Why Not Just Nationalize Unocal?

It is very unlikely, given today’s political climate, that the China National Offshore Oil Corporation’s (CNOOC – pronounced sea-nook) bid to buy the Unocal corporation will be permitted. The deal is too sensitive, so some excuse will be found to disallow the purchase.

The California-based petroleum corporation is on the market and seemed destined for incorporation into Chevron’s growing energy empire, when the state-owned CNOOC, China’s third-largest petroleum company, suddenly entered the picture by topping Chevron’s offer of $16.4 billion by 10 per cent.

The offer came on the heels of the Haier’s announcement that it wants to acquire the Maytag Corp (see post below). Not even the most avid China basher would argue that a washing machine maker is a threat to national security. But coming so close together the acquisition attempts contribute to the growing anxiety in America that China wants to buy up the country.

Not surprisingly, members of Congress are agitated. On Thursday Rep. Richard Pombo (R-Calif.) introduced a resolution stating that, “the U.S. increasingly needs to view meeting the energy requirements within the context of our foreign policy, national security and economic security agenda. This is especially the case with China.”

The same week, in an unrelated matter, the House voted 313-114 to block the U.S. Export-Import Bank from underwriting a $5 billion loan to the China state nuclear power corporation so that it can buy reactors and steam generators from the Westinghouse Corporation, a shoot-yourself-in-the foot action if there ever was one.

Yet for all the fuss and bother it has raised in Washington, it is far from clear that CNOOC can prevail even in a straight commercial fight with Chevron. Some argue that the playing field is tilted in China’s favor because, being a subsidiary of a state-owned corporation (70% equity owned by the Chinese government), CNOOC has unlimited deep pockets.

But in a bidding war, CNOOC would be seriously outmatched by Chevron, which has pretty deep pockets of its own. Chevron’s total market capitalization of about $115 billion and cash reserves are five times that of its Chinese rival. To pull this deal off CNOOC would have to borrow about $15 billion. Its debt-to-earnings ratio would shoot through the roof. Indeed, several international credit agencies have already lowered the Chinese company’s credit ratings in anticipation.

That’s one reason why some analysts in Asia look on the CNOOC’s bid as foolish to the point of recklessness. “You have to wonder why CNMOOC is banging its head against the wall,” says Foo Choy Peng at UOB Kay Hian Securities in Hong Kong. He doubts the sale will pass muster with regulators.

Two years ago CNOOC failed in an attempt to buy a stake in the $7.4 billion Caspian Sea Kashagan oil field, despite being teamed up with Sinopec, China’s second-ranked oil company. Ultimately, their effort was rebuffed when Exxon Mobil and Conoco Philips upped their bids. One would not be surprised to see something like that happened with Unocal.

Nevertheless CNOOC persists, and it is easy to see why. Unocal’s reserves, mostly in the form of natural gas, are mainly concentrated beneath waters off of Vietnam, Indonesia and Myanmar. They would increase the Chinese company’s total reserves by a significant amount and feed its new refineries along China’s southern coast.

On Friday the company took an unusual step of directly asking the Treasury Department’s Committee on Foreign Investments in the United States to scrutinize their project expeditiously. They are hoping to put that inevitable review behind them before Unocal’s board of directors acts on the Chevron bid. It is scheduled to meet to discuss the deal on August 10.

If the issues involve national security, foreign policy and energy independence, why doesn’t the Congress take the next logical step and consider having the U.S. government buy a controlling interest in Unocal itself? In other words, nationalize Unocal. That way the country would have ultimate control over Unocal’s resource base.

Of course, most Americans would be aghast at this violation of free market principles. Yet these same people opposing nationalization think there is nothing wrong about the government interfering to stop what is basically a straight-forward commercial transaction on exaggerated concerns about national security.