Lessons learned from Unocal may not be enough to ensure US approval

Perhaps because August is traditionally a slow news month, CNOOC's $15.1-billion (12.3 billion euros) bid late last month to buy the Canadian oil and gas independent Nexen Inc has generated a tremendous, some might say inordinate, amount of copy in the Western media. Since the announcement, the Wall Street Journal alone has run more than 80 items focusing on the proposed acquisition, its nitty-gritty aspects and its wider implications.

Under the deal, CNOOC, which is China's top offshore oil and gas developer, would acquire Nexen's leases in strategic oil and gas production areas such as the North Sea and the Gulf of Mexico, thereby raising the geopolitical stakes.

Surely, CNOOC was not expecting to fly under the radar on this one. But the speed, breadth and depth of the emerging political opposition in the US should give the Chinese government concern. Notwithstanding the August recess, members of the US Congress, ranging from a firebrand Republican conservative to two progressive East Coast Democrats, have already spoken out against the acquisition.

Shortly after the bid announcement, Senator Chuck Schumer, a senior Democrat from New York, wrote in a letter to the US Treasury Secretary, Timothy Geithner, in his capacity as chairman of the Committee on Foreign Investments in the US, which has approval rights over the deal, that the committee should withhold approval of the CNOOC bid until "China's government has made tangible, enforceable commitments to ensure US companies reciprocal treatment". His letter was later joined by a similar one from Congressman Ed Markey, also a Democrat.

And Republican Senator James Inhofe of Oklahoma voiced opposition to the takeover, citing national security concerns. It is only a matter of time before more members of Congress, whether due to genuine national security concerns, or to secure reciprocal access for US companies in China, or to score political points with voters, begin to follow suit. Notably, not one US politician has yet spoken out in favor of CNOOC.

Which raises the question: despite CNOOC's best efforts, is CNOOC-Nexen destined to go the way of CNOOC-Unocal?

For those with short memories, in 2005 CNOOC made a play for the US energy company Unocal. The takeover bid met with so much opposition in Congress, which even passed a resolution urging the Bush administration to block the takeover by an overwhelming margin, that CNOOC withdrew it before a review by the Committee on Foreign Investments in the US had even begun.

As CNOOC gears up for round two with US politicians and regulators, this time over Nexen, many commentators have cited CNOOC's "lessons learned" from Unocal as evidence that things will go more smoothly this time. However, there is compelling evidence to the contrary.

First, the good news for CNOOC:

1. Competition

In 2005 CNOOC was not the only oil giant interested in Unocal and its prize oil-producing assets. Chevron Corp aggressively pursued the company and upped the ante with rival bids. By most accounts it was Chevron's behind-the-scenes lobbying, more than anything else, that caused the unraveling of the CNOOC takeover. Nexen is an ailing company in need of a buyer, and its low share price is attractive. But unlike Unocal, it is not clear that Nexen has another worthy suitor waiting in the wings. That eliminates one powerful potential source of opposition to the CNOOC bid.

2. Canadian involvement

From a regulatory and political perspective, Unocal was strictly a US affair. In other words, the jurisdictions outside the US where Unocal held major assets - Indonesia, Thailand and Myanmar, to name a few - did not have much say or sway. But Canada is a serious world power, and a very serious player on the world energy stage; its proven oil reserves are exceeded only by those of Saudi Arabia and Venezuela. If the Canadian government decides that the acquisition is in its best interest - and, despite some naysaying, most signs point that way - that could bring additional pressure to bear on the US government. However, cutting the other way is the fact that the Canadian government's staunch support for the Keystone XL pipeline was insufficient to push that project over the finish line in the US this year.

And now the bad:

1. Politics

In 2005 the White House was occupied by George W. Bush, a man who had never met a fossil fuel he did not like. Republicans controlled both houses of Congress. Opposition to CNOOC's bid for Unocal, in any event, crossed party lines. Today there is a Democrat in the White House and the Democrats have a majority in the Senate. More importantly, the US is on the cusp of a presidential election. In this highly politicized environment, from which quarters does CNOOC expect to draw support? It should not count on an endorsement from President Barack Obama or even the presidential hopeful Mitt Romney. The best CNOOC can hope for is silence from Congress and the presidential candidates, and even that now seems optimistic.

2. Location of assets

The vast majority of Unocal's oil and gas assets were located outside the US. While the opposition to the Unocal takeover could fairly be described as fear-mongering (Unocal controlled less than 1 percent of US production), the Nexen takeover does raise US national security concerns due to the deep foothold that CNOOC would gain in the Gulf of Mexico.

3. Nationalism

From the point of view of many Americans (both regular folk and politicians), there is something humbling, verging on humiliating, about an emerging Chinese power picking off the United States' prize natural resource assets as if it were a poor colony rather than the world's sole remaining superpower. With the US economy continuing to sputter and Americans feeling as insecure as ever about their futures, this affront to national pride is sure to be felt more acutely now than in 2005, when the US was in tip-top financial shape.

4. New regulations

Today CNOOC faces a Committee on Foreign Investments in the US with a far broader mandate than the one it would have faced in 2005 but for the early withdrawal of its Unocal bid. In 2007, directly as a result of the furor over Unocal, the US Congress enacted the Foreign Investment and National Security Act, which added "energy assets" to the list of foreign investments requiring the committee's approval; the irony is certainly not lost on the Chinese government. And, for all of the reasons described above, the committee's approval is far from assured.

To be sure, CNOOC has learned some lessons from Unocal, but probably not enough to graduate from this tough school.

The author is an adjunct professor of oil and gas law at Georgetown University Law Center and is engaged in the private practice of energy law. The views expressed here do not necessarily reflect those of China Daily.

(China Daily 08/17/2012 page9)