ChinaFDI

Lessons From the Cnooc-Unocal Saga

By Philip Andrews-Speed and Ma Xin
909 words
4 August 2005
The Asian Wall Street Journal
A7
English
(c) 2005 Dow Jones & Company, Inc. To see the edition in which this article appeared, click here http://awsj.com.hk/factiva-ns

As the directors of Cnooc lick their wounds after this fight they have a number of lessons to ponder, as does the Chinese government.

Cnooc had been the slowest among the three Chinese national oil companies (NOCs) to move into the international arena. Its assets are limited to Indonesia and Australia. The planned takeover of Unocal would, at one bound, have allowed it to satisfy a number of ambitions: to expand its size and its geographic scope to take it into the rank of medium-sized international oil companies, and to build on its regional gas interests in Southeast Asia. Where the other Chinese NOCs expanded in a piecemeal fashion, Cnooc sought to reach its goal in one bound.

This ambition became unstuck, not through faulty commercial judgment, but through a failure to adequately assess the political furore that would be stirred in Washington by threatening the concerns of both the anti-China and the energy-security lobbies. In hindsight, it would be interesting to know how much attention was spent by the Cnooc board and their advisers in assessing this risk.

These political machinations will have reinforced the assessment of Cnooc and the two other Chinese NOCs, Sinopec and China National Petroleum Corporation, that the international energy world is highly politicized -- not just in developing and transition countries, but in market economies as well. The obvious conclusion from that is that, in future, it makes more sense to grow in a more incremental manner, buying up smaller companies, parts of companies or individual production assets. Cnooc's next target is likely to be much smaller. Indeed there are already reports that it is considering bidding for the British gas company BG, which has extensive assets in Central and Southeast Asia.

At the same time Cnooc's board might want to review the way in which it carries out such bids. The overt backing of the Chinese government can be seen as a liability rather than an asset. Reliance on financing from state banks and from the parent company was used as evidence of direct government support and provided the basis for the argument relating to unfair competition in the battle with Chevron -- despite Cnooc's insistence that the terms were strictly commercial.

The Chinese government needs to review both its overseas energy strategy and industrial policy. The drive for Chinese NOCs to gain access to overseas oil and gas production lies at the heart of Beijing's energy-security policy. This episode with Unocal is the most visible example of a failure to properly implement this strategy. CNPC had previously been repelled in its bid for Russia's Sibneft, and Sinopec and Cnooc were pre-empted by partners in their attempt to buy British Gas's share of the giant Kashagan field in Kazakhstan. But none of these contests were played out in such public view as the bid for Unocal.

The Chinese government is unlikely to change its overseas energy strategy in response to this disappointment, but the realization will start to dawn that the international petroleum arena is risky and unpredictable. As many international oil companies know, the best laid plans can go awry, sometimes with huge costs. The Chinese government and its NOCs are undergoing a rapid and intense learning process on risk assessment and risk management.

The more subtle lessons relate to the relationship between the Chinese government and its NOCs, the structure of the NOCs, and the nature and extent of government ownership of the NOCs. At present the Chinese government retains 100% ownership of each of the three NOCs. Each has a corporatized subsidiary of which only a minority of shares are publicly owned; 30% in the case of Cnooc It may now be time for the Chinese government to consider raising the percentage of traded shares so that it becomes a minority shareholder, allowing the company to both behave and appear more like an independent agent.

Another issue for the Chinese government to consider is that consumer governments, which are China's competitors for energy resources, are as important to have as friends as producer governments. During the last few years, successive Chinese leaders have courted the governments of the world's oil producing nations, large and small. It may be time to spend as much effort on the governments of the major oil-importing nations, both in the West, and in South Asia and East Asia.

Cnooc's bold bid for Unocal has attracted global attention, not least from the NOCs of other countries. Developments in recent years had suggested that NOCs have a competitive advantage over international oil companies (IOCs). Political connections, easy access to cheap capital and overenthusiasm combine to give them what can be seen as an "unfair" advantage. This advantage may be further enhanced by the tendency of some NOCs to treat the issue of reputational risk with disdain, by invest in countries which IOCs dare not touch. What the Cnooc-Unocal episode has shown is that, in some fields, the IOCs still retain the advantage.

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Mr. Andrews-Speed is director of the Centre for Energy, Petroleum and Mineral Law and Policy at the University of Dundee, Scotland, and author of "Energy Policy and Regulation in the People's Republic of China" (Kluwer Law International, 2004). Ms. Ma is a researcher and doctoral candidate at the Centre.

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