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China tells Congress to keep its nose out of
their business as oil war for Unocal heats up

Author's Note: On June 21 I reported in this column that China was planning to make a bid for California-based UNOCAL Within a week CNOOC (China National Offshore Oil Company) made an unsolicited offer for UNOCAL, besting Chevron's $16.1 billion offer by $2.4 billion.

On Thursday, July 7 after OPEC's July 6 announcement that it would be impossible to meet the industrial nation's projected oil needs by 2020, oil spiked at $61 per barrel, driving up the price at the pumps at least 10 cents per gallon. As Americans grumbled over the extra dime per gallon they were putting in their gas tanks on Thursday morning, Londoners were experiencing their own version of September 11. A previously unknown Islamic cell group in London strategically placed four explosive devises in the city's financial district, killing at least 50 Londoners and wounding over 700.

When the news of the catastrophe spread, oil prices spiked another 10 to 20 cents a gallon at the pumps, with gasoline in California selling at $2.33 per gallon and in rural West Virginia around $2.39 per gallon. To sidestep new demands from UNOCAL that they sign an agreement guaranteeing that most of Unocal's Asian oil is sold in America, CNOOC is preparing to increase its own offer to $20.5 billion, counting on a continued buoyant oil market to make their buyout of UNOCAL profitable. "Our board." CNOOC board chairman Fu Chengyu said, "has made a decision that we have to win this bid."

After CNOOC shocked the financial markets by bidding against Chevron for UNOCAL, Congress stunned China by demanding that the White House review the Chinese offer as a potential threat to the national security of the United States. On Thursday, June 30 the House of Representatives adopted the resolution 398 to 15 noting that CNOOC was controlled by the Communist regime even though Fu Chengyu, chairman of CNOOC has insisted that he was "...not a government leader. Nobody tells me how to run this company. We are in our own business. I have just one job, one responsibility, which is to make sure that I can continue to grow this company." The Committee on Foreign Investments (a department of the US Treasury) demanded that before any deal is approved China must agree to sell part of the company's Asian-generated oil to the United States. It is also looking for national security assurances from China—that China will never be able to satisfactorily provide.

Like most Chinese communists in important positions, Fu is a party hack who heads not only CNOOC but its state-owned parent company as well. The People's Republic of China owns 70% of CNOOC's shares. The shares are controlled by a government holding company for China's State Council (the equivalent to, say, the Dept. of Commerce or the Dept. of the Interior). Congress sent a very clear message to the White House making it very clear to the Bush Administration that allowing China to gain control of an American oil company was tantamount to handing over to our most deadly enemy a slice—albeit a small one—of the United States oil supply.

Several UNOCAL shareholders—definitely a minority—want to make sure the CNOOC deal is not rejected since it is $2 billion more than the Chevron offer. They do not think CNOOC represents a threat to the United States, nor do they believe that CNOOC would divert all of UNOCAL's inventory to China. What's more, they don't care. They are short term investors who are in it for the quick profit.

Furthermore, they insist the demands of the House of Representatives are simply pre-election bluster to convince the voters they are trying to keep UNOCAL's inventory of gasoline in the United States. And, they aren't the only ones complaining about Congress. The Chinese government issued a strongly worded rebuttal to the Bush Administration through the State Department excoriating Congress for what they termed was "...injecting politics" into what they insisted was nothing more than "...a standard business deal."

"We demand that the US Congress correct its mistaken ways of politicizing economic and trade issues," the diplomatic note said, "and stop interfering in the normal commercial exchanges between enterprises of two countries. CNOOC's bid to take over the US UNOCAL is a normal commercial activity between enterprises and should not fall victim to political interference. The development of economic and trade cooperation between China and the United States conforms to the interests of both sides." Actually, it does not. If CNOOC was a normal shareholder-owned corporation in our understanding of the word, and the nation in which that company was located was a historic ally of the United States, I could probably agree with the Chinese assessment. As it is, while China is currently America's largest trading partner it is an avowed enemy who has made it clear to the world that it intends to destroy the United States whenever it is capable of doing so. America needs to ban the sale of UNOCAL to China—at any price—for national security reasons if not for economic ones. China needs the oil produced by UNOCAL It's a safe bet that if China gains control of UNOCAL, all crude oil from Asian sources will immediately be diverted to China regardless what promises were made or agreements signed.

