China and the CNOOC Bid for Unocal: Issues for Congress

Publication Date: September 2005

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Energy

Type:

Coverage: China

Abstract:

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 given China's large holdings of foreign exchange reserves (more than $700 billion), growing needs for industrial resources, and a willingness by Beijing to back its major industrial corporations. This report will not be updated.