take other actions with respect to
Unocal’s minority pipeline interests and storage assets so long as such a sale did not
cause substantial economic harm to Unocal. CNOOC also was open to discussing
with CFIUS placing non-exploration and production assets under American
management through arrangements that it claimed CFIUS had approved often in the
past. CNOOC further emphasized its commitment to retain the jobs of substantially
all of Unocal’s employees, as opposed to Chevron’s plan to lay off employees,
especially in the United States.26 CNOOC also stated that it was willing to continue
CNOOC, Ltd. “Statement by Fu Chengyu, Chairman and CEO of CNOOC Limited.”
Beijing, June 24, 2005.
Unocal’s practice of selling and marketing all or substantially all of the oil and gas
produced from Unocal’s U.S. properties in U.S. markets.27
The Executive Branch was virtually silent on the proposed CNOOC bid. In
Congress, however, the attempted acquisition generated considerable concern — both
for the implications of the deal itself and because it coincided with other issues and
policies related to China. Congressional activity took two tracks. The first was to
generate public awareness, discussion, and analysis that would highlight the
implications of the proposed deal and put pressure on CNOOC to alter or withdraw
it. Through hearings, statements, and studies, the issue was raised and scrutinized
by the American public. The other track was through letters to the Secretary of
Treasury (as chair of CFIUS) and legislation aimed at CFIUS. These raised concerns,
called for a thorough review, required a study of China’s energy requirements and
how that affects the United States, or, in the case of one bill, would prohibit CFIUS
from approving the proposed acquisition.
The expressed opposition by certain Members of Congress to the proposed
CNOOC bid for Unocal arguably played a key role in the withdrawal of CNOOC’s
offer on August 2, 2005. In explaining why it withdrew the bid, CNOOC stated that
the company had “given active consideration to further improving the terms of its
offer, and would have done so but for the political environment in the U.S.”
CNOOC said that the political environment made it very difficult for them to
accurately assess their chance of success, creating a level of uncertainty that
presented an unacceptable risk to their ability to secure this transaction. They
accordingly reluctantly abandoned their offer.28
The bills in the 109th Congress that directly address the CNOOC bid for Unocal
are as follows.
H.Res. 344. (Pombo) Expressing the sense of the House of Representatives
that a Chinese state-owned energy company exercising control of critical United
States energy infrastructure and energy production capacity could take action that
would threaten to impair the national security of the United States. Calls on the
President to make a thorough review if the deal takes place. August 30, 2005.
Passed/agreed to in House.
H.Amdt. 431. (Kilpatrick) to H.R. 3058 (P.L. 109-115, Transportation,
Treasury, Housing and Urban Development, the Judiciary, the District of Columbia,
and Independent Agencies Appropriations Act, 2006). Prohibits the use of funds
from being made available to recommend approval of the sale of Unocal Corporation
CNOOC, Ltd. Transaction Information Website. At
CNOOC, Ltd. “CNOOC Limited to Withdraw Unocal Bid,” Press Release, August 2,
to CNOOC Ltd. of China. Amendment agreed to on June 30, 2005. Struck out of
S. 1412. (Dorgan) A bill to prohibit the merger, acquisition, or takeover of
Unocal Corporation by CNOOC Ltd. of China. Introduced July 15, 2005.
H.R. 6. (Barton) Energy Policy Act of 2005 (P.L. 109-58, signed into law
August 8, 2005). Section 1837 requires a study by the Secretaries of Defense and
Homeland Security of the growing energy requirements of the PRC and the
implications of such growth on the political, strategic, economic, or national security
interests of the United States. The study would include an assessment of the
relationship between the Chinese government and energy-related businesses located
in China and delays CFIUS from reviewing sensitive international energy mergers
and making recommendations to the president.
The failed CNOOC bid for Unocal left several potential issues still outstanding.
To what extent does a threat to economic security constitute a threat
to national security? Would foreign ownership of oil supply in the
United States threaten to impair U.S. national security sufficiently
to deny that ownership? This question would have to be answered
on a case-by-case basis by CFIUS.
To what extent would foreign ownership of dual use technology —
such as deep water drilling — threaten to impair U.S. national
security? Unocal’s use of cavitation for deep water drilling
apparently also is used by the Chinese military to do nuclear tests
underground.29 Since this is not an export of such technology, it
would not fall under export controls of the U.S. Export
Administration Act. Again, this would be determined by CFIUS on
a case-by-case basis.
What changes, if any, should be made to CFIUS to enable it to
consider national economic security as well as traditional national
CNOOC Bid for Unocal, if Successful, Would Face Tough Scrutiny in Washington.
International Trade Reporter, Current Reports: Foreign Investment. July 14, 2005.
Statement by Rep. Nancy Pelosi, Congressional Record, June 30, 2005. P. H5516.
security in its decisions?30 Should the Exon-Florio provision be
To what extent should companies that rely on financing by a central
government or government-owned financial institutions be allowed
to outbid U.S. companies that do not benefit from such backing?
There is no U.S. law or provision of the World Trade Organization
that deals with such capital transactions. U.S. subsidy law is aimed
at exports and not acquisitions. How can a determination be made
as to whether a loan is made on a commercial, rather than a political,
basis? What rate of interest constitutes a subsidy?
Should policymakers be concerned when a Chinese state-backed
company takes over a privately owned U.S. company? Should
potential acquisitions by Chinese companies be treated differently
because some consider China to be a potential military rival? Would
BP or Shell, but not CNOOC, PetroChina, or Sinopec, be allowed to
acquire a company like Unocal?
To what extent should reciprocity enter into CFIUS reviews? If
acquisitions by U.S. companies are not allowed by a country, should
that country’s companies be permitted to acquire American firms?
What about other trade-related problems, such as enforcement of
intellectual property rights or access for U.S. exports?
To what extent should the United States intervene in Chinese
acquisitions of American assets located in countries with
questionable human rights and other records? If an American
company has operations in Burma, for example, should human rights
considerations enter into a decision to allow an acquisition of that
company by a Chinese firm — considering the poor record of human
rights by Beijing?
How will the political opposition to CNOOC’s bid affect U.S.-China
relations? Will it lead China to restrict U.S. investment in China?
Will this incident discourage Chinese investment in the United
States? If China stops purchasing or sells some of its holdings of
U.S. Treasury securities, what impact will that have on U.S. interest
rates and the ability to finance U.S. government debt?
A recommendation by the U.S.-China Economic and Security Review Commission in its
2004 Report to Congress was that Congress should revise the law governing the CFIUS
process to expand the definition of national security to include the potential impact on
national economic security as a criterion to be reviewed, and should direct the
administration to transfer chairmanship of CFIUS from the Secretary of the Treasury to the
Secretary of Commerce. (P. 11)
Should the U.S. government intervene to stop company stockholders
and managers from receiving a higher offer for their assets because
of political or security concerns? Would government intervention
to block a private transaction create inefficiencies in the market, or
would U.S. intervention merely offset a market distortion caused by
intervention by the Chinese government?