Nevertheless, in an attempt to deal with what many UNOCAL officials believe are onerous conditions imposed by the federal government to block the sale because of the Bush Administration's close ties with Standard Oil, UNOCAL's Board of Directors told CNOOC it would consider withdrawing its support for the $16.5 billion Chevron offer and would endorse the CNOOC offer to UNOCAL's stockholders if China would guarantee that a large portion of UNOCAL's Asian oil reserves would be sold in the United States. Shareholders close to the situation have indicated that CNOOC would likely not comply with that portion of UNOCAL's request. This will force CNOOC to do one of two things: [a] withdraw its $18.5 billion offer—or [b] increase it to $20.5 billion

China is now the world's second largest consumer of crude oil. By 2050 it will be the world's largest oil consumer. Until the People's Republic of China is able to adequately tap into its own oil reserves, it must rely on imports (unlike the United States which has allowed environmentalists to shut down 80% of its own oil exploration, drilling and transmission of known reserves, forcing it to rely on Mideast oil), creating the projected shortfalls that are responsible for the current spike in gasoline prices at the pump.

What the short term UNOCAL shareholders like about the CNOOC deal is that it is all cash—not yuans—dollars. $18.5 billion dollars. The Chevron offer is 75% stock, 25% cash. Media people close to Chevron noted that the only people who want the CNOOC deal are short term UNOCAL investors. The majority of the UNOCAL shareholders have said the stockholders will likely take the Chevron deal if the company sweetens the pot a little—coming with $2 to $3 per share of the CNOOC offer due to the sensitivity surrounding the Chinese offer—and the length of time it will take to finalize the deal.

A spokesman for the US Treasury said the CNOOC deal faces obstacles from Bush's National Security Adviser, Steve Hadley. Because of questions raised about national security, the Committee on Foreign Investment will not begin its review of the CNOOC deal until UNOCAL—which still favors Chevron at less money—until UNOCAL finalizes a deal with either Chevron or UNOCAL At that time, the committee will meet and decide if the deal can be consummated. Heel dragging by the Bush Administration is not making JPMorgan and Goldman Sachs—the brokerage houses that structured the deal for CNOOC—happy. But the heel-dragging offers hope to the Attorney Generals of California, Montana, New Mexico and Texas which have won environmental lawsuits against UNOCAL totaling $771 million for toxic waste cleanup. In addition, the States fear that if China gains control of UNOCAL, CNOOC will not honor the healthcare and pension liabilities owed, which could threaten the solvency of the treasuries of those States.

The only American corporation (other than their investment brokers, JPMorgan and Goldman Sachs) that seems eager for China's buyout of Unocal is another member of the Seven Sisters—ExxonMobil. On the surface it appears strange that one of the Standard Oil kids would turn on another member of the family, Chevron (formerly ChevronTexaco). It becomes understandable when you realize that ExxonMobil has entered a joint venture with one of their Saudi partners to expand a Chinese refinery in Southern China. the expansion will make that refinery one of the largest oil refineries in the world. The expansion will cost $3.5 billion—about a third of the current Chevron bid for Unocal. The venture will be jointly owned with the Chinese National Offshore Oil Company owning 50% of the refinery, and ExxonMobil and the Saudi government each owning 25%. It appears to me that the Chinese government is expanding their refinery capacity just in time to refine all that Asian Unocal oil. If that's true, then it supports the view that China plans to divert that oil supply away from the United States.

While the CNOOC deal may be good for short term investors trying to make a quick buck, it's bad deal for America. Why is the Bush Administration dragging its heels? The US Treasury needs to ban the sale of UNOCAL to an enemy of this nation which has vowed to destroy the United States. If China decides it does not want to sell its cheap trinkets to America, I say good riddance. It's like getting two birds with one stone. Two good deals for America...for the price of one. Of course then Walmart would have to find another slave labor country to buy merchandise from. I wonder if the gulags in Siberia are still churning out cheap parkas, longjohns and ice skates?

Well, once again you have my two cents worth on this subject.




Just Say No
Copyright © 2009 Jon Christian Ryter.
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